Agora Financial’s Rude Awakening

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Laguna Beach, California

• Jim Rogers returns for Part II of the great dollar warning,
• What to make of Greenspan’s comments on housing – Is ‘09 the bottom?
• The best ways to own gold, how to diversify greenback holdings and more…

Eric Fry, reporting from Laguna Beach, California…

Alan Greenspan predicts the U.S. housing market will bottom out during the early part of 2009…which pretty much guarantees that it won’t.

Whatever virtues Greenspan may have displayed during his 19-year tenure as America’s most famous bureaucrat, clairvoyance was not one of them. Indeed, his feeble powers of prediction are legendary. Every time he looks into the future, it refuses to look back. He just can’t seem to get it right.

We admire this cowboy for climbing back onto the same mustang that keeps bucking him off, but that doesn’t mean we expect him to remain in the saddle for very long. Greenspan seems to spend a great deal more time dusting off dirt than holding the reins.

“Home prices in the U.S. are likely to start to stabilize or touch bottom sometime in the first half of 2009,” Greenspan informed The Wall Street Journal yesterday.

Should we believe him?

Before answering the question, let us not forget that Mr. Greenspan is the same individual who declared in November of 2006, “Most of the negatives in housing are probably behind us. The fourth quarter should be reasonably good, certainly better than the third quarter.”

Not content to make only a boneheaded prediction about the housing market, Greenspan embellished his November 2006 remarks by volunteering a boneheaded prediction about the U.S. economy.

“A lot of people are going to lose their homes,” he said. “It’s a family tragedy. It’s not an economic – or macroeconomic — tragedy.”

With the benefit of hindsight, we realize that “most of the negatives in the housing market” arrived long after November 2006. Further, we realize that the tragedy that ensued from the housing bust has become a massive, all-encompassing, “macroeconomic tragedy.”

During the last twelve months, nearly 25% of all homes sold nationwide fetched less than what the sellers originally paid.

In other words, Greenspan was dead wrong. If he had offered 100 different forecasts in November of 2006, none of them could have been more wrong than the forecast he actually offered.

Therefore, Greenspan’s calm assurances about the housing market impart neither calm nor assurance…which compels us to ask ourselves, “If Greenspan could be so completely wrong about the trend of the housing market – a sub-set of the overall economy – couldn’t he also be completely wrong about the trend of the overall U.S. economy? And if Greenspan has no clue about the future trend of the U.S. economy, what clue does Bernanke have?”

The future is utterly unknowable, no matter how many predictions Alan Greenspan makres. And the future is utterly unknowable, no matter how many forecasts the rest of the world’s central bankers might prepare.

The future is utterly unknowable…almost.

This we know:

1) Central bankers will print lots of money.
2) The earth will not fabricate any additional oil or copper or natural gas or aluminum any time soon.

In other words, paper currencies are certain to proliferate, while natural resources are sure to deplete. These trends provide a potent fuel for the commodity bull market that is now underway. Jim Rogers, the hedge fund manager-turned-world-traveler, believes commodity prices will continue climbing for many years to come.

Rogers explained his thinking at last month’s Agora Wealth Symposium in Vancouver Canada. In today’s edition of the Rude Awakening, you’ll find Part II of a lightly edited and condensed version of Rogers’ Vancouver presentation. Enjoy.

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Commodities…Buy the Dips!
By James Rogers

The commodity bull market has a long way to go. This bull market is not magic. It’s not some crazy “cycle theory” I have. It does not fall out of the sky. It’s supply and demand. It’s simple stuff.

In the 80s and 90s, when people were calling you to buy mutual fund and stocks, no one called to say. “Let’s invest in a sugar plantation.” No one called and said, “Let’s invest in a lead mine.” Commodities were in a bear market and in a bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they’ve never done it throughout history and probably never will. There has been only one lead mine opened in the world the last 25 years. There’s been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years.

Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil, they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world’s been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.

Meanwhile, you know what’s happening to demand. Asia’s been booming. There are three billion people in Asia. America’s growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That’s called a bull market.

One of the things you’ll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn’t matter about my theory. The fact is that it always works this way and it’s working this way now.

So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor's note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It’s a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.

I [mention this index] to show you that the commodity bull market is not something that will happen someday. It’s in process right now, and it’s going to go on for years to come, because supply and demand are out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don’t know when or why, but I know they are coming, cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they’re going to continue that [trend].

You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She’s very happy owning commodities. She doesn’t care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.

Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you’re not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchor because they are not going to do what the rest of your assets are going to do.

I will give you one brief case study about oil, because it’s one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row - Saudi Arabia has announced, “We have 260 billion barrels of oil.”

It is the damndest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, “How can this be? How can it be that they always have 260 billion barrel of oil?” (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, “You either believe us or you don’t,” and that’s the end of the conversation.

I have never been to the Saudi oil fields, and even if I had, I wouldn’t know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let’s look at the demand side.

The Indians use 120th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There’s 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind
of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.

So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same.

[Joel's Note: Here at the Rude Awakening, we receive a lot of emails asking about the best way to protect your wealth against the falling dollar. One obvious strategy is to own gold. You can do this a number of ways, depending on your own investment style and risk appetite. One valuable research service we’ve found is the Gold & Options Trader. It covers everything from short-term trades, trend analysis, junior miners and a whole gambit of other ways to “get into gold.” Read On Here For Details.

Another way to hedge against the plight of the greenback is to begin diversifying your holdings into other currencies, particularly those in which the issuing government has little or no debt. We’ve included some info and a link to EverBank’s new Debt-Free Index CD below for your consideration.

As always, be sure to do your own research to determine what best suits your goals and strategy. Whatever you choose, gold and currency diversification are a great place to start, so be sure to check ‘em out.

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[Rude Endnote: Over the past couple of days we’ve asked readers to weigh in with their own thoughts on the validity of the dollar’s bounce and the state of the commodity complex in general. “Is this the end of the resource bull market?” we asked after gold slipped $150 over the last month and oil entered an official bear market. “Or is this just the beginning?”

You’ll find a selection of the best emails in upcoming issues. If you’d like to voice your own opinion, please write to us at the address below. We look forward to hearing your thoughts.

Until next time…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com