 | | The Daily Reckoning | Wednesday, November 9, 2011 |
- Price distortion and signal jamming...markets plummet on euro-news,
- A couple of sexy Canadians for your portfolio consideration,
- Plus, Bill Bonner on Ali, “Smokin’ Joe” Frazier, “The Cavalier” and more...
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|  | | | | A Bull Market in Uncertainty | | No Easy Answers in the Search for Market Nirvana | | |  | | Joel Bowman |
Reporting from Cafayate, Argentina...
If you meet the Buddha, kill him.
— Linji
Markets in the US and Europe closed higher yesterday. The Dow ended up about 100 points. Newswires — forever quick to publish and always slow to think — claimed investors were cheering the resignation announcement from Silvio Berlusconi. The late afternoon rally was a “roaring approval” of the Italian prime minister’s move, they reported.
Since then, the “roaring approval” softened to an uneasy regret...followed by a quick rethink...then a mild panic...and, as of a few minutes ago, a mad dash for the door.
Renewed uncertainty about Italy’s ability to roll over its debt sent yields on the failing country’s 10-year bonds bolting past 7% this morning — a new euro-era high. Most European indexes slid at least 2% overnight.
Not to be outdone, measures in the US also gave up yesterday’s cheerful gains...and then plenty more. Last we checked the Dow had slumped about 3%, or roughly 400 points. The S&P 500 and Nasdaq were lower by 3.3% and 3.5% respectively.
Gold, too, is back down to $1,770, having lost about $12 overnight after briefly kissing $1,800 per ounce.
One thing that IS up is the CBOE Market Volatility Index, or VIX. “Wall Street’s Fear Gauge,” as it’s sometimes referred to, spiked above 32 earlier today. It’s a bull market in uncertainty...and with good reason.
European crises...debt ceiling brinksmanship...sovereign defaults and government overthrows...open source warfare and old style battlegrounds...occupiers...tea partiers...failed recoveries and flaccid economic growth...
It’s been a big year, Fellow Reckoner. And it ain’t over yet!
To say investors have had their work cut out for them over the past twelve months would be somewhat of an enthusiastic understatement. From zenith to nadir, peak to trough, the Dow Jones Industrial Average has swung roughly 17% during the last year, from an April 29 high of 12,810 to an October 3 low of 10,655. That’s a difference of 2,155 points...roughly the same reading the entire index registered back on New Year’s Eve Eve, 1988.
“Discovering, discovering, discovering,” we remarked last week. “That’s what the market is always doing.”
And thankfully, it will never stop. Not if it is left to its own searching, wandering, peripatetic nature. In this way, the market is a bit like the contemplative Buddhist, scouting around deep in the cave of his own mind. We can almost hear his innermost meditations...
“If you meet the perfect price, kill it.”
Why kill the perfect price, you ask? Because it’s an illusion, of course, a decoy on the path to pure market nirvana.
Prices change from moment to moment...transaction to transaction. And, because value is subjective, because it does not exist, intrinsically, within the goods and services we trade, it also changes from person to person, depending on their individual desires and needs at any given time. There is no perfect, eternal and everlasting price for all things...or even for any one thing.
“Value is not intrinsic, it is not in things,” observed Ludwig von Mises in Human Action. “It is within us; it is the way in which man reacts to the conditions of his environment.”
In this way, Mr. Market’s job is not an easy one. He must search endlessly for something he knows he will never find. He must seek that which does not exist beyond the moment. His work, therefore, is never done. The second he arrives at an answer, it changes before his very eyes, vanishes behind a cloud of smoke, morphs into something new and entirely unpredictable.
That’s what makes trading markets so difficult...and so exciting. It’s also what makes trying to control, cajole and contort them to one’s own whims and desires such a laughably futile endeavor. And it’s what makes watching the feds’ attempts to do exactly that so much fun.
The feds are always trying to force and control the markets, which really means forcing and controlling the human participants whom those markets represent. They think they know what prices ought to be, forever and ever, amen. Such is their immeasurable arrogance. The price of healthcare is too high, they say, the price of whisky too low. So they give the former away for “free” and levy taxes on the latter, trying to manipulate the real world prices to fit with their bloated opinion of what constitutes a better reality for people they’ve never met, living under circumstances they could never hope to understand.
But here’s what they forget: though prices are subject to (and indeed defined by) opinion, reality is not. Consequently, they can’t really “give away” free healthcare...or free education...or free anything. And so they don’t. Instead, they steal the funds to pay for it from other people — present and future — to make it appear free. That, or they borrow it from foreigners. (Or, as is more commonly the case, a combination of both.) Either way, the real world cost hasn’t gone anywhere...except now it exists as an interest-accruing debt, growing larger by the day. In this way, free tends to become very expensive very quickly.
You can see the skyrocketing price of free goodies all over the world. Take Europe, for example...
Over in the eurozone — as elsewhere — big thinkers at the central banks assume they can fix the price of everything. How do they do that? They fix the price of money itself by controlling the supply, outlawing competition and by finicking interest rates (the cost of borrowing). They think they know what a dollar — or a euro...yen...peso, etc. — ought to be worth and precisely how many of them ought to be in circulation to satisfy the myriad needs of its millions of individual users at any one time.
In 1999, the euro politicos thought they’d go one step further and throw a blanket over the whole of the European continent. No need for drachmas or liras or francs, they said. We’ll issue a new, Esperanto currency, one that can speak all of your languages, one that knows your every need and desire and that can fulfill them all. What had previously been an impossible task for the central banks of individual nations soon became, for the European Central Bank, a monumentally impossible task. Some 322 million Europeans use the moribund currency daily. Add to that 175 million people worldwide — including 150 million people in Africa — who’s own various currencies are pegged to the euro.
How were the eurofeds supposed to know what was best for half a billion different people, spread over dozens of countries around the globe? Perhaps they never stopped to ponder the question. Or maybe they did...but ignored the obvious answer. Most folk have a hard enough time working out what’s best for themselves...never mind anyone else.
So here we are, little more than a decade into the experiment and we see how things are going. Markets are daily discovering...discovering more of what they don’t like. And politicians are daily impeding...impeding the communication lines, fogging up the signals, breaking the market’s concentration and generally damning the whole discovery process to hell.
Hey, that’s no way to achieve market nirvana...dude.
| | | | | Urgent Message From Addison Wiggin |
I had no clue what Addison was doing in the office SO early Friday morning. Especially with a camera crew.
You see, Addison doesn’t often appear on camera. I knew something big must have been cooking.
And now that I’ve just seen the footage, I finally get the reason for his urgent message.
Check out this rare video warning that he’s recorded for you... right here...
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| | The Daily Reckoning Presents | | Crack This Code: EROEI | | |  | | Chris Mayer |
“I just want to stop and make sure we’re not on fire,” Brad said as we pulled over.
My friend Brad Farquhar is the co-founder and vice president of Assiniboia Capital, which invests in farmland. We had just driven through a canola farm some 50 miles outside of Regina, Saskatchewan. And apparently, the canola crop can get sucked in the car engine and cause a fire.
Worried about a smoky smell, we pulled over to check it out. But we were clean.
You may recall I wrote about Brad and canola investing in the August 2010 issue. (Note: Assiniboia’s canola partnerships are open only to non-US citizens. Blame the SEC and IRS for the draconian rules they impose.) What follows is an update, plus, a pair of new ideas from my Saskatchewan field trip.
The yellow flowers of the canola plant dotted the Saskatchewan prairies while I was there. The plants were full and tall under deep blue skies. Prices for canola are healthy. “This should translate into a net return to investors of between 20-25% for this year,” Brad told me. “We won’t know the final numbers until the crop is completely harvested and shipped, but about 80% of the variables are now removed. The final results may even edge up a bit more as some pretty good-looking fields get combined.”
Last year was a tough year, a kind of worst-case scenario. Excessive rains soaked the prairies. It tested Assiniboia’s business model, which aims to keep risks low by using crop insurance to cover the downside. The partnership broke even, a victory given the conditions. In a best-case scenario, the partnership could double its money in a season. Not a bad set of outcomes.
I like these kinds of ideas, and not only for the payoffs. Whatever happens in Europe?or in the debt markets, the intrinsic usefulness of farmland and food crops seems to offer a relative safe house — with a good shot at making a lot of money as well.
There is another reason, though, to favor such assets. It has to do with something called EROEI, which stands for “energy return on energy invested.” It is an expression of the idea that it takes energy to create energy.
Stephen Johnston at Agcapita is another one doing similar activities up here. I know Stephen as well, and he pens an interesting free monthly letter. (You can get it here.) In his September letter, Stephen talked about “EROEI decay.”
“I feel confident that EROEI is an acronym that will receive much wider recognition over the next decade,” he writes. “Because we are in the process of transitioning from high EROEI sources of hydrocarbon energy to low EROEI sources — think Saudi Arabia versus the Alberta oil sands.”
Stephen points out that more and more of our energy is coming from sources that require more and more energy to extract. He gives us some approximate EROEI ratios for various energy sources:
1970s oil and gas discoveries: 30 to 1
Current conventional oil and gas discoveries: 20 to 1
Oil sands: 5 to 1
Nuclear: 4 to 1
Photovoltaic: 4 to 1
Biofuel: 2 to 1. Currently, the world produces around 86 million barrels of oil per day. But 86 million from high EROEI sources is much different than 86 million from less-efficient sources. “Effectively,” Stephen goes on, “the net energy left over to drive economic growth is significantly lower in the latter scenario.”
Why does this matter? Simply put, a lower mix of EROEI sources means higher prices for many commodities, because it will take more energy to produce them. This doesn’t automatically mean commodity producers win, however, because people can adjust their behavior.
For instance, when gasoline prices get too high, people cut back on their driving and find ways to save on gasoline. Economists call this the “elasticity of demand.” It means that demand can give and bend, like an elastic band, limiting how high prices will go.
But not all commodities bend so easily. Food is one. EROEI predicts higher food prices, because modern agriculture depends heavily on fossil fuels for irrigation, fertilizers, herbicides, storage and transportation.
Stephen gives examples. The most striking is with irrigation. “Irrigation accounts for approximately 20% of US farm energy use,” Stephen writes. In areas where water is scarce, such as in India, over half of all farm energy use simply drives irrigation pumps.
So in a world in which EROEI is on the decline, those assets with lower energy intensity will enjoy an advantage over less-efficient competitors. Might Canadian prairie farmland, which has no need for irrigation and low fertilizer needs, thrive in such a world?
I believe so. And this is one reason I’ve directed readers of my Mayer’s Special Situations letter toward investments in the province. Most of my field notes on Saskatchewan wound up in that letter, because we own a pair of companies based there.
One is a company called Viterra. It is one of my favorite long-term agribusiness holdings. Viterra processes grain, getting it from the farm to markets worldwide, as well as storing grains in a network of silos and sheds. It also sells seed, fertilizers and equipment to farmers. It also turns raw materials into animal feed and food ingredients. The stock is under my buy price of C$11 per share and trades for about 12 times earnings.
Viterra’s headquarters are in Regina. In fact, its main building was only a few blocks from my hotel. But it has a global presence with trading hubs, terminals and processors in Asia, Australia and Europe.
I like Viterra as a play on Saskatchewan’s bountiful harvests. And recent market woes have put the stock on sale.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel’s Note: Chris’s next Mayer’s Special Situations alert is due out two days from now. If you’d like to receive a copy — along with access to the entire MSS portfolio, including research catalogue — here’s how to get on the mailing list.
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| | | | | Bill Bonner | | Educated Guessing Game | | |  | | Bill Bonner |
Reckoning from London, England...
Yesterday, Silvio Berlusconi said he will leave government...once the legislature has agreed on an austerity program.
Too bad. We’ll miss “The Cavalier.”
Once, in Rome, we heard him speak to a crowd. We didn’t understand a word of what he was saying. But he said it well. He was at ease...friendly...joking...enjoying himself.
And now what? The poor man will be out of politics. No more will he get to work with the great men of finance, trying to solve the historic problems of the day. He’ll have only his bunga-bunga parties with plenty of alcohol, music and beautiful young women. Poor fellow.
Our guess is that the great men of finance won’t be able to solve Europe’s debt problems. At least, not without a few blow-ups. And the European Union will probably end up less united than ever. (Gold is trading over $1,800 this morning...looks like investors are worried too.)
Until recently, both economics and politics argued in favor of a more centralized Europe. Now they are pulling it apart.
But we’ve made so many guesses over the past few months and years...we’ve lost track of them. Herewith a review:
First, back in the mid-’00s, we guessed that the housing market, stock market, and the financial industry would all blow up. They did.
Then, we guessed that this would not be followed by the typical recession/recovery pattern of the post-war period. It wasn’t.
Instead, we had a hunch that the economy had entered a Great Correction...from which it would not emerge for many years. So far, that appears to be what is happening.
As to what gets corrected, when and how...we admit ignorance. But ignorance never stops us here at The Daily Reckoning; it is like red meat to a hungry dog. We thrive on it.
We guessed that the main thing to be corrected was the credit bubble. Debt levels are too high. They need to be reduced. That’s why the feds have been unable to turn the situation around. In a recession, they can make credit cheaper and more abundant. That usually does the trick. At lower financing costs more projects make sense. People begin to invest and spend again. But it doesn’t work that way in a debt correction. It’s not a question of the price of credit...but of there being too much debt. Debt levels need to be reduced.
The price of credit has been reduced to zero (the fed funds rate)...and the US government is running trillion-dollar deficits. Neither monetary nor fiscal stimulus has worked. Both add debt; instead, debt needs to disappear.
We also guess that this correction will end with the end of the dollar-based monetary system that was set up in 1971. No paper money has ever survived a complete credit cycle. The dollar won’t be the first.
De-leveraging will keep prices low while cutting profits and sales. As it develops, stocks, real estate and other assets will eventually be marked down to real bottom-of-the-bust levels. You should be able to get a 5% yield on your stocks...about twice what is available today. That will mean prices at about half what they are today.
The slumpy economy...combined with periodic liquidity crises (such as is now happening in Europe)...along with falling asset prices will drive investors to the safety of US bonds. This will keep US government financing costs low — despite huge deficits. It will also convince the feds that they can pump large amounts of cash into the system without fear of inflation. This they will do...
The price of gold may fall in the early de-leveraging phase. Then, it will rise as the late de-leveraging stage begins. This is when the feds’ money-printing will move into high gear. Sophisticated investors — including foreign central banks — will be wary. They will buy gold.
The price of gold will rise. The Dow will fall. They will intersect at about $5,000.
But our guesses don’t stop there. We also guess that...
..the developed countries will find it very difficult to grow. First, because of the weight of debt. Second, because much of their capital is “invested” in unproductive, zombie industries. Third, because their populations are stagnant. Fourth, because they have already gotten most of the above-trend growth resulting from increased use of cheap fossil fuels.
..since the developed economies cannot grow...and since they are up to their chins in debt...they cannot fulfill the promises made to their citizens. The grand bargain of the modern, social welfare state will begin to look more and more like a bad deal. Young, unemployed men will become increasingly fed up. They will look for radical solutions...and more radical leaders with jingo answers.
..governments, which are inherently reactionary even in the best of circumstances, will respond with repression. They will not adapt peaceably. They will not throw their zombie clients under the bus. Instead, like the Ancien Regime, they will dig in their heels and protect them. The defense industry, for example, will try — probably successfully — to direct the citizens’ rage against imaginary foreign enemies...and thereby increase its own power and wealth...
..the real economy will weaken. Revolution will begin...probably coincident with hyperinflation. Finally, the middle class will be broke (the poor are already broke) and the country will be ruined.
There, that pretty much sums it up. Any more questions?
And more thoughts...
Two important events happened in 1971. One was the creation of America’s centrally-managed paper money system on the 15th of August. The other happened on the 8th of March at Madison Square Garden. Frank Sinatra was there. So was Hubert Humphrey. And so was Bernadette Devlin, an Irish political activist. They had all come to see the fight.
Center stage were Mohammed Ali, a charismatic, quick-witted, sure- footed boxer, who had joined the Black Muslims and changed his name from Cassius Clay. And “Smokin’ Joe” Frazier, one of the toughest sluggers of all time.
Neither fighter had ever lost a fight.
We remember it as though it were 40 years ago. Which is to say, we hardly remember it at all. But turning to press reports to refresh our memory, we recall that it was the ‘fight of the century.’ Not merely because they were two of the best boxers to ever practice the sport, but because it was a showdown that pitted two different styles...characters...and politics against each other. Frazier was direct, simple, and sans complexe. He advanced on his enemies like a Greek phalanx...relentlessly, unstoppably, without flinching.
“Joe Frazier would come out smokin’,” said George Foreman. “If you hit him, he liked it. If you knocked him down, you only made him mad.”
Frazier described it himself:
“The way I fight, it’s not me beatin’ the man: I make the man whip himself. Because I stay close to him. He can’t get out of the way. Before he knows it — whew! — he’s tired. And he can’t pick up his second wind because I’m right back on him again.”
Ali, on the other hand, could be light on his feet...hard to hit...and hard to beat, too. He said of his style: “Float like a butterfly; sting like a bee.” Ali could spout poetry...he was handsome and clever. And he had political ideas. As to America’s imperial adventure of the time, he said:
“I got no quarrel with them Vietcong.”
As a consequence of this forthright insight, he was convicted of draft evasion and stripped of his heavyweight champ title, which was subsequently restored after a court fight.
And so the stage was set. The fight of the century. The hero of the anti-war movement, of students, of the Left and the liberal intelligentsia...against the Great White Hope of the conservatives and blue collar patriots... “Smokin’ Joe” Frazier.
Why do we care? Because our day to day work is so full of humbug, nonsense and claptrap...it is comfort to see a solid blow. You can argue any side of the stimulus program. You can argue about what caused the slump and what to do about it. You can argue that Bernanke is a fool...or Summers is an even bigger fool...or about how high a banker will bounce when you throw him out of a 21st story window. But it is all idle. Vain. Useless. You might as well have an argument with your wife!
But you couldn’t argue with Joe Frazier’s left hook. It was real. It staggered 21 boxers in a row...before the 1971 fight with Ali.
The betting was going 6-to-5 in favor of Frazier. He was shorter. He had 7 inches less reach. But Ali moved around the ring fast. Frazier came at him, as he always did...but Ali managed to keep him away. The fight went on...round after round. But Ali was getting tired. Finally, in the 15th round, out came the left hook. Ali took it on the jaw and fell to the mat.
That would have been enough for most fighters. But Ali rallied. He got up and was able to finish the match. Frazier won by unanimous decision.
In a rematch in 1974, known as the “Thrilla in Manila” Ali finally subdued Frazier. The long battle left Frazier so beaten up that he was unable to come out for the 15th round.
But Monday night, Frazier fought his last fight — with cancer. Again, the decision was unanimous. “Smokin’ Joe” died. RIP.
Regards,
Bill Bonner
for The Daily Reckoning |
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