Best of the BRICs, Forecasts for 2010, Sea Change in the Bond Market and More!

by Addison Wiggin & Ian Mathias

  • A surprising lesson in contrarianism… which BRIC had the best decade?
  • The sector Marc Faber expects “massive outperformance” in the next 10 years
  • Stocks snap winning streak… Wall Street worried over ANOTHER banking bailout
  • Doug Casey offers an atypical look at the real value of gold
  • Plus, Byron King reveals one industry on the verge of a breakout year… finally

  Pop quiz: Which BRIC nation paid off the biggest returns in the last 10 years? No peeking…

Russia has a bad rep among its BRIC brethren. It’s politically unstable, GDP there is actually plummeting, its fate seems totally dependant on oil and gas revenues and it doesn’t even fit the bill of a real emerging market… more like a wounded superpower stumbling back to economic relevance. But as we begin the process of wrapping up the decade, here’s more proof that, as Rick Rule likes to say, “you’re either a contrarian, or a victim.” Buying into Russia after its 1998 default and most dips thereafter — despite all the booing and hissing from the cheap seats — would have made you very, very rich. 

Stay tuned in 2010 for more on these nations from our newest service, BRIC by BRIC.

  Back in the States, a sea change: After outperforming the stock market in the last decade, U.S. Treasury bonds are about to finish their worst year since at least 1978, when Merrill Lynch started keeping track. U.S. government securities are down 3.6% this year, according to Merrill / Bank of America data. (That might have something to do with the record $1.3 trillion of marketable debt issued by the Obama administration in the first 11 months of 2009.)

The Treasury will conduct its last auction of the year today — $32 billion in seven-year bonds. Once the auction is over, and par for the course in 2009, the government will have sold a record-tying $118 billion in debt this week.

  “It was wise to own long-term U.S. government bonds between 2000 and 2009,” notes Marc Faber, the man behind the Gloom, Boom and Doom report and the keynote speaker at our Investment Symposium this year. According to Bloomberg, U.S. debt has returned 81% over the last 10 years, while the S&P has fallen 8%.

“But for the next 10 years,” Dr. Faber continues, “I expect a massive outperformance of equities compared to bonds.

“An excellent candidate for a credit downgrade is, of course, Japan, and the time may (finally) have arrived for a more aggressive stance towards shorting Japanese government bonds, which currently yield just 1.268%. In fact, the big surprise for 2010 could be weaknesses in the yen and in Japanese government bonds and strength in Japanese equities, which have built a huge base against the S&P 500 over the last few years. Moreover, purchasing Japanese financials would be akin to reaching new highs in contrarian thinking.

“In addition, globally my preference would be to invest in high-quality large market capitalization stocks and avoid smaller companies, which may find it difficult to access credit on favorable terms…

“Personally, however, I am not increasing my allocation to equities at the present time, as I expect a more meaningful correction to unfold in either the first or second quarter of 2010. (In fact, on further strength I would look at reducing my exposure.)”

  Major market indexes in the U.S. ended their six-day winning streak with a tiny little fall yesterday. Both the Dow and S&P 500 lost one whole point… heh, perhaps some proof that traders have checked out until 2010. Those same indexes drifted lower this morning, both down about 0.3% at the opening bell, in part thanks to this:

  GMAC, the former financial arm of GM and now the scourge of the lending industry, is in talks with Uncle Sam for a $3-4 billion bailout. Facing what would be its third government injection, GMAC says it can’t raise enough capital to cover its lending losses (primarily from bad home loans and auto loans on American cars… shocker!).

Thus word has leaked that the government is just days away from upping its stake in GMAC. Since the government has already sunk $13.5 billion in this “Ally Bank,” worth about 35% of the company, we wonder what’s keeping the government from rolling GMAC back into GM (which it is already the majority stakeholder) and having one big, happy, one-stop auto shop.

  Stock weakness is helping the dollar push higher. At 78.2 the dollar index is almost a full point above yesterday’s low and just a hair off a four-month high.

  That’s bad news for gold. The spot price is down another $15 from yesterday, down to $1,087 as we write.

“Aside from a few Spanish galleons at the bottom of the sea and dentures returned to the earth after a lifetime of use,” Doug Casey muses in the latest issue of Whiskey & Gunpowder, “pretty much all of the gold ever mined and refined is still sitting on the surface of the earth somewhere. Nobody really knows how much that is, but the most reasonable estimates I’ve seen are something like 6 to 8 billion ounces. That happens to work out to about one ounce of gold for every human being on the planet at this time.

“Out of this, the U.S. government reports that it has 265 million ounces of gold in its Treasury. If we divide the money supply by the number of ounces the U.S. could back its paper with — and here we’d have to decide what measure of money supply we want to use. Nobody, including the Federal Reserve, actually knows how much money it has floating around out there. It would seem that there are about 6 trillion dollars outside the United States alone. Let’s estimate that M0 in the U.S., the narrowest measure of money supply that consists of just notes and coins, amounts to 1 trillion. So, 265 million into 7 trillion gives you about $26,415 per ounce of gold.

“Now, if we add in the total obligations of the U.S. government, which it will either need to print more money to meet, or it will have to default on — that’s about 100 trillion. If those dollars are printed, that would give us $377,358 per ounce. The same ratio for M1 would give you about $6,226 per ounce, and M2 would give you $31,320 per ounce.

“All of these numbers are far, far above the current level of roughly $1,000 per ounce. And that’s the answer to the question: Why gold? Because it’s got only one way to go: up. It seems to me that everyone should have a very significant portion of their wealth in gold.”

  Oil is resisting that dollar strength today, edging up to $79 a barrel. But as we observed yesterday, nuclear might be the big energy story of 2010:

  “Lately, I’ve been talking with people in the nuclear business,” says Byron King, “from uranium miners to reactor designers to government minders and check signers. Everything I’ve heard leads me to believe that 2010 will be a good year — finally — for the nuclear industry…

“Here are the nuclear numbers: There are 436 operating reactors in 30 countries around the world, 104 of which are in the U.S. These reactors produce just shy of 15% of the world’s electricity. The best data are that 50 reactors are currently under construction. There are 137 more being formally planned, and another 295 reported proposals seeking construction approval.

“Right away, it’s clear there are a lot of reactors out there, with something like 400 more on the way. So where will the world nuclear industry obtain the uranium fuel for all these new reactors? That’s a darn good question.

“Just in the U.S., annual uranium use for the nuclear power industry is about 55 million pounds. The U.S. produces less than 4 million pounds of this fuel — about 7% — and imports the rest.

“But despite the large U.S. demand for uranium imports, the world uranium mining industry lacks adequate capacity to meet demand. A large amount of the nuclear fuel imported into the United States comes from decommissioned nuclear warheads from Russia. The warheads trace their origins back to the Soviet Union.

“If you thought the U.S. had a problem with imported oil, now you know that there’s an issue with uranium fuel as well. Of course, I’m not the only one who knows this. It’s a national security issue, and I can tell you that things are about to change in a very big way… The nuclear industry is about to experience a breakout, and it’s going to be a major investment opportunity in which we can pretty much get in at the bottom of a down market.”

For your money, we don’t see a better way to get in on this trend than Outstanding Investments. You’ll get Byron’s best nuclear plays, plus the cream of the crop in the mining, energy and infrastructure sectors… all for a very inexpensive annual subscription. 

  “Unfortunately, you don’t get 10% of the news of all that goes on in Venezuela,” a Venezuelan reader writes, referring to Hugo Chavez’s threat to nationalize the country’s auto industry. “The 5 hits it right on with the Exxon, labor and exchange control comments but there’s more.

“Oil production, despite government claims, continues to decline on a daily basis. Depending on whom you ask in the private oil services sector, total production is no more than 1.3-1.8 MMBPD [million barrels per day]. One (of many) compounding factors: The government took over the boat companies that transported equipment and personnel around Lake Maracaibo. Since doing so (for, ahem, ‘strategic’ reasons), only 18% of the boats are working now. In the meantime, most of the submarine cables are being stolen for copper, leaving highly productive oil wells without power. Now there are no boats to go check on them (let alone transport repair crews) and don’t even ask about remote monitoring…

“But wait, even if they DID have the boats and the personnel, suppliers stopped supplying because PDVSA [Venezuela’s state-owned oil corporation] simply can’t or won’t pay overdue invoices. When they say they will, they try to force companies to accept local currency (the official rate is 2.15 to the dollar and the free rate is hovering at around 6). Even then, they demand an extra discount on an already signed contract price. Did I forget to mention having to pay a percentage to the PDVSA manager in an offshore account to actually get all that done?

”On the subject of vehicles, try buying a car in Venezuela. If you don’t have pull with a dealer or pay a salesman a sizeable commission under the table, you’re out of luck. Production on all car assembly plants has dropped dramatically in the last few years. If it’s not labor issues, it’s access to government-controlled dollars, etc. Incredibly, a lot of people are making a living buying new cars, holding on to them for a week or so and then selling them for a HIGHER price.”


Ian Mathias
The 5 Min. Forecast


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More