Agora Financial...Unplugged, Part III

Today’s guest essay brings us the final installment of Agora Financial “Unplugged”.

“You can’t take advantage of a firesale if you’re inside the warehouse when it burns down,” writes Dan Denning. “You want to be outside the warehouse, with a pocket full of cash, and a manifest of all the assets you want to own when the smoke clears.

“I’d make a list of energy stocks, stocks not correlated to the U.S. consumer, or balance sheets heavy on tangible assets and light on debt. I’d check it twice. And then I’d wait for this little rally to blow itself out and see what happens.

“In the meantime, I’d turn my attention to a part of world where all the biggest growth in the real economy is going to be for the next twenty years. Places where corporate earnings won’t be driven by debt. That’s a great opportunity for the readers now.”

Eric J. Fry
September 11, 2007

Keep reading to find out what other ‘great opportunities’ are in store…

Agora Financial ‘Unplugged’

And now, more news from Short Fuse in Los Angeles…


Views from the Fuse:

From the Financial Times comes a very interesting report…

Turns out the paper got their hands on a copy of a report that the Organization for Economic Co-operation and Development will release today.

“The current push to expand the use of biofuels is creating unsustainable tensions that will disrupt markets without generating significant environmental benefits,” say the authors of the study.

Here are a few key notes from the report:

“Biofuels would cut energy-related emissions by 3 percent at most.” (That’s not much.)

The United States spends an estimation $7 billion a year helping make ethanol, “with each tonne of carbon dioxide avoided costing more than $500. In the EU, it can be almost 10 times that.”

And biofuel land could take over the world. “As long as environmental values are not adequately priced in the market, there will be powerful incentives to replace natural eco-systems such as forests, wetlands and pasture with dedicated bio-energy crops,” it says.

Basically, the report backs up what we’ve been saying all along: ethanol is a fraud. An expensive, time and money wasting fraud.

That’s it for us today…we are heading over to attend the L.A. leg of the Fiscal Wake Up Tour. As most of you know, we’ve been following the Fiscal Wake Up Tour pretty closely for our documentary…and today’s event should be interesting. After all, we are in Los Angeles…

The Dow stabilized yesterday…but the dollar continued to drop.

“I sold all my stocks,” said an old friend yesterday. “I just think this is going to get worse.”

Our old friend is neither an economist nor an investment analyst. But he dresses well. He was wearing square-toed shoes long before other men we know. He is a trendsetter; maybe more in tune with the ‘zeitgeist’ of our time than an economist would be.

Success is a hard thing to overcome. After so many years of generally rising prices, it is hard to see a downturn coming. Here at The Daily Reckoning, of course, we have been seeing a downturn coming for the last eight years. The economy needs a correction; we’ve been waiting for one for a long time.

But now, for whatever reason, our friend feels the time has come.

We don’t know, but we find a sense of gloom spreading within our own business. On a conference call last night, we found our U.S.-based colleagues unusually fearful.

This is not the time for new projects…not the time to make new investments…not the time to take risks, they seemed to agree.

It is funny how these attitudes creep up on you. They come in the night, when you don’t see them. You wake up in the morning and they have taken over your body. You find yourself wanting to slash costs…slash capital spending…and slash your wrists.

It may be that the fundamentals are exactly the same as the day before. But suddenly, you sense that trouble is coming…and that you had better be careful.

As the dollar falls, so does the wealth of dollar holders – particularly Americans. We checked this morning and found the dollar had dropped to over $1.38 per euro (EUR). Last week, we paid $5 for a cup of coffee in London. And the price keeps going up.

Speculators, investors, and central bankers have figured out that the U.S. government and the Bernanke Fed will not protect the dollar – not when millions of Americans are having trouble making their mortgage payments. The U.S. money supply is increasing – nearly five times faster than GDP growth. And now, fearing a Japan-style deflation, the Fed is likely to cut rates later this month.

The Chinese have one of the largest dollar piles in the world.

“Is China quietly dumping US Treasuries?” asks Ambrose Evans-Pritchard in the English press.

“A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.”

The report continues:

“Data released by the New York Federal Reserve shows that foreign central banks have cut their stash of US Treasuries by $48bn since late July, with falls of $32bn in the last two weeks alone.

“‘This comes as a big surprise and it is definitely worrying,’ said Hans Redeker, currency chief at BNP Paribas. ‘We won’t know if China is behind this until the Treasury releases its TIC data in November, but what it does show is that world central banks are in a hurry to get out of the US. They don’t seem to be switching into other currencies, so it is possible they are moving into gold instead. Gold is now gaining momentum across all currencies and has broken through resistance at 500 euros,’ he said.

“Two top advisers to the Chinese government gave strong hints in August that Beijing should use its estimated $900bn holdings of US Treasuries and agency bonds as a ‘bargaining chip’, words taken as an implicit threat to trigger as US bond crash if provoked.”

The Chinese have denied it, of course. But betting against the U.S. dollar has been one of the surest gambles you could make over the last 35 years. Now, it is probably still a good bet.

“Hey,” writes an American friend in Paris, who suffers the fall of the dollar every day, “I strongly urge you to take a look at the chart at the link below. It’s from the Fed. It shows the Fed’s trade-weighted dollar hitting an all-time low since the index was established in 1971.

“Here we are at an all-time low on the dollar. All time.

“Is it a buy then?

“Well, what possible argument could you make for buying the dollar right now? That interest rates are going to rise to double digits again, like they did after the 1982 recession?

“Wait, I thought we were talking about the Fed cutting rates. How will the dollar if the Fed cuts rates? Oh, you mean it won’t?

“Can you imagine what would happen to those two million ARMs set to reset in the next two years if the Fed hiked rates?

“No…the Fed won’t be raising rates. So where does the dollar go from here? Here’s what traders are telling Bloomberg about the dollar and Treasury bonds:

“‘The only component we can be confident about as nations diversify currency reserves is that Treasuries will be sold.’ Sean Callow said at Westpac Banking here in Australia.

“China will ‘reduce its holdings of dollar assets to get higher returns,’ says Ha Jiming, the chief economist at Beijing International Capital Corp.

“I like what Masayuki Yoshiara said. He manages $25.9 billion for Sumitomo Life in Japan: ‘We’re not so bullish on the dollar.’

“Me neither.

“And when you look at that chart and consider the Fed will probably cut rates in the next ten days…it makes you wonder if gold isn’t about to go to $1,000 in the next eight weeks.

“I guess the other question you could ask is when and why would you buy the dollar. For yield? For safety? For old time’s sake?”

Colleague Byron King writes:

“What is going on with Argentina? On the one hand, we sing its praises at Agora and Doug Casey lives there and loves it. Rick Rule has companies that he recommends, that are one-trick Argentine ponies, and I don’t mean polo ponies. Bill owns the Rancho, as we all know.

“Yet the government is doing everything it can to wreck the energy economy. Look at this mess below, with Shell. There are price controls on oil & fuel, so there’s no production, and no import…and then they issue arrest warrants for the Shell executives? Can someone explain to me how this is business friendly? Or is this just high-visibility populismo & PR for the masses, and deep down nobody goes to jail? At least, winter is coming to an end down there and the weather will be warming up.

“‘BUENOS AIRES (MarketWatch) – The Argentine unit of Royal Dutch Shell plans to send letters Thursday to its service stations declaring a force majeure, citing a government order to shut down its refinery, Shell Argentina President Juan Jose Aranguren said.

“‘Shell Argentina began shutting down its Doc Sud refinery in Buenos Aires after receiving an order from the government’s Environmental Ministry on Wednesday night. “We have a situation of force majeure, and we consider it out of our control,” Aranguren told reporters during a meeting at Shell Argentina headquarters.

“‘The shutdown order is the latest in a string of clashes since 2005…price controllers have since fined Shell for allegedly failing to supply the market and sought arrest warrants for Aranguren and other Shell Argentina executives.'”

Until tomorrow,

Bill Bonner
The Daily Reckoning