Dave Gonigam – July 20, 2012
- U.S. drought zone expands, crops shrivel: Dan Amoss identifies who gains and who loses
- Marc Faber, Rick Rule and Frank Holmes — each with his own reason not to give up on commodities
- “Wishful thinking”: Ritholtz unpacks housing numbers… “Absolute frontier of monetary policy”: Dan Denning on this week’s Fed testimony
- Couple redefines “ostentatious,” nearly loses it all in the 2008 panic, now resorts to a lawsuit
- The corruption of a once-noble word… more scorn and invective traded over the “you didn’t build that” speech… and more!
The “Arab Spring” might become a long, hot summer.
This morning is a good time to recall what set off the riots that swept away authoritarian regimes in Tunisia, then Egypt, then Libya and perhaps now Syria. “Much of this,” Addison wrote here 18 months ago, “is backlash against corrupt and/or authoritarian regimes. But it took empty bellies to finally bring the rage to the surface.”
Corn and soybean prices hit record highs yesterday. Higher than during the Arab Spring. Higher than even the records set in 2008, when food riots raged in more than 30 countries.
The situation today is “not even comparable to 2007-08,” a veteran trader tells the Financial Times.
“A land mass the size of Montana fell into severe drought this week,” notes our macro strategist, Dan Amoss.
The National Drought Mitigation Center reckons 42% of the continental United States is in severe, extreme or exceptional drought — up from 37% only last week:
“The corn and soybean crops are at risk,” says Dan, scanning the landscape for winners and losers. “Yields will likely fall to multi-year lows. This is tragic for crop farmers devastated by the drought.”
“But farmers with the good fortune of water resources will see a much-deserved windfall of high corn and soy prices paid by food companies and consumers. This windfall will bolster the financial strength of the U.S. farm sector, so it can remain world-class in its productivity and technology (to mitigate supply damage from future droughts). A lot is riding on their shoulders.”
On the other hand, “Large food processors relying on steady supplies of farm products at low prices will struggle.”
Agriculture aside, “Among investors these days, a fellow commodity bull is about as rare as finding a positive story in the media,” says U.S. Global chief and Vancouver favorite Frank Holmes.
“Fears of slowing global growth and how it will affect commodities have caused many investors to dig their heels in the ground and resist owning natural resources.”
But Mr. Holmes says the demand for resources is nowhere near played out. He cites Jeremy Grantham, the legendary strategist from GMO, who says, “in the long run, you can’t afford to miss this opportunity”:
“The past decade shows a clear tipping point for resources,” Frank says, referring to the above chart. But a decade into the broad resource rally, it becomes more important to pick your targets: “Smart investors look past the rampant negativity in the media to see these patterns and anomalies to determine where the opportunities and threats lie.”
“There’s always an ebb and flow of commodities, both seasonal and cyclical. It’s important to anticipate these global trends to know how to participate.” At this stage of the game, Mr. Holmes is partial to dividend-paying resource stocks.
Natural resource markets “are as bad as they’ve ever been, and for me, that’s as good as it gets,” adds the incomparable Rick Rule.
Laissez Faire Books senior editor Doug French sums up Mr. Rule’s recent appearance at FreedomFest in Las Vegas: “The opportunity in resource markets is that millions of people around the world are enjoying a higher standard of living. As these people climb out from under the thumb of oppressive governments, their living standards rise — not to buy iPads, but to buy stuff requiring natural resources.”
Meanwhile, “the stock prices of companies that have secured natural resource deposits are unloved and may get more so, setting up what Rule thinks will be the ‘best resources M&A [mergers and acquisitions] market ever.’”
No doubt Mr. Rule will rattle off dozens of names and ticker symbols next week during the Agora Financial Investment Symposium. If you can’t join us, there’s always the next best thing — which this year is even better.
“It takes a lot of courage to be short” commodities, says the Gloom, Boom & Doom Report’s Marc Faber — who will also join us in Vancouver next week.
Despite the slowdown in China, he too believes there are still opportunities in the resource sector.
“I don’t want to be short copper,” he tells CNBC, “because copper can, like other markets, be manipulated because there are not that many players in the copper market, so we could see a rally in copper prices, we could see a rally in gold prices and so forth and so on.”
Precious metals are a snooze today: Gold has barely budged at $1,583. Silver’s showing a little more life, at $27.40.
Stocks are slumping as the week comes to a close; financials are dragging the Dow down three-quarters of a percent. But overall, the week should end in the green for the major indexes.
“The housing recovery is awesome — until you actually look at the sales data,” says Fusion IQ chief and Big Picture blogger Barry Ritholtz.
Count Mr. Ritholtz as unimpressed — especially after the existing home sales numbers yesterday from the National Association of Realtors. Fully 25% of June sales were foreclosures or short sales sold at deep discount. The NAR makes a big deal of the fact this is down from 30% a year ago.
“Hence,” writes Barry, “a huge drop in distressed sales pressuring prices (which would have caused even more distressed sales) is an artificial benefit of the voluntary foreclosure abatements — which have now ended.”
“The present residential real estate situation can be best described as massive Fed stimulus + government-induced foreclosure abatements = some stabilization.”
“Anything beyond that statement falls between wishful thinking and a guess.”
“We are at the absolute frontier of monetary policy,” says Dan Denning, keeper of the Australian Daily Reckoning. Mr. Denning is exhausted after subjecting himself to Fed chief Ben Bernanke’s testimony to Congress this week.
“Bernanke still subscribes to the view that if you make credit cheaper, you’ll boost economic growth. As far as we could tell, he provided absolutely no proof that the Fed’s purchase of U.S. Treasury bonds and mortgage bonds in QE1 and QE2 did anything to promote growth in the real economy. All he’s done is boost stock prices and make it easier for the U.S. government to finance its deficits.”
“The Fed can’t ‘promote growth’ when households are reducing debt. It’s telling that Bernanke said the government needs to get fiscal policy in order (spending), in order for consumers and businesses to be more confident about taking risk.”
The greenback is set to end the week lower than it began. But at last check, the dollar index was up for the day, at 83.4. It takes $1.217 to equal one euro.
“The German parliament voted and passed the resolution to have the ESM [European Stability Mechanism] recapitalize the troubled Spanish banks,” says EverBank’s Chuck Butler. “But remember, this is still the final decision of the German Constitutional Court, and they have stated that they will not have a decision on this until September. That’s a long time to go with uncertainty hanging over the euro like the Sword of Damocles — and another reason that I just don’t like the euro this summer.”
Meanwhile, it takes 78.576 Japanese yen to equal one U.S. dollar this morning — good news for Abe Cofnas’ “mock trade” of the week.
Recall from Monday’s episode that Abe expected the yen to end the week below 80.25. Barring a major market dislocation after we go to press… the trade is good for a 7% gain in four days.
[Ed. note: We have to go back and count: Eight experts cited in today’s 5 will appear next week at the Agora Financial Investment Symposium.
And that doesn’t count historian/author/documentarian Niall Ferguson… or perennial favorite Doug Casey… or the stable of Agora Financial editors like Byron King, Chris Mayer and Patrick Cox… or Agora Inc. founder Bill Bonner. (The Symposium is the only event in which he speaks every year.)
Right now, you can lock in the lowest price on recordings of this year’s event. And because so many people have asked for it, we’re making a video option available too. That’s right: Whether you want to watch at your desk or listen on the go, we have you covered. Act now for your best value.
What do you do after building the biggest (almost) and gaudiest (for sure) mansion in America… then coming face to face with foreclosure… and you can’t unload the place?
You sue the documentarian who made a film about your experience because she made you look bad.
Windermere, Fla., is home to Versailles, a mansion inspired by the French original and, in the words of colleague Chris Campbell, “the Godzilla footprint of the American delusion.”
Consisting of 90,000 square feet of 13 bedrooms, 22 bathrooms, a 20-car garage, three pools, two movie theaters, a bowling alley, a ballroom…
(pausing for breath…)
… a banquet kitchen, 10 ‘satellite’ kitchens, a two-story wine cellar, a two-story library, full spa, a bar and game room, a fitness center, an arcade, and an indoor roller-skating rink…
(haaaaa..)
… with Italian white marble outlining throughout… and that’s just the interior:
Two-thirds of the way through building this monstrosity, time share tycoon David Siegel was caught up in the market meltdown of 2009 and nearly ended up in foreclosure.
He tried to sell, cutting the price from $100 million (finished) or $75 million (as is) to $65 million (as is).
Producer Lauren Greenfield figured it was the stuff of a documentary… so she made one called Queen of Versailles, featuring the 76-year-old Siegel and his 46-year-old wife, Jackie.
(Jackie seems like a fine sort: Nightline recently caught her making snarky comments about piddly 99%ers jealous of their elite status… and one of their eight children complaining that one of the movie theatres isn’t big enough…)
The Siegels are now suing Greenfield for defamation, saying the film puts them — get this — in a bad light.
At the very least, David Siegel says she should update the film — now in limited release — to reflect the fact that he’s recovered his footing and managed to secure a $25 million loan to finish construction and hang onto the place himself.
If that’s something he’s actually proud of…
“I’m writing today from Rancho Santana, Nicaragua,” a reader informs us. “We arrived today, and it is beautiful on the Pacific Frontier. I enjoy The 5 Min. Forecast.”
[We’ve been at this long enough to know there’s a “but” coming…]
“However, can you please stop destroying the concept of capitalism and free markets by using the term ‘crony’ as a modifier of capitalism? Since when is a franchise enabled and protected by government force capitalistic or free market? It is neither. Call a spade a spade. It is fascism, mercantilism, socialism, Marxism, monarchy or any other authoritarian system. It is not capitalism.”
The 5: You mean yesterday’s 5? That was professor Niall Ferguson’s choice of words, not ours.
We hear your complaint loud and clear… but we fear the damage to those once-noble terms was done long ago.
“I must disagree with Jeffrey Tucker’s comparison of government to ticks on a dog,” writes another.
“Ticks will eventually drop off a dog. More appropriate would be comparing government to a tapeworm. You seem to be getting weaker and weaker, but can’t see the reason why until it eventually kill its host.”
“Mr. Tucker can take his political druel [sic] and shove it,” reads another hostile reaction to his take on the president’s “you didn’t build that” speech.
“In actuality, this country is in the financial mess we are in for a number of reasons, ONE of which is because the Republican Party was extremely complicit in helping the corporate structure of America export most of our manufacturing job to defund the unions that supported the Democratic Party. So please stop with your Republican BULL; what this country needs are policies that will benefit the general welfare, and not just the welfare of the corporations and wealthy elite. If the middle class does well, all levels of society will do well.”
The 5: “Republican bull”? You must be fairly new ‘round these parts. Heh…
“Having done my graduate work in linguistics,” writes a reader, “your correspondent who writes about that Obama quote, ‘Somebody invested in roads and bridges. If you’ve got a business, you didn’t build that. Somebody else made that happen,’ may himself want to take a course in linguistics.”
“The use of person (perhaps social or place?) deixis — on which I did a graduate paper — seems to indicate that indeed Obama was referring to the business builder. Unfortunately, Obama ham-hands language just as much as Bush, so it is a bit unclear. However, it appears relatively clear Obama was talking about the business creator.”
“In any event, I humbly suggest your Obamaphile correspondent stop reading your newsletters on how to make money, and get busy scouring the IRS manuals to find out how new and creative ways to pay more taxes to support… well… whatever.”
“It seems to me the ‘who built that’ discussion has a little bit of the old ‘chicken and egg’ flavor about it.”
“In the not so distant past (and even right now sometimes), child development experts were divided into two rather polarized camps: ‘nature’ (you will do well if you inherited good genes — upbringing is secondary) and ’nurture’ (you will do well if you were raised well — good genes are secondary). Most students of child development now agree that the values of nature and nurture are equally important and totally intertwined.”
“I suspect this is true with regard to the evolution of societies, as well. In America today, we increasingly burden our emerging entrepreneurs with oppressive regulations (the equivalent of otherwise healthy children being born with club feet)… and then… if they succeed in running a good foot race, anyway, we take much of their prize away from them (the equivalent of children being beaten the hardest when they succeed the most).”
“Thankfully for the future of America, many entrepreneurs are like the best race horses: They don’t care if they die racing… they just love to run.”
The 5: Amen…
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast
P.S. Our final correspondent’s comment gets to the heart of the theme of this year’s Agora Financial Investment Symposium. It’s “Innovate or Die: Empire at a Turning Point.”
As Niall Ferguson pointed out in yesterday’s 5, the United States — and developed nations in general — can break out of their economic funk by either fixing fouled-up laws and institutions… or by technological innovation.
The latter seems like a far better bet… and Ferguson leads a cavalcade of speakers who will address that very issue. Politicians and central banks will always muck up the works, but there’s still a world of profit opportunities our expert lineup will identify.
If you can’t join us in Vancouver next week, you can always get the high-quality audio — and now video — recordings of the event. Sign up here to secure the best price.