Agora Financial’s Rude Awakening

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Dubai, UAE

• Is the Dow preparing for a reversion to the mean?
• From 955 to 12,000…a bubble-hopping extravaganza of easy money,
• Empire, species and markets: from seed, to fruit to inevitable rot…   

From the Persian Gulf, Joel Bowman reports…

Let us begin the week with the new numbers, for they are a long way departed from the old ones.

The Dow Jones Industrial Average starts the week off at 12,209.81, a hefty 3.4% down from where it sat this time last Monday. Oil softened a tad from its stratospheric surge on Friday and now sits at $137 per barrel. And oh yes, an ounce of gold will set you back 909 United States dollars.

So what changed on Friday? What sudden, catastrophic event altered the collective fears, expectations and aspirations of the greater investment mob? Why was oil worth $11 more at Friday’s close than it was 24 hours prior? And why were stocks more than 3% cheaper on Friday than on Thursday?

Sure, the jobs report was atrocious…home prices continued to tumble…household net worth plummeted $1.7 trillion for the first quarter… and the economy at large continued its trudge into the marsh of recession…

But so what? None of the above mentioned contributing factors began contributing overnight. Oil was still a finite commodity on Thursday. Supply was still weak on Thursday. Demand still grew on Thursday…and Wednesday…and the Wednesday before that.

So why all the fuss now?

The market is in a perpetual state of flippant overreaction, like an easily spooked horse at the firing range. The problem for bullish investors, as far as we can tell, is that it has overreacted in their favor for so long.

If Mr. Market were a rational being with a single moving part, it would adjust incrementally, ebbing or flowing as steadily as the oil wells run dry…a fraction of a cent per day in consistent measure one way or the other. There would be no cause for $11 single day rallies in a steadily depleting commodity; no need for erratic swings in obviously moribund financial institutions. It would be entirely predictable, in other words…and utterly boring.

Instead, Mr. Market gets swept away in the frenzy, carried off by partygoers wearing bear masks or bulls horns and hoisted aloft to champion this week’s rally or that day’s pullback. Stock prices soar to ridiculous valuations…home prices skyrocket, lining flipper’s pockets with easy dough…the latest fads and crazes tempt those drunk on easy money to bid prices to the moon…and then, it all comes tumbling down.

For as long as your young editor can recall, a epidemic of stubborn optimism has buoyed the market. (The Dow, for example, was at a mere 955 points on his birthday.) When a bubble busts, we have since observed, it is just as soon replaced by frantic bidding in another pit.

But it is precisely because Mr. Market is not a rational being that such a spectacular ride is guaranteed. And, the greater the preceding run up in prices, the greater the chances of a decidedly unsmooth collapse.

As today’s lofty prices are increasingly challenged, perhaps we will see an overreaction the other way. While a 400-point sell off is surely uncomfortable, it’s not likely to be the last of its kind.

In the column below, Bill Bonner takes a look at mean reversion and wonders if we humans might be in for a similar correction. Enjoy…

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Boomer Trends Come to an End
By Bill Bonner

George Soros says the great credit expansion that was born with the baby boomers…and has lasted as long as we have…is now over. And this week comes word that the “end of abundance” is here too. That’s what it said on page nine of Monday’s Financial Times. And then, Bo Diddley died.

All the palmy trends of the boomer generation seem to be coming to an end.

Naturally, the world’s leaders are worried. They gathered in Rome this week for the customary monkeyshines. Even Robert Mugabe – who is banned from traveling in Europe – put on a false mustache so he could dine out on the Via Veneto, leaving his lieutenants in Harare to beat and starve Zimbabwean voters. Poor Mugabe. Goebbels would have gotten a warmer reception at a meeting of Jewish orphans.

At 84, Mr. Mugabe is almost living proof of Haeckel’s biogenetic law. It maintains that the history of the individual rehearses the history of the species. In Mugabe’s long life, from prison cell to presidential palace, he is the history of revolution…a Kerensky and a Stalin… the liberation struggle’s saint and its monster, too…all in one. To black Africans he is a big disappointment. To whites he is proof that Ian Smith was right all along. When Ian Smith left the top man role in Rhodesia, the country was the ‘bread basket of Africa’ with a currency as strong as the pound. Now it is a basket
case whose peoples’ bones stick out and whose dollars are already as worthless as a campaign promise.

But everything follows the same laws – from embryo to corpse…from boom to bust…from seed to fruit to rot…nothing escapes, neither an individual, an empire, a species, nor a market.

This is not the first time in our lifetimes that the world has seen this kind of show. In the ’70s, Paul Ehrlich, like Malthus before him, foresaw a crowded, hungry world. In his popular book, “The Population Bomb,” he said hundreds of millions of people would starve to death. This was a world in which England couldn’t even exist; he said it would disappear by the year 2000. He was wrong about that. He was wrong about a lot of things. Julian Simon challenged him, arguing that a free economy always reduces real prices. On September 29th, 1980, the two made a famous bet – on whether the prices for 5 basic metals – chromium, copper, nickel, tin and tungsten – would actually go down, inflation adjusted, in the following ten years – despite population growth. What happened? Simon won. On the 29th of September 1990, the prices of all five were lower. Ehrlich settled up with a check for $576.07.

In theory, Simon will always win a bet like that; competition and technology always force prices down. But Ehrlich wasn’t wrong about everything. And Simon wasn’t right about everything. While one believed the weight of numbers would send the world to Hell…the other had a god-like faith that the market would always save it, guided by an invisible hand to progress and prosperity. But while Simon is right in theory, the invisible hand is not always the gentle paw that he imagines; it does not necessarily call out for more booze just because the crowd gets thirsty. In fact, sometimes it vanishes altogether, allowing a Mugabe to ruin a country…instead of permitting the free market to build it up.

Simon had the good luck to make his bet at the beginning of a major decline in commodity prices. Oil, for example, hit an all-time high over $100 a barrel, in current dollars, in December 1979. Ten years later, it was trading near $30. And by 1998, the price had fallen to $10. Had he made his bet ten
years earlier or ten years later, he probably would have lost.

Back to the raw facts facing the Roman holidaymakers: Over their plates of crespelle all fiorentina, delegates will learn that high food prices are putting millions of people on the verge of starvation. Then, as they wash down their peposo with a tide of Barolo or Chianti Classico, they will reflect on how this came to be. The “green revolution,” someone will mention, seems to have run its course. (Out of politeness or imbecility, no one will mention the Fed’s easy money policies.) Ehrlich’s population bomb never exploded, they might come to believe, because irrigation, selective breeding, and the use of petroleum-based products greatly improved farm productivity.

But now, the green revolution has turned brown. It is as mature as the credit cycle…or Robert Mugabe himself. The water is running out. Opposition to bio-engineering is growing. And petro-chemical inputs are both less effective and much more expensive than they used to be. Result? In 1961, crop yields grew by 10% per year. Lately, they’ve increased less than 1% per year.

Meanwhile, in 1970, there was about 1 acre of arable land on the surface of the planet for every pair of feet. But the feet have multiplied – just like Erhlich said they would – from a bit over 3 billion people to more than 6 billion; and now the species is expanding like sub-prime debt. Just look at a chart. Human population looks just like the NASDAQ in ‘99 or oil in ‘08. This bubble-like population explosion, along with urbanization, highways, pollution, desertification and so forth, has cut the amount of farmland per person in half. Meanwhile, the number of people bellying up to the bar
continues to grow by 11% per year – more than 10 times faster than crop yields.

Everyone wants a drink; but there’s only so much beer on tap. Who knows? This may be a good time to short the whole damned race.

[Joel's Note: Bill Bonner will be joined at the podium by investment guru Jim Rogers as keynote speakers at this year’s Agora Financial Investment Symposium. Spots are almost all taken, so if you’ve been on the fence about whether or not to join us in Vancouver to discuss investment opportunities in the time of scarcity, this may be your last chance.

Take a look at the program below, tell your partner you’ll be “out to golf,” and book your tickets here.

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[Rude Endnote: While the financials are spraying red ink all over your trading screen, why not capitalize on their losses? In his newest report, Dan Amoss of the Strategic Short Report deals the dirt on one company set to reveal some embarrassing data and shows how you can make a bundle through a technique he calls the “paddle strategy.” Read Dan’s report here.

The guys over at the 5-Minute Forecast will be along with your daily round up soon. Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com