Nothing to Worry About

by Addison Wiggin – January 28, 2011

  • Inflation “not a cause of concern” at Davos… While food riots rage in world’s largest Arab country

  • Q4 GDP prints at 3.2%…The 5 digs in for devilish details

  • Gold bounces off 4-month low… Fascinating chart points to ongoing demand

  • Readers resurrect ghost of Smoot-Hawley, insist on a “balanced” track record

Global inflation is “not high on the list of concerns” of Treasury Secretary Tim Geithner. So he told the annual gathering of the World Economic Forum.

Of course not. Why would it be high on the list of your concerns when you’re comfortably ensconced at a five-star hotel in Davos, Switzerland, eating bonbons and discussing matters of little concern to the hoi polloi?

We can think of one reason: In the world’s most populous Arab country, and the world’s biggest wheat importer, just 1,629 miles to the southeast… people are taking to the streets.

“Food prices and inflation are crucial issues in Egypt,” says Ann Wyman, head of emerging markets at Nomura. “It’s something you’re seeing in the popular response.”

That “popular response” brought out the tear gas and water cannons today. The government has cut off Internet access. At least seven people have been killed and 1,000 arrested since the “popular response” erupted on Tuesday — when protesters began demanding the resignation of Egyptian president Hosni Mubarak.

Food prices in Egypt have risen 21% in the past year. But why should that bother the folks gathered in Davos?

The Commerce Department is out with its first guess at fourth-quarter GDP — an annualized 3.2% to the upside.

Unfortunately, two-thirds of that figure can be attributed to the price index for “gross domestic purchases” — in other words, the cost of living.

If you’re bothering to keep score at home, here are some other highlights…

  • For all of 2010, GDP grew 2.9%… the fastest since 2005

  • As a reminder, GDP fell 2.6% during 2009

  • At $13.383 trillion, the U.S. economy is finally larger than it was when the recession began in Q4 2007 — by just $20 billion.

The GDP figure was a bit lower than the Street’s guess. The major stock indexes are in retreat. A try for Dow 12,000 may well have to wait for next week.

Gold is bouncing off a four-month low, as bargain hunters are moving in. After an overnight low below $1,310, the spot price is up to $1,325. Silver has likewise recovered from sub-$27 territory, to $27.50.

While gold is about $100 off its all-time high, the latest quarterly report from the World Gold Council (WGC) points to continued strong demand.

Whether it was coins, bars or ETFs, Europeans are increasingly fleeing their bonds and currencies for the safety of gold.

The WGC report included a fascinating chart that tells us why: Judging by the spreads on credit default swaps, investing in the debt of developed European economies is now equally as risky as the debt of emerging market economies.

“If volatility and implied risk premia increase,” says the WGC report, “investors may have to turn elsewhere to park defensive capital. “In this case, gold has a long track record as an alternative vehicle for wealth preservation.”

Something else we found interesting… if you’re trying to avoid market volatility, gold was the place to be during 2010. The yellow metal proved less volatile than stocks, base metals, oil, grains, you name it.

The only sector more stable was livestock.

[Ed. Note: While gold is “in consolidation mode,” as our friend James Turk would put it, it’s an ideal time to explore Byron King’s presentation on Nine Ways You Can Still Get Rich With Gold. You can view it here.]

The trouble in Egypt has also driven up crude prices nearly 3%, back above $88 a barrel.

Egypt is a minor oil producer, but any sort of tension in that part of the world is bound to drive up prices. And as we noted yesterday, even the Saudi Arabian princes are stocking up on wheat for their people in hopes revolution doesn’t spread.

Cocoa prices have risen nine straight days to a one-year high, thanks to jitters over what’s going to happen next in Ivory Coast.

When we last left this drama, the president had lost an election, but refused to leave office. The winner of the election called for a ban on cocoa exports, hoping to starve the government of revenue and finally chase the incumbent out of office.

This morning, depending on whom you believe, about 80% of the country’s exporters are honoring that call. But we won’t really know until the shipments stop, or they don’t.

This is vindication for Resource Trader Alert editor Alan Knuckman, who laid on a cocoa play at the start of the year that at first went against him. But his conviction was unshakeable: “Cocoa has been essentially unchanged for 2010 while almost every other commodity has had significant gains,” he told CNBC on Dec. 21.

“Record deliveries in the December contract can be interpreted as a pickup in the market action. Another run targets yearly highs at $3,500” per metric ton.

Today, the price stands at $3,358. As such, a 20% move up in the last 24 days has delivered an 87% gain for Alan’s readers.

So far this year, his average play is up 35% — winners and losers combined. And the year’s just getting started. Alan extends you an invitation to the “Millionaire’s Market“ in this report.

Ah, you spend billions on a wall intended to keep out the wandering hoards… and they go and get medieval on your ass:

Yes, that’s a catapult. It’s being used by marijuana smugglers to launch their cargo across the border from Mexico into Arizona.

It’s nine feet tall and sits on a flatbed towed by an SUV. A Mexican army officer says it was capable of launching 4.4 pounds of pot at a time.

We can only imagine how long this was going on. It was finally broken up last Friday when U.S. National Guardsmen spotted the contraption and called Mexican investigators.

They seized the catapult and about 45 pounds of pot… but the intrepid entrepreneurs got away, no doubt to launch from somewhere else.

“Why is a great publication like this,” a reader asks indignantly, “spreading the b—s— that Social Security has 1) a trust fund and 2) it will last until 2037. It’s full of worthless IOUs. Surely, you know the money was spent long, long ago. Don’t you?”

The 5: Um, yeah. That’s why we said: “The reality is worse than even the CBO admits because Congress already spent all the ‘trust fund’ money, leaving IOUs in its place.”

Why don’t you try reading this “great publication” before you hit the reply button?

“Thank God you speak openly about your politics,” writes a Reserve member, continuing yesterday’s discussion. “I relished that even when I was a liberal Democrat, because I knew you were really saying what you felt, rather than tiptoeing around sensitive topics like the mainstream media do. I’d call it ‘political disclosure.’

“To imagine that politics doesn’t affect investments is to play the same ‘buy and hope the government takes care of the market for us’ game that the financial peddlers play. Please keep up that political talk, and thanks to you all for talking some sense into me!”

“Regardless of your political views,” adds another reader, “you need to tell it like it is, and I believe you do that. Politics affect the market, individual industries, individual companies and individuals.

“Sometime I agree with your political views and sometimes I don’t, but I need the facts, and I do believe I get the facts from The 5 Min. Forecast.

“Keep reporting it like it is.”

The 5: While we’re certainly happy for the accolades and support, we’re still wondering which political views we’ve espoused that have elicited this debate. Having said that, we’re about to offer one to this next reader, hang on.

“All Americans are for innovation and those protected by patents,” a reader writes, picking up a theme from earlier this week, “notwithstanding their costs. The problem is that innovations are too quickly shipped overseas to be mass-produced at third-world wages and plants and then exported to America at below-market prices.

“Where is the protection for the American worker?

“The world is totally different from the Smoot-Hawley days in the 1930s with the instant speed in communications, worldwide marketing, mobility of people and production, etc., and America needs to reconsider tariffs when dealing with the emerging markets.

“The best thing W ever did was impose tariffs on steel imports in the early 2000s (I’m not a fan of his, and I’m choking as I write this) — that saved the American steel industry … think where America would be today with the no steel industry and the Chinese producing 80% of the world’s steel.

“The rare earth fiasco would be a gentle breeze compared to the tornado, hurricane and tsunami all rolled into one had the steel industry have had to close its doors back then.”

The 5: O, the plight of the American worker. We’ve been forecasting trouble for the American worker for more than a decade. See: Financial Reckoning Day. The simple fact is there are people around the world willing to do like jobs for less pay than Americans will. Often, it’s American firms with protected patents that are contracting the cheaper labor. The products are not imported to America at below-market prices. They are imported to America at below-American labor market prices. How do you fix that? Tax incentives, some say, but we haven’t seen much in the way of effective proposals.

Tariffs do not help. After studying the Bush steel tariffs, the International Institute for Economics concluded they did indeed save 3,500 jobs in the steel industry… but killed 43,000 jobs in other industries that could no longer buy cheaper imported steel. You rob a whole lot of Peters to protect a few Union-protected Pauls.

Conversely, on our recent trip to Rancho Santana, we met one “American worker” who accurately predicted the rise in steel prices as Bush implemented the tariffs. He’s now one of the leading steel shipping container brokers in the world. He went from pulling down an hourly wage and some $29,000 a year to being sufficiently independent to buy and sell tracks of land in Latin American as an offshore investment strategy.

It’s possible lawmakers can catch up to market realities and effectively incentivize corporations and entrepreneurs to build “stuff” in the U.S. again. But it’s going to take awhile, and it won’t be pretty. In the meantime, our suggestion, as crass as you may find it: Forget about policy, and CYOA.

OK, we’ll admit that one could probably be interpreted as political. But it still leans to the practical side, wouldn’t you say?

“Instead of complaining about the political state of the I.O.U.S.A., why not just get enough people elected that have the same view as yourselves? You already have one person in Congress — you need only 217 more to control Congress. Plus, another 51 to control the Senate and one to be the president.

“This should be easy considering all the money your subscribers are making with Byron’s excellent stock selections. As a Canadian, I’d love to see this, as it might lead to some change in this country!

“Oops, maybe I should follow my own advice…”

The 5: Ugh. Perhaps you missed our comment yesterday about the decontamination chambers we have installed in our Baltimore HQ. We’re content to step aside and let politicians make their devil’s deals for votes and then do our best to help readers invest accordingly.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S.: “I find it interesting that you cite the great results from the different advisers and their newsletters, but you never show the picks that didn’t turn out so well. Surely, these advisers are not right 100% of the time.

“Why not give a more balanced report?”

The 5: No, they’re not right 100% of the time. That’s why in addition to citing the big winners, we also cite overall track record.

For example, with Byron King’s Energy & Scarcity Investor, we’re happy to cite gains like 186%… 229%… even 398%.

But we’ll also share this…

Over the three-year history of the publication (including the Panic of 2008, which decimated many small-cap resource stocks), the average closed position is up 50%… and the average open position is up 61%.

“Overall, I am thrilled with the returns on the ESI picks in my portfolio,” writes a satisfied reader who sent us a spreadsheet of all the recommendations he invested in, with gains ranging from 49-482%. The average gain is 189%.

Energy & Scarcity Investor is well worth the subscription price, and I highly recommend it.”

To learn about Byron’s two favorite plays of the moment, give his current presentation a look.

P.P.S.: Good grief: Unconfirmed reports from Egypt say the police are fighting the soldiers. In the time it took us to write today, oil’s back above $89, gold’s back to $1,342 and the Dow’s down 131. We’re back with follow-up coverage on Monday.


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