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The Daily Reckoning Weekend Edition Saturday, October 09, 2010 Buenos Aires, Argentina ------------------------------------------------------- Commodities go boom!...And central bankers go mad, "Rice is the new iron ore...corn the new gold," Plus, all your weekly reckonings, neatly sorted and ready for your fin de semana reading... --- Resource Trader Alert Half Price Special Ends Wednesday --- DEADLINE - 11:59PM Wednesday Oct 13 Because market analyst Alan Knuckam is on one heck of a hot streak right now -119% average gain for all recommendations opened and closed over the last 6 months - we're making it as easy as pie for Agora Financial readers to get his research... Act by 11:59PM this Wednesday and save nearly 50% on what others have paid! Click here now for more details... ------------------------------------------------------- Joel Bowman, reporting from Buenos Aires, Argentina... Paper is out; stuff is in. That's what the markets are telling us right now. The dollar, that esoteric, floating abstraction upon which the financial world erects its sandcastle economies, plumbed a new seasonal low this week, with the dollar index flirting dangerously with its support level of 77. "Stuff," as measured by the CRB Commodity Index, meanwhile, soared to within reach of the psychological 300-point milestone. Indeed, everywhere we look, stuff is on the march. Gold opened to another record above $1,365 on Thursday, then retraced a bit to around $1,345 as of this writing. Oil shot through $84 a barrel this week and copper busted the $3.75 mark, reaching ever closer to the 2008 high of $4.08. Not to be outdone, silver climbed to a fresh 30- year high, topping $23 per ounce by Friday morning. The message from Mr. Market, in anticipation of the Fed's QEII program (second round of quantitative easing - fancy jargon for "money printing") is clear: Increasingly, investors are coming to prefer the sober, welcoming embrace of physical materials to the unrelenting, drunken currency abuse perpetrated by the world's central bankers. In actual fact, there's not a whole lot that hasn't been rallying in dollar terms lately...except, of course, the reputation of those responsible for destroying its credibility. While the dollar index plummeted 12.4% from early June to the end of September - even as headlines persisted about a shaky euro - everything else has benefited. Our mates over at The 5 sketched up this neat little chart, which really puts the story in perspective: One particularly notable - and worrying - component of the skyward global commodity trend can be found in the agricultural sector. The story here is part weak dollar and part supply-demand dynamic. Unlike metals or energy, however, the agricultural component of the commodity complex is not typically a "dollar diversification" tool for the emerging market's growing middle classes, or for the 1.2 billion (according to UN data) hungry souls around the world. For them, food is a necessity, not an investment strategy. The demand for dietary staples, therefore, does not enjoy the same price elasticity as does, say, an iPod or a spiffy new electric can opener. And, as the global population swells to 9 billion by mid-century, you can bet this is a trend with marathon legs. Partly due to this reality, farm commodities - or "ags" - have staged a remarkable rally this year. Wheat, for its part, is climbing back toward its 2008 crises levels. Prices have risen some 75% since June as the Black Sea region suffers through the most severe heat wave in nearly half a century. The affected area ordinarily produces roughly one quarter of the entire global output. Consequently, experts forecast Russia's harvest will come in around 60 million tonnes this year, well shy of the 75 million tonnes consumed domestically. Moscow has since implemented a ban on grain exports until late 2011. Chris Weafer, chief economist at Uralsib Financial, recently told The Financial Times that, even allowing for the country's emergency stockpile of 9.5 million tonnes, "We think Russia faces shortfall of 17 million tonnes and will have to import next year." Of course, supply shocks have been around as long as Mother Nature herself. Extreme weather patterns probably spawned the Biblical concept of the "seven fat years followed by seven lean years." Droughts in Australia, floods in Pakistan, heat waves around the Black Sea and cold snaps across the south all collude to hinder global production, and have done, in one form or another, for millennia. But now, more than ever, global population growth and the emergence of the middle classes in developing markets are trimming that critical margin for error. As Javier Blas reports in the FT, "...the most important underlying trend is the rise of emerging markets, where there are not only a growing number of mouths to feed, but where people with rising incomes want to eat higher-quality food - notably chicken, pork and beef. That in turn increases global demand for grain for animal feed." Corn, for example, is up more than 40% since June as global stock levels, with a "stock to usage ratio" of a paltry 12%, dipped to their lowest levels in almost four decades. Unfavorable weather patterns in the US kicked the rally off, but it was the revelation that China, feeding the fastest growing middle class on the planet, imported a record 432,000 tonnes in August that really kicked it into overdrive. This trend is all the more alarming, at least from a geopolitical perspective, when one considers that the US diverts a little over one third of its entire crop production to ethanol for fuel, a boondoggle that led one wry commentator to declare the program a blatant act of "unsustainable, government-sponsored food burning." To be sure, the hand of the state is always a dead weight on production, but when it comes to food, the matter quickly transforms from one of mere-to-moderate inconvenience to one of severe-to- apocalyptic life and death. Moreover, if analysts like John Clemmow of UBS are correct, what's on tap in the months to come could dwarf even the epic food crises of '08. "Clemmow maintains that despite riots and rationing at the time, there was no rice shortage in 2008," relayed The 5 earlier this week. "The shortage two years ago was the result of governments panicking over supplies." But "Unlike in 2008," says Clemmow, "there is now a possibility that with export bans in place, production problems in Pakistan and the strong suspicion that China and the Philippines will be importing in large quantities, we could be in for a fundamental squeeze." "Rice is the new iron ore," Clemmow concludes, "and corn the new gold." As the food crises of 2008 illustrated all-too-clearly, the world's dietary consumption habits seems to be approaching an important inflexion point, where a hungry emerging population literally eats into the market's ability to absorb supply shocks. It would be foolish, and immoral, to blame the hungry for demanding their daily bread...and equally blind to assume they'll ever be satisfied without it. Regards, Joel Bowman For The Daily Reckoning P.S. Traders looking to cash in on the run up in commodities are well advised to check out our Resource Trader Alert. Editor Alan Knuckman is on a "nine for nine" winning streak right now, including a gold play his readers cashed out of just this past Monday for a tidy gain of 221% in a little over five months. Until Wednesday, his Resource Trader Alert is going out the door for half price.Details Here. --- Mayer's Special Situations Resource Report --- American experts call this unconventional new natural gas recovery program... "The Biggest Resource Breakthrough Since the 'Beaumont Miracle' of 1901" But only one of these cutting-edge companies offers you the "secret wealth advantage" I reveal right here. (Click to Cont. Reading) ------------------------------------------------------- ALSO THIS WEEK in The Daily Reckoning... Thoughts on the Greater Depression An Interview With Doug Casey "Several...things almost equally radical should be done besides defaulting on the debt. I recognize that an outright default is most unlikely, but the national debt should be defaulted on for several reasons. To start with, once the US government defaults on its debt, people will think twice before lending it any more money; giving politicians the ability to borrow is like giving a teenager a bottle of whisky and the keys to a Corvette. A second reason is that the debt is an albatross around the necks of the next several generations; it's criminal to make indentured servants out of people who aren't even born yet." The Newspeak of Paul Krugman - Destruction is Creation By Steven Horwitz Canton, New York In his September 28 New York Times blog post, Paul Krugman announced that "economics is not a morality play." That turn of phrase is his way of defending the idea that in unusual times, such as the sort of deep recession we are in, we can get strange relationships between economic cause and effect. The result is that actions which we might find highly distasteful can have positive effects. Thus we cannot afford to be overly concerned with morality if the goal is to get out of the recession. When Emerging Markets Emerge By Chris Mayer Gaithersburg, Maryland Sometimes the best way for an investor to see ahead is to take a look and see what happened in the past. The history books have a riveting story to tell about emerging markets. This story has clues that tell us what might happen in the big emerging markets of today - such as China, India and Brazil. The Four Pillars of Successful Real Estate Investing By Ronan McMahon Waterford, Ireland Brazil has become a middle-class country. Car sales were up 17.9% for the first quarter of this year. Domestic budget airlines are growing exponentially, as this new middle class takes flight to various business and vacation destinations. In the first eight months of this year, 1.95 million new jobs were created - double the figure for the same period last year. The latest forecast for GDP growth this year is 7.3%. A Tojo Moment By Bill Bonner Paris, France "This week, Tokyo's central bankers rediscovered a modicum of their old mojo,"The Financial Times told the world on Wednesday. Typically, the FT reports the dialogue correctly but misunderstands the plot action. But we can correct the sentence with a single capital letter. For what they really discovered was a modicum of their old Tojo. --- Special Weekend Reading Gold Report --- With over 40,000 copies now in print, read your free online review copy of the brand new breakthrough financial report from Gold, Silver, and Energy expert Byron King... The Curse of the Incas Gold's Untold Story and the Shocking New Role It Could Play in Your Financial Survival A 476-year old mistake could soon cost you your retirement. How so? To understand, you have to let me share a little-told story. It starts like this...(Cont. Here) ------------------------------------------------------- The Weekly Endnote: "...and he told me he believes in big government; Keynesian Theory; Quantitative Easing...and the tooth fairy!!!" "Doug Casey said what?!?" "Take my central banker...please!" These are just a few of the submissions so far for our "funniest caption" competition. The picture your Fellow Reckoners are referring to is the screen shot, below, of the latest installment in our Daily Reckoning Video Series. If you haven't checked it out yet, visit our Facebook page here, or just click on the screen shot. Oh, and don't forget to leave a caption at the bottom of the page. Winners will be announced next Wednesday. And that about wraps it up for another week. We've been given a hot tip about a "locals favorite" parilla not far from our current digs here in Palermo, so we're off for a little afternoon bife de chorizo y vino tinto. Enjoy your weekend... Cheers, Joel Bowman Managing Editor The Daily Reckoning ------------------------------------------------------- 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 at joel@dailyreckoning.com The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Have You Heard of the OTHER Government Backed "Pension Program?"