Agora Financial’s Rude Awakening

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Laguna Beach, California

• Who gets the Arctic…and all the riches therein?
• The world lays claim to a new shipping route,
• America’s highest-margin export and plenty more…

Eric Fry, reporting from Laguna Beach, California…

If the credit crisis is really over, as Ben Bernanke and the rest of the nation’s financial experts believe, why do we amateurs still feel as though the crisis is just beginning?

What’s wrong with us?

What lack of talent, experience and/or educational background prevents us amateurs from perceiving economic vitality in the midst of utter stagnation?…Or from appreciating the miraculous healing powers of a half percent interest rate reduction?…Or from recognizing the stock market’s new record highs as a surefire sign that all is well?

We amateurs here at the Rude Awakening are not quite sure what’s wrong with us; but we are in no hurry to take the cure. Our disease – let’s call it congenital skepticism – compels us to distrust economic cures that goose the stock market, but simultaneously pummel the U.S dollar…while bringing no respite whatsoever to any aspect of the real economy.

The stock market is climbing – Yippee! – but so are long-term interest rates. Meanwhile, the money in our pockets is turning into scrap paper. Homeowners are still defaulting on their mortgages in record numbers and America’s cash-strapped consumers are just as strapped as they were before Ben Bernanke became an overnight economic rock star. In fact, consumers are WORSE off today than they were on September 18, when Bernanke slashed half a percent from overnight lending rates. That’s because the long-term interest rates influence mortgage rates are rising…and the dollar is falling.

But a weak dollar is a good thing, the experts tell us…without the slightest hint of irony.

“The dollar’s in a quasi-sweet spot,” explains Bank of America chief market strategist, Joseph Quinlan. “It’s dropped enough that it’s creating an earnings upside for U.S. multi-nationals.”

Unfortunately, “sweet spots” like these have a way of becoming bitter-sweet…or just very, very bitter. A weak dollar may delight a U.S. multinational, for example. But for those of us who hope to buy as much as possible with strong dollars, rather than to sell as much as possible with weak dollars, a feeble greenback imparts no joy whatsoever. We are simply poorer.

And in fact, thanks to the Greenspan/Bernanke doctrine of “credit creation at any cost,” the dollar-holders of the world have become poorer and poorer, year after year. The dollar has shed more than one third of its trade-weighted value since 2001. But the dollar’s shockingly large decline does not seem to trouble Chariman Bernanke, especially not when share prices are rising and newspaper headlines are lauding his brilliance. He seems to assume that the dollar will remain the world’s leading monetary brand, no matter how badly he abuses its value and legacy.

But maybe Mr. Bernanke takes too much for granted. Maybe the world’s non-American dollar-holders will begin to contemplate the dollar’s intrinsic value – its paper and ink value – and will seek to hold fewer of them.

“The U.S. dollar is America’s highest-margin export,” quips James Grant, editor of Grant’s Interest Rate Observer. “It’s cheap to produce and easy to ship.”

Therefore, says Grants, “the 21st century dollar is a miracle of suspended disbelief. It’s not enough that it’s uncollateralized (there’s nothing which the Treasury is bound to exchange for it; what backs it is politics). In its electronic form, the greenback is also invisible. Dollars recorded as book-entry securities course through the world’s electronic payments system or reside on the electronic ledgers of foreign central banks.”

Gold, by contrast is not quite as easy to produce. It does not fly off governmental printing presses at the whimsy of politicians and central bankers. Neither does gold disappear at inconvenient moments, like when wars erupt or regimes change or when overly educated central bankers attempt to rescue well-heeled stock market speculators.

Yes, dear investor, paper money is easy to produce. Gold is not. Paper money is so easy to produce, in fact, that money-printing companies cannot seem to make the stuff fast enough. A little-known company in England, De La Rue plc, is in the money-making business…literally. “De La Rue produces paper money for 150 countries.” James Grant observes, “It says that it is printing at near capacity and that pricing is strong.”

Reflecting this boom in money-making, De La Rue’s share price flirts with all-time highs. The gold price also flirts with all-time highs. A mere coincidence?

Money-making, it seems, is a very good business… especially for gold.

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Thanks, Global Warming!
By Chris Mayer

“The sea route running along the Arctic coastline of North America, normally clogged with thick ice - is nearly ice free for the first time since records began.”   - “Northwest Passage Is Now Plain Sailing,” Guardian Unlimited, Aug. 28

It started with a Russian expedition planting the Russian flag in a polar seabed. Though largely symbolic, it touched off a scramble among a handful of nations, all trying to lay claim to the Arctic. Among these claimants: the U.S., Canada, Russia and Denmark.

Why the sudden interest in the Arctic? There are two big reasons. First, thanks to global warming, deposits of natural resources once layered over in impenetrable ice are now easier to get at. Second, thanks to melting ice, some previously icebound shipping lanes are opening up.

Today, the Arctic prize is a multibillion-dollar opportunity.

As a treasure trove of natural resources, the Arctic boggles the mind. By some informal estimates, the region holds 25% of the world’s undiscovered oil and gas. It could also hold massive amounts of crystallized methane - another potential fuel source. More formal surveys are under way by the Arctic lottery hopefuls. So in time, we’ll know more about what Mother Nature has cooked up in the oven beneath the icy Arctic crust.

Minerals galore also lie untouched below the cold blue polar sea. One day, the region could be home to the undersea mining of copper, zinc, cobalt and diamonds.

In truth, these resources are still a long way from being developed. The climate is incredibly harsh, and easier-to-get-at resources still exist on the fringes of the Arctic. As an oil and gas story, this one has a long fuse.

The Arctic thaw’s more immediate and bigger impact will be as a shipping lane. Since Aug. 21, the Northwest Passage has been open to navigation and free of ice for the first time. “Analysts… confirm that the passage is almost completely clear and that the region is more open than it has ever been since the advent of routine monitoring in 1972,” reports the U.S. National Snow and Ice Data Center.

The fabled Northwest Passage through the Arctic Ocean connects the Pacific and Atlantic oceans along the northern coast of North America. To pass through here from China on your way to Europe is about 5,000 miles shorter than going through the Panama or Suez canals.

As the Financial Times observes, “A ship traveling at 21 knots between Rotterdam and Yokohama takes 29 days if it goes via the Cape of Good Hope, 22 days via the Suez Canal and just 15 days if it goes across the Arctic Ocean.”

An oil tanker could make the trip from the Russian port city of Murmansk to the east coast of Canada in a week by crossing the Arctic Ocean. That is about half the time it takes to get an oil tanker from Abu Dhabi to Galveston, Texas.

In the early 1900s, it took the famed Norwegian explorer Roald Amundsen and his team nearly two years to pick their way through the ice and narrow waterways. Now an open passage could revolutionize shipping.

More than 90% of all goods in the world, measured by tonnage, make their way by sea. And as I’ve noted in past issues, the rapid surge in trade with China and India is putting a lot of strain on ports around the world. In recent years, the volume of container shipments has grown 5-7% annually - basically, doubling every 10-15 years.

The ships carrying those containers are getting bigger, and the old canals can’t hold these new seafaring beasts of burden as they once did. The Suez Canal can still handle the largest current container ships, but not the next generation.

The Panama Canal is even smaller. It’s too small for ships that are now common on longer shipping routes. Panama plans to deepen its channels and make them wider. But even so, the new Panama Canal won’t be able to service the next generation of ships.

So it looks like the world will have a new navigable ocean. The effects on trade could be immense. Much shorter shipping distances and quicker shipping times will lower the cost of doing business. It could lead to big increases in trade and, certainly, a major shift in sea lanes.

A freer-flowing Arctic Ocean would also bring fish stocks north - with fishing fleets not far behind. It could mean a new boom in fishing for salmon, cod, herring and smelt. It could also mean that sleepy old ports could become important new hubs in international trade.

As the Financial Times recently opined, “Leading world powers have an unprecedented chance to win navigation rights and ownership of resources in the Arctic seabed untouched since its emergence during the twilight of the dinosaurs.” The U.S. alone could lay claim to more than 200,000 square miles of additional undersea territory.

The specific investment implications of this are still too early to say. But the cracking open of new trade routes or reopening of old ones - and their impact on global trade - always has ripple effects across financial markets. As for the Arctic, this has got to be one of the most important new developments on that front in a long time.

[Joel's Note: By now you know that Chris revels in hunting down these types of trends. Readers of his Special Situations newsletter don’t mind grabbing the profits that come from his astute due diligence, either. If you would like to know exactly how Chris is playing this shipping and transportation trend, I suggest checking out his latest report. You can find the goods right here: Mayer’s Special Situations

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Rude Endnote: It’s often said to me that “that Rude Awakening mob are nothin’ but doom and gloomers.”

While it’s hard to remain cheery given the current state of the world, we’re happy to report that the Rude readership still has a few witty one-liners. Our afternoon was brightened up considerably yesterday when we opened an email from PDR. It read, “If brains were dynamite, government wouldn’t have enough to blow its nose.”

Touché, we say.

Cheers,

Joel Bowman
Rude Awakening