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The Daily Reckoning Weekend Edition Saturday, February 26, 2011 Buenos Aires, Argentina ------------------------------------------------------- Food crises, chaos in the Mid East...it all comes back to commodities, Your chance at locking in our best resource-related research...for life! Plus, all the past week's reckonings, archived for your inflated enjoyment... ------------------------------------------------------- Chaos Across The Middle East...Skyrocketing Commodities...Food Riots... What's An Investor To Do? Introducing our Ultimate Lifetime Resource Package: The Resource Reserve* Available Until Monday, The Resource Reserve* includes our premier commodity trading and investing services: Energy & Scarcity Investor, Resource Trader AlertAND Hulbert Financial Digest's top-performing letter over the last 10 years,Outstand Investments...FOR LIFE! ..all for a one-time payment. Learn More Here. *NB: Positions Strictly Limited. Offer MUST Close Monday, Feb. 28. ------------------------------------------------------- Joel Bowman, from his hardship post back in Buenos Aires... "It all comes back to commodities," as Alan Knuckman, editor of Resource Trader Alert, likes to say. From a trader's perspective, Mr. Knuckman is absolutely right. One need only look at events unfolding around the world, and the commodity price action precipitating them, for supporting evidence. According to data released by the World Bank, food prices rose a stunning 15% from October through January. The World Bank's own food index now sits just 3% below its 2008 record. (Though a separate index maintained by the UN's Food and Agriculture Organization has already surpassed 2008 levels.) The price spike prompted World Bank chief Robert Zoellick to note: "Global food prices are rising to dangerous levels and threaten tens of millions of poor people." From food riots across the Middle East and North Africa to food stamp programs across North America (Uncle Sam is now reportedly feeding some 43 million mouths in the homeland!), it is plain to see that global political stability largely rests (or fails to rest) on the affordability of everyday resources. In other words, full bellies seldom take to the streets in protest. Governments know this, of course, which is why the surreptitious "bread and circuses" scheme persists as the preferred method of crowd control for states all over the world. A little reality television and a few crumbs from the political classes' tables is more than enough to sate the riotous impulses of most would-be freedom fighters. To be sure, there is more than a little "Hanky Bernanke" going on with the world's supply of non-intrinsically valuable resources, too. We're referring here to the temporarily disruptive advent of fiat monies. "The Bernank" would like us to believe that his policy of flooding the world with dollars has nothing to do with the escalating price of commodities priced in those very same dollars. "As to where the blame should fall," observed Eric Fry in a recent Daily Reckoning, "that's open to dispute. Bernanke has already presented his defense, pro se, before the court of public opinion. On the other hand, the nifty little chart below testifies persuasively for the prosecution. Bernanke first entered the bond-market-manipulation business back in March of 2009, right around the second "dip" on the prosecution's chart, above. "The stock market was on its back," recalls Eric, "economic conditions were deflationary and fear was palpable. He announced that the Fed would buy $750 billion of mortgage-backed bonds, $100 billion of Fannie Mae and Freddie Mac securities, and $300 billion of long-term Treasury securities... "With every step down this slippery slope toward dollar debasement," continues Eric, "the commodity markets reacted ever more violently." "Bernanke says the soaring prices of agricultural commodities are a 'growth effect,'" Eric concludes. "We say they are a 'dollar effect,' or rather, a 'dollar debasement effect.'" As to the omniscience of central bankers and the omnipotence of the monetary policies in their employ, your editors would profess less fence-sitting agnosticism than outright atheism. Don't be fooled, Fellow Reckoner. Here on earth, at least, a printed dollar is just another tear in the vale. Regards, Joel Bowman for The Daily Reckoning P.S. Don't trust the state to handle your financial security? More than a little suspicious that they might even be trying to destroy it? Are you interested in taking charge of your own wealth? Good. That's a start... To help you achieve real financial independence, we're reopening our Resource Reserve for the first time in years...but only until Monday. What does this include...and, moreover, why is it so important right now? We mentioned Alan Knuckman above. Alan has been able to capitalize on the strength-to-strength commodity story (or, if you like, the weakness-to-weakness dollar story) to deliver some stunning gains to readers of his Resource Trader Alert. In one three-month stretch during 2010, he bagged nine winners in a row...for an average gain of 157%...in an average holding time of 14 weeks. So far this year, he's closed positions for gains of 95% and 217%...and his readers are holding out for bigger gains on a heating oil play already up 223%. Not bad, eh? Well, that's just for starters... The Resource Reserve also includes Byron King's Energy & Scarcity Investor...plus our flagship resource publication Outstanding Investments - just named the top-performing letter over the last 10 years by the independent Hulbert Financial Digest - also edited by Byron. We've featured Byron quite a bit recently, mostly due to his prescient insights regarding the ongoing chaos in the Mid East. Byron actually told his readers to sell two oil companies with Egyptian exposure - securing gains of 50% and 143% in the process - right before the meltdown there (Jan. 29, to be exact). Here's what a couple of his readers had to say after he helped them heap gains into their own portfolios... "Energy & Scarcity Investor is without question my best advisory service," writes the first. "I have made more money with Byron than anyone else." "I invested $41,030 in nine stocks," another wrote us late last year, giving us some specifics, "and they are now at $65,095, for a $24,071 gain, or 58%, since Oct. 13." So that's Alan's Resource Trader Alert PLUS Byron's Energy & Scarcity Investorand his flagship Outstanding Investments service, all wrapped up in one package. And, if you make the commitment to membership by the deadline on Monday, you get them all for one payment...for life. That, in a nutshell, is the Resource Reserve... ..Plus, you also get free admission every year to our investment symposium in Vancouver. Wrote Addison regarding the deal in Friday's issue of The 5: "We're holding a limited number of slots open for the Resource Reserve... After all, there's only so much space in Vancouver. And the fact that it's so cheap, we'd bankrupt ourselves if every reader took us up on the offer. The slots will likely fill up before we close this offer on Monday. Take the opportunity to review all the benefits of Resource Reserve membership in this invitation." Interested? Get on board today. Click here for a detailed presentation, complete with side notes. Or click below for a straightforward text version... Agora Financial's Resource Reserve, Offer Closes Monday, Feb 28. ------------------------------------------------------- China - Risks and Opportunities By Puru Saxena Hong Kong, China Opinion is currently divided on the world's second largest economy. On one hand of the spectrum, the bears believe that China is a train- wreck and that its economic growth is unsustainable. These sceptics love to highlight the property bubble in China and they never miss the opportunity to mention the fact that fixed asset investment accounts for a disproportionately large chunk of the Chinese economy. According to the bearish camp, China's economy is not real; rather, its breakneck economic growth is centrally planned by Beijing. Furthermore, the bears argue that China's vast foreign exchange reserves are meaningless and that they will be used up in dealing with the aftermath of the Chinese real estate bust. On the other side of the equation, the optimists believe that China is the next great nation in the world and its super power status is all but assured. These bulls point to China's foreign exchange reserves, low debt levels, high savings rate, strong work ethic and growing domestic consumption. According to these folk, China's economy is amongst the strongest in the world and Beijing is in total control. So, given such conflicting views, it is hardly surprising that investors are confused about China. Furthermore, it goes without saying that over the past few months, we have spent a lot of time thinking about China's prospects. Therefore, we will now outline our views about the Chinese economy and its financial markets. First and foremost, we want to make it clear that we are not bearish about the long-term prospects of the Chinese economy. After all, the country has amassed the largest foreign exchange reserves in the world (US$2.85 trillion), it boasts a very high savings rate (37%), its household debt to GDP ratio is very low and its per-capita income is rising rapidly. Therefore, at first glance, the Chinese economy appears to be in good health. Unfortunately, China's economy also has a soft underbelly; it's out of control property market. After reviewing heaps of data, it is clear to us that real-estate prices along the coastal cities in China are grossly over inflated and due for an abrupt adjustment. When measured in terms of affordability (median home price to median household income), it is blatantly obvious that Chinese property is in a gigantic asset bubble. Moreover, various other data points also confirm overvaluation and excesses in China's property market. According to some reports, billions of square feet of commercial real- estate is unoccupied in China. Furthermore, we have also heard accounts from reliable sources that there is rampant speculation in China's residential real-estate. For example, the Chinese have been snapping up bare-shell apartments (no internal walls or fittings), for the sole purpose of flipping these properties for a quick profit. It is interesting to note that these buyers are not the least bit interested in a rental yield, their only intention is to sell these properties to a 'greater fool'. Needless to say, China's banks have been doing their part to fuel this speculative orgy. For instance, the South China Morning Post recently reported that in 2010, China's banks originated CNY8 trillion in new 'official' loans and this amount exceeded Beijing's loan target. However, the buck did not stop here and allegedly the Chinese banks loaned out an additional CNY3 trillion via 'off the balance-sheet' arrangements orchestrated through various Trust entities. The chart below captures the sharp increase in China's Yuan-denominated loans. According to China Daily, outstanding Yuan-denominated loans stood at CNY47 trillion at the end of October, which is an astronomical sum when you consider that China's economy is worth only CNY37 trillion. Unfortunately, this rampant credit growth is not slowing down and apparently, Chinese banks have already created new loans worth CNY1.5 trillion in 2011! So, there you have it. All the conditions are now in place for a property bust - extreme overvaluation, abundant credit and massive oversupply. The trillion dollar question though is whether the unavoidable bust in housing will impact China's broader economy or will the damage be confined amongst the property speculators and developers? Unfortunately, this is a very difficult question to answer but given the relatively low household debt in China, we are inclined to believe that the pain will be limited to the property developers, leveraged speculators and banks. We have no doubt in our mind that China's non- performing loans will escalate in the future, therefore we believe that an investment in Chinese banks is risky. Furthermore, when the Chinese property boom turns sour, various asset markets and economies will be impacted. First and foremost, the prices of base metals may fall from their lofty levels and this will affect the earnings of the major mining companies. Remember, China is the major importer of base metals and any slowdown in its real-estate construction will diminish demand for industrial raw materials. Accordingly, we have recently liquidated our investment positions in the base metals mining companies. Moreover, any fallout from the Chinese real-estate bust will surely impact the economies of the commodity-producing nations such as Australia and Brazil. Thus, investors should remain vigilant and perhaps reassess the risk/reward of their cyclical investments in these resource-rich nations. Now, this may sound strange but despite our near-term concern about China's housing bubble and our bearish stance towards certain sectors, we remain optimistic about the nation's long-term economic prospects. In terms of the broader Chinese economy, we believe that a housing bust in China will cause some hiccups in its breakneck growth. However, we suspect that this slowdown will be temporary because most Chinese households are not leveraged to their eyeballs (China's household debt to GDP ratio is below 20%). Furthermore, it is notable that currently, China's private domestic consumption accounts for only 34% of GDP (Figure 2) and in our view, this percentage will increase in the future. Remember, in its latest five year plan, Beijing has made it clear that it wants to increase private consumption and reduce China's dependence on low-margin manufacturing and exports. It is our contention that China's policymakers are serious about this issue and they have the necessary tools to encourage domestic consumption. For instance, if Beijing allowed its currency to appreciate, such a move will undoubtedly increase the purchasing power of the Chinese, thereby increasing private consumption. Despite the looming property bust, it is our contention that China's stock market has already discounted the housing problem and this is why the Shanghai Composite Index is trading approximately 55% below its all-time high. As far as valuations are concerned, it is notable that the index is trading at 17 times reported earnings, which is remarkably cheap when you consider the 12-year average price earnings ratio of 34. Last but not least, if you factor in this year's corporate earnings growth, the index is valued at just 13.1 times projected after-tax earnings. In summary, given our long-term optimism towards the Chinese economy and the historically low valuations, we are maintaining our investment exposure to our preferred companies in China. While we continue to avoid the property developers and banks, we have allocated capital to terrific Chinese companies which should benefit from an increase in China's domestic demand. If our assessment is correct, the ongoing weakness in Chinese stock prices is a good buying opportunity for the patient investor. Regards, Puru Saxena for The Daily Reckoning Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription here. Puru is also the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. ------------------------------------------------------- 50% OFF Mayer's Special Situations ends Thursday, March 3rd! Microcap "Stealing" Oil from Iran Could Return 4,599%! One tiny company has found a way to legally "steal" oil from Iran's largest oil field... Which means it's now sitting on oil reserves that could be worth over fifty times its total market-cap, setting the stage for an astronomical run-up of 4,599%! Resource expert Chris Mayer shares everything you need to know about this urgent opportunity in his brand new presentation... Click here to watch it right now. ------------------------------------------------------- ALSO THIS WEEK in The Daily Reckoning... The Box of Money By Eric Fry Laguna Beach, California The most persuasive arguments for buying gold do not reside in musty old economics textbooks or in the minutes of the latest FOMC meeting...They reside in Henry Hackel's "box of money." Henry, as faithful Rude Awakening readers will recall, is the president of R.F. Lafferty, a broker-dealer specializing in options trading and resource stocks. In his 26th floor corner office overlooking the Hudson River sits a non-descript cardboard box - a simple shoebox that contains a powerful message: Buy gold. "When Money Dies" By Chris Mayer Gaithersburg, Maryland I didn't come up with the phrase, "when money dies," though I like it a lot. The phrase captures an important idea. It is that money - I refer to that paper kind issued by governments - has a finite life. At some point, it becomes worthless, or dies. The Best Investments of the Next 50 Years By Chris Mayer Gaithersburg, Maryland Some of the most successful companies of the last half-century all had one thing in common. And I am certain that the best investments of the next half-century will also share this trait. It's pretty simple and intuitive, yet I wonder why more investors don't focus on it. He Who Begins to Count Begins to Err By Chris Mayer Gaithersburg, Maryland "If you spend more than 13 minutes analyzing economic and market forecasts," the famous investor, Peter Lynch, once remarked, "you've wasted 10 minutes." Oskar Morgenstern (1902-1977), a professional economist, probably would have agreed with Lynch. I found myself thinking about Morgenstern over breakfast recently as I was skimming financial headlines in the newspaper. He was a "numbers guy" who understood the limitations of numbers. How Much More Demand Can Silver Handle? By Jeff Clark Stowe, Vermont The numbers for silver demand are starting to make some market-watchers nervous. The US Mint sold over 6.4 million silver Eagles in January, more than any other month since the coin's introduction in 1986. China's net imports of silver quadrupled in 2010, to 122.6 million ounces, roughly 13.7% of global production. Meanwhile, mine production can't meet worldwide demand; the only way demand gets fulfilled is from scrap supply. ------------------------------------------------------- WARNING: This is Controversial. It Offends "Gloom and Doomers" Here's why it's NOT the end of America... Shocking new presentation reveals epic opportunities - viewer discretion advised for thin-skinned fear mongers. Watch the presentation right here. ------------------------------------------------------- The Weekly Endnote: Yes, fellow Reckoner, we promised you an announcement on the Daily Reckoning Financial Darwin Awards: The State Edition, today. Each year we pay our respects to a list of companies that kindly remove themselves from the corporate genepool, thereby releasing their capital into the economy for more productive outfits to make better use of. This year, we decided to do a "state edition," honing in on states determined on sending themselves to the tar-pit of insolvency. Unfortunately (or fortunately, depending on how you look at it), the project has kind of ballooned beyond our expectations. We've literally received hundreds of reader emails dishing the dirt on state-sponsored incompetence and waste during the past week. A few prominent bloggers have even expressed interest in running the results of our little competition to their subscribers. Apparently, the bull market in devolutionary, politico-idiocy is stronger even than we had first thought. As such, we're going to hold off on announcing the short list and "winning" state until next weekend. That'll give us a bit more time to share with you some of the boots-on-ground emails during the coming week and to build some more momentum leading up to the announcement. Who knows how big this thing will grow? Stay tuned and, if you're so inclined, send your nomination for "biggest loser" state to us at the address below. And, as always, enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning P.S. Remember to keep your anecdotes of state waste to policies and idiocies that occurred during the past year. (Sorry Massachusetts "Big Diggers," but we must limit the entries some way...) ------------------------------------------------------- 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?"