Gold Shrugs off IMF Sale Report, Food Riots in Africa and the Caribbean, Kerr’s Farmer Contacts, and More!

by Addison Wiggin & Ian Mathias

  • Stocks Sideways as Earnings Reports Await… Gold Shrugs off IMF Sale Report
  • Dire Forecast From World’s No. 2 Oil Producer
  • Food Riots in Africa, Caribbean…and a Worrisome Sign in New York City
  • Kerr’s Farmer Contacts Bring Bad Tidings on Ethanol Plants, 2008 Crops

The Great Greenspan Reputation Rehab tour is officially under way.

“I was praised for things I didn’t do,” Greenspan said this morning in The Wall Street Journal.
“I am now being blamed for things that I didn’t do.” Not that he spoke up when Bob Woodward hailed him as the “Maestro”…or when Time
magazine featured him on its cover as the head of the “Committee to Save the World,” of course.

Yesterday, we noted fiery comments Greenspan directed at critics in the Financial Times. Today, The Wall Street Journal
trots out the results of not one, not two but three recent interviews.


The Maestro’s Last Defense: Look deep into his eyes. When his hand closes into a fist, 18 years of easy money policies will vanish from your memory. Poof!

“Omniscience is not given to us,” Greenspan told the WSJ, dodging one bullet. “There is no way to predict how innovative markets will develop. All you can do is set a general strategy. The choice is between a lightly or tightly regulated economy. The former is highly competitive, innovative and dynamic — but periodically visited by wrenching crises. The latter is more stable, but slower growing.”

“Monetary policy is process based on probabilities,” he continued, dodging another, “I don’t remember a case when the process by which the decision making at the Federal Reserve failed. Events often did not proceed as we anticipated, but that resulted from a lack of foresight, not from a flawed decision making process.”

Nearly 300 years ago, John Law, a Scottish gambler and womanizer, conducted the first modern experiment with paper money in early 18th-century France. While the party raged, Law became the richest man in the world and was hailed a hero by king and court. Before it was all over, Law barely escaped France with his life after having his carriage smashed by an angry mob. We recounted the story in Financial Reckoning Day in 2002, at the height of Greenspan’s Maestro-ness.

The fabulous destiny of Alan Greenspan awaits…we’ll keep you posted.

Likewise, the sunny optimism breaking over Wall Street — thanks to the Washington Mutual rescue plan — turned cloudy yesterday. Traders are getting jittery about first-quarter earnings announcements.

Perhaps, rightfully so.

Alcoa, the first Dow component to report, did so yesterday after the close. It came in at 44 cents per share… analysts were expecting 48. But we don’t expect the aluminum producer will have much of an effect. Most of the financials begin reporting next week. That’s when the fireworks will begin.

For the day yesterday, the Dow and S&P each lost a skosh. The Nasdaq dropped about a quarter percent…down 0.26% Otherwise, trading was quiet.

We’re detecting a theme in much of the day’s news. Something you might call “Peak Everything.” Oil, food, water — you name it — supplies are falling and prices and tensions are rising. The world appears to be entering one of those phases in history that will take generations of library-sequestered historians inventing new theories to explain.

But let’s dive in, starting with oil. It’s approaching record levels again. Light, sweet crude closed up nearly $3 yesterday, at $109.09. One reason for the rise: a decline in production from Russia — the world’s second biggest oil exporter.

“Production has been flat the last three months,” explains our Byron King, citing an obscure report from oil analyst Aram Mäkivierikko, “and it’s still below the maximum of under 10 million barrels per day set last October. That’s putting a strain on global supply, despite what OPEC ministers say.”

In a worst-case scenario, the study says, Russian production has already peaked. And even in the best-case scenario, production can’t increase by more than 5-10%. Should this report bear scrutiny, the implication of “Peak Oil” in Russia will be dramatic.

On the home front, Byron’s keeping his eye on a company that claims it can transform used tires into fuel…and it’s going into commercial service no later than May 31. Down the road, the same technology could be used to breathe new life into American oil wells that have been abandoned for decades.

And it has a one-of-a-kind leg up on all competing technologies when it comes to extracting oil shale — the hard-to-extract stuff in the Rocky Mountains that’s estimated to total three times Saudi Arabia’s proven reserves. We’ve reserved details for paying members of Byron’s Energy and Scarcity Investor — on sale this week. If you’re interested in learning more, you can do so here for a limited time.

Just days after Robert Zoellick, president of the World Bank, warned 33 countries are at risk of riots because of food prices — the risk is already becoming a reality in several of them.


Four people have been killed in Haiti, where the prices of rice, beans and fruit have risen 50% in the past year.

Food riots were reported in four West African nations yesterday, and a nationwide strike was called for today in a fifth. Plans for a general strike in Egypt to protest rising food prices have been squelched, but only because police arrested more than 200 people.

“I think what we are facing is a perfect storm,” comments Bettina Leuscher from the World Food Program. “More and more people are going hungry and need food aid. At the same time, we’ve got the lowest food reserves in some 30 years on the markets. And prices have gone up tremendously, sometimes doubled in the last few months and you’ve got climate change with less harvest, droughts, floods.”

No riots in New York — not yet, anyway — but food pantries report major shortages because donations are way down.

“We need to be concerned,” U.N. Secretary-General Ban Ki-moon commented yesterday, “about the possibility of taking land or replacing arable land because of these biofuels.” This, two years after the United Nations Food and Agriculture Organization forecast that biofuels would wipe out hunger and poverty for up to 2 billion people.

“I’ve heard from at least a dozen farmers,” counters Kevin Kerr, who has been on the biofuel beat for years, “in Illinois, Minnesota, Iowa, Wisconsin and Indiana. They’re all telling me the same stories of either ethanol plants under construction that have ceased operations or plants that are declaring Chapter 11. Looks like the ‘dream’ of the new gold rush in corn-based ethanol is starting to unravel, and fast.”

How about the outlook for U.S. crops this spring? Says Kevin: “Not great.”

“The wet, muddy conditions and continued rain make it next to impossible to get equipment in the fields,” Kerr writes. “Also, farmers run the risk of putting seeds in too early and, basically, losing the crop. The situation is pretty grave this year, as demand for all the grains is very high, as are the costs to plant them. The hope seems to be that we will have another year like last year and Mother Nature will be kind. It may not end up that way.”

Kevin heads out next week for his annual trip to the upper Midwest. “I knew corn would be going to $6 three years ago largely because of what I found out by visiting farms and seeing what was going on long before the ethanol boom landed on the front page of Barron’s.” We’ll keep you posted on Kevin’s travels.

Oh…some angry farmers respond to our coverage of the ethanol boom, too, below.

Then there’s this water issue.

“Water is absolutely not fairly priced or realistically priced,” Peter Brabeck-Letmathe, CEO of Nestle, said yesterday, citing frequent and lavish subsides to farmers in both the developing and developed worlds. “People are using water as if it is a resource that will be free of charge forever. That is the reason we are running out of water.”

Oy, we can’t catch a break on these themes.

Of course, our Chris Mayer has been sounding the alarm about water for nearly two years now. The newest addition to his Blue Gold Portfolio is already up 12% — in part because of news that it just landed a contract to rehab a couple miles’ worth of sewer pipe in Manhattan.

We’re also covering “peak everything” in our investment symposium in Vancouver this July. A View From the Peak: Investing Profitably in a Time of Risk and Scarcity will feature the most successful resource investors on the planet and over a 1,000 individual investors — like you — striving to stay ahead of the next investment trends. Don’t hesitate to join us. Details here.

The International Monetary Fund announced yesterday that it plans to sell 13 million ounces of gold — about 12% of its total holdings. That could drive up supply in the market and take gold to the woodshed…

Selling its gold will help the IMF raise cash to shore up its balance sheet. To that same end, the IMF will make an uncharacteristic move for a bureaucratic colossus — cutting about 15% of its work force. That means 380 people will have to find something productive to do in Washington, D.C.…rather, they’ll have to move.

Gold traders shrugged off the news. The U.S. Congress would have to sign off on the sale, and chances are that it’s not even going to be brought to the floor until after the election. The yellow metal closed yesterday at $920, up about $5.

The paper currencies were “boring” yesterday, in the words of our currency counselor Chuck Butler. The dollar index closed essentially unchanged.

But today, the British pound closed at a record low against the euro. A survey on the U.K. housing market that suggests interest rate cuts from the Bank of England are just over the horizon. Maybe the pound fancies a sprint to the bottom against the U.S. dollar? That would be fun to watch…from the sidelines, at least.

One of Europe’s more famous watering holes — indeed, one of Ernest Hemingway’s hangouts — has taken pity on dollar holders, posting this sign on the outside:

“Harry’s Bar of Venice,” the sign reads, “in an effort to make the American victims of subprime loans happier, has decided to give them a special 20% discount on all the items of the menu during the short term of their recovery.”


Harry’s Bar of Venice: 20% Isn’t Really Much of a Discount With the Euro at $1.57, Is It?

The offer applies to all Americans. You don’t even need to show your passport; they’ll judge by your accent and attitude. Arrigo Cipriani, the bar’s 76-year-old owner, says he can’t afford to be picky. “Since the start of January, we noticed a drop in (American) customers of between 5-10%, and now that we are in April, it looks really frightening.”

One catch: The discount applies only to the restaurant tab. Drinks remain full price. “Huh? What good is that?” “Extreme” Ian might have written this morning, if he weren’t learning how to surf in Costa Rica this week.

Special thanks, by the way, to Dave “Dollar Bear” Gonigam, of The Daily Reckoning’s Desidooru Saloon fame. Dave’s pinch-hitting for the week, while Ian gets his ya-yas out down south. Thanks, Dave.

“Who’s getting bailed out?!” responds an incredulous reader to another’s beef with the media’s characterization of the Bear Stearns “bailout.” “I believe the answer is the bondholders of Bear Stearns and the counterparties to the derivatives held by Bear or those that held derivatives to which BS was the counterparty.

“J.P. Morgan is said to be the largest holder of derivatives, to the tune of 400% of its capital. If true, that means that the Fed is bailing out J.P. Morgan and the other large investment banks that could have also gone under if a large number of the counterparties to the derivatives they were holding defaulted.”

“Taxpayers are guaranteeing 100% of their principal,” agrees another. “Why should we do that?”

The 5 responds:

In this age when “socialized risk” is not only acceptable, it’s the lifeblood of the system, what do you expect?

“When will you guys give a farmer a break,” writes a Nebraskan who’s had enough of our ethanol bashing, thank you, “and let him make some money from the market once? You talk about the vast amount of waste using corn to make ethanol. Just go to the edge of any Midwestern city and see all of the arable land going to waste being cemented over.

“Think of all the water, fertilizer and chemicals used on lawns in cities. Transporting ethanol? How about transporting oil halfway around the world to use in the U.S.? Would you rather be supporting a U.S. farmer or the Middle East? Sounds to me you like to support the Middle East.”

“We American farmers have sold our food too cheap for too long,” writes another, putting it more succinctly, “It’s time the price goes way up to keep up with postage. For instance: 1960 — 4 cents versus corn $1. Postage is now 41 cents, so corn should be up 10 times also, or $10. Or how about cars in 1960? $2,300. Now $30,000, or 15 times as much. Any way you look at it, we have been taken advantage of. Maybe now the price can go up another two or three times so we can live too.”

The 5 responds: Food riots…angry farmers…water and energy crises…hmm. What century is this? Did we miss something on the way to work this morning?

Hope you’re having a good day,

Addison Wiggin
The 5 Min. Forecast

P.S.: To our surprise, we also discovered the newly revised and updated version of our book The Demise of the Dollar
is available on Amazon this morning. We originally released the book in 2005, but its tense was mostly future. Many of the things we forecast two years ago came to pass in a way that surprised even us.

In October, Deb Englander and Joan O’Neill, our editor and publisher at John Wiley & Sons, suggested we take a crack at editing the original to bring the themes up to date. After a few months, working with our new best friend Dori Perrucci, we’ve done just that. The new edition is even better than the first…as we had a chance to go back and correct things that drove us nuts about the first. Take a look:

The Demise of the Dollar: Why It’s Even Better for Your Investments

rspertzel

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