Inflation Around the Globe, Kerr’s 2009 Commodity Pick, The Russian Boom, Gold Forecast, and More!

by Addison Wiggin & Ian Mathias

  • Inflation everywhere… latest data confirm prices rising around the world
  • Kevin Kerr on the Corn Belt flooding… and his favorite commodities trade for 2009
  • Gas and oil still on the rise… Chris Mayer with an unlikely industry booming in an unlikely place
  • Byron King on a “vast” offshore oil stash about to be tapped
  • Gold is still cheap, says James Turk… one measure that suggests spot prices should soon double

00:00 The world is awash in cheap money. One stop at the gas pump and you know the effects in the U.S.

Today, we see that inflation in Europe has raced to a 16-year high. The inflation rate in the eurospace ticked up to 3.7% in May, reports the EU Statistics Office. As in the U.S., food and energy costs led the way, rising at annual rates of 6% and 13%, respectively.


00:11 And they’re not alone… check out the latest annual inflation rates from around the globe:

India: 8.75%, seven-year high
Turkey: 10%, 14-month high
Russia: 15%
China: 7.7%, near 12-year high
Vietnam: 25%
UAE: 9.3%, 19-year high
Saudi Arabia: 10.5%, 30-year high
Kuwait 10%, record high
Mexico: 4.9%, accelerating at a 3-year high
Brazil: 5.5%
England: Predicted above 3%, 1-year high
South Africa: 10.4%
Zimbabwe: 165,000%, record high (OK, not a fair example)

How will the world combat inflation in unison? Such is the economic challenge in the twilight of the great dollar standard era.

00:31 The euro soared versus the dollar in response to today’s inflation data. The dollar index had risen steadily all last week, over a full point, to 74.2. But now, traders believe a July ECB rate hike is all but certain. The dollar index was sold down to 73.6 this morning, while the euro was bid up to $1.54. The pound rode the euro’s coattails and is up to $1.96.

“The Japanese yen continues to get dragged through the mud,” laments Chuck Butler. “The carry trade is really the cat’s meow in the markets again.” The yen is now at 108 versus the dollar, a four-month low.

00:44 The status quo remains in the U.S. Corn Belt: Water is high, crops are spoiled, corn continues to set record highs every day. July futures leapt 3% in Asian trading this morning and opened in Chicago at a record $7.53. Corn’s now up 90% in the past year, 25% in the last month alone.

“There is little chance of farmers switching now to soybeans,” says Kevin Kerr. “Seed and fertilizer are not ‘readily available,’ and they would cost a fortune even if they could be obtained. Even more of a problem is that June 10 is really the cutoff for soybeans to get in the ground.

“Many farmers will simply opt for ‘Plan B’: take the government insurance money and call it a year.

“I think 2009 will see surging dairy, cattle, hog and produce prices.”

01:06 Retail gasoline stuck yet another record high this morning. $4.08 is the new national average, up a full dollar from this time last year. And lest we forget, aside from the typical drivers of gas prices, the success of the U.S. corn crop is also affecting your price at the pump.

“Gas prices and ethanol will surge on this disaster — there are no two ways about it,” adds Mr. Kerr. “Farmers, in some cases, have been paid in advance (crazy) to deliver corn to elevators. There was no problem while the weather seemed OK, but now it’s another story. Government flood insurance may help farmers eat this winter, but it won’t alleviate the gas shortages we almost certainly will see.”

01:20 “The high price of oil and gas doesn’t crimp activity everywhere,” notes Chris Mayer, finding opportunity amid crisis, as usual. “In Russia, for example, the car trade is booming. In fact, the high price of oil has helped the Russian market for cars. The Economist reports that car ownership in Russia is well below that of other developing countries. In Russia, about 200 out of every 1,000 people own a car. The ratio is over 500 out of every 1,000 people in Western Europe, and about 800 in the U.S.

“In 2007, new car sales were up 36% by volume — some 57% by value, reflecting the new buying power of Russia’s burgeoning middle class. Some think that this year, Russia will surpass Germany as Europe’s largest car buyer.

“Think of the consequences of so many new cars hitting the road. Add in China and India. Think of all the fuel they will have to burn. All the steel consumed. The roads yet to be paved. The storefronts and hotels and all the trappings that go with an increasingly mobile population. It’s mind-boggling.”

01:45 “We will pump more oil,” declared Saudi Arabian King Abdullah on Sunday. King Abdullah signed a pact with U.N. head honcho Ban Ki-moon over the weekend. Saudi oilmen will now have to boost production by around 200,000 barrels (2%) by July. Should they achieve such an increase, the oil-rich nation will be pumping 9.7 million barrels a day, its highest level ever.

01:55 “Current price levels do not reflect supply and demand realities,” reads OPEC’s latest monthly report. Adding to the selling pressure on oil this week, the cartel has cut its 2008 global oil demand forecast. OPEC now believes the world will consume 1.28% more oil this year, around 86 million barrels a day.

02:02 Thus, oil softened a bit Friday and over the weekend. Spot price fell as low as $134, but is already back to around $136 as we write.

This week, keep an eye on the U.S. inventory report out Wednesday, and any news leaking from an emergency OPEC meeting in Jeddah. The Saudis have called for the oil cartel to suddenly meet this coming weekend, the results of which could really shake things up. We’ll keep you updated.

02:10 “The outer continental shelf (OCS) areas of China are still wide-open for development,” notes our oilman Byron King. Since the U.S. is showing no near-term interest in drilling ANWR or the Eastern Shore, Byron’s turned his eye to the Far East.

“There is quite a lot of OCS area in East Asia. China, in particular, has a vast offshore area, starting with the Yellow Sea up next to the Korean Peninsula.” Byron passed along this map… OCS is in light blue:

“Furthermore, China has been looking offshore for energy resources for only a couple of decades, and almost all of that exploration was within spitting distance of shore.”

If you think the Chinese growth story isn’t going away, Byron recommends you look into Asian offshore drillers. He just told Energy & Scarcity Investor readers his favorite, and it’s still below his “buy” price. Get the ticker, here.

02:40 Or better yet, you could get Byron’s preferred Chinese driller, Chris Mayer’s backdoor play on Russian growth, the specific commodities options Kevin Kerr recommends, plus loads of other Agora Financial products, services and recommendations… everything we’ve got for one heavily discounted fee. Learn how, here.

02:50 Priced in gold, oil has reached a record high for the first time in years. Light sweet crude now costs around 4.8 grams of gold per barrel. Oil hasn’t been nearly this expensive (or gold this cheap) since 2006:

“Even though its price has risen more than threefold since 1999,” James Turk tells us, “gold’s purchasing power today is far less than it should be. The gold price is not rising as fast as the dollar’s loss of purchasing power. Based on its historical relationship to oil, gold should be twice its current dollar price.”

03:04 Gold has recovered most of last week’s losses. Since Friday, the precious metal popped about $35, to around $887 this morning. As far as we can see, most of today’s buying support is courtesy of a weaker greenback.

03:14 Martin Sullivan, head of AIG, has joined the list of recently fired Wall Street CEOs. AIG has tapped Robert Willumstad as the new head honcho. Willumstad, if you recall, left Citigroup in 2006 after the powers that be passed him over for the CEO title… which went to Chuck Prince.

AIG, the world’s largest insurer, has now hired three new CEOs in as many years.

03:22 Lehman Brothers posted a $2.8 billion loss today, the first in the company’s public history. The brokerage firm had announced the loss last week, but this morning’s earnings report makes it “official.” Most of the details of the announcement this morning were in line with expectations, a tiny bit surprising in light of the sudden firing of the firm’s CFO and COO last week. Dan Amoss is currently digging through the earnings report and conference call… we’ll let you know if he finds any gems.

LEH is up 3.8% as we write.

03:45 The U.S. stock market enjoyed a friendly Friday the 13th. Major indexes rallied as crude oil retreated and the core CPI report came in line with expectations. Some dollar strength helped too, and the Dow and S&P 500 gained 1.5%. The Nasdaq jumped 2%.

For the week, despite all the volatility, the three indexes finished pretty flat… the Dow gained 0.8%, the S&P 500 lost 0.8% and the Nasdaq stopped where it started.

03:52 In the bond markets, we note that the yield on 2-year Treasury notes just posted its biggest gain in 26 years. Yields shot up 65 basis points last week, the largest gain since 1982. That’s about as loud a voice the Treasury market can muster… bond traders are suggesting that the Fed has shifted its focus from fostering growth to fighting inflation.

04:00 Asian markets kicked off this trading week with a nice rally. As it turns out, even Japan’s Nikkei 225 is a “dollar trade” these days… the major Japanese index jumped 2.7% early this morning as a stronger dollar/yen ratio gave hope to struggling Japanese exporters. Benchmarks in Hong Kong and Singapore rallied nearly 2%, as well.

04:10 And as gas prices skyrocket in the U.S., so do sales of these silly things:

Segway Inc. told the AP today that retailer walk-in traffic is up 30-40% this year and that sales were likely to jump 50% by 2009. We have to admit… nothing wrong with breaking away from oil and gas dependency. Just wish it didn’t cost $5,000 and total emasculation.

04:25 “So Exxon is leaving the retail gas business,” surmises a reader of our report on Friday. “Could it be that Exxon just wants to shift the blame for the higher gas prices? After all, if it isn’t the retailer, it can’t be held accountable for the price, can it? Just a thought. Especially considering those pesky recurring meetings with Congress.”

The 5: “I like the move,” responds our new options advisor Wayne Burritt. “The company will continue to market its first-class branded products to its 12,000 Exxon Mobil and Tiger-themed stations on a wholesale level. That means the energy behemoth is still a huge player in the landscape but now off-loads a ton of retail risk.

“The fact is, selling gas – even as the current nose-bleed levels – is a tough game to make money in. Wholesale prices can simply rise at a much faster rate than retail prices, putting a big squeeze on profits. That’s why gasoline retailers have long relied on action at the pump to drive consumers to their bigger margin offerings, such as auto repairs and food and drink sales.”

05:00 “Toward the whole gold confiscation concern,” writes another, “does it matter if a few privately owned coins go unaccounted for by the government? Sure, I’ve been buying, but I’ve also been giving them away as gifts. So if by the miracle of the PATRIOT Act, someone at the Treasury knows I bought a silver coin in 2007 and he knocks on my door, how does he respond when I say I no longer have it? (Hey, sold it for quick cash at the jeweler last year to buy food and heating oil — at a loss, no less). Will he care enough to get a court order to search my property, interrogate my friends and relatives, launch an investigation and haul me to court, r treat me as an enemy combatant… ad nauseam?”

Cheers,

Ian Mathias
The 5 Min. Forecast

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