 | | The Daily Reckoning | Wednesday, August 4, 2010 |
- A commodity wrap up, from coal to gold to sweet, sweet sugar,
- The Coast-to-Coast Correction tour heads south and east,
- Plus, Bill Bonner with more on prices and Bernanke's blunder...
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|  | | | Smart Money Not On Nevada's Recovery | | Unemployment and Real Estate Woes Likely to "Stay in Vegas" | |  | | Joel Bowman |
Reporting from Tucson, Arizona...
In yesterday's edition, Eric Fry offered some thoughts from Las Vegas, the first stop on our Daily Reckoning Coast-to-Coast Correction Tour. As Mr. Fry mentioned, neither of your editors incurred any serious financial or moral losses while in Sin City. At least none worth fessing up to, anyway.
Rather than surrendering their hard earned paper dollars to The Strip's many one-armed bandits, your editors spent their days in the desert gathering and collating macro-economic data points.
"Although the residential real estate market in Las Vegas has been stabilizing for the last two years," observed Eric, "home prices remain more than 50% below the peak levels of 2006."
A conversation we had with a particularly chatty taxi driver seemed to confirm these findings.
"We were lucky," the friendly fellow informed us. "We got in about 13 years ago. Paid just near one-eighty [thousand dollars] for our place, three bedrooms and a two-car garage. A few years back, folks were buying similar houses in our neighborhood for almost half a million. Can you imagine?"
"Just on the right here, thanks. No, I can't. That's amazing."
"Now they're back down to two-forty, give or take. Can you imagine, though...half a million for our little place? We shoulda sold then, but you never know, do you?"
The condition of the Las Vegas real estate market is hardly surprising when one considers the state of Nevada's nation-beating unemployment figures. After all, it's hard to pay down a mortgage without a reliable source of income.
At 14.2%, Nevada's unemployment rate comfortably outpaces the national average of just below 10%. That figure (official as of June) easily tops the state's previous record of 9.9%, set back in the early 1980s. What's more, many analysts don't see the situation improving measurably until later in the decade. Needless to say, the subsequent and ongoing flood of jobless claims has created a huge drain on the state's taxpayer-funded unemployment trust.
Since it went bust late last year, the state has borrowed roughly $450 million to keep the program going. Officials project the sum could reach $1 billion by the end of the year.
Nevada's unemployment trust currently pays 26 weeks of claimants' jobless benefits, but does not include the additional 73 weeks of unemployment extensions currently paid by the federal government. The state council is currently discussing ways to wean itself off the Federal government's teat, though with unemployment not projected to top out until next year, and not forecast to return to single digits until sometime in 2014, such a move looks unlikely at best.
And Nevada is by no means alone. "As of July 27, 35 states and territories have had to borrow from the federal government to pay jobless benefits," reads a report in the AP. "Some experts have projected the combined debt could reach $70 billion."
The Coast-to-Coast Correction rolls on, in other words...and so does our little tour.
After their stint on The Strip, your co-editors parted ways. Mr. Fry returned to his natural habitat - the brutally paradisiacal setting of Laguna Beach, California - while yours truly continued south and east, down into cactus country, Arizona. Our first stop was the old gold rush town of Wickenburg, about an hour outside of Phoenix, where we spent the first night.
We rolled in, weary and thirsty, sometime around sunset. The sky turned orange and then dark purple in the rearview mirror as the night stars readied for their evening appearance. If you haven't yet experienced a desert sunset, there really is nothing quite like it. The receding heat follows the sun over the horizon, past the sleepy mountains and on into tomorrow. Street lamps flicker on and off, unsure of their cue. Motel signs light up, beckoning truckers and travelers alike in for a soft night's rest.
Named after the German prospector, Henry Wickenburg, who found his fortune there during the 1862 Gold Rush, Wickenburg is today a sleepy little town of around 7,000 souls.
"It can get up to ten or twelve thousand during the high season," the bartender at Rancho Bar 7 told us half way through our second draft. "But we've been hit pretty hard with all this economic downturn stuff."
"I see," we nodded. "In what ways?"
"We're a construction town, you know."
"Really? What does the town...um, construct?"
"Houses, mostly. It was all real estate a few years back...buying, selling...old, new, renovations...you name it. That's changing, though. Big businesses are moving out, plus the bypass went through, so not many people stop by these days. We still get a few tourists, mostly for the dude ranches and recovery clinics."
"The recovery clinics?"
"Yeah...they offer counseling, equine therapy, all kinds of stuff to help with addictions to sex, drugs and rock n roll. Rich people send their kids along when they get into trouble. We've got three within an hour or so drive from here. But even they're not doing so well. Going straight costs money, you know. And those places can be expensive."
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| | The Daily Reckoning Presents | | Sweet Profits in Sugar? | |  | | Chris Mayer |
August, the eighth month of the year, is the last month before the traditional harvest time in the Northern Hemisphere. Thus, the old saying was "If the 24th of August be fair and clear, then hope for a prosperous Autumn that year."
So far, the month of August has been very fair and clear for the stock market...and for the commodities markets. These buoyant trading days of early August continue last month's bullish action in both the stock and commodities markets.
But as we approach the harvest season, my thoughts turn first to the rumblings in the grain pits. Agricultural commodities have been rallying strongly for several weeks. All the farm goodies enjoyed a nice jump after falling fairly sharply during the early part of this year.
These strong agricultural prices have been helpful for most of the "ag- focused" stocks I have recommended to the subscribers of Mayer's Special Situations. The ag plays I favor focus primarily on fertilizers or irrigation equipment.
Sugar, is another agricultural product worth paying attention to. I think we're in good position for another big sugar rally. I've been doing a lot of work on Brazil lately, in preparation for my upcoming trip there. And while I knew Brazilian infrastructure was poor, my research really hammers home to me just how bad it is. What does this have to do with the price of sugar?
Well, Brazil is a big sugar producer. Apparently, there are 122 ships sitting around in Brazilian ports waiting to load sugar for export. Some trucks are waiting as long as 40 hours to unload their cargo on these ships. What a mess! It makes me think of what Peter Fleming wrote in Brazilian Adventure, "A man in a hurry will be miserable in Brazil." You need a lot of patience to operate in this market.
Heavy rains have something to do with it. Ports have stopped loading, to try to minimize water damage. In any case, the sugar coming out of Brazil may be less than normal. I listened in to comments by Cosan's CEO (Cosan is a big Brazilian sugar refinery) and he thought there would be less sugar produced this year than the year before.
Another factor to add into this: India's monsoon season had about 16% less rain than normal for June. India is a big producer and consumer of sugar. This is not a good sign for the sugar crop there.
Inventories of sugar are already pretty low. F.O. Licht, a firm with a 130-year history in commodities, reported that the Philippines, India, Pakistan and Indonesia are "virtually out" of sugar reserves.
No surprise, then, that speculators are loading up on sugar again.
A recovery in sugar prices would likely aid stocks like Imperial Sugar (NASDAQ:IPSU), which took a beating in its last quarterly report as sugar took a big dip. In coming quarters, this may well reverse.
By the way, the performance of coal is worth noting. We've talked about China's voracious appetite for coal, in particular the metallurgical coal, used in making steel. It can't make enough to satisfy its own demand.
This next chart makes that really clear:
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China has a yawning gap in met coal, and those blue bars on the chart show you how much it's had to import. This is likely a long-term and permanent gap. So I expect there will be good opportunities in supplying China with met coal in the years ahead.
One other interesting note in this admittedly brief and haphazard commodity survey: Palladium may be giving off a clue. Over the weekend, I read an interesting letter by John Clemmow at UBS, who put forward a novel idea about the relationship between palladium and gold.
Palladium is an important industrial metal. Lately, it's become more exciting, because it is the key metal used in diesel engines. These engines are selling strong because of demand from emerging markets - a trend expected to continue for years. Along with this, Russia is, apparently, close to exhausting its stockpiles of the metal. But no one knows for sure, as such stockpiles are state secrets.
In any case, palladium is a market that appears to be in surplus. This is a trend that doesn't seem likely to end anytime real soon. Mine supply is not likely to decline. If anything, it will rise. Plus, there is a lot of palladium in stock.
Yet palladium rose recently to $488 per ounce, the highest price since June 23. This is in sharp contrast to the gold price, which is down. Clemmow notes, "Gold...can be many things, but as I've pointed out before, [it] only massively outperforms in a climate of fear. Palladium is - to me - the ultimate risk on metal trade. If it is going up, then so should the price of other risk assets."
Clemmow finds that a palladium-gold ratio tracks the stock market closely. "The news that palladium is rising while gold is falling is just another signal that risk is coming back to the market." Here is his chart:
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As I say, it's a rather novel indicator, another measure of fear or lack thereof. Right now, it shows fear receding and risk assets rising. Clemmow's indicator says stocks are headed higher. We'll see.
In the meantime, there are many curious wrinkles in the commodity markets these days and lots of opportunity. It's a great unfolding drama with never-ending twists and turns. Forced to hazard a guess today, I'd bet August is very sweet for sugar and that agricultural commodities in general continue to lead the pack.
Chris Mayer,
for The Daily Reckoning
Joel's Note: A few months back, your wayfaring editor took a research trip to Beijing with Chris Mayer, Addison Wiggin and Bill Bonner. We were there to check out the whole "boom vs. bubble" debate from a frontline vantage point, and to work out some details on a possible business venture there. We met with business insiders, money managers and guys who know the opportunities there better than anyone else.
Sometime during that hectic schedule, Chris managed to compile a stack of research notes, which he then converted into a special report. In it, he details eight tiny companies - all riding quirky investment niches in the Middle Kingdom - that he expects to explode in the near future.
If you're interested, you can still grab a copy of the report, along with a month-long trial to Chris's premium service, Mayer's Special Situations, all for a dollar. Here's a brief intro letter to get you started.
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| | | | Bill Bonner | | Economic Deflation: The Blood on Bernanke's Hands | |  | | Bill Bonner |
Reckoning from Ouzilly, France...
We left off yesterday wondering what stock market investors were thinking. They bought stocks heavily on Monday. Then, yesterday, they sold them a bit - the Dow fell 38 points.
Yesterday was largely uneventful. Gold rose a dollar. Oil climbed to $82.
Maybe stock market investors are not really expecting to get rich. Maybe they're trying to avoid getting poor. They may figure that the real risk is being in cash...not in stocks.
If so...they may have a point.
Here's the low-down...
As near as we can tell, the Japanese-style correction is still underway. Consumers are careful about spending because they fear they might not have jobs. Employers are careful about hiring because they fear they might not have revenue. And banks are careful about lending because 1) few people want to borrow, and 2) the banks figure they may need the money themselves.
Meanwhile, Ben Bernanke has staked his entire reputation on being able to avoid a Japanese-style slump. He gave a famous speech about it back on the 21st of November 2002. He called it "Deflation: Making Sure it Doesn't Happen Here."
Well, that was when the inflation rate was not far from the Fed's 2% target. What's happened since? The consumer price inflation level - as measured by the government - has now dropped down to 0.5%. And many economists think it will go negative soon.
Hmmm... This leaves Mr. Bernanke in a tight spot. It looks like deflation is happening here. And it is happening after Ben Bernanke has already used most of his tricks to stop it. The Fed is lending money at 0.25% interest - effectively zero. What's it going to do next? Pay you to take the money?
If Bernanke allows deflation to happen...and persist...he will have Congress on his back. The Fed is supposed to be independent. But every Fed member knows which side his bread is buttered on. And no one doubts where the butter comes from - the US Congress and the administration. And everyone also knows that there will be mid-term elections this year.
As it stands, the voters are not too happy. They've seen the banks get bailed out. They've watched Goldman's boys make their millions. And they've begun to wonder whose interests their elected representatives are really serving - the voters who sent them to Washington? Or the special interests who write big campaign checks? (Goldman gave millions to the Obama campaign...one of the best investments it ever made...)
Unfortunately for democracy, the poor voter has no idea of what is going on or why. If he has a job and his house is rising in price, he'll likely vote for the clowns already in Washington. If not, he'll want new clowns.
And right now, his house is likely to be underwater...and probably sinking. As for his job, he's lucky to have one.
Ben Bernanke must surely feel the pressure to "do something," right?
Not only that, his reputation is at stake too. What did he say in that remarkable 2002 speech? Oh yes, that "under a paper money system, a determined government can always generate higher spending and hence positive inflation."
Well, maybe. But so far, it is looking as though it may not be as easy as the younger Mr. Bernanke thought. We have a paper money system, no doubt about that. We also have a Fed that is determined to keep inflation positive. But we also have inflation that is becoming less positive every day...and may turn negative soon.
And more thoughts...
Remember our discussion of prices yesterday? Here at The Daily Reckoning, we have nothing against higher prices...and nothing against lower prices. It's dishonest, misleading, and treacherously false prices that we don't like. They send the wrong information. They may tell us that an item is plentiful, for example, when it is actually in short supply. They may cause us to invest our money in the belief that profit margins are increasing when they are actually shrinking. They may also induce us to expand production, when the world already has far too much of what we have to offer.
And unfortunately for the market system, we live in a world of phony prices. Nobody knows what anything is really worth... Let's take a simple concept like consumer price levels, generally. According to the feds' calculation they're barely rising at all. But if you computed them the same way the Europeans do, you'd find the US price level moving up at 3.5% per year.
So, then you'd have to wonder whether Bernanke and company should be concerned at all. If it's inflation they want, inflation is what they've got. Maybe. We don't know. We can't trust prices...or the calculation of price levels.
But the Bernanke team probably has to trust its own numbers. After all, if you can't trust numbers you twisted yourself, what is the world coming to?
Besides, whether the inflation rate is 0.5% or 3.5% hardly matters. People don't have jobs. They don't have incomes. They don't have much desire to vote for sitting politicians. And Ben Bernanke is going to lose his reputation - such as it is - if he allows this Japanese-like slump to continue.
So, what's he going to do. He has to "do something"...but what? Well, there aren't many choices. About the only thing he has left is "quantitative easing." Yes, maybe stock market investors are right. Maybe they don't really think stock prices are going to rise. Maybe what they're really worried about is that cash will turn out to be a bigger trap that stocks. After all, if there is one thing a central bank ought to be able to do - if it puts its mind to it - is create 'positive' inflation. And it looks as though the Bernanke Fed will go all out to do it.
The Fed's Open Market Committee meets next week. Most likely, they're going to threaten to buy more treasury bonds. That's the way they hope to get more dollars in circulation and raise consumer prices - thus encouraging both "positive" inflation and consumer spending. If that doesn't work, they'll have to resort to even more radical solutions - such as dropping money from helicopters.
They'll keep at it, most likely, until they get the job done. Whether that will take 6 months or 6 years - we don't know.
In the meantime, the sensible investor may figure he'd rather be in, say, Exxon or Intel or Johnson & Johnson rather than in the US dollar. Many of the blue chips are cheap. They will probably get cheaper. But then, once the Bernanke inflation machine begins to get some traction, they will probably be a much better place for you money than cash.
Bill Bonner
for The Daily Reckoning |
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