Oct 27 2009 2:40PM

Or, to use the terminology currently in vogue, the situation is not green and brown.

One day, headlines in the popular press focus on the green shoots emerging in the economic outlook. The next day, the green shoots are dismissed as nothing more than brown weeds. Reporters in the public media are constantly looking for the 30 second sound bite or six word headline that explains the economic situation. The real world is not so simple.

The US economy may or may not be out of recession, depending on whose interpretation of the technical definition of recession tops the day’s headlines. What is certain is that it will be a long road back to the glory days that Americans enjoyed a few years ago. By one measure, before the financial crisis, 40% of economic activity in the US was predicated on financial services. We saw how much real value was created by American financial services.

Rebuilding industries that create tangible value will take some time. Real value-added industries have long since been pushed aside to make room for the service economy. Manufacturing and mining, for example, have largely left the country.

As gloomy as it may appear on the surface, investors need to look beyond the headlines. Consumers have not stopped spending. The decades-long growth in spending has stopped. The pace of sales may even have dropped a couple of percent. But, consumers are still spending at nearly the pace of the glory days. The “moribund” housing industry is presently building 581,000 homes. That is down a third from a normal level, but not exactly in the grave either.

The US will continue to churn along at more or less the same pace for the foreseeable future. There will be ups and downs, of course.

Investors, media and other commentators in the US are so caught up in their own gloom that they find it difficult to see the rest of the world.

Let’s add up the numbers: The Western World is in recession, with economic activity the same or down by a couple of percent from a year ago or two years ago. China, by far the world’s largest user of metals, is growing at 8% a year. On balance, after an initial decline, metal use has returned to a state of growth.

When the financial crisis hit, metal producers cut production. Inventory levels built slightly, but remain low in the context of annual consumption. Amid a consensus view that the recession may continue, metal producers have not yet reactivated expansion projects and new development and are keeping marginal producing mines off line.

At no time does the media note that the copper price has doubled from the start of the year. Instead, the Bloomberg headline reads: “Copper Prices Drop for Second Straight Day as Inventories Gain”. Most of the metal prices have rebounded strongly.

In the face of a doubling of the copper price, the brilliant analysts in the public media have turned to Chinese pig farmers borrowing from local banks as the reason for the rising price of copper. One enterprising farmer was reported to have amassed 20,000 tonnes of the metal. To put that amount into perspective, it would require two trains, each one mile long to transport that amount of metal. Assuming his average price was $2 a pound, the farmer would be in hock to his local banker for $44 million.

Only a careful read of the article notes the fact that his metal stockpile consists of scrap metal. No other specific farmer, pig or otherwise, has been recorded as having stockpiles of metal, be it copper or other metals.

While investors focus on the day to day moves in metal markets, the real story is the long term supply shortage as the Western World gets back to growth. For anybody willing to look into the future, companies with base metal deposits represent compelling bargains.

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