Great Power Shift

by Addison Wiggin & Ian Mathias

  • The U.S.-China power shift… 20 years into a 50-year process?
  • Marc Faber on where we stand after a “colossal misallocation of capital”
  • The chart that shows stock valuations still above their long-range average
  • Rothschilds, Financial Times catching onto Chris Mayer’s Brazilian farmland story
  • Bringing the troops home: Reader continues debate started by Doug Casey in Vancouver

  We begin this morning with a provocative proposition — that the shift of wealth and power from the United States to China is a 50-year process, and that process is already 20 years along.

Bill Bonner suggested it to a full house on Friday at the close of the Agora Financial Investment Symposium… and behind this proposition is a precedent. After World War II, Britain was burdened with both “the cost of empire, and the illusion of empire.” It was superficially powerful and prosperous, while its colonial outpost of Hong Kong was an inconsequential flyspeck.

By the time Britain handed Hong Kong back to China 50 years later, Britain was a second-tier power and Hong Kong set the standard for modern prosperity. Did the U.S. and China begin the same dance when the Cold War ended?

“It wouldn’t surprise me if what’s being corrected is not just the debt bubble, but the illusion of empire.”

  Shorter term, “what we’re seeing right now,” Bill continued, “is an orderly destruction of debt. And as long as that goes on, we’re going to see no fireworks in the gold market, we’ll see lower equity prices, we’ll see bonds and the dollar hold up.”

After the credit crisis hit, Bill began rethinking the proposition we laid out in the first edition of Financial Reckoning Day — that we were headed for a long Japan-like slump. Japan had savings… and it had exports… and the United States has neither. But now those factors seem less and less relevant. The Japan scenario is back in play.

  “We had a colossal misallocation of capital” from 2001-2007, Dr. Marc Faber told our Vancouver gathering on Friday. And “the Federal Reserve hasn’t learned anything at all. What they’ve done is to create larger economic and financial volatility and a series of larger unintended consequences.”

He briefly walked through the following timeline…

• 2002-2008: All assets up, dollar down

• Panic of 2008: All assets down, except the dollar and Treasuries

• March 2009-November 2009: The Fed “created a bubble in everything” and the dollar weakened

• November 2009-present: Euro starts to weaken, dollar strengthens, asset markets no longer perform.

“When the dollar is weak, it means global liquidity is expanding. If the dollar weakens substantially, then I think asset markets could go up.”

Dr. Faber was just one highlight of a packed final day of the symposium, along with the Sovereign Society’s Eric Roseman and Mt. Vernon Research’s Karim Rahemtulla — both of whom were brimming with specific recommendations to capitalize on the current environment.

You can get full access to all of the final day’s action — and the previous three days’ — with the complete set of audio recordings from the Symposium. We’re making them available at a special discount — but only through midnight tonight.

  New home sales perked up 23.6% in June, according to the Commerce Department. Of course, after the expiration of the homebuyer tax credit and May’s record fall (a revised 36.7%), almost any number was going to look good by comparison.

  After a flat open, the stock market got a spring in its step from those housing numbers. Both the Dow and the S&P are up about 0.5% as we write.

  “Monetary policy has an important influence on stock market valuation,” says our stock market vigilante Dan Amoss, taking a longer-range view. “If you stretch the S&P 500 valuation chart back to 1880, you see that valuation cycles are agitated by unstable monetary systems. Boom/bust cycles are much more violent when monetary policy remains loose and banking is undisciplined.

“This chart from my presentation in Vancouver shows the Shiller P/E ratio hovering around 19, well above the long-term average of 15 and bear market bottoms in the range of 5-10. The market is not ‘cheap.’ It was a huge bubble peak in 2000, so I’m looking for a bottom in the Shiller P/E ratio in the 5-10 range a few years from now:

Shiller P/E ratio

Dan also previewed a new short idea… but in fairness to his current subscribers who haven’t seen it yet, he spoke only in generalities. If you want to be on board when he’s wrapped up all the research and completed his write-up, here’s where to go.

  Spot gold took a dive as soon as the housing numbers came out. An ounce currently fetches $1,180.

  European stocks went largely nowhere today in reaction to the “stress tests” performed on 91 eurozone banks. The Committee of European Banking Supervisors released the results after the close on Friday. It found seven banks short on capital — five in Spain, one in Greece and one in Germany.

Recall Rob Parenteau’s remark last week that these stress tests are a huge black box… We have little idea what criteria the regulators used to reach their conclusions, and traders seem to realize this, if their reaction amounts to one big yawn.

  Oil is down nearly 1% this morning… still above $78, though… as traders digest these news items…

• Tony Hayward could be the “former” CEO of BP by the time you read this. The board is meeting today to negotiate his departure. BP’s Q2 results (and remember, the Deepwater Horizon disaster didn’t happen till after the quarter began) are due tomorrow

• Venezuelan caudillo Hugo Chavez is threatening to cut off U.S. oil supplies in the event Colombia attacks Venezuela. (Colombia — a U.S. ally — claims Chavez harbors Colombian rebels.) Traders have heard these threats before, and they know nothing’s ever come of it, so they’ve discounted the news.

  The FDIC shuttered seven banks at the close of business Friday, the largest in Jasper, Ga., with about $1 billion in assets. We now stand at 103 bank failures for the year, compared to a mere 64 at this point last year.

  The mainstream is suddenly catching on to the Brazil farmland story that Chris Mayer’s been following for a while. “It’s a compelling story with good economics,” he says, “and people are starting to notice” — especially the proposition of turning the grassland of the cerrado into productive farmland.

The Financial Times reported last week that a farmland development group backed by Jacob Rothschild hopes to become the first Brazilian listing on the Hong Kong Stock Exchange. That would make the phenomenon truly global.

Says Chris: “Agrifirma Brazil is the name of the firm” and it "‘purchases scrubland and transforms it into agricultural land,’ the FT reports, which is exactly the thing I’ve been talking about. Agrifirma raised $179 million to date, including investments from two Hong Kong tycoons. No surprise the Chinese are so interested in Brazilian farmland. They see firsthand the sweeping impact of dietary changes brought on by a swelling middle class and rising population. There is also a shortage of farmland in China.

“Brazil is lucky in this regard. It has plenty of flat land and water and sunshine. Agrifirma has 60,000 hectares of land in Bahia and plans to work up to 100,000 before the IPO sometime early next year.

“So perhaps investors will have a pure-play farming stock to consider. Perhaps there will be more in the future.”

Which is why Chris is heading down to Brazil to check out the situation for himself later this year. We’ll bring you his firsthand accounts here.

  “In response to the reader who said that ‘to reduce [the military] by 95%… would be disastrous’ because ‘with current unemployment rates for young persons likely in excess of 20%, the last thing the U.S. needs is more unemployed, disillusioned, disenfranchised youth on home territory’ is quite shortsighted.

“Reducing a behemoth with a $700 billion budget by 95% would free up hundreds of billions of dollars back to the taxpayer’s pocket, without considering the tax cut multiplier effect, which would potentially grow the economy enough to employ another 500,000 of these soldiers.

“Besides, 500,000 people would actually do something productive, instead of being cannon fodder for presidents with low ratings.”

The 5: Reading your remarks, we recall the gloomy forecasts that we’d head back into depression after the end of World War II and the return of all those soldiers. Montgomery Ward refused to expand on the basis of that theory. Sears bet the opposite and is still in business.

Of course, it helped that government’s share of GDP shrank dramatically after the war.


Addison Wiggin

The 5 Min. Forecast

P.S. “We like to think the assault on enterprise comes from Washington,” bank lobbyist Andrew Lowenthal commented during his address on Thursday. “The truth is that it comes from the financial services industry itself. They argued for so long about the ability of markets to enforce discipline, yet they were the first ones to ask to be spared of their own bad decisions. And they made a lot of bad decisions.

“They want you to think this was some really complex ordeal that led to the crash. It wasn’t. It’s not as complicated as they’ve led you to believe. Most of it was really simple: They invested in long-term assets using overnight funding. It was a Ponzi scheme that fell apart. Simple.”

Tonight is the last call for recordings of the Vancouver sessions at a discounted rate. The price goes up at the stroke of midnight tonight. Act today and as a special thank-you, you’ll get a generous discount on admission to next year’s conference. Order here.

By the way, the Symposium got some nice coverage by the folks at The Motley Fool, who had reporter Morgan Housel stationed in Vancouver all week. You can check out his most recent report here.


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