Trade Wars, Global Credit Shrinks, 2010 Oil Forecast, New Years in Nicaragua and More!

by Addison Wiggin & Ian Mathias

  • Last news of 2009 could be big story of 2010… U.S./China trade battle escalates
  • Global credit shrinks for first time… Dan Amoss on how it’ll affect you next year
  • Oil prices set for record annual performance… Byron King explains why higher U.S. prices seem imminent
  • Plus, Addison checks in from afar… tales from Rancho Santana, below


  Here’s some fitting news for the very last day of 2009, particularly for those of us in the forecastin’ business: The trade war rages on.

The U.S. has “won” the latest trade battle with China, announcing yesterday that it is imposing a 10-15% tariff on $2.8 billion worth of Chinese steel pipe. (Heh, that’ll teach ’em!) The U.S. International Trade Commission voted unanimously in Washington to impose duties, saying that Chinese government subsidies have made an unfair environment for American steel producers. One could argue this is almost exactly like American subsidies on corn production, which have made an unfair farming environment for the rest of the world. But this is different, of course. Steel starts with an “s,” for one thing… unlike corn.

Joking aside, the trend can’t be denied. In the past few months, we’ve seen trade squabbles between the U.S. and China over tires, auto parts, chicken feet, solar panels and now steel. Despite some lip service during President Obama’s trip to Beijing back in November, there’s been no sign of these tensions easing, and sooner or later, someone is going to get their feelings hurt. Could make for an interesting 2010.

  Another hurdle for 2010: State and local tax revenues fell again in the third quarter of 2009, the Census reported this week. That’s the fourth quarter in a row and the first quarter of the fiscal year 2010 for most states… not a very auspicious start, especially considering the $193 billion in combined state budget deficits already expected this fiscal year. Collections in the quarter fell 6.7% year over year, to “just” $266 billion.

“States will continue to struggle to find the revenue needed to support critical public services for a number of years,” says a recent study from the Center on Budget and Policy Priorities.

  Global cooperate credit shrank in 2009 for the first time in at least 15 years, says a study released this week from Mizuho Securities. Corporate bonds, paper and asset-backed securities fell about $300 billion from June 30, 2008, to the same day in 2009. That hasn’t happened since at least 1994, when the Bank for International Settlements started keeping track.

  “With government policy shaping up the way it is,” writes Dan Amoss, “there’s little reason to expect a strong resumption in the credit cycle in the U.S. This will limit the extent to which Fed policy eases credit conditions for the typical business or household. Despite rhetoric, today’s government policy resembles that which helped fuel the credit bubble: Put off hard choices into the future and attempt to maintain an untenable status quo.

“Amazingly, the big banks have managed to extort mind-boggling subsidies out of taxpayers and the Fed by threatening a return to panicked financial conditions. Few expected in early 2009 that the banks would retain such power over their so-called regulators.

“Government and big business are aligned as never before in history. Right now, the stock market doesn’t seem to mind this, but this has dangerous consequences for the health of the U.S. economy. Those expecting a much-improved 2010 environment for the labor market, small businesses and prudent savers will be disappointed.”

  After yesterday’s small gain in major stock indexes here in the U.S., stocks look poised for a small loss today. As we forecast, this will be a very dull ending to an extraordinary year for stocks. Still, we’ll wait for the dust to settle and give you the official 2009 market wrap-up on Monday… barring catastrophe, the Dow will have risen over 20% this year, for its best annual gain since 2003.

  While it’s too early to make it official, this will likely be oil’s best year in a long time, too. Light sweet crude may have caught more headlines at $140 a barrel last year, but according to Bloomberg, futures will have risen 77% this year, the best gain since 1999.

  “In 2010, the Obama administration will likely continue to approach the energy sector more from the side of the environmental movement than from the standpoint of basic energy production,” forecasts the venerable Byron King.

“Offshore energy development is treading water at best (so to speak). There’s no top-level support for drilling off the East or West coasts of the U.S. That’s not on any radar screen anywhere. Fortunately, there’s continuing effort in the Gulf of Mexico. And other nations of the world are actively promoting offshore development while advancing the state of technology. (Which is why we have so many “foreign” energy firms in the OI portfolio, by the way.)

“Arctic development, which requires a decades-long focus, is practically at a standstill in the U.S. There are just a few projects in the Beaufort and Chukchi seas moving ahead, mostly under past inertia. Contrast this with Russia, which is aggressively developing technology (new icebreakers, ice-hardened drill ships, etc.) to exploit its vast Arctic energy reserves.

“Onshore oil and gas drilling is happening in the U.S., but problematic. Federal regulators have hinted that there will be strict national-level restrictions on subsurface hydraulic fracturing (“fracking”), a key part of recent success in recovering natural gas and gas liquids. The best I can say is that there’s grudging acknowledgement within the Obama administration of the dramatic potential of fracking to increase U.S. energy output.”

So how should you prepare? Byron just contributed two of his favorite 2010 plays to an MSN Money feature. But for the really good stuff, check out his Outstanding Investments.

  Gold is ending its remarkable 10-year run with another small decline today. The spot price is just above $1,095. Still, any investment in gold during the early years of the decade should have about tripled by now… not bad for a “barbaric relic.”

“There are many commentators out there,” writes Frank Holmes, a regular at our annual Investment Symposium, “who see no value in gold and who denounce it as an investment at every opportunity. They are certainly entitled to their opinions, but it’s hard to argue with the numbers over the past 10 years — investors on average would have been better off with a gold allocation than having no exposure.

“We consider gold a legitimate asset class, and for that reason, we consistently suggest that investors consider a maximum 10% allocation to gold-related assets — half in bullion or bullion ETFs and the other half in gold equities — and that they rebalance each year to capture the swings.”

  Last today, one more lesson from 2009: Boring is good.

In spite of all the buzz this year about gold, and silver, and the dollar, and banks, and oil, and the credit markets, and on and on — lead will go down as the best-performing commodity of 2009. Heavy, dirty, toxic, boring lead… up 145%. Funny how that works, eh?

  “We’re on the Pacific coast,” writes Addison from a holiday vacation on the Pacific frontier. Here’s a map for a more precise location.

“If you find Managua, then Masaya, then Granada… going south, then come to Rivas. We’re due west of Rivas. Rivas is the state capital, in the state known also as Rivas. Rancho Santana, Agora’s stake in the region, is the largest and, until recently, the only development in Rivas. There’s a new one just next door that has been sponsored by Nicaragua’s largest rum family.
“The lake to the east is cool too. It’s the largest lake in Central America and the 19th largest in the world…. and the only lake that sports freshwater sharks. Various Agora people own property along the shoreline of the lake south of Granada. Granada itself is pretty neat too. That’s where we stayed the first night. It was among the first settlements built by the Conquistadors when they came to the new world. It was built in 1524 and has been inhabited continuously since.
“One interesting tidbit about Nicaragua. The Spanish settled only the Pacific coast. The Caribbean side, even to this day, is inhabited by a tribal people known as the Miskitos, who are a mix of native American Indians, escaped slaves and British sailors who escaped their conscription on royal ships. The whole area east and northeast of the big lake are autonomous regions with hardly any towns, cities or government. Weird, eh?”


Ian Mathias
The 5 Min. Forecast

P.S. “‘Is it safe?’ That’s the first question anyone you talk to about Nicaragua asks,” Addison continues. “Old news stories containing with names like Sandinistas, Contras and Ollie North come to mind for most. ‘Wasn’t there some scandal with guns and the Iranians?’ one asks, visions of civil war and death squads dancing around in their heads.

‘Si, si, si,’ our driver Damien, a native of Granada, says, ‘but that was my father’s generation.’ The current generation of 20- and 30-something Nicaraguans are much like those in Baltimore, Dubai or Bombay. They’re up on communications technology… and want to use it to make their lives better. Damien was born in Managua, educated in Guatemala and now runs the concierge service for Rancho Santana. But his family owns an Internet cafe and he’s saving money to start his own networking business. The true benefit of the ‘information age’ is that a guy like your editor can set up shop in a low-cost, low-tax joint with world-class surfing waves (like Rancho Santana) and still keep his life together. Heh.

“So what about the Sandinistas? They did overthrow the U.S.-backed dictator Anastasio Somoza in 1979. But at the time, the Somoza family owned everything in the country… the media, education system, means of production for the country’s export crops of plantains, coffee, almonds, rum… leaving anyone without ‘connections’ living hand to mouth off the land. Today, you see a myriad of little businesses and small distribution outfits for all manner of goods and services. After the revolution, the Sandinistas restored the republic and they’ve been holding elections ever since. Now, according to Interpol (the international police), Nicaragua is ‘the least violent country in Central America and one of the safest in the entire hemisphere’… including the United Sates.

“In 2007, Daniel Ortega, the strongman behind the Sandinista movement, won the presidency again… but this time around, he’s invested in hotels along the coastline and arranged the state to help promote retirement living for aging boomers in the U.S. The director of sales here at the ranch spent 10 days in Las Vegas this past October, half of it by request of the Nicaraguan government, which had sponsored a booth at the annual AARP convention.

“In a very real sense, the opportunity to invest down here is a reflection of the investment strategy we use when looking for beaten-down stocks. The hangover from bad press in the ’70s and ’80s (mostly because the U.S. government lost its insurgent conflict here) has depressed prices for world-class real estate along the coast. More on the splendor later… but for now, Happy New Year from Nicaragua!”

If you’re having trouble picturing this paradise, check out our Rancho Santana Web site, which was just recently updated and improved. If you’d like to be invited to see the place yourself, Addison is going to be extending a unique invitation to members of the Agora Financial Reserve. From what this editor hears, it’ll be a sweet deal on a relaxing weekend there, along with a very rare discount on property for those who just can’t bear to leave.

Of course, it takes a unique person to be interested in this unusual opportunity, which is why we’re inviting only Reserve members. If you’re not a member, well… we don’t mean to be a tease. Here’s one more chance to get in, in case the prospect of this Nicaraguan getaway is too tempting to pass up.

P.P.S. The U.S. markets are closed tomorrow, so your Baltimore-based editor will close up shop for the day, too. It’s been a pleasure sharing 2009 with you — a remarkable year of superlatives. We hope, at the very least, you’ve managed to enjoy the ride. Have a Happy New Year.


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