Agora Financial’s Rude Awakening

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Laguna Beach, California

• Gas pump grief: American’s linger between denial and anger,
• Stocks are down, real estate is down, commodities are up,
• Brazil gets an upgrade on Mother Earth’s riches and more… 

Eric Fry, reporting from Reno, Nevada…

Stocks are falling.

June of 2008 was the worst June for the Dow Jones Industrial Average since 1930, when the Dow plummeted 18%. In the June just completed the Dow fell “only” 9.3%.

…And real estate is falling.

The Standard & Poor’s/Case-Shiller index of home prices is falling faster than at any time in its 20-year history.

…But most commodity prices are flirting with new all-time highs.

Maybe these price trends will soon reverse themselves. Or maybe, as Kevin Kerr explains in the column below, commodity price will continue soaring for many years to come.

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The Slow Death of the American Lifestyle
By Kevin Kerr

The world keeps turning and the world’s natural resources keep getting used up. Despite this elementary fact, the “experts” continue to debate whether or not resources are running low. But the evidence is pretty clear, at least to this trader.

In the past year, we have seen prices explode in the oil and agriculture markets. And this could be just the beginning of the rally, not the end, as some would have you believe. Personally, I think we are about halfway to the new top for many commodities. That means $200 oil (easily) and gold at $1,500-2,000. The agriculture markets have even further to go.

Key commodities are becoming more and more scarce. So we can expect to see more suffering in the poorest countries first. Then the economic impact will work its way up the food chain (no pun intended).

The facts are fairly grim if we look at them closely. But very few Americans understand the ramifications.

In her famous book On Death and Dying, Elisabeth Kubler-Ross describes the stages of grief:

• Denial: “It can’t be happening”
• Anger: “Why me? It’s not fair”
• Bargaining: “Just let me live to see my children graduate”
• Depression: “I’m so sad, why bother with anything?”
• Acceptance: “It’s going to be OK.”

The American public is going through the stages of grief right now. Rising prices are just a market-based signal that we are losing our economic and resource abundance. As the American Dream fades away, it’s like a death in the family.

Right now, I think we are between the stages of denial and anger. Ask yourself these questions: What do you think when you pull up to the fuel pump and have to pay $4 for a gallon of regular gas, or nearly $5 for a gallon of diesel? Or how about when you go to the supermarket and have to pay $4 for a gallon of “store brand” milk, or the same price for a loaf of “store brand” bread? Are your emotions between disbelief and anger? Are you saying to yourself, “Hey, what the heck is going on?” (I’m cleaning it up a bit because this is a family-friendly publication.)

No commodity has hit Americans in the wallet harder than energy. Over the last couple of years, the prices of oil and gasoline have more than doubled. But even with these dramatic price increases, Americans continue to drive their cars. We have seen a very small decrease in gasoline usage - only about 1% or so.

We still like to drive our big SUVs. We still drive alone to work. Most people rarely take public transportation (if there is any). And we love to run our air conditioners full blast while watching the documentaries on global warming and dying polar bears on our 62-inch plasma TVs.

We complain. But we are still in denial. “This can’t really be happening,” we tell ourselves. “The price or gasoline will surely be dropping back below $3.00 a gallon.”

Yes, we like to grumble when we fill up those big SUVs, mostly because it’s easier to complain than make the tough changes that are needed. We feel entitled to keep living as we do. Hey, after all, we’ve earned it. Right?Rather than make difficult choices, we are in that denial stage and buy the line from the government and media that all is well.

The facts and the fiction often get mixed up when discussing the issue of “Peak Everything.” Take the surging price of crude oil. Some people (including a lot of politicians) want to blame the traders and speculators. A lot of people blame OPEC. The list of culprits goes on ad infinitum.

The fact remains that it’s not just one reason or another that we are in this energy disaster; it’s actually all of these reasons and others. It’s a culmination of many years of poor energy policy, shortsighted planning (if you can even call it planning) and an overdose of arrogance that only
superpowers can have.

It’s like a football team saying, “We’re No. 1 always will be.” So the team stops training hard. Players quit working out and coming to practice. The coaches just relax and forget about recruiting or developing new talent. Nobody designs new plays or bothers to scout the opponents to see what they are up to. And then the team expects to go out into the world and bring home the trophy every year. “Hey, we deserve it. Right?”

Or go back to the analogy of the Titanic. The ship was state of the art. It was not “supposed” to be able to sink. But now as the water rushes in and the ship is dropping lower and lower into the sea, the cold water is hitting us all in the face. Now our lawmakers are scrambling to plug the holes, and it’s not working. The smart people (or maybe they were just lucky) are already in the lifeboats.

Only time will tell if the U.S. can actually move into the acceptance stage. But in the meantime, commodities will continue to dwindle.

And as this happens, there will be incredible opportunities to profit as investors. These opportunities will abound, as they always do when stupid decisions are being made.

[Joel's Note: We were actually fortunate enough to hear Kevin deliver the “demand is real…very real” presentation to a group of mega-fund managers here in the United Arab Emirates a few weeks back. Kevin was invited to speak at the event, for which attendees paid $10k per seat. The audience listened and dutifully took notes while Kevin spoke about how to make money investing in commodities. And, as you have seen over the last few days in particular, there is plenty to be made in the explosive resource…if you know how to play it. As a special offer to Executive Series members, Kevin has agreed to offer a “guest pass” for a behind the scenes look at his unique approach to commodity trading. If you’re interested in learning the art of profiting in the commodities arena, you can take him up on his offer right here.

Kevin Kerr’s Resource Trader Alert – Guest Pass Offer

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Did You Notice? Brazil Joins the Big Leagues
By Christopher Hancock

Standard & Poor’s recently slapped the coveted international seal of approval \on Brazil’s credit. Now, with its score rising from BB+ to BBB-, Brazil’s cost of capital will fall significantly - putting the booming nation on track to soar even higher.

Consider the investment-grade credit rating the global version of an American Express Black Card. With it, there is no limit. Just ask the American government.

The Bovespa, the Sao Paulo Stock Exchange, climbed 6.3%, to 67,868.46, on the news. We’re not surprised to see the Bovespa react so strongly. We’ve seen this happen before.

When ratings agency Moody’s raised Mexico’s rating to investment grade in 2000, it sent the Mexican Bolsa IPC Index into a multiyear uptrend.

Want two more recent examples? Take the upgrades of Russia and South Korea. As with Mexico, the Russian and South Korean markets were rewarded handsomely.

The world’s ravenous appetite for raw materials is the great driver behind Brazil’s strong forex reserves - the principal factor behind Brazil’s ratings upgrade. And this trend won’t end anytime soon.

The Economist highlights a report funded by Rio Tinto. In it, Ross Garnaut and Ligang Song of the Australian National University conclude: “The increase in China’s demand for metals during the next two decades may be comparable to the total demand from the industrialized world today.”

Plus, now-unavoidable infrastructure replacement in the West should only add more pressure on limited supplies of copper, nickel, iron and zinc. As long as the world keeps demanding the bounties of the Earth, Brazil should continue to prosper.

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[Rude Endnote: An interesting tidbit flirted with our attention as we flipped
through the Weekend FT. The paper noted that 42% (not a typo) of the world’s population is now living under double-digit inflation!

“Six out of the 10 most populous countries have inflation running at more than 10% as rising food and fuel make up the largest share of the population’s spending,” the tidbit read.

Of course, you can rarely trust government numbers…especially when it comes to things like CPI. Here in the UAE, for example, “official” inflation is hovering around 9.7% but, talk to anyone on the street and they’ll tell you the situation is far worse. Food at the grocery store is going through the
roof and, although the Emirates is on the other end of the energy stick (being a major exporter of oil) the expats residing here are really feeling the pinch. The dirham’s peg to the U.S. dollar doesn’t make matters any easier either.

With that in mind, we’d like to hear how things are going in your neck of the woods. Are home prices falling in your neighborhood? Is your grocery bill eating away at your savings? What do you plan to do about it?

Send your boots-on-ground report to us here and keep an eye out for your fellow readers’ comments in the days and weeks ahead.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com