Agora Financial’s Rude Awakening

Jump to Comments

Laguna Beach, California

·      Dow rallies after Citigroup’s cash injection, but at what cost?
·      Investing in the coming agriculture boom, five companies ripe for the pickin’,
·      Where to stash your money when deflation turns to inflation and more…

Eric Fry, reporting from Laguna Beach, California…

Citigroup did not go bankrupt yesterday, therefore the Dow Jones Industrial Average soared nearly 400 points. If Citigroup does not go bankrupt tomorrow, there’s no telling how high the Dow might go.

Joy and jubilation returned to Wall Street yesterday because the federal government tossed a $326 billion lifeline to Citigroup - $306 billion worth of loan guarantees and $20 billion of actual cash. Unfortunately, Dow points aren’t as cheap as they used to be. Remember last March, when the Treasury handed a $30 billion check to J.P. Morgan to finance the Bear Stearns takeover? The Dow rallied 187 points on the news – or about one point per $160 million of bailout money.

By comparison, each one of yesterday’s Dow points cost $823 million. Alas, a law of diminishing returns seems to be taking hold. So even if we believed that the Treasury could buy a new bull market, the results would not come cheap. At $823 million per point, the price of sending the Dow to a new record high would be a whopping $4.7 trillion.

Unfortunately, an opposite tendency pertains: the more the Treasury spends, the more the market tumbles. Would you believe that the federal government has ACTUALLY committed $7.7 trillion worth of bailouts, loans and guarantees since the credit crisis erupted last year? And would you believe that the Dow has tumbled more than 5,700 points since this bailout bonanza began?

So, let’s see, that about one Dow point LOST for every $1.3 billion of bailout monies.

In no small bit of irony, the Treasury unveiled its very first bailout facility, the $80 billion “Master Liquidity Enhancement Conduit” (MLEC) on October 15, 2007 – just one week after the Dow registered its all-time high. Although the much-ballyhooed MLEC never actually materialized, it launched a wacky, new era of subsidized corporate failure and governmental caprice. Each new bailout has arrived on the scene as a “necessary evil.” But now we’ve got so many of these little devils running around that all hell has broken loose.

It’s entirely possible, of course, that all these devilish bailout programs will transform the devastated financial markets into a heaven on earth… or at least a heaven on Wall Street.  But the early evidence is not very comforting.

According to a team of number-crunchers at Bloomberg News, “The U.S. government is prepared to provide more than $7.7 trillion on behalf of American taxpayers…This unprecedented pledge of funds includes $3.2 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s.”

The Bloomberg calculation includes a broad array of both direct and indirect bailout programs.  In addition to the Treasury’s $947 billion TARP program, for example, the Federal Reserve has pledged to protect $2.3 trillion worth of money market funds and the FDIC has promised to guarantee $1.4 trillion worth of bank deposits. Various other programs and “facilities” provide the other $3 trillion worth of loans or guarantees.

Where does all this money come from? No one can really say exactly.  But we know where it does NOT come from. It does not come from an enormous piggy bank that is sitting in some federal building in Washington, DC.  Nor does it come from a traditional bank account that holds traditional savings.  No, this money comes from that elaborate hall of smoke and mirrors known as the Federal Reserve. 

This money comes from a monetary “system” that is not really a system at all; it is a work of performace art – an improvisation of a monetary system. The system utilizes an artful combination of promises, accumulated goodwill, foreign borrowings and government IOUs to validate trillions of dollars worth of a paper currency that America prints for itself. As long as this improvisation delights the dollar-holders of the world, all is well. But at some point, they might tire of the performance.

A few dollar-holders may be tiring of the performance already. On news of the Citigroup bailout, for example, the dollar slumped against both gold and the euro, while Treasury bonds also fell. One day does not make a trend, of course. But one year does. For more than a year, the U.S. government has been piling bailout liability upon bailout liability, while simultaneously forcing the Federal Reserve to bury the actual costs inside the complexity of its balance sheet and the opacity of its monetary machinations.

For now, the exact cost of socializing America’s recent financial sins remains a mystery. But even without the details, a couple of observations seem self-evident:

1. Nation’s do not usually purchase their prosperity, especially not with banknotes that they manufacture for themselves. Nations EARN their prosperity by the sweat of their brows.
2. The American government and its monetary authorities do not actually possess all the money they are spending, loaning and pledging in their various bailout programs. To the extent, therefore, that these bailout programs must deliver actual cash, the risk of inflation mounts. In other words, the money that does not really exist must come into existence somehow. And all of the possible sources of non-existent cash are inflationary.

Net-net, an inflationary cycle may return sooner than most folks currently imagine. To be sure, a sort of deflation now envelopes the globe. But if the current bailout bonanza continues, this deflationary episode may yield very suddenly to a new inflationary episode…in which case the bull market in commodities might resume on very short notice. Already, gold has rebounded more than $120 from its recent lows of $700 an ounce. And many other commodities are showing signs of life as well.

In the today’s edition of the Rude Awakening, Chris Mayer offers a kind word for agricultural commodities. Even if deflationary conditions persist, Chris argues, the global supply/demand picture for the grain markets suggests much higher prices. Read on…

—- Mayer’s Special Situations Royalty Report —-

Urgent Retirement Recovery Alert:

Closed to New Investors for the Last 6 Years — Now Open Again… The “Chaffee Royalty Program” That Turned Every $1 Into $50

In 2002, the same royalty “paycheck program” that paid out $50 for every $1 invested… decided to shut the door to new “members.”

In 2008, that door is open again… and it just got easier than ever to “make money while you sleep”…

But there’s no telling when it could close again…So you’d better collect your own “Chaffee Royalties” right NOW! Full Report Here

—————————————–

Meal Ticket
By Chris Mayer

“In my own case, the Depression brought a strange result,” writes Eddie Cantor in 1931. “Before the crash, I had a million dollars, a house, three cars and four daughters. Now all I’ve got left is five daughters.”

Eddie Cantor (1892-1964) was a comedian, singer, songwriter and actor. “Banjo Eyes,” as he was sometimes called, was also the author of two little books on the Great Depression. “People used to rob banks,” he writes in Yoo-Hoo Prosperity. “Now we’re lucky when it isn’t vice versa.” Cantor jokes about many troubles in the Great Depression, but one recurring theme is the relative lack of food.

A millionaire is “one who eats three square meals a day.” Things were so bad that “the pigeons are now feeding the people.” They were funny lines…sort of. For many of the people living during those times, Cantor’s jokes were not so far from the truth.

We have it comparatively easy in this, the crisis of 2008. We may have to make do with fewer Swatch watches and Coach handbags. We may have to pass on the latest iPod and make do with last year’s winter coat. These hardships are not important, except for people selling those goods. But the credit crisis is also affecting the world’s ability to produce one thing important to everyone: food.

It’s harder for farmers to get credit for next season’s crop, especially farmers overseas. They need fertilizer, seed, fuel and more. And most farmers need to borrow money to obtain these essential items. No credit; no crops.

Therefore, the global credit squeeze might reduce plantings of key grains, even as world inventories of these grains hover near historic lows. In Russia, for example, cash-starved banks have cut off funding for the industry. The head of the Russian Grain Union says, “Many farmers probably won’t be able to borrow money for the spring sowing.” This is important because Russia is no lightweight in the grain division. It produces 9% of the world’s wheat, for instance. No surprise that the United Nations considers Russia a critical component of the global food supply.

Ironically, Russia just had its best harvest ever. And still, global grain inventories remain low. Bloomberg reports that global inventories of corn, wheat and soybeans are the second lowest they’ve ever been since 1974.

A number of countries already fear what might happen next year. The Washington Post Foreign Service in Shanghai reports that China adopted a number of measures to protect itself from the worsening food crisis: “Among the most extreme measures [China] took was to impose new export taxes to keep critical supplies such as grains and fertilizers from leaving the country.”

These taxes are extremely high, on the order of 150%-185%. China worries that richer countries may outbid its own farmers for supplies and weaken China’s own food supply. One Chinese fertilizer company, which produces 150,000 tons per year, already said that the new taxes mean exporting is no longer profitable.
China was the biggest exporter of certain types of fertilizer. No longer. That’s a lot of supply off the market.

Fertilizers are absolutely critical in maintaining (and improving) crop yields. Without them, we’d produce far less per acre. As a result, in parts of Africa where people depend on Chinese fertilizers, the food supply problem is now more acute. China’s export taxes and bans follow those of other grain producers, including the Ukraine, India, Pakistan and Argentina.

Amazingly, despite these various maneuvers around the world to prevent grain exports, the prices for wheat, corn and soybeans are all half of their mid-summer highs. It seems the market believes a global recession will dampen demand. Maybe so, or maybe the market doesn’t know anything. The severe commodity selloff during the last few weeks might be saying a lot more about the desperation of hedge fund managers to raise cash than about the prospect that grain demand will fall - in which case, we could see another surge in prices next year.

Demand for grains is still very strong. In China, each wage-earner devotes about 40 cents of every dollar earned to buying food. In India, that number is a staggering 70 cents out of every dollar earned. In other words, the food budget in these countries is hardly a discretionary item. It will remain constant, or even rise, no matter what the global economy does.

Meanwhile, the people in these countries who have a couple of extra rupees to toss around are upping their consumption of meats, which increases the per capita demand for grains. As PotashCorp chief William Doyle recently pointed out: “The average daily protein intake in China has increased by 40% over a 20-year period, with the greatest percentage of that increase coming from meat consumption.” You can see it in the size of the people themselves: The average 6-year-old Chinese boy is 12 pounds heavier and 2 inches taller than 30 years ago. These people aren’t going back to the ways thing were. This is a long-term story, and these trends should continue.

 

Yet even if demand growth for grains slows, it’s not likely that those low global grain inventories will improve. Even if grain demand fell to 2% per year, we’d still need record production to keep grain inventories from falling further.

For all these reasons, I think the future is still bright for agriculture and all that it entails. I think the fertilizer companies look cheap again. We owned Agrium (NYSE: AGU) for nearly three years, and it more than tripled our money. The stock is now a good one-third below what we bought it for initially.
PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS) are other names I’m looking at hard right now - both have been crushed in this troubled market.

Beyond that, irrigation companies have come way down, even after posting outstanding results. Lindsay (NYSE: LNN) and Valmont (NYSE: VMI) are two irrigation equipment makers, for example, both coming off great quarterly results.

In 1931, Eddie Cantor wrote that the biggest thing in years was bread. “Why, they’re giving it away free! Whenever four men get together at a street corner, it used to be a merger,” he writes. “Now it’s a bread line!” It’s funny now. Next year, it might not be, at least to some.

[Joel's Note: In whipsawing markets like these, it’s the value guys, the self-described “vulture investors,” who are often the first to spot the bargains as the bottom nears. As Rude faithfuls know, Chris Mayer has been our go-to value guy from day one. We’ve watched his special reports make steady (and sometimes explosive) returns for his subscribers and happily publish his thoughts whenever we can.

So, take a look at the stocks he’s keeping an eye on above and, if you haven’t done so already, have a quick read through his Chaffee Royalty Program Report. We trust you’ll find some bargains in there that should hold you in good steed in the uncertain months and years ahead.

— When Fear = Profit: A Special Volatility Report —

Bailouts…Deleverging…Government Shenanigans…Unprecedented Volatility…

Put simply, the markets are bucking and kicking like we’ve never seen before .

With such unpredictability, it is difficult to know where to invest, if at all.

There is, however, one man who has been relishing the recent whipsawing market conditions. Steve Sarnoff has been on an absolute tear lately. His last five picks have all more than doubled… and are sitting at cumulative highs of 1,222%.

Take a different approach and learn how to make fear in the markets work FOR you with Steve’s Options Hotline Service Right Here

—————————————–

[Rude Endnote: “What would be wrong with GM spinning off its various divisions, which used to be stand alone companies, as new companies?” writes one reader.

“GMAC could then merge with GM and all the nasty debt centered there. Then we shall see how useful the top brass is. The individual companies would then compete to build the best cars for the future. Honestly, some will make it and some will not, but is that not the free market? Just a thought.”

Rude: Hmm…top brass being forced to prove themselves, individual companies competing honestly for market share without government handouts, allowing – gulp – inefficient companies to fail…

You’re right, it DOES sound a lot like the free market and, consequently, not something Congress is terribly interested in promoting, alas.

Until next time…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com