Members, with inflation running rapid worldwide and with the new emerging middle class especially out of China we are seeing demand for all food increase and as predicted we are starting to see social unrest as a result. I have stated my concerns on past economy calls that the emergence of a large new Middle Class would put demands on Mother Earth that she may not be able to fulfill. I am predicting many more problems to happen in the future. Here is what has happened only in the last few weeks.
Governments all over the world are restricting food exports as food prices in their domestic economies are rising. Saudi Arabia cut import taxes on most foods as they are more concerned about feeding their people than protecting the domestic farmer from more competitive foreign imports. India has banned exports of all rice due to domestic shortage concerns and Vietnam has substantially cut back its rice exports.
Not only is worldwide demand for food increasing at never before seen rates but supply is becoming more limited. There remains ridiculous policies regarding using agricultural land for massive corn crops for ethanol that requires more energy to make than the energy it produces. The industry has heavy gov’t funding and strong lobby groups and therefore it is unlikely this foolish experiment will be stopped and certain persons are making too much money. But we are now seeing the consequences that are only going to get worse as more agricultural land is used for production of bio fuels.
Another problem on the supply side is agricultural land in China has decreased by over 25% in the last 20 years due to lack of available clean water and turning agricultural land into development land.
On the news last night I saw the India trade minister being interviewed and he said food shortages were becoming the most pressing trade issue. He said that world food stocks have never been lower. I spoke to a close personal friend last night in Manila and we were discussing the world food situation and he told me that in the Philippines government investigators this week raided warehouses suspected of hoarding rice.
I am following closely and will keep you updated in the coming months.
Well members I hope you read my report just 2 weeks ago and took the action steps that I discussed. I discussed that gold was overbought and there was a high likeliness of a sell off. In fact gold has fallen 15% in the last few weeks and we continue to see short weakness for gold FIC looks at this as a normal occurrence in a market that has had a very fast runup and we are excited by the fact that many members may be able to buy gold on this sell off.
We are convinced that the trend for gold over the long term remains upward and over time we call for gold prices to be much higher. As I have announced in February and March Economy Calls the International Monetary Fund would be selling 10% of its gold reserves to raise cash. That cash has been used by Central Banks to ensure the banking industry can be given emergency reserves in the event of any concern about banking solvency. Central Bankers I believe are selling much gold to have massive cash reserves on hand to avoid another calamity like Bear Stearns. As stated the Bear Stearns collapse was the most negative financial event since the beginning of the subprime mortgage crisis.
Members, do not panic with the pull back of gold. In fact gold could pull back much lower and we will still be in secular bull market in gold prices None of the trends have changed especially the non stop printing of the US dollar which will ensure that gold prices eventually will move to much higher levels. In addition, US interest rates remain near all time lows and US treasuries are not attractive to foreign investors and eventually once again they will look to higher returns and safety by investing in gold and existing the US dollar.
On April 1st the bond spreads narrowed between government bonds and corporate bonds and we saw a very strong rally in financial stocks. Many traders liquidated their positions in gold and hopped on the financial stock one day surge. It is possible that we might see some short term strength in financial stocks however, I would be very weary about still buying any financial stocks as we still could suffer an unpleasant surprise like a Bear Stearns collapse. Noone knows for sure and the club would rather sit in cash then try to play any short term rallies in the high risk financial sector.
Nothing has changed fundamentally with the US dollar. However, the dollar has had such a strong sell off that what is occurring right now with the short term rally of the US dollar is what I refer to as a suckers rally. The Federal Reserve with its low interest rate policy continues to flood the market with cheap paper to pay for the war in Iraq, to pay for social services and most recently to create enough liquidity in the marketplace to ensure that banks continue to lend.
The long term outlook for the US dollar remains very Bearish and both the Republics and Democrats strategies only focus on more outlandish budgets and spending that the country cannot afford. I am absolutely convinced that there is absolutely no way with US demographics of an aging population of baby boomers and a medical program that outpaces inflation by a factor of two times that the next generation of Americans will suffer a dramatic decline in life-style.
It is the politicians desire to be reelected. The most popular way to get reelected is to announce new spending programs and make promises to the voters. The problems is that if America was to keep all its spending promises by 2040 the debt will be so large that the USA will only be able even to service the interest payments on the debt. That means that not only is there no new programs but existing programs cannot be afforded. In other words there will be no social benefits at all. I am not overdramatizing the situation. It is the fact that US spending is out of control to the amount of almost $2 billion per day more in spending than tax revenue.
No US political party has policies to stop the spending spree. America is a society where I see over time the elimination of the Middle Class who kept all their assets and money in US dollars. Make sure as an American member that you see more opportunities for investments outside of the USA to ensure you are not caught in this inevitable occurrence.
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Investors often move to gold in times of fear or uncertainty in the markets. The same phenomenon is now true for oil. When traders are concerned about the declining US dollar they buy oil futures. Recently with the rally in the US dollar oil prices have fallen 10% but still hover at the $100 mark. Oil could drop again as low as $80 in the short term but once again the long term trend for oil prices is much higher. Nothing has changed with the supply or demand fundamentals and sometimes there are other factors that influence the price of oil.
Right now financial institutions are tightening margin requirements on trading futures and this has caused a sell off in overall commodities led by oil as traders cannot leverage their trades like in the past. This also has the effect of cooling speculation and many traders have left the short term trading opportunities available in commodities futures.
Members the last few weeks all trends that I have spoken are working in reverse. Inflation is a great example. With the non stop printing of currencies around the world and money supply in the USA alone increasing 30% in the last 3 years we are looking at inflation that is going to take away the purchasing power of of all citizens.
But Mike when I read the inflation reports this month inflation had actually declined. But with so much money supply chasing the same amount of goods and services how can this occur? Well when we dig deeper into the inflation numbers we see that 3 of the major index measurements decreased.
1. The cost of borrowing money with lower interest rates.
2. Lower automobile prices.
3. Lower home prices.
Once again in isolated period of times we may see periods where we see inflation decreasing however, with so much new money supply being created everyday the trend remains upward for extreme inflation in the future.
The best way to make money in these current market conditions is through trading. It is rare that I have made such a statement but any short term upward movement in a stock or a market sector will be met with profit taking outweighing more buyers buying stock. Therefore, for those who trade I would be buying gold, oil and other commodities on sell offs and selling them on market upward movements. In this marketplace we are unlikely to see sustained market rallies as traders are very quick to take any profits.
I only suggest that very skilled technical market members who watch daily charts participate in the process of trading. It is a strategy where all your gains can be wiped out in minutes. For the majority of members the best strategy is to remain on the sidelines in cash in the short term or make an investment and be very patient and don’t expect large gains in the short term.
Another market indicator that is causing much concern is the spreads between corporate bonds and government bonds is at historic highs. The market is very fearful at this time and as a result investors are not buying corporate bonds. For this reason corporate bonds are priced much higher than government bonds. This is a bad indication of the overall lack of confidence in the market. At this moment the spread between government bonds and corporate bonds is about 4%. The historic average is about 2-2.5%.
I will note that the rally in the US financial sector on April 1st was for the first time in many months the positive perception that spreads between corporate bonds and government bonds narrowed. This is an indication that fear is abating and hence the reason we saw strong buying in the markets of financial stocks and bonds.
Today on April 2nd I am also seeing that insurance rates on all risks investments is decreasing. This is a positive indicator as investors are signally more confidence in all risk investments with the strongest confidence the last few trading sessions returning to the banking sector and the reason we have seen a rally.
With short term strength in financial stocks we are likely to see a shift away from commodity stocks and another reason for the short term bearish outlook on commodities. The good news is if we see a sustained rally of financial stocks this will be for the entire markets and we will see recovery in all sectors. We are a long way from this as we await many more market indicators in the coming months.
This current market is driven by bad news. In fact I have witnessed many times in recent months that a great announcement by a company is only met by selling and the stock moves up very little however, any slight bad news and stocks have had an over exaggerated sell off.
The school of thought that a slower economy will reduce demand for economies has been discussed for the last few years however, in recent weeks I have noticed it has been discussed much more within the popular media and a contributing factor to the short term sell off in commodities overall. Also the dollar has rallied the last few weeks and a higher dollar leads to lower commodity prices as commodities are mostly priced in US dollars and it takes few dollars to buy the same amount of commodities.
I remain very bullish on commodities overall for many years to come. This month I read a fascinating report by Jarod Diamond in the New York Times. He stated that there are 1 billion people in the developed world living with a relative consumption level of 32. The rest of the world’s 5.5 billion people live with a relative consumption index close to 1. That’s is right as Canadians and Americans we consume 32 more than the average person in the developed world which includes energy, food, and all other times of consumption whereas most Kenyans have a relative consumption of just 1.
Through his very complicated mathematical index calculation he measured that China’s relative consumption level is about 3. This was the point in his conclusion that fascinated me the most and my believe that we remain invested in the right areas. If no other factors change, no new population growth, no other countries increase their relative consumption rates, an increase of Chinese per capita consumption to levels in the West would increase global energy demand by 106% and that of metals by 94%. In other words , if China were to achieve relative consumption parity to the West which I believe will happen over the next 50 years then demand would double for all commodities with no population increase. The challenge is that the world population will be close to 10 billion in the next 50 years and we cannot as a human race sustain this growth and this level of consumption. In my opening tonight I discussed we are already seeing social unrest due to the extra demands on food due to the growth of an emerging Middle Class world wide demanding more and better foods.
I am confident that this run on all commodities worldwide will work as follows. Middle Class existence in the emerging nations will improve at the expense of the Middle class in the West who can no longer afford all the luxuries of the past.
The primary goal of all governments is to increase the living standards of its population. This trend which is underway will not change. Members here is where the study gets more intense. If India’s citizens were to move to Western per capita consumption levels then world consumption of things would triple and there is no way the world can sustain this type of consumption. Now if the entire world were to catch up the amount of consumption would increase by 11 times. This is the equivalent of attempting to support 72 billion humans (6.5 billion population time 11)
The difficulty for Canadians and Americas is that this formula is a zero sum proposition. In other words, what is used for consumption purposes in India and China will not be used by Americans and Canadians. No politician ever discusses life in 50 years as frankly I don’t think they care beyond getting reelected. I am very concerned in the long term for our children and especially our children’s children. Planet Earth cannot sustain this growth and one day we will require a world governing body and that will only happen when the human race is faced with mass populations dying without change. The only way such changes will occur is if it happens to Westerners. Only at the point when we cannot buy milk, bread, meat and gasoline and walk in the streets protesting worldwide will a new worldwide governing body emerge. I believe we are only 50 to 100 years away from this happening but just your reaction right now Most of you think, “I will not be here and that is the problem.”
We have seen very few sectors to make money but we have discussed carbon capture as a place that investors could make strong returns but would have to be patient. The Freedom Investment Club bought 400000 shares of HTC Pureenergy Inc at $2.09 per share. The stock is now trading above $4.80 per share. The company is in the business of Co2 capture and storage and on March 28th Prime Minister Harpur handed HTC a cheque for $240 million to help develop the world’s first and largest commercial scale carbon capture and storage demonstration project.
Other than the election in Zimbabwe it has been a quiet month geopolitically. It looks like Mugabe’s rein of bankrupting his economy and bringing misery to millions is over as despite his attempts to fix the election he has lost the vote however, still as I speak he has not conceded defeat. There are a few people that are better off never have lived on the planet it is very unfortunate for the damage that Mugabe has caused millions that at an earlier stage he was not brought out back and shot. He is a narcissist self absorbed by greed and power that took a once prosperous country and turned it into an economic basket case. To give members a sense of how bad things are if I give someone $10 US I would in return receive $400 million Zimbabwe dollars. Inflation is so bad that prices double every few days. It will be great to see the end of this tyrant. Maybe they can send Mugabe to join Chavez on a one way ticket to oblivion. These men are the saddest creation of human beings.
Today Fed Head Bernanke implied that the economic stimulus programs seem to be working and that is a signal at least in the short term that we are unlikely to see any further interest rate cuts. The Fed in previous months have loaned capital to banks that in the past would not meet loan criteria. For example, the two mortgage lenders in the USA Freddie Mac and Fannie Mae have been making loans available to homebuyers in geographical areas they would not have in the past. Job growth in the US was better than expected as analysts expected a loss of 75000 jobs in the private sector but the number came out that jobs increased by 6000. The worst news since my last writing when Bear Stearns collapsed is that the large Swiss bank UBS writedowns exceeded 19 billion and they are now raising 15 billion through an offering.
US elections and statements made by candidates are not impacting the markets. This will change as we get closer to a Federal election and it becomes apparent who will become the next President of the United States.
From this time last year mortgage applications are down 28.7% and refinancings are down 38.1%. The highest number of adjustable mortgage resets have occurred in March and we will see what happens to the number of foreclosures over the next several months and determine if we see a market bottom in US housing prices.
The feedback on an upcoming fieldtrip to Chula Vista near San Diego on a previous newsletter was overwhelmingly positive with over 200 members interested to attend. The purpose of the field trip would be purely educational to examine the market as it is a great market study for what has happened in the subprime mortgage crisis. In Chula Vista residential developers dominated city council policy and the area was overbuilt with new homes very quickly. This was an area that was particularly aggressive with questionable mortgage practices and initial adjustable mortgage teaser rates. I continue to watch the carnage in the area as Executive Homes that were selling for 1.5 to 1.7 million less than 2 years ago are now selling in the 800k range and it is likely these properties could drop further. It is impossible to pick a market bottom but when market indicators are showing signs we are near a bottom due to the overwhelming interest the club is looking further into planning a field trip and possibly an investment opportunity.
One of the most commonly asked questions remains on uranium as many members continue to own uranium stocks. Activity on the spot market has been very quiet with the majority of demand coming from discretionary buyers. Sellers now appear willing to lower their offering prices to attract buying interest.
Despite the recent uncertainty and spot price weakness, the fundamentals for uranium long term remain strong. Internationally many governments continue to endorse nuclear fuel led by China and Russia. There is also renewed political support for nuclear expansion in the UK and Europe.