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The Daily Reckoning Weekend Edition Saturday, January 15, 2011 Buenos Aires, Argentina ------------------------------------------------------ The many and far-reaching effects of the floods in Australia... Nathan Lewis gives his assessment of the cheapest thing on earth... Plus, this past week’s reckonings, archived and worth more than a poke in the eye with a sharp stick... ------------------------------------------------------ Good Only Until Midnight Saturday, Jan. 22 - Give This Profit Engine a Risk-Free Try $100,000 fits on a dinner plate. $1 million fits in a grocery bag. Act before midnight Sat., Jan. 22 and find out how you can start stuffing your own grocery bag with cash. Amazing? Preposterous? Get all the details, and find out how easy it really is, right here. ------------------------------------------------------ Joel Bowman, from Buenos Aires, Argentina... Before we get into this weekend’s regular reckoning, we’d like to offer our thoughts and most sincere “hang in there, mates” to our fellow Queenslanders. As many of you would have already seen, Australia’s “Sunshine State” was this week inundated with floodwaters after a month of torrential rain. The effected area, according toReuters, was larger than France and Germany...combined. Thanks, too, to those fellow reckoners who wrote in to check on your Aussie editor’s family and friends. We’re relieved to report that, although pretty sodden, our loved ones are all alive and well. Unfortunately, the death toll continues to rise across the state, where, at last count, 27 people were confirmed drowned since the rains began in December and more than 50 remained missing. If there is a positive to be found in this disaster, it must surely be the conduct of the Queensland people. Although millions of people in and around the state’s capital city, Brisbane, were affected, only a small handful of incidents involving looting have thus far been reported. Overwhelmingly, the news reports stories of solidarity, compassion and of general concern for neighbors in the worst hit regions. The catastrophe, and similar events in other parts of the world – most notably in Brazil – also offers a timely reminder of just how little the margin for error exists with regard to the world’s food and energy supply. Australia is a major exporter of, among other things, wheat, fertilizers, coal, sugar, meats and assorted fuels and minerals. Our man Down Under, Dan Denning, after offering his own, heartfelt words of condolence to the people of Queensland, put the situation in economic terms. “Australia is the world’s top exporter of metallurgical coal (steel making, or coking coal) and the world’s second largest exporter of thermal coal (power plants). Queensland exporters alone account for 60% of global seaborne coking coal exports. The Financial Times reports that the spot price for coking coal is now around $295 per tonne. That’s a 30% premium to the quarterly contract price for coking coal.” Continued Dan, “Coal prices (both thermal and coking) have been trending up since the middle of last year. Thermal coal now sells for $140 per tonne, a 40% gain in the last twelve months. For Queensland right now, though, the biggest worry is not the reduced volume of thermal coal exports in the rest of this quarter. It’s the supply of thermal coal for Queensland’s own power plants.” Your editor’s home state also contributes more than 75% of the nation’s total fertilizer exports and more than half its total exports of animal oils and fats and sugar and sugar preparations. Of course, the supply-side of the equation only tells half the story. The demand for these and other natural resources is increasing exponentially as the world’s emerging markets graduate tens and even hundreds of millions of people to “middle class” status. As living standards rise, so does the appetite (and demand) for a higher quality diet and increased energy usage. All this, along with the inflationary tendencies of the world’s man-made disaster – central bankers – adds up to large and swelling upward pressure on commodity prices. Nathan Lewis, author of Gold: The Once and Future Money, lends us a unique perspective on this trend and what it will mean in the months and years ahead. Please enjoy... ------------------------------------------------------ The Cheapest Thing on Earth By Nathan Lewis Quick: name an asset, publicly traded, that is the cheapest in a hundred years. Houses? Nope. Stocks? I don’t think so. Commercial real estate? Bonds? Not too many, are there? Now here’s a tougher one. Name an asset that is near the lowest price in all of human history. The answer is: wheat. Actually, the entire agriculture complex, including corn, beef, pork and beans could fit this description. But for now we will focus on wheat. Wheat? Didn’t that just leap higher? Aren’t we wringing our hands about the high price of wheat? People don’t realize how cheap wheat is today, even after its recent gains. In 1904, a bushel of wheat cost about $1.00. That was in 1904 dollars. Since a $20 gold coin contained about an ounce of gold in those days, your $20 gold coin would buy about 20 bushels of wheat. This was a typical price until the mid-1960s. Today, your $20 gold coin – it could be the very same one – would buy about 187 bushels of wheat. Since there are 60 pounds in a bushel, that would be 11,220 pounds of wheat. At today's $7.74/bushel, a pound of wheat costs about $0.13 wholesale. Combined with a little meat and vegetables, it would feed a man for a day. Here’s what it looks like graphically: We can see that the price of foodstuffs fell dramatically beginning in the late 1960s. This could be ascribed to the “Green Revolution,” which increased crop yields dramatically. However, even if we take just the last few decades, we see that wheat has fallen to very low levels, when compared to the eternal money of gold. (These month-end values are updated to December 2010.) Commodity values across the board fell against gold during the 1970s, and never really recovered. So, it is possible that grain values will fall to an even lower plateau during today’s currency devaluation episode. However, we know that wheat is never going to zero. The downside is limited. Actually, it is getting a little difficult to grow wheat these days, mostly due to continuing strange weather. Less supply. On the demand side, multiple billions of people mostly in China and India are adopting a more westernized diet, and they now have the money to pay for it. More demand. I don’t know what will happen to wheat over the next ten years. However, I suspect that it could do better than stocks, bonds, real estate, and even gold and silver. Regards, Nathan Lewis for The Daily Reckoning Ed. Note: Nathan Lewis is the author of Gold: the Once and Future Money(2007). He is an asset manager in New York. ------------------------------------------------------ Did You See The Video About The American Nuke Bomb LOST Under Ancient Ice Fields? Way back in 1968, an American B-52 crashed in northwest Greenland... Unfortunately, the nuclear bombs on board got forever swallowed by an ancient ice sheet... But there's an unknown penny stock set to rise 2,000% from this sorry situation. Sound unbelievable? Watch this presentation for proof... ------------------------------------------------------ ALSO THIS WEEK in The Daily Reckoning... Buy a House... Then Buy Another By Chris Mayer Gaithersburg, Maryland Investment ideas are cyclical. They go dormant for a while, then revive, like fashions or cicadas – obeying their own curious rhythms. During the past few years, rare was the investment thinker who said you should buy a house. Housing was in a bubble that was deflating. But the investment seasons turn. Today some smart investors are once again saying you should a buy house. John Paulson is one of them. The Biggest Resource Stories for 2011...and Beyond! By Byron King Pittsburgh, Pennsylvania I’m going to countdown three of 2010’s biggest resource stories – not to reminisce about profitable investments from the year gone by, but to highlight what I believe will be very profitable investments in the year ahead... The “Risk On” Trade...Brazilian Style By Ronan McMahon The new middle class in Brazil is growing...and spending their newfound wealth. Brazil is booming. And Brazil’s northeast is growing at a faster rate than the rest of the country. The most exciting story to emerge from Brazil in recent years is the rise of the middle class. In the last eight years, Class C (Brazilians earning $650 to $2850 a month) grew quickly. Today, 94.5 million people fall into Class C. They are driving the Brazilian economy, buying cars, washing machines, vacations, and new homes. How to Invest Successfully in Emerging Market Real Estate By Ronan McMahon Today, I’m revisiting my “Five Golden Rules for Buying Pre-construction.” I find this a useful process whenever a pre-construction project I have invested in or recommended is delivered. To remind you, buying pre-construction is where you buy into a development before it has been constructed. You are relying on a set of architectural plans. Frequently, developers will offer substantial discounts to buy off-plan. Often the best units go to “insiders.” Illinois is No Peter Pan Frederick J. Sheehan North Weymouth, Massachusetts Illinois is a state in which the legislators have so betrayed the taxpayers that a lifetime on Devil's Island would be too good for them. For instance, the liability of the four state pension plans is calculated at $151 billion or $280 billion, depending on the assumptions used. The $280 billion figure is analytically controversial but deductively compelling given the efforts to deny and confuse bondholders and the public alike respecting the coming collapse of the municipal bond market. ------------------------------------------------------ Why Some People DIDN'T Go Broke In The Bust From 2008 until now, some people watched their gains go UP...as high as 448%, 556%, and even 579%... On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it - and so could you. Click here to watch the free new video that shows you how. ------------------------------------------------------ The Weekly Endnote: “I'm going to be contrary to the contrarians,” begins a fellow reckoner in response to our latest “Group Research Project.” “The best buy for a condo under $300,000 dollars: Florida! If you can stomach the risk and manage your finances properly in the future, hey the real deals are there. “America, though times and future times are rough, still has all the amenities. Florida, but check the hurricane ally...” If you’d like to nominate your own pick for Best Under-$300,000 Condominium In The World, please email us at the address below. We’ll feature a selection of these in upcoming issues of The Daily Reckoning. Just be sure to let us know if you are the “Best Condo” seller. That fact won’t disqualify your submission, but we’d still like to know. 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?"