 | | The Daily Reckoning | Wednesday, October 27, 2010 |
- Death of a Perónist: Markets cheer as Argentina's first man departs,
- Not-so-fun food facts...and the $359 billion global restaurant tab,
- Plus, Bill Bonner with a new zombie alert, the curious TIPS auction and plenty more...
|  | | The Future of Argentine Business
| Markets React to the Death of Néstor Kirchner
| |  | | Joel Bowman |
Back in Buenos Aires, Argentina...
The city is deserted. Shops are closed. Cafés are empty. Parks and playgrounds stand idle, their trees and swings blowing gently in the soft spring breeze.
Today is census day in Argentina, when 650,000 professional counters hit the pavement to tally up the "whats," "whens" and "wheres" of their fellow Argentines. Folks have been ordered to stay home between 8 AM and 8 PM and to cooperate fully, as is their "civic duty," with the busy little tab-keepers.
Of course, there are a few ne'er-do-wells flouting authority...a handful of no-good dog-walkers, the odd roller-skater and even a couple of rogue octogenarians we saw walking arm in arm along the street below our window...the usual riff-raff. For the most part, however, the Argentines seem pleased enough with an excuse to stay in for the day. Many were out late last night celebrating the fact.
But there is a pall hanging over the city, too; a somber mood weighing on her great shoulders. It began to spread in the early morning, from the Rio del Plata in the east, out over the slow, rolling Pampas and, by now, up into the highest reaches of the Andes and to the loneliest Patagonian outpost.
The headline in today's Buenos Aires Herald delivers the blow:
"Former President Kirchner Dies"
The passing of the nation's most powerful - and controversial - politician since the Peróns was, of course, deeply felt by his leftist comrades.
Venezuelan President Hugo Chávez was so touched he sent President Cristina Fernández de Kirchner (Néstor Kirchner's wife) his regards via his Twitter account. Tweeted Chávez: "Oh, my dear Cristina... So much pain! What a great loss Argentina and America are suffering! Kirchner forever!"
According to the Herald, "Chávez and Fernández de Kirchner share a friendly and cordial relationship via Twitter. Both heads of state tend to communicate with each other to report on any type of news event."
How sweet.
Unlike the rest of us, a politician needn't be possessed of any useful talent or skill in order to induce a tone of national mourning when their death finally comes due. It seems even the vilest of busybodies become immortalized on point of departure. Witness Chairman Mao's grinning banner atop the gates of Tiananmen Square for proof...or the sorry, ever-prostrating state of North Korea, where the dearly departed father of Kim Jong-il (Kim Il-sung) is still held to be the official and supreme leader.
We recall, too, when former Prime Minister Benazir Bhutto found eternal glory at the tip of an assassin's bullet during the tumultuous run up to Pakistan's elections in late 2007. Twice during the 1990s the since- apotheosized figure was removed from office on grounds of corruption. It had further been alleged that Bhutto's government had provided military and financial support for the Taliban, even sending a small unit of the Pakistani army into Afghanistan to help the group, seeing them, as one author later wrote, as a group that could "stabilize Afghanistan and enable trade access to the Central Asian republics."
In '98 Bhutto fled to Dubai, where she remained in self-imposed exile until 2007. Then, when her time came to depart from life and politics together, all debts were forgiven in the eyes of the public. Such was the outpouring of grief and emotion in the country that Bilawal Bhutto Zardari, Benazir's 19-year old son, was even appointed head of her Pakistan Peoples Party...which then went on to win the election! The year following Bhutto's death she was named one of seven winners of the United Nations Prize in the Field of Human Rights.
Néstor Kirchner, too, was no saint on earth. Politics is a grubby game after all. Few escape its arena without at least a little dirt on their mitts.
But perhaps it is not polite to cast judgment on the dead. And of what use is it anyway? They're not going to change their ways now. In any case, our beat her is money. And besides, the weighing of vice and virtue is a job better left to mightier hands. Fortunately, Mr. Market cares not for such flippant bouts of human sentimentality.
Following news of Kirchner's death this morning, Argentine assets skipped the mourning period to stage a hefty rally on foreign markets. (Argentine markets are closed due to the people counting project.) The nation's bonds rose in New York as investors' fears over Kirchner standing again for top job in 2011 were allayed...forever. Grupo Financiero Galicia (ADR), Argentina's largest consumer lender, surged as much as 26% on the NASDAQ this morning as investors applauded what they hope will be a new and prosperous era for business in the country.
Roberto Sanchez-Dahl, an emerging market debt manager, summed up the situation in an article posted by Reuters. "For Argentina, as a credit and a country that is the recipient of investors' money, there is no better scenario than having Kirchner out of the political arena."
We will have to wait and see what this event portends for South America's second largest economy. For now, the streets and parks are empty, spring is in the air...and tomorrow is another day. | |
| The Daily Reckoning Presents
| The 40-Year Food Outlook
| |  | | AddisonWiggin |
The short-term (1-3 year) outlook for agricultural commodities is bullish enough. When you start looking out decades, the picture becomes one of an epic bull market.
Feast on the following highlights from an August report by the United Nations Food and Agriculture Organization, working with the Organization for Economic Cooperation and Development...
- World population will grow 2.3 billion by 2050, to over 9 billion
- Nearly all this growth will come in developing countries
- This population growth will require a 70% increase in global food production
- In developing countries, production will need to nearly double
- Making this happen will require annual investment averaging $209 billion.
And if you break out the details, that $209 billion figure is just the private investment required if the percentage of the world that goes hungry stays static.
If hunger is to be eliminated in the next 15 years, that investment figure jumps to $359 billion.
Is it any wonder the FAO expects grain prices over the next 10 years to remain 15-40% above their levels of 1997-2006? Oh, and that's before you adjust for inflation over the next ten years.
So who stands to profit from that annual investment of $209 billion to boost crop production? Hint: It won't be food manufacturers. They're going to be hit hard. Instead, you'll want to be investing in the suppliers of fertilizer and/or farm equipment.
Every month, the Institute for Supply Management releases its Chicago- region Purchasing Managers Index - a gauge of manufacturing activity. The numbers are rarely as interesting as the comments from real businesspeople who respond to the survey.
In the survey released Sept. 30, one comment read: "Look for consumer food prices to rise soon. Food manufacturers simply cannot continue to absorb commodity increases."
The market is just now waking up to this reality. On Oct. 8, when the Agriculture Department cut its forecast for the US corn crop, shares of Tyson, the chicken producer, dropped 6%. Smithfield, the pork giant, also took a hit. In contrast, seed giant Monsanto rose 3.5% and fertilizer maker CF Industries jumped 6%.
So again, who benefits from that $209 billion annual stream? Richard Feltes, an analyst at the RJ O'Brien brokerage in Chicago, perhaps puts it best: "Buy farm equipment stocks and sell food company stocks."
There aren't many ETFs that focus on the kind of stocks that went up on this chart. But the Market Vectors Agribusiness ETF (MOO) is one that does. MOO's top 10 holdings make up nearly 60% of the entire fund. No. 1 on the list, making up 8.5% of the holdings, is Deere & Co. - the quintessential farm equipment stock. Nos. 2 and 3 are PotashCorp and Mosaic, the leading producers of fertilizer. Potash is the subject of a buyout battle right now, and its outcome is uncertain. Mosaic could well become a takeover target. So it's a volatile, but also exciting, time for the sector.
MOO also gives you access to stocks you can't buy on US exchanges, like Wilmar Intl., an Asian agribusiness giant. It's the world's largest producer of palm oil and the second-largest company ranked by market cap on the Singapore stock exchange. It's a simple call. Buy MOO and hold it. We don't know if you'll be able to ride it all the way to when world population reaches 9 billion in 2050...but it'll have staying power.
Farmland, itself, is another very compelling way to capitalize on the coming bull market in agricultural commodities. But buying farmland is, obviously, much more difficult than buying a share of stock.
"Productive agricultural land with water on-site will be very valuable in the future," says Michael Burry, the hedge fund manager who bet against the housing bubble and the principal character in Michael Lewis' best-selling book The Big Short. "I've put a good amount of money into that."
Farmland has had a remarkably consistent return. A farmland index compiled by the National Council of Real Estate Investment Fiduciaries has risen an average 11.2% annually since 1992. There hasn't been a single losing year. And only one losing quarter.
Within the United States, the average price of farm real estate has doubled over the last decade, to $2,140 an acre, according to the US Department of Agriculture.
Elsewhere in the world, the farmland rush is on. High-net-worth individuals like George Soros and Ted Turner are buying farmland in Argentina, for example. But the biggest buyers are the sovereign wealth funds of governments in countries where farmland is at a premium - think China, India and the sandy Middle Eastern countries.
They're finding willing sellers in developing countries. Figures are hard to come by, but the World Bank estimates foreign investors of all stripes bought 111 million acres in the developing world in 2009 - a 10-fold increase in 10 years. Two-thirds of those deals have been struck in Africa.
The iconic example is a deal that fell through. In 2008, South Korea's Daewoo Logistics signed a lease on farmland in Madagascar, the large island nation off Africa's southeast coast. The company planned to plant corn on territory larger than the state of Connecticut.
Angry voters promptly ousted the government that leased the land. The new president revoked the lease, saying, "Madagascar's land is neither for sale nor for rent."
But Sudan's is. Nearly 10 million acres of Sudanese farmland have been sold to foreign buyers between 2004-09. More than 6 million acres in Mozambique have also changed hands. Liberia, Ethiopia and Nigeria have likewise sold sizeable tracts.
For investors, it's a high-risk proposition. Many of these governments are selling the land from underneath the peasants who tended it for generations and kicking them out. They're not very happy about that. If they can't get redress, they might well seek revenge. Even in countries where the rule of law and property rights has a stronger history, the rules can change in an instant. Brazil just passed a decree limiting acreage held by foreign-owned companies.
So the best opportunities for US investors may be close to home. But that presents a problem for just about anyone who doesn't know the farming business: How do you capitalize if you want to buy farmland, but you don't know a combine from a cultipacker?
That's where a growing number of specialized funds are stepping in. Boston-based Hancock Agricultural Investment Group has 210,000 acres of holdings, almost all in the United States. Agcapita, a Calgary-based firm, has acquired more than 30,000 acres, mostly in Saskatchewan.
But beware...You can't dabble in these funds the way you can a mutual fund or an ETF. The typical minimum investment is $25,000...and the typical minimum commitment is six years. Still, if you have the cash and the patience, farmland could provide the biggest payout of all as the agriculture sector booms over the next decade.
We're talking about long-term trends here. Growing populations. More affluent populations seeking a better diet. A world farm system stretched to the max. But make no mistake - agriculture is volatile, and there will be shakeout periods.
How patient are you? When the grains and the ag stocks pull back, will you still believe in the long-term story strongly enough to hold on? I hope so, because the opportunity is enormous.
Regards,
Addison Wiggin,
for The Daily Reckoning
Joel's Note: As we mentioned in yesterday's issue, reckoners looking to snap up some quick gains in the commodity markets could do far worse than checking out Alan Knuckman'sResource Trader Alert. Alan retains a few open positions in the agricultural sector right now and, for those metal hounds out there, a silver play currently up around 190%. Here's how you can get started in what Alan calls the "Millionaire's Market" today.
| | | | Bill Bonner
| A Few TIPS on Inflation Protection
| |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
What a whacky, whacky world...
"Debt sales highlight abnormal conditions," says the headline in yesterday'sFinancial Times.
Abnormal? Freaky. Bizarre. Strange.
The latest auction of TIPS - US Treasury debt with inflation protection - produced a curiosity. Investors were willing to pay $105 for every $100 worth of inflation-protected notes.
Go figure.
What does it mean? What are investors worried about? On the surface of it, they are setting themselves up for a built-in loss. TIPS always offer less interest than regular bonds. You give up some yield to pay for the inflation protection. But TIPS buyers are now buying them with negative yields. Which is to say, they pay for the privilege of owning the bonds. Inflation has to beat expectations...and then some...before they are even at breakeven.
All very weird. If they are so afraid of inflation, why not buy gold? No negative yield. You pay $100...you get $100 worth of gold.
And you won't have to worry about the people who are making the calculations. In the case of TIPS, the people who sell the notes are the same people who determine how much they're worth - because they're the people who figure out the CPI. Besides, we haven't studied the matter, but when we last looked into it, we found that there was a delay in making the adjustments. So, in a period of hyperinflation the adjustment process would be overrun by events. When Hungary had its hyperinflation of 1947, for example, the pengo lost half its value every 13 hours. No adjustment in the world can keep up with that rate of loss... A TIPS holder would be wiped out. A gold buyer, on the other hand, would be, well, golden....
The other strange thing about protecting oneself from inflation via TIPS is that there isn't any inflation to speak of. According to the people who keep the statistics, the rate of consumer price inflation is barely 1%. And according to the people who buy regular non-adjusted Treasury debt, there is no inflation on the horizon either.
All of which makes the TIPS auction curiouser and curiouser...
Stock market investors didn't seem to know what to make of it either. The Dow ended yesterday essentially unchanged.
Gold didn't know what to think. It didn't move yesterday.
And that's not all...how's this for weird?
From Bloomberg:
"Dollar Gains Against Euro on Speculation Fed Easing Will Spark Inflation"
Huh? Investors worried about inflation in the dollar. They buy dollars? Yep.
The dollar strengthened against the euro for the first time in three days on speculation an increase in debt purchases by the Federal Reserve will cause inflation to accelerate.
Sterling rallied against all of its major counterparts as a report showed the UK's economy grew in the third quarter at double the pace forecast by economists and Standard & Poor's raised the nation's credit outlook. The yen dropped versus the dollar on the prospects of Japan renewing intervention to weaken the currency and protect exporters.
"Inflation expectations have been lifted because people think the Federal Reserve will be successful," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York.
The US currency appreciated 0.8 percent to $1.3859 per euro at 5 p.m. in New York, from $1.3965 yesterday. The dollar gained 0.8 percent to 81.43 yen, from 80.81 yesterday, when it reached 80.41 yen, the lowest level since April 1995. The euro was little changed at 112.86 yen, compared with 112.85.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major US trading partners including the euro, yen and pound, increased 0.7 percent to 77.6533. The gauge has fallen 1.4 percent in October on speculation a boost in debt purchases, also known as quantitative easing, will erode the value of the greenback. The Fed is next due to decide on policy at its Nov. 2-3 meeting.
The markets are seriously confused. Inflation? Deflation?
Well, what are we going to do?
We'll hold our gold. We'll sit. We'll laugh. And we'll wait for this whole shebang to go ka-plouey.
How's that?
And more thoughts...
A zombie alert. Bloomberg has the report:
Chris Whalen is famous lately for predicting a return of the subprime crisis in 2011. His thoughts on the greater mortgage system are also interesting, as discussed in an interview with King World News.
Whalen says GSEs [Fannie Mae and Freddie Mac] don't help homeowners. Rather they promote a system that locks marginal borrowers into costly interest payments, helping their own bottom line. The zombies at Fannie and Freddie prey on house buyers.
We interrupt the normally crisp flow of ideas in these daily reckonings with a parenthetical remark. Looking through the newspapers and magazines this weekend we were offered thousands of "homes" for sale. We thought a home was something you lived in. But the ads offer "new homes" - empty houses that no one has ever lived in. It doesn't make any sense to us. But we conclude that the word "house" has been withdrawn from the dictionary.
Yes, dear reader, the homing crisis in America only seems to get worse and worse. We remind readers too that this was a crisis created largely by the government - which subsidized mortgage rates (sponsoring Fannie and Freddie), provided a tax break for mortgage interest, and told banks that they had to lend to poor credit risks in bad neighborhoods.
And now, true to form...the government is making it worse. How? By bailing out failed lenders - Fannie and Freddie. The last estimate we saw put the cost of keeping these incompetents alive at more than a quarter of a trillion dollars. That is bad money after bad money, in our opinion. The Feds are also threatening to slow down the foreclosure process...which would further delay the correction in the homing market.
Now...Chris Whalen continues:
"If you're a wealthy American you can [refinance], but if you've got a seven-something FICO score and you're in a so-so neighborhood so the collateral doesn't have a big score in the equation, you're screwed," Whalen says. "These are the people Fannie and Freddie doesn't want to see prepay, so they can keep the income on their portfolio. It's horrible! People don't realize how predatory these government agencies are.
"Everything Orwell ever wrote was true and it's proven by the way people like Barney Frank and Chris Dodd have personally benefited from this housing mess, while they're actually hurting the poor people most." Regards,
Bill Bonner
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com
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