The price of almost everything on the planet has been rising. And so has the inevitable talk of a commodities bubble and price manipulation. The discussion has become front and center in global markets around the world as economies reel under the heavy weight of soaring prices.

It’s simple for a senator to blame high oil prices on speculators. But don’t hold your breath to hear a long discussion of the taxes on every gallon of gasoline and heating oil that the government collects each time we fill up our tanks. Perish the thought.

So who are these speculators, and why and how could the high prices of commodities be their fault? Of course, those are the real questions. But the conversation never really gets that far. The cameras are turned off before the detectives hit that crime scene.

To say we are in a crisis is a massive understatement. It’s like saying there was a little fire on the Hindenburg. As oil prices surge and the ebb and flow of trading begins to catch up with the world’s growing population, we can expect to see these prices continue to climb – maybe exponentially.

Meanwhile, the fools in Washington, and those political candidates hoping to get into that asylum, continue to talk the same smack they have for years. Essentially, they’ll say whatever they need to in order to get elected. What else is new?

The problem this time, however, is that the situation is simply too dire. We should not waste time trying to find scapegoats. That won’t solve the problem. It will just distract attention while politicians hope for answers.

But let’s face it. The blame game works. The politicians have an easy target in speculators. After all, the average American imagines Gordon Gekko-type characters slashing and burning their way through Wall Street and making the everyday man’s life more expensive while they water-ski behind their yachts.

So for senators and other politicians, it’s not a tough putt to get the general public to latch on and want to lynch every speculator out there.

But Gordon Gekko was not a speculator. He was a manipulator. He used information he should not have had to do things he should not have done.

That does not matter to the politicians, however. They want to paint every speculator with a broad brush. To the politicians, every legitimate speculator is an unlawful manipulator.

The problem is this: If the politicians restrict legitimate speculation, they will cripple the free market and actually cause prices to surge even higher. Politicians have confused things pretty badly.

Speculation shapes the margins of the markets. Many markets cannot function correctly without some element of speculation at the margins. Few politicians seem to understand that. Or they do, but won’t acknowledge it. Either way, it’s a critical mistake to be focusing on witch hunts, rather than real answers.

In real estate, it’s location, location, location. In trading, it’s liquidity, liquidity, liquidity.

In case a number of U.S. senators don’t know, one of the most important elements in a free market is a provision of liquidity. It is possible to discover an "active price" only when the market is free and open. This is the job that speculators perform. Without speculators, there cannot be free market capitalism.

Yet even in the face of clear evidence that speculators perform this vital service, all we hear about is how speculators are causing the run-up in energy prices. And then we hear how speculators need to be more "regulated." It’s absurd and dangerous.

As Richard Rahn of the Cato Institute writes in a great article for The Washington Times, "Many members of Congress make up ‘solutions’ to things they do not understand and cause problems where there are none or make real problems worse, which explains the current run-up in gasoline prices."

Amen.

You may be reading this and saying, "Of course you’re saying this. You’re a speculator!"

Very true, but I am also a consumer who has to buy gasoline and heating oil, just as you do. I also know the risks of assuming any position in these volatile markets. And that risk is calculated each time I trade. There are no guarantees. (How I wish there WERE some guarantees when I lay my cash on the line!)

The other very important factor here is to realize that speculators are not beholden to one side of the market. They are married to movement, not direction.

As far as my trading portfolio goes, I couldn’t care less if oil were moving higher or lower. As long as there is movement, we have trading opportunities.

The problem with blaming speculators is the damage done to the free market can be irreversible.

Richard Rahn goes on to say, "Speculators are not the problem; they are part of the solution, by reducing the risk for producers, refiners and other oil market participants. This risk reduction results in more production of oil, other fuel, food and metals where futures markets exist."

Once again, he has hit the nail on the head. Reducing the number of speculators in the free market actually has the reverse impact. It drives prices much, much higher.

Let me just say that I am one of the biggest advocates of free, open, transparent markets. So are almost all speculators. The integrity of any market is only as good as its participants. And in some cases, I can see the need for more regulation. But the best regulator of the commodity market is usually the market itself. Markets punish unwarranted excesses.

Did you notice that back in July – when oil prices slipped from record highs and even had their biggest one-week drop in history – nobody was calling for speculators’ heads? There were no congressional hearings into the matter, just silence.

The fact of the matter is that speculators were just as active on the way down as they were on the way up, providing the service they do. With or without speculators, prices will continue to climb. The solutions, however, will be much harder to come by without speculators. The speculators are the ones who add liquidity and discover the best free market prices every day.

We must set aside all of the election-year rhetoric and demand better from our politicians, energy producers and even ourselves. We all have to take some responsibility if we hope to find solutions. Simply blaming one group of people is not going to work. The challenges of Peak Oil – if not Peak Everything – remain. Banning speculation means just losing a critical piece of the early warning system.

Regards,

Kevin Kerr
for The Daily Reckoning
August 5, 2008

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

The above essay was excerpted from the latest issue of Oustanding Investment’s.

Let us keep looking through our binoculars…

We are trying to see the big picture, trying to understand what is really going on. We can imagine ourselves like Caesar – watching the action at Alesia from a nearby hill – or like Lee looking at Cemetery Ridge as the Confederates tried to push back the Yankees. Which way is the battle going? Who’s going to sweep the field…who’s going to carry the day? Caesar won at Alesia with a combination of strategy, planning, and discipline. But Lee lost at Gettysburg for lack of resources…bad luck…and bad tactics. And now…General Bernanke is losing too.

Yesterday’s news described another day of deflation. The Dow lost 42 points. Oil fell almost $4, to $121. The commodity index, the CRB, dropped 18 points. And gold lost nearly $10, ending the day at $907.

What to make of it?

Banking has always been a boom and bust business. Bankers tend to act like retail investors who just happen to have a lot of money. They lend to whatever is fashionable…then, when the go-go businesses go bust, the bankers look for the next opportunity to lose money.

The retail investor doesn’t know anything about investing or economics either. Instead, he watches television or reads the papers. Gradually, he forms the opinions that turn him into a chump for Wall Street – ready to buy financial products because he’s heard someone say they make good "investments."

From 1997 to 2007, the retail lumpenhouseholder developed an extraordinary hallucination; he came to believe that he could make money simply by buying a house and living in it. Of course, the little guys are always susceptible to delusions – especially those that flatter them or offer them something-for-nothing; that’s how democracy works. But what was really remarkable, in the ’97-’07 period, was that sophisticated bankers and brokers came to believe the same thing – that they could get rich by buying and trading the mortgage contracts of people who thought they’d never have to pay back their mortgages.

Of course, the whole thing blew up last year. The marginal homeowner is in trouble – with more mortgage than house. And the marginal banker is in trouble too – he owns the mortgage! So far, houses have fallen about 20%, with another 10% to 30% left to go. And the banks have written off about $476 billion worth of bad credits – according to the Int’l Institute of Finance – with maybe another half a trillion in mortgage-related losses.

So far, the subprime mortgages have been the focus of losses. But now the Alt-A and Prime mortgages are getting into trouble too – with delinquency rates in both categories on the rise.

Nothing astonishing about this picture. A correction is always equal and opposite to the claptrap that preceded it. The housing hallucination was a whopper. So is the correction. The housing bubble caused big increases in nominal GDP, retail spending, and corporate profits (from the financial sector). Now, the GDP is flattening out, retail spending is softening and corporate profits have been crushed.

Taken altogether, guess how much money the Dow stocks are making? These are the companies that form the backbone of American commerce and industry. Guess again. Because if you put them all together, says Barron’s, you’d have a loss of more than $80 billion. The last time there was such a loss in the Dow was 75 years ago – in the Great Depression.

This is an encouraging word to many observers. They note that the last time Dow earnings went negative proved to be a very good time to buy stocks. After ’32, stocks in the United States went up 373%.

But wait, they went up AFTER having lost about 85%. The Dow in ’32 rose from a low of 41…with stocks trading at only 5 to 8 times trailing earnings (in terms of current negative earnings, the P/Es were meaningless). In other words, the stock-market had been crushed before it rose again.

Today’s stock-market has not yet been crushed. In fact, the Dow itself is only a bit lower than its all-time high.

The correction has taken the wind out of Wall Street’s sales. But, so far, it has done very limited damage to U.S. stocks. Most likely, more pain lies ahead…before another upswing.

Hey, don’t take our word for it. No less an authority than Alan Greenspan himself says there is more suffering ahead…and there is no less an authority than Alan Greenspan.

The auto business is being corrected – severely. One of the biggest losers on the Dow was – no surprise – General Motors. It lost $11 a share in the second quarter- which is almost unbelievable, for a share that sells for $10. And Chrysler’s latest attempt to raise money fell $6 billion short. The auto industry will probably go broke – and be nationalized, like housing.

*** A correction is always equal and opposite to the deception that preceded it. You can quote us on that, dear reader.

A correction is always deflationary too. Delusions and hopes push up asset prices. Reality and despair pull them back down. The latest figures show M2 – a measure of the money supply – no longer growing. True, the feds are desperately trying to increase the money supply with bailouts and tax rebates. But the bankers are running scared. They get their hands on some hard cash…and they want to hold onto it as long as possible. They figure they might need it.

This is the phenomenon that Keynes described as "pushing on a string." The feds push. But the string bends.

Of course, it’s not just the bankers. Remember, bankers act like retail investors – and householders. And right now, they’re all feeling a bit under stress and looking for stray coins under the seat cushions.

Unemployment is rising. It is projected to hit more than 6% before the end of the year. In the last major recession – of the early ’90s – unemployment hit 7.8%. It could well reach up to 7% or 8%…or higher…this time too.

The combination of falling employment (including overtime and so forth) and falling house prices makes it almost impossible for the consumer to continue consuming in the manner to which he has become accustomed. We are watching the retail sales figures closely for proof. Broadly, from our great distance, the figures show little sign of a let-up in consumer spending. But when you look more closely, the picture is more interesting.

Consumer spending continued to rise in the last quarter, for example. But there were three important nuances:

First, most of the growth in consumption spending is no longer coming from the consumer. It is the government that is doing the spending. The feds are stepping up to the plate to try to compensate for weakening consumer spending (they don’t know they are doing this…they are just doing what comes naturally). Federal government spending rose at a real rate of 6.7% in the last quarter, while personal consumption rose only 1.5%.

Second, consumer spending is not even keeping up with consumer incomes. The feds handed out billions in tax rebates, which boosted incomes by 4% – more than twice the level of consumer spending increases. This tells us that consumers are trying to cut back.

But third, they’re finding it especially hard to cut back because prices are still rising. Ah, here’s the real complication. It’s a deflationary correction – we see that clearly, through our binoculars. But consumer prices are still going up. In June, consumer prices rose 0.8%. Doesn’t seem like much, but multiply that times twelve and you have an annual rate of nearly 10%. Prices for the essentials – food and fuel – have risen so much that the consumer has to spend all his money just to keep up. The broad figures show consumer spending rising…but the consumer is actually consuming less. He’s eating out less – so the restaurants are failing. He’s buying less – so the retailers are hurting. And he’s driving less – so gasoline sales, in gallons, are actually going down.

And pity the poor baby boomers! They’ve lived their whole lives with a pot of honey in their hands. Save money? Why bother? Na na na na live for today! The economy was always expanding…they were always getting richer…jobs were always plentiful…and so were credit cards. Now though, the tables are turning against the boomers. When companies lay off employees – they get rid of the middle-aged, expensive workers – the baby boomers. And since the poor boomers never bothered to save money – and since their houses are losing value – they now face retirement with no money in their pockets and no way to get more.

And now, even when they save money, they get kicked in the derriere. Interest rates are so low, they make almost nothing.

What are the poor baby boomers to do? D-O-W-N-S-I-Z-E in a hurry…

*** Zimbabwe with oil…

That’s today’s Venezuela…more tomorrow…

Until tomorrow,

Bill Bonner
The Daily Reckoning

First, Kill All the Speculators! originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

Many of us out there who have been involved in commodities trading and analysis have been warning, watching and waiting for the last two-three decades. So it comes as little shock to us that we are in this “crisis” now.

One of my favorite writers and lecturers (and Byron’s, too) is James Howard Kunstler. The Long Emergency is the title of one of Kunstler’s books, as well as one of his catchphrases, and, boy, is it dead on.

This commodities frenzy, and the related dash by nations to snatch up and secure all sorts of resources, has been a long time coming. It certainly didn’t happen overnight. I can safely say that for the vast majority of my career, commodities have been the poor red-headed stepchildren of the investment world. Two decades ago, when I walked onto the trading floor of the New York Cotton Exchange at the old World Trade Center, the climate was very different from today’s.

Back then, most “mainstream” investment houses looked at the commodity markets as a subculture. Commodities were, basically, another branch of Las Vegas, just without the free buffets, dancing girls and booze. Actually, maybe some of that stuff was available on a daily basis, but it was a lot different then.

I compare it to how Times Square was back in the 1970s and early ’80s. If you ever visited the Big Apple back then, you know that Times Square was the worst of all things. It was a seedy, grimy, crime center filled with many colorful characters. Let’s just say Times Square was not a place tourists went, unless, of course, they were sex tourists.

Beneath it all, though, was an unpolished gem. The same is true with the resources market.

Fast-forward to today.

Imagine you’re Rip Van Winkle and you go to sleep on 42nd Street back in, say, 1975 (let’s call you “Rip Van Wino”). You wake up in 2008 and see all the porno houses gone, bars shut down, strip clubs a distant memory… and then, suddenly, you are escorted to a homeless shelter because of New York policies on street people near 42nd Street…

Welcome to the new world.

In some ways, this is true of the commodity markets, too. When I got involved with commodities in 1988, the exchanges were the low men on the totem pole. The members held all the exchanges privately, and none were traded on the stock exchange. It was a secretive world, and the only way to get a job on the floor was to know somebody. I got my job because my best friend’s brothers owned seats on the floor and gave me a job as a clerk.

Everyone on the trading floor was either related to or knew someone in the biz; it was a very incestuous market. The basic reason was that there was so much money to be made in the market nobody wanted outsiders coming in. It was a shortsighted approach, but it was the rule of law down there. The problem was that the markets stayed small and took only a small percentage of the global investment pie.

As the early 1990s set in, commodities, basically, fell and/or stayed stagnant for much of the decade, except for during the occasional war, such as we had in 1990 and 1991 (oil went wild when Saddam Hussein invaded Kuwait).

The general public focused on stocks and still pooh-poohed commodities. Nobody talked about corn or soybeans at any cocktail parties I went to in 1991. Now it’s different. I must get 15 calls a week inviting me to speak about corn and soybeans at events or on TV. It’s been a paradigm shift from 1989 to 2009.

Question: If a bubble pops on Wall Street and all the traders are in the Hamptons, does it make a sound?

The most common question I have gotten on a weekly basis for the last 18 months is “When will the bubble pop?”

My answer is pretty standard: “There is no bubble!”

I am not usually invited back to those cocktail parties, as it scares the guests. The truth is we are not in a bubble. We are in an upward correction propelled by years of denial, stupidity, underinvestment and neglect. The blame falls squarely on several parties.

Wall Street is guilty for not embracing the commodity markets earlier. Wall Street should have allowed commodity prices to reflect the true nature of pent-up demand by making those markets available to its clients. Instead, Wall Street discounted commodities as some form of gambling.

The commodities exchanges and traders are also to blame for not making their markets more transparent, and for also projecting an image of secrecy and mystery.

And both Byron and I could tell you stories about the underinvestment in basic production over the past couple of decades. Really, what were people thinking? That prices were low, and would stay low forever? Did it ever occur to anyone that all those babies born in the 1970s and 1980s might some day grow up and want food, energy and manufactured goods?

No, this is not a bubble. It’s a coming of age, a big, hard reality check that has been decades in the making. I have seen more activity by Wall Street in the resource markets in the last three years than in the previous 17. And I do not expect that it will ever go back to the way it was. I also don’t expect to see 42nd Street filled with porno and hookers again, either.

Change is often hard to accept. $140 oil, $1,000 gold, $8 corn… this is all the new reality. None of these new price trends are a figment of some rogue speculator’s imagination or the products of evil activity. This is a wake-up call that our growing world is hungry for the limited resources it still has.

The most important thing to remember is that markets, even parabolic bull markets, always correct. Those corrections can be painful if one is overextended or married to one side of the market – in this case, the bull market.

So ride the wave of change, of course. Be flexible, buy on the corrections, sell for profits on the overdone rallies and vice versa. Go short when clear tops have been made (although I grant it can be hard to determine the exact top).

There is no trail of breadcrumbs to follow on Wall Street, but that’s why you have Byron and me to help guide you. As long as grains don’t go up too much more, we should be able to supply you with a good trail to follow for many years to come, whether commodities are in rally mode or consolidation.

Best wishes for profitable investing,

Kevin Kerr
for The Daily Reckoning
July 16, 2008

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

The above essay was excerpted from the latest issue of Oustanding Investment’s.

Oh dear reader! This morning, we are practically panting…

The world economy is slowing down. The global financial system is falling apart.

The whole situation is a mess…a disaster for investors…a catastrophe for homeowners…a Waterloo for the financial industry. But it is God’s gift to us.

What fun it is to read the paper! So much nonsense! So many clowns! Such drivel…such claptrap…everything is working out just as we expected.

We had to put down our copy of the Financial Times this morning. We were afraid of internal hemorrhage. Besides, our eyes were watering so much we could barely see…

First…there is Ben Bernanke on the cover, looking rather serious, as he appeared before the U.S. Congress yesterday. The poor man was expected to explain what was going on. What could he say, but that the economy was beset by “numerous difficulties?” He had to play the politician, in other words – the cunning dumbbell…avoiding at all costs saying anything useful or true. Of course, it is true enough to say that the economy faces troubles, but that description of it hides so many absurdities…and so many errors…and so many vanities and hallucinations.

Why didn’t he just come right out and explain that Americans have been living beyond their means…and now they’re being forced to cut back? That’s what yesterday’s retail sales figures showed – that consumer weren’t spending so much. What’s surprising about that? Nothing at all…we’ve been talking about it for months…even years.

But the news struck economists and financial reporters like a UFO sighting – they didn’t know what to make of it.

There’s also a photo of a long line in front of IndyMac’s door – waiting to get their money back. Mr. Bernanke might have also explained what was happening in the financial industry. Wall Street banks…Fannie Mae…Freddie Mac…IndyMac…Bear Stearns and the whole lot…made their money by peddling debt to people who already had too much. What did you think…that they could do that forever?

The headman at the Fed would have done us all a service, in our opinion, if he leveled with the nation.

“Look,” he might have said, “the prosperity we have enjoyed for the last few years has been largely an illusion; it was based on debt, leverage, and speculation. We all know you can’t get rich by spending more than you earn. And you can create real prosperity by borrowing money and spending it on consumer items. We’re now paying the price for those mistakes. Let’s just get it over with.”

Those words may or may not have been on call for him. He might have doodled something like that on the back of an envelope on the way to Capitol Hill. Maybe they came to him in a dream.

But when he got in front of the microphone, he realized that the truth is the last thing anyone wants to hear. He wisely avoided it, sticking with the stock phrases and standard wording of economic obfuscation.

Meanwhile, down the street, the U.S. president shifted from soporific twaddle to breathtaking imbecility.

“To the extent that we find weaknesses [in the financial system] we’ll move,” said the president of all the Americans, George W. Bush.

Mr. Bush has a weakness himself – for movement. He has presided over the most fidgety administration since Franklin Roosevelt. Not content to sit still, he spent more, borrowed more, and stirred up more dust than any previous administration. Now, he proposes a vast new expansion of the war against Free Enterprise.

Bailing out Bear Stearns, providing tax refund checks, and nationalizing Fannie and Freddie “signal a weakening of the administration’s ideological commitment to free-market principles,” says the Financial Times.

At this moment, we had to put down the paper. Where has the FT been? This administration has no commitment to any principles, as near as we can see. All it took was a terrorist attack in New York, and it threw over its entire conservative foreign policy in favor of reckless interventionism. And now we have a crisis in the financial industry. Of course, the big lenders, spenders and speculators are only getting what they deserve. Still, the Bush Administration is mounting an invasion.

We predict that it will have roughly the same results. Sweden, of all places, faced a major financial meltdown in 1991. The government hastened to intervene with a bailout. The cost – if translated to an American-scale economy – was more than $1 trillion. Mr. Bush’s intervention will cost that much – we predict. Or more.

*** Let’s check with our war correspondent.

As you recall, just when it looked as though inflation had the upper hand, the forces of deflation began a major counter-offensive. The artillery barrage began only a couple of weeks ago. Since then, the battle has shifted dramatically.

“The balance of economic forces is contractionary,” writes Martin Wolf in the Financial Times.

He notes that inflation is not completely whipped. On the very cover of the FT is the news that “inflation hits 16-year peak.” Also, gold rose strongly, which the dollar fell to a new all-time low against the euro. Still, the gods of financial war seem to have gone over to the deflation camp.

The banks are collapsing. The roof is caving in on housing. And yesterday, even the oil price slipped. It closed down $9 bucks.

So far, the black goo has confounded economists. The world economy is slowing down. People are cutting back on their use of energy. In the United States, families are taking vacations closer to home, for example.

Also, the Bernanke Fed was hinting strongly that it wouldn’t be lowering rates further – and might even be raising them. Under those conditions, the dollar was widely expected to go up…and the price of oil to go down.

It didn’t happen. And even now – with the price of oil dropping – you’d expect the dollar to go up and gold to go down. Nope. Didn’t happen. Speculators are wagering that the United States will soften up the dollar still further…they’re betting on more trouble, that is… They’re dumping oil, because it will inevitably and eventually respond to the drop in economic activity. But they’re buying gold, because they also want safety – from the dollar…from defaults…from bankruptcies…and from the claptrap solutions of public officials.

“If the ongoing deleveraging of the US economy weakened US consumption,” continues Wolf, “the economy might go into a deep recession. US fiscal deficits would then soar and long-term US interest rates might jump. This could make the debt dynamics of the US government look very unpleasant. A flight from the dollar and dollar bonds might even ensue.”

Until tomorrow,

Bill Bonner
The Daily Reckoning

P.S. There is one area of the market that’s not taking it on the chin right now – and that’s the commodities and natural resource sector. We realize many investors shy away from this area because it seems complicated – volatile, even.

Shock to the System originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

As you know, Byron and I travel near and far to find the most cutting-edge information on everything from energy and metals to agriculture and emerging markets. We have found that seeing something for oneself is truly the best way to judge what may be the next great investment opportunity.

After all, the guy sitting behind a desk on Park Avenue almost certainly has no idea what is really going on with farmers and what is going on in their heads this year.

I know what is going on inside the heads of the farmers. This spring, I went to visit farms in the Midwest, as I do every year.

It was a Saturday in mid-April when I pulled up to the Miller Armstrong Building in the sleepy farm town of Waseca, Minn. Waseca is also home to a federal penitentiary and Jeff Skilling, former Enron CEO and allegedly one of the "smartest guys in the room." Now he is a convicted felon, serving time.

I drove into town and watched the cattle grazing outside the prison. I wondered for a moment if those cows knew they had a famous neighbor. They didn’t seem to care. The cows seemed more concerned about where to find some food. It was certainly foreshadowing what I was about to hear from the farmers.

I was greeted by my friend and Outstanding Investments member Geb Singlestad. Geb escorted me to a casual meeting at the Armstrong hall building. Charlie Nedoss of Peak Trading and about 15 other farmers accompanied me. One reporter showed up. Everyone introduced themselves, and we all grabbed some coffee. I spoke with the reporter for a few minutes, and the meeting began.

The thing about small-town America is everyone is friendly, but cautious. Geb invited all these farmers to the meeting. Later on, we learned that most of them thought we were there to sell them something… We were not.

Most of the farmers showed up out of respect for Geb, because he is a sort of patriarch in the community. The meeting was scheduled to last about 45 minutes, but once it got going, we covered so much ground and there were so many questions that we ended up being there for 2½ hours.

The questions came fast and furious. One farmer asked, "Do these people in Washington or in the cities know how much we are paying for our input costs? Do they have any clue how much the farmer is being squeezed?"

The best question of all, in my opinion, was asked a few times. "What will it take? How high will prices have to go to get people to change?"

I said that I think prices will have to go much, much higher before urbanites even consider switching off American Idol and protesting in the street. The farmers realize that most people in the country have no idea about either the process or the cost of what it takes to get their dinner from field to fork.

One farmer belted out, "As long as they have groceries on the shelves, lights on, the ATMs working and their jobs, then all is well. They don’t have a clue."

There has always been a line between city and suburb dwellers and their rural counterparts. Most people in urban areas have little understanding of how much work goes into generating our food supply and then transporting it to each and every city.

Just the volume of diesel fuel usage to grow the crops is astounding. Agriculture is a very fuel-intensive undertaking. With diesel prices topping $4 and rising, the costs continue to climb at the grocery store.

After our meeting with the farmers, Geb took Charlie and me to see the newest ethanol plant being built in Janesville, Minn. This new structure is a 110 million-gallon ethanol plant. It has several rail lines being built to run directly into the plant. The outside of the building itself is huge. The towering cranes were working full tilt while we were there, and the parking lot was full of workers’ cars. The one thing that neither Charlie nor I saw was a water supply. An ethanol plant uses a huge amount of water, so where will it come from?

It seems with ethanol, as with so many things, the answer from the government often comes after a major project is already well under way. For the last eight years, the Bush administration has seemed to be more likely to do first and fix later. What’s the old saying? "Better to ask for forgiveness than permission."

Anyway, the ethanol plant has provided many good jobs in the area and is slated to produce a real boom for the local economy. That’s all well and good, but is it sustainable?

In his book The Long Emergency, James Howard Kunstler discusses the 3,000-mile Caesar salad. He discusses how we all have become used to getting our food from all points of the country and world, and how that will need to change. The farmers whom I met with feel the same way.

The days of being able to transport produce and grains across the country are facing such high costs from diesel that it will put them out of reach for many consumers. Sure, people in America are not starving. At least, not yet. But what they are doing is donating less to food banks, and feeding their children watered-down soup and soda, instead of milk.

With egg prices surging 26% and milk prices near record levels, consumers are making very difficult choices. My own aunt leaned into me at dinner recently and said, "Ya know, I bought a container of whipping cream and it was $7. That’s crazy." Yes, it is crazy, and the even more insane thing is that prices may well have much further to go.

The farmers I met with are struggling with some of the highest input costs they have ever faced, and for some, it means that with all the massive expenses of running a farm, their margins are shrinking fast. Most of the farmers wondered what I think would happen if food stopped showing up on shelves in the city and the power went out and the ATMs shut down. You know what would happen? Panic.

The divide between the food source and the end-users is wide. As costs continue to skyrocket, we better begin to appreciate and support our farmers, because the long emergency is here and time is running out.

As I said my goodbyes to the farmers, Scott walked with me on his farm and showed me all his new farm equipment. One tractor, a John Deere, looked brand-new. He told me that Deere simply has no equipment in stock, because sales are so red-hot. He said it’s much the same for Caterpillar and others. So even as the farmers complain about higher input costs and consumers in the cities complain about higher food costs, the beat goes on.

The solutions are not at all clear, but it is obvious that we need to begin to think locally. Food sources will need to be closer to the final consumers. The old way is simply not sustainable anymore.

In the brave new world, we will all likely have to become "locavores." A locavore is someone who eats food grown locally. That would be a major shift difficult for most of us to fathom. But like it or not, it’s a change that is not going to be a choice. It will happen regardless of how much we fight it. Really, the question is how high of prices are we willing to pay in the meantime.

Regards,

Kevin Kerr
for The Daily Reckoning
June 18, 2008

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

For a very limited time, you can join the small circle of investors who get Resource Trader Alert, Outstanding Investments – and the rest of the research and investment services Agora Financial has to offer – for life.

What goes around, comes around…

Every country in the world has had to put up with finger wagging and scolding from U.S. officials. The U.S. economy was the world’s best for so many years – and American experts, government officials, professors and consultants never got tired of saying so.

But now…as the Rolling Stones put it… "Tables turn and now her turn to cry." Now, the tears are coming from the United States; the foreigners are doing the scolding.

Bloomberg reports that U.S. housing starts are at their lowest level in 17 years. Housing prices are going down too, while consumer prices go up – both apparently at a faster and faster rate.

Producer prices in the United States rose 1.4% last month, following an increase of 0.2% the month before…annualizing the two months gives us a rate just shy of 10%.

Meanwhile, prices paid by producers were 7.2% higher than a year ago.

Worldwide inflation is about 7%, says Bill Gross of PIMCO. And since price inflation has now been globalized, there is no escaping. Here in Britain, consumer price inflation, officially, is running at its highest rate in 10 years.

"There is really nothing we can do about it," said an analyst at this morning’s investment meeting. "We’re a small island. We have to import things from overseas. Prices are rising everywhere. How can they not rise here? We’re just at the beginning of this trend. It’s going to get worse."

It is going to get worse everywhere. Inflation is in the pipes. Soon, it will be backing up in the bathtub drain and spilling over from the sink. Over the last 15 years, the world has seen huge inputs of ‘liquidity’ – cash and credit from central banks and the financial industry. Everyone was perfectly happy when this juice was going into asset prices. But one by one the bubbles have popped…and now the liquidity goes where it is unwelcome – into commodities, food, and fuel.

Consumers and central banks are both trapped. Central banks want to lower rates and increase liquidity in order to stimulate a sagging economy. But their inflation no longer swells assets prices and nourishes economic growth; now it leaks into consumer prices.

And the poor American consumer…he spent his entire career preparing for an economy that no longer exists. He has a big house…a big car…and, often, a big mortgage. America’s far-flung suburbs were invented when gasoline was only about 25 cents a gallon and real U.S. incomes were rising. We remember it well. We’d drive into a gas station and tell the pump monkey: "Let me have $2 worth." Heck, 2 bucks’ worth was all you needed. You got eight gallons – enough to last you all week. Now, gasoline is $4 a gallon…and real incomes are scarcely higher than they were in the late ’60s. And now the typical commuter lives too far out in the suburbs to walk to work. And even if he could, this item from the Wall Street Journal offers little comfort:

"Pain at the Other Pump: Shoe Prices Rise." The story tells us that footwear is going up too – about 10% to 15% next year, which "would be the largest single-year increase in more than 50 years."

And the poor man didn’t bother to save money, because he didn’t need to. His house rose in price…and there was always someone ready to lend him money when he needed it. But now…the cost of credit is going up too.

What we are looking at is big. It’s an historic turnaround. In financial terms, it is the end of the era of cheap credit. In cultural terms, it’s the end of the prosperous, suburban U.S.A. as we have known it…the U.S.A. that we grew up in.

The last credit expansion began, by the way, with the Reagan Revolution, in the very early ’80s, with bond yields over 15%. It ended either in 2003 or 2005 or a couple weeks ago. Yields on the 10-year Treasury note fell below 4% on several occasions. But now they are rising. Investors fear rising inflation. Even at current rates, they still buy treasuries at yields below the rate of consumer price inflation. But they’ll regret it, in our opinion. The trend seems to be up. It is the beginning of what probably will be a long period of higher inflation rates…higher bond yields…and tighter credit generally.

So too have we entered into a period of higher energy costs. The price of oil hit a new intraday high yesterday at nearly $140. It will probably drop back below $100…but the days of $10…$20…or even $50 oil are probably gone forever.

And the suburbs? Are they dead too? We don’t know…but hope so; we never liked them.

All this is bad news for people who organized their lives on cheap oil and cheap credit – especially those for whom it is too late to make big changes.

USA Today reports, for example, that the rate of bankruptcy is skyrocketing among old people. From 1991 to 2007, the rate went up 150%. But for those 75 to 84, the rate has exploded 433%.

The poor codgers. It’s bad enough being old. Imagine being broke too.

*** A few weeks ago, the Indians were giving America a piece of their mind. This week, it’s the Chinese. The subprime crisis was caused by Washington’s "warped conception" of market regulation, said a Chinese banking regulator… and the Chinese media has gone so far as to compare China’s decisive action in Sichuan Province after the earthquake to the Bush administration’s diddling after Hurricane Katrina.

"U.S. credibility and the credibility of U.S. financial markets is zero everywhere in the world," says Joseph E. Stiglitz, a professor of economics at Columbia University.

"Anybody looking at this from the outside says, ‘There’s been a lot of hot air coming out of the U.S., so why should we listen to these guys when they didn’t know how to manage risk?’"

The Chinese yuan has gone up 11% against the dollar so far this year.

*** When it rains, it pours. The Midwest has seen the worst flooding in 15 years…pushing up grain prices even higher.

But it could be worse. You could be in Argentina, from which our colleague Paola Pecora reports on the latest conditions (farmers are blocking roads to protest tax increases):

No market for grains
Running out of food and fuel
Inflationary expectations rising
Consumers expect to consume 24% less than the year before
220 roads blocked
An actual 20% drop in consumption spending
74% of people expect higher prices
Increasing poverty
Fall in foreign exchange reserves at the Central Bank
Public debt higher than before the default of 2001
Flight of bank deposits
Real incomes falling

"Things get worse every week," writes Paola.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Invasion of the Locavores originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

The world keeps turning and the resources get used up. It’s really quite simple.

Despite that fact, the debates rage over Peak Oil, Peak Food and peak everything else. It’s about as sensible as rearranging deck chairs on the Titanic. So the "experts" continue to debate whether or not resources are running low. But the evidence is pretty clear, at least to this trader.

In the past year, we have seen the oil and agriculture markets explode. And this could be just the beginning of the rally, not the end, as some would have you believe. Personally, I think we are about halfway to the new top for many commodities. That means $200 oil (easily) and gold at $1,500-2,000. The agriculture markets have even further to go, in my opinion.

Key commodities are becoming more and more scarce. So we can expect to see more suffering in the poorest countries first. Then the economic impact will work its way up the food chain (no pun intended).

The facts are fairly grim if we look at them closely. There is going to be less of everything. Yet there will be more people who want those things. Let’s face it – wars have been fought over far less.

In her famous book, On Death and Dying, Elisabeth Kubler-Ross describes the stages of grief:

• Denial: "It can’t be happening"
• Anger: "Why me? It’s not fair"
• Bargaining: "Just let me live to see my children graduate"
• Depression: "I’m so sad, why bother with anything?"
• Acceptance: "It’s going to be OK."

In my opinion, the American public is going through the stages of grief right now. Rising prices are just a market-based signal that we are losing our economic and resource abundance. As the American dream fades away, it’s like a death in the family.

Right now, I think we are between the stages of denial and anger. Ask yourself these questions: What do you think when you pull up to the fuel pump and have to pay $4 for a gallon of regular gas, or nearly $5 for a gallon of diesel? Or how about when you go to the supermarket and have to pay $4 for a gallon of "store brand" milk, or the same price for a loaf of "store brand" bread? Are your emotions between disbelief and anger? Are you saying to yourself, "Hey, what the heck is going on?" (I’m cleaning it up a bit because this is a family-friendly publication.)

I think folks mistakenly thought prosperity would go on forever.

Dinner is always fun until the waiter brings the check. Or as my colleague Byron King once said, "It’s easy to look rich as long as you don’t ever pay the bills."

No sector has recently hit Americans in the wallet harder than energy. But even with those dramatic price increases, major changes are still not happening. We have seen a very small decrease in gasoline usage – only about 1% or so.

But while some travel may be down as costs have gone up, the numbers are not really dramatic. No, I am not pointing fingers. I live here too. If I looked at my own lifestyle, I couldn’t say that I am making radical adjustments, either.

We still like to drive our big SUVs. We still drive alone to work. Most people rarely take public transportation (if there is any). And we love to run our air conditioners full blast while watching the documentaries on global warming and dying polar bears on our 62-inch plasma TVs.

Yes, we like to grumble when we fill up those big SUVs, mostly because it’s easier to complain than make the tough changes that are needed. We feel entitled to keep living as we do. Hey, after all, we’ve earned it. Right?

Rather than make difficult choices, we are in that denial stage and buy the line from the government and media that all is well.

The facts and the fiction often get mixed up when discussing the issue of "Peak Everything." Take the surging price of crude oil. Some people (including a lot of politicians) want to blame the traders and speculators. Other people blame farmers and corn-based ethanol. A lot of people blame OPEC. The list of culprits goes on ad infinitum.

The fact remains that it’s not just one reason or another that we are in this energy disaster; it’s actually all of these reasons and others. It’s a culmination of many years of poor energy policy, shortsighted planning (if you can even call it planning) and an overdose of arrogance that only superpowers can have.

It’s like a football team saying, "We’re No. 1 and will always be that way." So the team stops training hard. Players quit working out and coming to practice. The coaches just relax and forget about recruiting or developing new talent. Nobody designs new plays or bothers to scout the opponents to see what they are up to. And then the team expects to go out into the world and bring home the trophy every year. "Hey, we deserve it. Right?"

Or go back to the analogy of the Titanic. The ship was state-of-the art. It was not "supposed" to be able to sink. But now as the water rushes in and the ship is dropping lower and lower into the sea, the cold water is hitting us all in the face. Now our lawmakers are scrambling to plug the holes, and it’s not working. The smart people (or maybe they were just lucky) are already in the lifeboats.

Only time will tell if the United States can actually move into the acceptance stage. But in the meantime, commodities will continue to dwindle.

Regards,

Kevin Kerr
for The Daily Reckoning
June 3, 2008

P.S. As the price of commodities contains to rise, there will be incredible opportunities to profit as investors. These opportunities will abound, as they always do when stupid decisions are being made…and you can bet that Bryon King and myself will alert our Outstanding Investments readers to where this opportunities for profit are hiding. If you aren’t yet a subscriber, there’s never been a better time to discover the world of natural resources.

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

Today, we begin ab ova, as the Romans say – with the egg.

The price of eggs has gone up 30% in the last 12 months. Why the big increase? Because the things that go into making an egg have gone way up – feed for the chickens, heat, light, and transportation.

As the egg goes, so goes the chicken…and the whole chain of consumer products that make up our cost of living. Everything is going up.

If we were looking for something to blame, we could turn to the price of oil. It was only $80 a barrel as recently as last summer. This morning, it is trading at $127 a barrel – near an all-time record, even in inflation-adjusted terms.

Modern economies run on petroleum products. As oil has gone up…so has everything connected to it. But as the oil price rises, it sets in motion a whole contraption of actions and reactions. As the price of a gallon of gas rolls up a penny, it tips over a little cup in which there is a steel ball. The little ball rolls down a track, trips a number of levers and switches, and runs into another ball attached to a string, which then swings over to the left and knocks over a glass of water, which falls down onto a tray of fast-growing ivy seeds, which send out shoots and vines and strangle the entire apparatus.

Well…you get the point: one thing leads to another…

And one thing that high oil prices lead to is higher prices for everything else. And higher prices lead to less purchasing power on the part of the average consumer, which leads to fewer sales, which leads to less output, which leads to lower earnings and slower growth…etc. etc.

This has put the airline industry is in "desperate" condition, reports the New York Times. Fuel is the airlines’ biggest expense. As it has gone up, airlines’ profit margins have gone down.

The latest report from the manufacturing sector show declining factory orders for four months in a row. And USA Today reports that many people are seeing declines in their incomes – in ways that don’t show up in the employment numbers. While the unemployment figures show little contraction, sales commissions, tips, and even Wall Street bonuses are going down fast.

Foreclosures are still rising nationwide, says the Wall Street Journal. The famous Foreclosure Bus Tours have now moved beyond hard-hit cities in Nevada and California; now there’s one touring the New York area!

Forbes has a word for all this: Stagflation. Of course, it’s not a very original word, but Forbes is not a very original magazine. But it’s not a new situation either, says the magazine. Stagflation is the devil’s child you get from the unnatural union of consumer price inflation and a stagnant economy. It’s also what the United States endured in the 1970s…the last time oil prices were so high. The price of gasoline rose during the late ’70s…and hit a record high, adjusted to today’s dollars, over $3 at the beginning of the ’80s. For all the whining about it, today’s gasoline is not much higher. But by 1981, the price of fuel was headed down. Over the next four years it fell in half…and stayed low until George W. Bush invaded Iraq.

Are we enjoying a re-run of a ’70s show? Is it time to get out the strobe lights and the leisure suits? Should we repaint the house in ’70s style slime green and dirty-carpet beige? Can we forget about trading in the SUV or putting in a wood stove? Won’t this whole thing blow over – the way it did in the ’70s?

George Soros says the bubble in commodity prices will burst. We believe him. So, can we stop worrying about high oil prices and rising inflation?

Not so fast, says Paul Krugman. This ain’t the ’70s because we don’t have the same kind of inflation, he points out. At the end of the ’70s, everyone was sure prices would continue to go up. In May of ’81, the United Mineworkers Union was able to negotiate a 33% pay raise spread over three years. The miners thought they needed the increase to make up for increases in the cost of living. And the mine owners thought they could afford it – because the price of coal had been going up for many years. They were both wrong.

But that was "wage-push" inflation, Krugman maintains, very different from what we have today.

Yes, he is right. This is a different kind of inflation…a different kind of stagflation…and, we predict, a story with a different kind of ending.

Stay tuned…

*** How will the story turn out?

Well, we repeat ourselves, what ultimately turned the situation around at the end of the ’70s was a change in regime at the Fed…the worst recession since the ’30s…and a whipsaw on Wall Street that whacked both the bond market and then the stock market, wiping out more than half the value of each of them.

At the end of the ’70s, the jig was up. When everyone had come to expect more inflation from the Fed, the central bank no longer saw any benefit in it. Its new money and credit was being anticipated and absorbed – in wage and price increases – even faster than they made it available. Inflation no longer worked, in other words. It no longer deceived businessmen into thinking they should expand production. It no longer deceived investors into believing their assets were going up in value. And even the lumpen householders had caught onto the game; as soon as they got a wage increase, they spent it quickly…and then demanded another one.

The feds didn’t have much choice. They could either inflate much more heavily than expected and wait for the disaster to catch up to them…or they could admit that the flimflam no longer worked, raise rates, and squeeze the "inflationary expectations" out of the system. Paul Volcker took the latter course. That, combined with the natural feedback look of the oil cycle – in which higher prices drew forth new supplies, as they always do – sent the price of oil back down. In today’s dollars, a gallon of gasoline sold for about $1.50 from 1986 until 2003.

Volcker’s anti-inflation Fed also knocked the price of gold down from over $800 in 1980 to around $275 in 1998.

(It was at this point that the then-chancellor, now-Prime Minister of England, Gordon Brown, decided to sell tons of Britain’s gold. It is why the low point in the gold market, set in the late ’90s, is still known as the "Brown bottom.")

Of course, many people expect a repeat of the story. They see inflation rising…oil over $125…and gold over $900 (it closed yesterday at $897)…and it makes them feel 30 years younger; they think they see "Mary Hartman, Mary Hartman" on TV again and Jimmy Carter in the White House. Soon, they believe, the Fed will begin raising rates; oil will fall back to $70; gold will crash back below $500; and inflation will go back to sleep.

And maybe it will happen. But we’re a long way from it, in our opinion. We haven’t really had the run up in consumer price inflation yet. Forget the eggs, say the feds. According to their numbers, the CPI is only increasing at 4% per year. Not too bad. Nothing to get excited about. And certainly no reason to renegotiate a union contract.

Nor has there been a big sell-off in the bond market. Only very recently have yields on the 10 year note crept up over 4%. And yesterday, they sank back under the 4% mark. Wait until they’re over 8% – then, we’ll talk!

And as for the stock market – what’s the problem? Stocks got killed in the ’70s…they were down 75% to 90% in inflation-adjusted terms. But what has happened in the stock market recently? The Dow is still within 10% of its all time high. And over the last 10 years, in nominal terms, it is up 2.5%.

No, dear reader, we have a long way to go before we can have a genuine recovery. First, we need something to recover from. We need an egg. Then, we can have a chicken.

*** Bad news is beginning to seep into the British press. Mortgage approvals just hit a record low. And the Guardian reports that more and more people have "negative equity" in their houses. The Financial Times says that the United Kingdom is "near recession," and that foreign investors are "losing faith" in the island’s economy.

*** The simplest way to invest was to buy the indices. Don’t worry about chasing alpha (beating the market). Besides, says Warren Buffett, you probably won’t be able to do it very well anyway. So just buy the ETF. Especially when you’re entering a foreign market.

Then, along came a ‘better way’ to buy an ETF. Instead of just putting all the leading stocks into the ETF, the managers decided to run them through a few basic screens – eliminating or reducing exposure to those companies with poor measures on such things as growth, dividends, earnings, sales or book value. This was expected to give ETF investors a little taste of "alpha" – above market performance.

Well, don’t bother, says a new study. According to professors Richard Roll of UCLA and Moshe Levy of Hebrew University, so-called "fundamentally-weighted indexes" do no better than the traditional ones.

Just buy the ETF.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Are We Witnessing the Slow Dealth of the American Dream? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

I am racking up the frequent flyer miles this year. My travels in 2008 have taken me to exotic locales like Singapore, Hong Kong and Dubai, as well as somewhat less exotic locales like the American Midwest. But guess what, the Midwest is the place that’s making the headlines in Singapore, Hong Kong and Dubai. The soaring price of agricultural commodities like wheat, corn and soybeans is one of the biggest news stories on the planet right now.

But ag commodities aren’t just a huge news story, they are also one of the most exciting trading opportunities of 2008 and beyond.

Whether my travels take me to the Middle East or the Midwest of the U.S., the stories are very similar. Most people are concerned about the rising costs of agricultural commodities. And they should be. The commodity boom is real. It is not a bubble, no matter how many folks wish that it were.

In fact, now you have all of these dollar bulls coming out and saying that the worst is over for the dollar and that the commodity bubble will soon burst. They say that the commodities markets are simply speculator-driven. I disagree. Do you remember as a child wishing for something, wishing so hard, yet it didn’t come true? Wishing for something to happen does not mean it will be so. (I never did get that red bike.)

The dollar will probably bounce a little higher, but the same problems that drove the dollar into the basement will persist, and even worsen. The Fed can’t just snap its fingers and wipe away a credit crisis with some stimulus checks. Too many folks are subscribing to the idea that the consumer will somehow come to the rescue and spend our way out of recession. That’s pure fantasy.

The hope that the commodity bubble will burst is also a fantasy. The fact of the matter is that we are in a new paradigm for commodities and the old-school thinking about how commodities used to be traded has to be changed. And this is true of most commodities – none more so than the agricultural ones. Sure, speculation is a part of this puzzle, but to say it’s all speculators and hedge funds that are causing the run-up is a sad mistake.

As I sit here writing this column, I am watching CNN out of the corner of my eye, and on the air is Jonathan Stevens, a baker from a Massachusetts company called Hungry Ghost Bread. He is starting to grow his own wheat and encouraging his customers to do the same. Not a bad idea. For a 50-pound bag of organic flour, he used to pay $25, but now pays around $60. So in back of the store, the bakers are now growing their own wheat. Now, while farming in your backyard may not seem very practical, it’s becoming part of a new reality: If you want to be sure you have the food you need – absolutely sure – you’ll want to grow it where you live.

Most of the world’s inhabitants already understand this essential reality. America’s are just starting to re-discover it. In fact, we’ve even made up a new word to describe this ancient necessity of growing food where you live. The word is "locavore" and it means someone who eats food grown locally. Wow! Very trendy!

Demand for ag commodities is real and it is worldwide. Meanwhile, supplies are stretched thin. So any "supply shock" has the potential to cause prices to soar even higher. A new supply shock might be developing right under our noses. The planting season here in the U.S. is getting off to a very bad start, as the weather has been awful. Torrential rains have flooded many fields, making planting impossible. The U.S. Department of Agriculture reports that only 10% of the corn crop west of the Mississippi has been planted, compared to a five-year average of 35% for this time of year.

Plantings for soybeans, spring-wheat and rice are also trailing behind their five-year averages.

Therefore, this year’s corn crop could be extremely disappointing. Some of the other crops might also disappoint. In my trading service, Resource Trader Alert, we are betting on much higher prices in soybeans and corn, and we are using option spreads to take advantage of this.

My annual meetings with Midwest farmers are always helpful. But my recent meetings with farmers in Minnesota were particularly helpful. Not only did I gain some insights about this year’s crops, I also learned a great deal about the soaring prices of fertilizers and other farming "inputs." The long and short of it is that input costs are rising about as fast as commodity prices. So many farmers are getting squeezed.

And these rising input costs are here to stay, which probably means that rising grain prices are also here to stay. Yes, prices will fluctuate dramatically. But the bull market in agricultural commodities is very, very real.

Why deny it? Why not trade it?

Regards,

Kevin Kerr
for The Daily Reckoning
May 08, 2008

Attendees at the conference Kevin spoke at earlier this week paid $10,000 per ticket to learn how he does what he does. Now, these are guys who run tens, sometimes hundreds of millions of dollars, so that’s not going to break their bank, but it’s not something everyone can afford.

In addition to his media appearances and conference globetrotting, Kevin has been a regular to the pages of The Daily Reckoning for years.

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

The above was taken from Kevin’s book, A Maniac Commodity Trader’s Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls "the last bastion of pure capitalism on Earth." Whether you’re a novice or an experienced trader, Kevin’s down-to-earth, clear-cut guidance will make you savvier, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you.

A quick look at the numbers:

Yesterday, the Dow fell more than 200 points. Oil, up $1.69, hit a new record. The dollar rose to $1.53 per euro. And gold lost ground…dropping down to $871.

Up, down…up, down…what’s going on? Is the economy recovering? Is the stock market giving us the "all clear?" Is the smart money buying the United States of America again?

No. No. And no. At least, not in our humble, timid, looking-over-our-shoulder and keeping-our-fingers-crossed opinion.

Yes, dear reader, here at The Daily Reckoning headquarters we are sometimes right…sometimes wrong…and always in doubt. What are we in doubt about today? Practically everything. Still, that doesn’t stop us from having opinions.

But let’s begin by looking at Consumeris Americanus, a species that has been having its share of trouble lately. Its habitat is threatened by falling house prices…its food supply has become more expensive. What’s the outlook?

First, this report from Bloomberg:

"U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.

"Consumer credit increased by $15.3 billion for the month to $2.56 trillion, the biggest monthly rise since November, the Federal Reserve said today in Washington. In February, credit rose by $6.5 billion, previously reported as an increase of $5.2 billion. The Fed’s report doesn’t cover borrowing secured by real estate, such as home-equity loans.
"Consumers are turning to credit cards after banks tightened standards for home-equity loans and other borrowing. The March figures brought U.S. consumer borrowing in the first quarter to $34 billion, the most since the first three months of 2001, when the economy entered its last official recession.

"’Consumers are strapped as incomes are not keeping up with inflation and this is leading them to rely increasingly on credit to see them through the worst housing downturn since the Great Depression,’ said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi in New York. ‘The days of extracting cash from one’s home to spend on goods and services are long gone.’"

But wait? The feds clearly want to protect this endangered species. These dinosaurs vote! So, they’re sending out ‘rebate’ checks…they’re cutting rates…they’re spoon feeding the banks so they’ll be able to help the consumer out with more credit on easier terms.

Richard Benson comments:

"For the average American, this rebate check represents only one car, credit card, or partial mortgage payment. When you consider it cost well over $60 now to fill up the gas tank for a mid-sized car, and a lot more to go out to eat, it won’t go very far.

"On the household front, millions of homeowners haven’t even finished paying their heating bills from last winter, and over six million Americans asked for energy assistance funds so their power wouldn’t be shut off. (In California alone, 1.7 million households are behind on their utility payments.)

"Signs of the stretched consumer include the following stunning facts:

- Home equity loans have a seven percent delinquency;
- Subprime mortgages, past due over 60 days, are pushing 14 percent;
- Over one million homes are in foreclosure and three million more are empty, and up for sale;
- Ten million homes have mortgage balances greater than their value. (No wonder some homeowners are walking away from them);
- In the auto market, 25 percent of all car loans are higher than the car is worth. (The average balance these cars are underwater for is $4,300!)

"Jobs are also falling off a cliff. If it hadn’t been for the Birth Death computer model at the BLS creating service jobs out of thin air, the payroll data would have shown over 280,000 people actually lost their jobs in April. Currently, 2.7 million workers have exhausted their unemployment benefits, and with no job prospects or income, hello collector!"

Meanwhile, the rising price of food has forced a record 28 million Americans onto food stamps. Trouble is, says the bleeding heart press, the giveaways don’t go as far as they used to. Many are "still hungry," according to a CNN report.

It’s true that we haven’t lived in the United States for more than 10 years. But we used to live right in the heart of the Baltimore ghetto. There, almost everyone got food stamps and other taxpayer-financed freebies. What we recall is that people tended to be overfed…not hungry.

But, back to our doubts and opinions…

Consumeris Americanus isn’t looking his best. But so what? The newspapers tell us that the ‘worst is behind us.’ The credit crunch is over, says Buffett. The housing crisis is over, says the Wall Street Journal. And just look at the stock market…

The stock market is said to look ahead. It is thought to see through the headlines…through the noise and opinions…and through the theories…to tell us what is really going on.

Look, say the bulls, the stock market is doing well; there’s nothing to worry about. The chartists say the next move is up. The Dow Theory folks say we’re still in a bull market. The dreamers are hoping for Dow 15,000.

Of course, they’re right about one thing; there’s nothing to worry about. We’re just talking about money. But anyone who thinks the stock market really predicts future money trends hasn’t been paying close attention. In early January 1990, the key Japanese stock index was over 39,000. It had risen like a rocket for the preceding five years. Surely, it saw more growth and prosperity ahead, right?

But that very same month, Japan, Inc. ran into a serious problem. The stock market crashed…and the economy went into a long slump – from which it still hasn’t recovered.

In the United States 10 years later, again the stock market had registered steady, impressive gains over the preceding five years. The NASDAQ was going almost straight up. Surely, stock prices signaled more growth and prosperity ahead, right?

Nope. The NASDAQ crashed…the Dow sank…and in real terms, after a decade, even in the Dow stockholders are still down 20% to 30%.

No, dear readers, the stock market is often blind, deaf and dumb. It can’t see ahead. It can’t hear the warning whispers. And it can’t put 2 and 2 together.

*** "What beautiful weather…" we said to a colleague yesterday. "It looks like the beginning of summer in London, doesn’t it."

"The beginning? You better enjoy it. This might be the end of summer too."

London is not known for its great weather. Sometimes, a few lovely weeks in May or June may be all the summer Londoners get.

*** "You may be able to print your way out of a recession," said another colleague this morning, "but you can’t mint your way out."

"What?"

"In the U.S.," he explained, "because of price increases in the metals markets, it now costs more than 5 cents to make a new nickel. And here in England, if you melt down two pennies, you get 3 pennies worth of copper."

*** And here’s more, from the Washington Post, on Japan’s self extinction:

"Japan celebrated a national holiday on Monday in honor of its children. But Children’s Day might just as easily have been a national day of mourning.

"For this is the land of disappearing children and a slow-motion demographic catastrophe that is without precedent in the developed world.

"The number of children has declined for 27 consecutive years, a government report said over the weekend. Japan now has fewer children who are 14 or younger than at any time since 1908.

"The proportion of children in the population fell to an all-time low of 13.5 percent. That number has been falling for 34 straight years and is the lowest among 31 major countries, according to the report. In the United States, children account for about 20 percent of the population.

"Japan also has a surfeit of the elderly. About 22 percent of the population is 65 or older, the highest proportion in the world. And that number is on the rise. By 2020, the elderly will outnumber children by nearly 3 to 1, the government report predicted. By 2040, they will outnumber them by nearly 4 to 1.

"The economic and social consequences of these trends are difficult to overstate.

"Japan, now the world’s second-largest economy, will lose 70 percent of its workforce by 2050 and economic growth will slow to zero, according to a report this year by the nonprofit Japan Center for Economic Research.

"Population shrinkage began three years ago and is gathering pace. Within 50 years, the population, now 127 million, will fall by a third, the government projects. Within a century, two-thirds of the population will be gone.

"In what is now being called a "super-aging" society, department and grocery stores have recorded declining sales for a decade…"

*** Food riots have broken out in several countries…including several oil producers. The oil exporters find they need to spend more and more of their loot feeding their own growing populations. Several have tried to invest in more local food production, but have been stopped by a lack of water.

*** Here’s something interesting. Our Buenos Aires correspondent, Horacio Pozzo, tells us that U.S. company, Amyris, has gotten together with a Brazilian company, Crystalsev, to produce a sugar-caned based bio-diesel fuel which is "equal or better than diesel from petroleum." Several large companies from Europe and America are moving to Brazil to take part in the development of bio-diesel fuels. And Fiat Powertrain Technologies says it will launch a motor designed to run on ethanol – also in Brazil, in 2010.

*** Finally, more than a million Americans are being fed and housed, courtesy of state, local and federal governments. They’re the lucky ones…paying no mortgages…losing no jobs; they don’t even have to buy bread. Still, life in U.S. prisons is probably no picnic.

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Food Crisis, A First-Hand Report originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

What do you think is the most important commodity in your life? Yes, oil is important, but not as important as staying alive – after all, you can survive only about a week without water, right? Just look around. How much water do you personally use in a day? And think about how much water you don’t even realize you use. Water is something we take for granted, and it’s a growing crisis that’s beginning to hit traders’ radar screens.

Reports from the World Health Organization show an epidemic problem: A staggering 2.6 billion people – 40 percent of the world’s population – do not have even the most basic sanitation, and more than 1 billion people still drink unsafe water. This can cause a range of diseases and even death. The world is just one natural disaster from a lack of clean water. One example of the devastating impact of nonpotable water was the tsunami in Asia. Many thousands of deaths could have been prevented had there been fresh water supplies.

Water pushed through hydroelectric dams is one of the world’s most efficient and harmless forms of electricity generation. Water is also vital in sanitation, manufacturing, drinking, and more. The water industry is very complex. The list of related companies is long, from water suppliers and bottlers to technology and equipment firms.

Think there’s no real way to play water supply and demand? Think again. The explosion of the world’s population and the dwindling supply of fresh water on the planet are sounding alarm bells for the greatest commodity play of all time. Make no mistake: Water is an increasingly vital commodity. And that hasn’t gone unnoticed by worldwide capital markets.

Very few people know about the Dow Jones U.S. Water Index. This index lists only 23 companies, mainly utilities, but rest assured that there are many, many others. Surprisingly, many experts contend that the way to play water isn’t just through U.S. utilities. Worldwide, the utilities are considered overvalued to some extent.

Even though the utilities are expensive in the United States, one country that offers even better opportunity due to pent-up but exploding demand is China. China’s population of 1.3 billion is more than one-sixth of the world’s total. The sheer numbers are staggering.

And while not everyone there drives a car, everyone does drink water.

Here’s a list of water crisis facts, provided by Summit Global Management:

- The World Health Organization says that 60,000 children die each day from lack of water and/or dirty water, by far the largest health problem in the world.

- Only 20 percent of the world’s population currently enjoys the benefits of running water.

- Every year, according to the World Bank, the amount of global water polluted equals the amount of water consumed: Fresh water is disappearing at an alarming rate, especially when compared to the rising world population.

- Since the turn of the last century (1900), the U.S. population increased 200 percent, while per capita water usage shot up 500 to 800 percent, depending on the region.

- It takes 1,000 tons of water to produce 1 ton of grain; agriculture consumes 75 percent of the world’s fresh water. The World Water Council says we will be 17 percent short of necessary water to feed the global population by 2020.

- Users of the most water in California, in decreasing order, are alfalfa growers, cattle ranchers, cotton farmers, rice farmers, and the city of Los Angeles.

- In the United States there are 58,000 water utilities, 90 percent of which serve less than 4,000 homes and have operating budgets of less than $2 million.

- About 500,000 tons of pollutants pour into U.S. rivers and lakes each day.

- California accounts for 20 percent of all irrigation and 10 percent of all fresh water use in the entire United States.

Opportunities exist in the United States, if you pick the right players. The U.S. water infrastructure, much like the oil refinery situation, is falling apart. The Environmental Protection Agency (EPA) and others estimate that up to $1 trillion will have to be spent to upgrade U.S. water infrastructure over the next few years. That work will fall into the hands of only a few key players in the water market, and the rewards for the shareholders of those that are chosen could be substantial.

It’s unclear as I write this which players will be on top in the next decade; some may not even exist yet, but will be born out of necessity. As I mentioned earlier, the best thing to do is to keep an eye on China, as their need for water will be the most immediate. Take, for example, the grain situation in China in summer 2006. Severe drought afflicted China’s poor western region and underscored how vulnerable the country’s critical ecology was despite its growing wealth, raising concerns among some big commodities traders that China might need to import massive amounts of grain.

A report by the United Nations Food and Agriculture Organization warned in 2006 that some parts of key provinces lost half of their winter wheat crops. Some areas experienced massive food shortages that were on the verge of epidemic.

The cause was lack of water supplies – an ongoing and growing problem in China. In some villages and cities the major water sources have reportedly dried up by more than 70 percent, according to the UN agency’s global information and early warning service. China was the fourth-largest destination for U.S. farm products in 2006, overtaking the European Union, with purchases of $6.8 billion, according to the U.S. Department of Agriculture.

It seems ironic that millions of Chinese are potentially facing food and water shortages, even as the nation’s economy is growing by leaps and bounds. That growth clearly comes at a price worldwide, not just in China.

Speaking of prices, we continue to pay an ever-higher one for our energy. The boom in mining, drilling, foresting, and other resources sectors has a downside, too – a negative effect on our environment. From greenhouse gases and strip-mining to deforestation and drilling in Alaska, the commodities boom is not without casualties.

Energy and mining are on the top of the list when it comes to harming the environment. Just ask anyone who lived in Alaska when the Exxon Valdez disaster occurred. The ecological implications were daunting. Drillers and the oil majors are spending more and more to protect the environment, partly for public relations and partly because they have to. However, measures are being taken in some sectors to stop the destruction – and this is also providing an opportunity for investors.

Various companies that do cleanup and reclamation are set to do well as an ecology-conscious world demands that we be good stewards of the environment at the very same time we are searching for resources. Investing in these companies is a way to further expand a winning portfolio.

The commodities markets are always in flux, and it’s important to keep up with new markets and new opportunities. Always study the markets you want to enter – take an interest in them. One of the most important things in this business is to be interested in what you are trading. Otherwise, trading becomes a chore. Be passionate about the market you choose to follow, but never let emotions cloud your judgment.

Regards,

Kevin Kerr
for The Daily Reckoning
April 23, 2008

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

The above was taken from Kevin’s book, A Maniac Commodity Trader’s Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls "the last bastion of pure capitalism on Earth." Whether you’re a novice or an experienced trader, Kevin’s down-to-earth, clear-cut guidance will make you savvier, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you.

"Let Rome in Tiber melt…"

Rome did melt into the Tiber. The place was invaded by barbarians…the population sank from over a million to under 100,000. And when the city was "rediscovered" by tourists with a sense of history in the 17th century…there were goats grazing amid the ruins of the ancient city.

There are people who believe that power, progress, and wealth are always on a rising slope. Let them come to Rome!

Roman property was a sell for a period of probably a thousand years…from the peak of Roman power, around 100 AD, down to its nadir, sometime after the Renaissance.

We have come to Rome on your behalf, dear reader. We poke through its dusty ruins looking for the future. There are more ruins to come, we think…

(Oh, the labors we undertake for your sake, dear reader. Last night, trying to get in the spirit of the place, we drank nearly a whole bottle of wine from Abruzzo. Today, we will go with a Tuscan variety…)

But let us first look at the news:

"Does the US matter any more?" The question comes to us from the head of research at Societe Generale. Looking at the data from the International Energy Agency in Paris, reported in this space yesterday, he noticed that now China, Russia, India and the Mideast use more oil than the USA. What’s more, energy use in America is going down…while it is skyrocketing in those other countries. Thanks largely to growing demand in the emerging markets…and the falling value of the U.S. currency…the price of oil hit a new record yesterday – at $118.

The United States matters less and less to the oil market – but is still very important, of course.

We have guessed that the United States of America is a sell. Its money, its paper, its property, its labor, its stocks, its industries, its debt – sell them all.

We don’t mind saying so…still, we don’t like to hear the foreigners say it. A man may have noticed the swelling with his own eyes; still he doesn’t like to hear a stranger say his wife is getting fat. So when the Financial Times comes out with an article saying the same thing, it sticks in our craw.

At least the FT is nice enough to use a euphemism. Instead of seeing the United States on its knees, it sees the "end of unipolarity." As we all know, when the Soviet Union threw in the towel in 1989, the US was the world’s undisputed hegemon. America was on top of the world – with no real competition. It was a "unipolar" world, as the FT would put it. The stock market boomed. The dollar rose. America’s chest swelled with homegrown pride and the entire world’s credit. And by the late ’90s, President Clinton summed it up: "things couldn’t get better," he said.

He was right. They couldn’t. So, they got worse.

No nation can stay on top of the world forever. But when you have no competition, you can’t rely on others to bring you down; you have to find ways to destroy yourself. For that job, America found just the men it needed just when it needed them most – Alan Greenspan and George W. Bush. What these two men accomplished is probably one of the greatest feats in human history. They took the richest, most powerful country the world has ever seen and, in the space of only five years, practically ruined it.

First, says the FT article, the soaring price of oil had the effect of transferring trillions of dollars from the biggest oil user – the United States – to the oil producers, notably the Arab states and its former enemy, Russia.

Second, the federal government went from a budget surplus over $100 billion in 2000 to some of the largest government deficits ever recorded. Those, along with huge current account deficits equal to 6% of GDP, changed the United States from a chooser into a beggar – heavily reliant on foreign money.

The FT doesn’t mention it, but America’s spending spree had another important effect – it lit a fire under its new commercial rivals. Americans spent absurdly – which caused the Chinese to build factories, learn skills, and pile up a mountain of U.S. dollars.

Professor Paul Kennedy practically foretold all this when he noted that super-powers tended to "over-reach." But even he couldn’t imagine how much of this over-reach would be caused by so few people in such a short period of time. Alan Greenspan reached for the stars in the early 2000s. His emergency-level Fed rates triggered an explosion of spending, borrowing and leveraging…which has now blown up in our faces.

And the Bush Administration took on a war that has proved to be costly beyond anyone’s imagination. The total price of the war may come to $1 trillion or more – at a time when the United States already needs to borrow $2 billion per day.

Obviously, more prudent, more cautious leaders would have prevented these catastrophes. They would have read history…reduced expenses…raised interest rates…pulled back the troops…and saved money. But sensible leaders do not make history. Fools do. People reach for glory. Then, they over-reach.

"Oh, look," said Elizabeth on yesterday’s walk about. "This Piazza Navona is built around what used to be Emperor Diocletian’s stadium. I don’t know anything about Diocletian…"

"The only thing I know," we replied, "was that Diocletian prefigured Richard Nixon by about 19 centuries."

"What do you mean?"

"Diocletian was faced with high rates of inflation. He imposed price controls as a way of trying to control prices. Of course, they didn’t work. They never do. But Richard Nixon probably never read the history of Diocletian’s price controls. Otherwise, he wouldn’t have done such a stupid thing."

George W. Bush and Alan Greenspan, too, may have long arms…but they are short on history. Still, the pair seems to have worked a turnaround that history will record as one of the greatest ever.

After being on top of the world so recently, now…the United States slips and slides. The banks are in trouble…homeowners are in trouble…and the economy is in such trouble that the feds are now considering new emergency measures to rescue it.

From California comes word that foreclosures are running 327% ahead of last year. Drivers are cutting back on gasoline use – for the first time in U.S. history they have to compete with the Chinese for every gallon. They’re "feeling squeezed," says an AP report.

Americans now earn less than the French. How long will it be before they earn less than the Chinese? How long before Washington melts into the Potomac?

We don’t know…but we will do our best to be prepared when it happens.

*** "I love coming to Rome," said Elizabeth. "Everywhere you go, there’s something to see. Right around the corner is the church of St. Agnes. You know, they martyred her because she refused to marry one of the Roman aristocracy…who was pagan. The church is built on the site, it is said, where she was exposed. They stripped her naked and chained her on the spot. It was supposed to be a humiliating way to kill her, I guess. But her hair hung down and preserved her modesty. At least, that is what it says in the Christian legends. And so they tried to burn her…but the fire wouldn’t touch her. In any event, she died…and the street here, St. Agnes ‘Agone,’ records the place and the pain of it.

"I’ve booked a tour of the Vatican…and then a tour of the Vatican’s art collection. There’s a group of Americans who organize these things…it looks like a very good service."

"How long are these tours?" we wanted to know.

"Well, each one is about 4 hours. But don’t worry. I know what a Philistine you are…I only booked it for myself."

Until tomorrow,

Bill Bonner
The Daily Reckoning

Portfolio Soaked with Profits originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

As an American man in my early 40s, I can say that for most of my life, I have taken certain things for granted. I don’t mean that I have been ungrateful for the abundance this country has to offer. I would say, instead, that I’ve been oblivious.

Now don’t get me wrong – as a child and young adult, I was fortunate enough to travel all over the world. My father made it a point to take us everywhere, and we often saw countries where there was poverty and no such things as running water, 7-Elevens or mega-malls, and where there were certainly no Starbucks, health care or gigantic well-stocked supermarkets. No, I was aware we had much more of everything in the U.S. – clearly, we had it better here. But as a child, I just never thought it could change.

Then I grew up.

When I was a kid, I would spend a lot of time at my grandparents’ house on Sundays while my parents went to the Minnesota Vikings games – they were big fans. (Trust me, you had to be a big fan in those days – the stadium was outside, and it was darn cold in January. That was when NFL football was good.)

Anyway, my grandmother was in her 70s and had lived through the Great Depression and a couple of world wars, so she had seen hard times indeed. In her basement, she had a room that was filled from top to bottom with canned foods from her garden. It was an enormous garden filled with produce, not flowers. (Well, maybe a few flowers.) She also had a gigantic bin filled with coffee, and an even bigger industrial garbage can from Sears, filled with sugar. As a kid, I remember asking her why she had all that sugar in the garbage can. She replied, "Because you never know, Kevie." I had no idea what she meant. Now all I can think is how right she was.

Who knows, maybe she planted the seed right then and there for me to be interested in commodities trading? Heck, I would give a lot for Grandma’s sugar-filled garbage can today, with sugar prices surging the way they have at the start of 2008.

As I have said for the last three years, the soft commodities are much undervalued, and we are seeing that move now just as we did in grains, and as we did in energies before that. The move higher in soft commodities like coffee, cocoa, sugar, cotton and others is just starting, not ending.

I really enjoy history. I can’t say I am a scholar of history – I’m more like a History Channel buff. It’s interesting that when we look at the history of food prices in America, we see that in 1901, people spent 43% – almost half – of their income on food, according to the Bureau of Labor Statistics. Do you know what that figure was in 2003? We will answer that in a minute.

It is true that since 1901, the percentage of our income spent on food has dropped dramatically, and it would seem to confirm a theory called Engel’s Law. Engel’s Law is the observation by 19th century German statistician Ernst Engel that "The proportion of income spent on food falls as income rises." But look deeper. Has spending gone down, or has it just shifted elsewhere?

Upon closer examination of my own spending, I realize that as I get older, my rising income has also meant more dining out. Restaurant dining and takeout food require even more energy, and are more expensive. Look at your own history, and you will see what I mean.

The extra money has certainly not gone into savings accounts, since the U.S. has one of the worst savings rates in the world, as well as some of the highest credit debt.  According to the Bureau of Labor Statistics, the average American family spent $40,817 on goods and services in 2003. So where did all that money go?

OK, now the answer to our question. How much did the average family spend on food in 2003? Only about 14%, or a vast improvement over 1901, right?

Well, not really.

According to Advertising Age magazine, "Unlike in 1901, in 2003, the majority of the family budget went for the house (33 cents of every dollar) and car (19 cents). After paying for food (13 cents), medical bills (6 cents), a little booze (1 cent) and more, families had a nickel left to spend on entertainment." A nickel?

I just went to a Florida amusement park with my wife and baby, and at $200 for entry – trust me – a nickel is a little bit of an understatement.

And I will also say that in the area where I live in Connecticut, I see people living in these vast McMansions that cost $1-3 million. And they earn less than I do. I am just astonished. They must be spending 70%-plus of their incomes on their mortgages.

There is absolutely no doubt that consumer spending has increased exponentially since 1950. OK, let the good times roll. The government and die-hard bulls immediately point out that factoring in inflation, the increase is less dire. Maybe, but the "adjusted for inflation argument" won’t feed your family or run your car. Try paying your mortgage and telling the bank that adjusted for inflation, your payment should be 30% less. See if they foreclose on only 30% of your house.

So we are all feeling the pinch of higher prices. We are used to increases in gasoline, health care and homes. We don’t like it and we complain, but we expect it and we continue to fill up our Hummer and grumble and drive on. When it comes to groceries, however, and milk surging to $4.85 per gallon, look out.

How is this possible? How could it have happened? Ah, you can almost hear Marlon Brando saying, "The horror!"

My daughter turned 1 year-old in January. We always have to remind her not to play with her food. You would expect to have to do that with a 1-year-old. But you wouldn’t expect to have to do that with our government leaders. (But come to think of it, many of them could use a good spanking.)

I am often asked by private clients, TV and radio interviewers, readers like yourself and others, "Why is this happening? Why are food prices surging?"

Simple. Stupidity, I think to myself.

The United States has some of the richest farmland in the world and more modern farming equipment than any other nation on Earth. The problem is we also use a lot of energy, and that is one thing we don’t have much of. So what are we to do?

Then the political light bulb came on – dimly, but it came on. The idea was to turn a key staple of our food supply (corn) into fuel and thus create a panacea for the energy problem. This was a miracle, right? Wrong. Ethanol is nothing new; it has been around since cars first rolled out of Detroit. Ethanol from corn comes at a very high price. Not only does it require several steps to turn corn into ethanol, but it requires acres more of land, fertilizer, fuel, water, etc. At the end of the day, the only thing that widespread ethanol use is doing is destroying more of our natural resources while perpetuating the myth that we are doing something about our energy problem. It’s almost criminal.

Now, don’t get me wrong. Farmers have used ethanol for years locally, and in many instances, it makes complete sense. After all, growing a limited amount of corn on your own farm and refining it a few miles away at the co-op ethanol plant and then running your farm equipment and also pocketing a little coin at the same time – while providing some ethanol to the local community – made sense. Unfortunately, the government, lobbyists and politicians have perverted ethanol into a national mandate and thrown billions in subsidies to the industry.

It has become so absurd that farmers are becoming careless, throwing aside less-profitable crops like cotton and wheat.

In addition, being overlooked are prudent farming methods like crop rotation and not growing corn on corn, or the process of growing a different crop the year after you grow corn in a particular field. The environmental statistics are staggering, too.

In Wisconsin, for example, local rivers and tributaries have been dropping rapidly due to all of the extra water consumption – millions and millions of gallons. One local farmer in my farmers network says that he has lived in one location for 60 years and has never seen the lake near his farm so low. He says the local ethanol plant is talking about having water "shipped in." You have got to be kidding!

So what does all of this mean for us as investors? Plenty!

The days of cheap oil are already with us, and by adding certain key energy stocks to the OI portfolio, we, in essence, have a hedge against higher oil prices. We need to consider doing the same for food in our portfolio. I will tell you that in my own portfolios, I do have exposure to soybeans, wheat, corn and all the soft commodities. And they have done very well for me – as well as for our Resource Trader Alert members. In addition, stocks that will continue to benefit from rising food costs and global demand are companies like John Deere, Caterpillar, Monsanto, DuPont and The Andersons.

There is no doubt in my mind that oil prices will continue to go much higher, however. Eventually, when they get too high (that may be when oil is $600 per barrel), we may finally have a car that runs on switch grass, but clearly, this will not happen anytime soon. The difference between food and fuel is there is never going to be an alternative for food. We all need to eat, and there is no substitute. Did you ever chew on a piece of switch grass? I rest my case. The time to protect your portfolio from rising food costs is now. The days of cheap food are over.

Regards,

Kevin Kerr
for The Daily Reckoning
March 20, 2008

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

Yesterday, the world had a chance to take a better look at the Fed’s latest rate cut…

"Yecch," it said. And so "Hell Week" continued.

Despite the Fed’s intervention, in both London and New York the cost of money for most borrowers actually went up.

"Fed cuts fail to lower 30-year mortgage rates," notes the Los Angeles Times. At the long end of the yield curve, rates are determined more by fear of inflation than by the Fed’s price fixing. Thirty-year fixed-rate mortgages have gone up from 5.6% to 6.4%.

But even at the short end, where the Fed is pressing its fat thumb on the scale, "Money market rates rise as banks hoard cash," says a Bloomberg report.

The banks are holding onto their money because they figure they might need it. That’s what everyone does in the opening stages of a credit contraction. They’re afraid that if they lend it out…they will later discover that the borrower can’t pay it back.

Yesterday brought news that two big borrowers had gotten whacked. Endeavor Capital lost 28% trading Japanese bonds. And poor John Merriwether! Almost exactly 10 years ago, the man’s Long-Term Capital Management went broke. Now, the news tells us that his bond fund has just taken a 24% hit.

And Britain’s biggest mortgage lender – HBOS – denied rumors that it is having liquidity problems.

The Fed giveth.

Mr. Market taketh away.

It’s "the Great Unwind," says Citigroup. What is being unwound is the ball of debt, derivatives, speculation and outsized asset values all over the world.

The Dow fell yesterday – down 293 points. Commodities got whacked hard too. Oil lost nearly $4 a barrel. Gold dropped to $945. And copper – which tends to be an indicator for the whole economy – seems to have topped out.

In terms of our ‘battle’ between inflation and deflation, yesterday, deflation won.

*** In spite of all the bad news, Hell Week hasn’t really been so bad. It’s more like Purgatory or Limbo…or a halfway house after coming out of state prison.

The headlines speak of a worldwide financial crisis, but so far, the effects of this crisis are extremely limited. The OECD reports that unemployment around the globe is only 0.3% higher than it was a year ago, the same figure U.S. unemployment has risen during that period.

Aside from panicky capital markets, some areas don’t seem to be suffering at all. Latin America, Asia, the Gulf, and Africa all seem to be growing, with no significant economic effects – at least, not yet.

The Financial Times summarizes the outlook for the world’s major regions:

In the United States, people wonder how hard the landing will be.

In Europe and Japan they wonder whether the landing will be hard or soft.

In the rest of the world, they ask whether they will have a landing at all.

America’s central bank is now lending money at about half the rate of consumer price inflation. A borrower can take the money and almost certainly make money. If nothing changes, he’ll pay back money worth less than the money he borrowed…or, he can put it on deposit in Britain at twice the yield…or in Brazil, where he’ll get 5 times the yield.

The lower rate is intended to encourage borrowing. Whether it also encourages consumer spending, hiring, and capital investment is another whole group of questions with very uncertain answers. If the answer is yes…you can reasonably expect further inflation in the commodities markets…rising stock prices…and a positive GDP growth. If the answer is no…you can expect higher unemployment, falling stock and housing prices…and probably falling commodity prices too.

While yesterday was clearly a ‘no’ kind of day…there is no guarantee that every day will be a ‘no’ day.

Another way to look at this is a way long time Daily Reckoning sufferers will recognize: it is our familiar battle scene…with the heavy cavalry of inflation charging the steadfast infantry of deflation.

While that picture has fairly well described the financial world for the last year or so…we think it is time to add a complicating feature. It is as if a third army has appeared on the field of battle…of unknown size…and unknown intentions. So let us review the battle lines.

On the one side, is the familiar force of a credit cycle downturn…believed, by us, to be the beginning of a major contraction in the credit market. These things are big. The last big force in the credit world was the expansion that began in 1980. Obviously, it lasted for 25 years, perhaps a bit more. That expansion seems to have come to an end. Yields are about as low now as they were when the last expansion began…and probably turning up.

That "probably" is an important word. Recently, yields have been going down, as investors sought safety from default over safety from inflation. Looking for protection in the treasury market seems to us a bit like looking for veracity in the U.S. Congress…and we suspect that when things settle down, investors will realize they’ve made a mistake.

"The credit crunch is rapidly morphing into a credit collapse," says Harvard’s Kenneth Rogoff. "The same factors that propelled the housing bubble are now spinning in reverse. And there’s no bottom in sight."

On the other side, of course, is the other familiar force – inflation. It’s what you get when you favor the production of ‘money’ over the production of the things it is used to buy. Inflation is clearly driving up some prices. Oil is holding over $100. Gold has been on a tear for 8 years. Rice just hit a 32-year high. CNNMoney reports that inflation is Americans’ number one concern.

Meanwhile, keeping our pict-o-rama of the world’s financial scene before us, with inflation on the left, deflation on the right, down the center comes a huge, disorganized, polyglot collection of fighters – lean and hungry – emerging markets, oil producers, former Soviet republics…the bric-a-brac of humanity.

While deflation knocks down commodity prices – these emerging economies are buying them as fast as they can.

While inflation is pushing up automobile prices – they’re making new cars for only $2,500.

While deflation cools the U.S. economy – these third world economies are still heating up.

While inflation squeezes aging, middle class families in the West – in the East, millions of young, new families are becoming middle class, bursting at the seams with new consumer demand.

What will happen when these three armies collide?

We don’t know…but we’re watching…

*** Mentioning 1998 brings back memories. That was when people still believed the promise of the dotcom era. They thought new technology and capitalism would make them all rich. They ran up prices on Wall Street in anticipation.

And then we came up with a hypothesis: that when the tech bubble burst, the U.S. economy would sink into a long, slow Japan-like slump. With Addison, we wrote a book on the subject – Financial Reckoning Day – arguing that central bank wizardry might be able to stop inflation, but it had never proven that it could cure a deflationary slump. Even a bad central banker can stop inflation, if he has the backbone for it. The reason for this is almost too obvious; central banks can stop inflation because they are the ones who create it.

But deflation is the markets’ revenge…and central bankers have never shown they can stop it once it gets going. That is what we learned from the Japanese in the ’90s. You can use all the fiscal stimulus you want…and all the monetary stimulus too. It doesn’t mean the economy is going to pick up.

We’re beginning to think we were right in Financial Reckoning Day. Or almost right. Yes, dear reader, we said that after the tech bubble popped, the U.S. economy would enter a long, slow slump, a al Japan. Obviously, we were too early…there was one more big bubble still to go – in residential property. But now that that bubble has come and gone, here we are again – possibly facing another Japan-style funk.

*** "It’s no secret: Homebuilding stocks have performed horribly," says our colleague Dan Amoss. "Most are 60% or 70% below their highs. A few regional builders are in the low single digits, drowning in debt and heading to zero."

"But stocks never move in a straight line. The sector has enjoyed a massive short covering rally since late January. Most are up 40% or more in a few weeks. This gives us a good short selling opportunity.

"Homebuilding bulls are hoping for a quick housing market recovery, because they need one for the stocks to have a sustainable rally. This spring, as selling season kicks off, you’ll start hearing ‘affordability’ arguments from housing bulls in the media. I suggest ignoring them.

"Housing bulls fail to appreciate how the easiest mortgage environment in history magnified every homebuyer’s purchasing power. They also focus on monthly payments in a 5-6% mortgage environment, without incorporating the burden of falling house prices. Incomes and 5% mortgages can support housing prices in many areas of the U.S., but not in areas like Las Vegas, Phoenix, and most of California and Florida.

"Measured over a full boom-and-bust cycle, homebuilding is not a great business. Even at the peak of the housing bubble, most builders’ operating profit margins maxed out at 15%. This business is capital-intensive and requires a rising house price environment to thrive. The most aggressive homebuilders loaded up on raw land at inflated prices and levered their balance sheets with visible and hidden debt. Now most are liquidating inventory as fast as possible, even at steep losses.

*** What are they putting in the water in New York? Has no one any sense or dignity?

First, Eliot Spitzer confesses to a mortal sin and resigns his post as governor of the state. Then, his replacement goes before the cameras to make a similar admission – even before he’s accused of anything.

Then, it gets even tawdrier. His wife, for no apparent reason other than to frolic in the sewer with the two governors, revealed that she too had done things that would make her eligible for death by lapidation in other countries. But this is New York, remember. She’ll probably go on Oprah instead.

And, as if all this weren’t absurd and pathetic enough, we discover that New York’s new governor and his wife went to the Days Inn on upper Broadway and 94th Street in order to bring more excitement to their married life. The Days Inn?

At this point, your editor notices his stomach seizing up…and beginning to convulse. He doesn’t know whether he is going to laugh, or be sick.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Food For Thought originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

My grandmother Oget Palm was just a little girl when my family was scheduled to sail from Europe to New York in 1912. Her parents (my great-grandparents) and her siblings were prepared to make the trip from Gothenburg, Sweden, where they lived. They were scheduled to be in the steerage compartment – as all immigrants were – aboard the newest and "safest" ship on the sea, the RMS Titanic.

It’s funny how fate can change so many lives. Just before the trip from Sweden, my great-grandmother contracted rheumatic fever, or what they used to call consumption. Nobody is really sure. She was only 33. Sad to say, she died.

But there is another side to the story. The family was delayed from sailing to America as they mourned their loss. Thus, they missed sailing on the Titanic. And everyone knows what happened to the Titanic. To make a long story short, I am here today and writing to you only because of my great-grandmother’s death. If my family had sailed on the ill-fated White Star Liner, they would probably have drowned. Almost all the immigrants remained locked in steerage as the Titanic sank.

Later on, my grandmother and her family sailed into New York Harbor on a different ship. She remembered gazing at the Statue of Liberty. I returned with her in 1997, and we walked through Ellis Island together. We even found her name in the book they used to categorize everyone who came through, an experience that is truly chilling. Back then, everyone was processed at Ellis Island and made their way to the places where they had relatives. Typically, the Swedes and Norwegians went to Minnesota, and that’s how yours truly ended up being born there.

At the base of the Statue of Liberty is a plaque with a poem called "The New Colossus":

Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!

I tell you all this because I want you understand that I have a great deal of gratitude for the ability of my family to immigrate to the United States. And I happen to like this poem a lot, too. Unfortunately, the fact of the matter is times have changed and the United States, and even the planet, cannot sustain so many people.

The light that burns twice as bright burns half as long. And America has burned very brightly for a long time. As the resource battles begin to heat up, we are already seeing where some of the major battle lines will be drawn, and it’s not a pretty picture.

The simple fact of the matter is the world’s resources – not just oil – are dwindling faster than a fallen pop princess’ career.

While shortages of key industrial and energy commodities are frightening, no other sector will threaten global stability more than agriculture.

It seems ironic that as global population is reaching an all-time high, we are turning at least half of our crops into ethanol or biofuel. This is a questionable, if not idiotic, alternative that clearly does as much damage as good. While the short-term impact is obvious, the longer-term ramifications for agriculture on a global scale could be devastating.

In 2007, we saw stark glimpses of just how bad this situation will get. The "Tortilla Crisis" in Mexico, the "Pasta Protest" in Milan (I happened to be there for that one), the riots and crushing of one supermarket shopper in China over cooking oil…we have seen dairy, meat and bread prices skyrocket.

The idea of food inflation is new to many Americans, who are used to prices for food being only about 13-16% of income. Back when my grandmother got off the boat in 1912, they were more like 45%.

The facts of life are not always pleasant, but the truth must be told without all the politically correct, wish-upon-a-star answers. The U.S. is blessed to be one of the nations with some of the best agricultural land on the planet. From sea to shining sea, we have cropland as far as the eye can see. For years, the bounty of the land has been a supermarket for the world; now it’s a fuel station, too. China, which has hundreds of millions more hungry mouths than we have, has far less arable farmland. And worse, China has far fewer controls in place to regulate farming methods.

In recent years in the United States, the number of immigrants has swollen. The porous borders continue to attract newcomers as if it were still 1912. Here in the U.S., a lot of people still think that America can still absorb a massive influx of immigrants from all over the planet who are poor, tired and hungry. And while that is nice, romantic thinking, the fact of the matter is we cannot.

Now, I would hate for us to change the plaque on Lady Liberty to "Bring us your well-fed and rested, employable and intelligent," but the truth is maybe we have to.

As investors, we must look at this situation as an opportunity for our portfolio. First of all, I suggest if you have some extra land (condo developers and house flippers, listen closely), grow a vegetable garden, and if you are ambitious, raise some sheep and cows, because they will come in handy. A little more practical and with less bunker mentality is to add stocks of some of the key agricultural companies that help support the industry, like those dealing with equipment making, fertilizer, irrigation and transport. These are the names you always hear, like John Deere, Monsanto, Caterpillar, etc.

These companies will do well for the same reasons drillers and equipment maker stocks do so well when the energy markets are surging. The same thing applies to these agricultural-related companies. Agriculture is in a serious bull market right now, one that is not likely to end anytime soon. Now, none of these is an official Outstanding Investments recommendation, but take a long look at this sector. I think you will see the picture is clear why this is a smart sector in which to have at least some exposure.

My grandmother may have missed the Titanic, and figuratively, I hope we all do too. But keep in mind that our ship (the USS America) is sailing in uncharted waters and we had all better get smart fast. Really, the food supply is stretched and getting stretched thinner and thinner. There are only so many lifeboats, and unfortunately, that’s the new reality. Increasing population and rising demand for scarce resources mean that there is a big iceberg ahead. So man your stations.

Regards,

Kevin Kerr
for The Daily Reckoning
March 11, 2008

P.S. You won’t want to miss the boat on the offer that we’ve been cooking up for you: a lifetime subscription to all of our services that target the commodities and natural resource universe. That’s Outstanding Investments (which I co-edit with Byron King), my own Resource Trader Alert, and Byron’s Energy & Scarcity Investor.

We’re calling this package deal The Resource Reserve, and if you sign up, not only will you be raking in major gains with all three of these services, (Resource Trader Alert alone yields success rate of 83.02% in the rowdy world of commodity options) but you’ll get first crack at our newest stock and options research service that would focus in on profiting from the boom in precious metals – free of charge.

Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

Financial stocks are getting whacked. With good reason. Merrill Lynch (NYSE:MER), for example, wrote off nearly half its book value in the last half of last year. UBS (NYSE:UBS) wrote down 40%. Morgan Stanley (NYSE:MS) a quarter. And no one knows where it will stop.

"The leading players in the greatest credit expansion of all time were the financial companies," we explained to Elizabeth on our way back from Geneva. "They were the debt mongers. They made their money by leveraging up the entire world – from people living in trailers on the outskirts of a godforsaken town in the middle of nowhere…to the masters of the universe themselves in Manhattan and London. Now that the world is de-leveraging itself, it’s only natural that the financial industry takes the biggest hits."

Yesterday morning alone, Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) – who played a starring role in the leveraging spectacle – saw their own stock marked down. The companies lost some $4.5 billion worth of capitalization before lunch was served.

And you remember Blackstone (NYSE:BX)? The private buyout firm was so much in demand during the boom times that even its founders decided it was time to sell – to the public. You may recall; we were suspicious. The idea of Private Equity was that the hotshots could outsmart the public markets. It was an idea completely at odds with Modern Portfolio Theory, which holds that price movements are random; therefore it isn’t possible for a Private Equity firm to beat the public markets for long. If they seemed to do so, it was just, well, a fluke.

MPT was always a fraud, but it more than a little cheeky on the part of Blackstone to pretend that it could beat the public markets while at the same time becoming part of them. If they could really outperform the public markets, we wondered, why would owners ever want to sell? What could they do with the money? And if someone who actually could outsmart the public markets offered to sell you a piece of his business…shouldn’t you be a bit suspicious? Unless you’ve got some pretty racy photos that you’re planning to show to his wife, it makes no sense. Obviously, the seller has a better idea of what he’s unloading than the buyer does of what he is getting – especially if he’s such a great judge of investment value. Wouldn’t it be like challenging a world master to a game of chess, in which you were blindfolded? Wouldn’t the buyer likely be the loser?

Well, as it turned out, the buyer was a chump. People who bought Blackstone shares when it went public last June have lost 55% of their money.

Of course, it’s not just Blackstone that is getting beaten up. The whole capital structure is getting hammered. "Margin calls pummel hedge funds," says one headline. "Peloton [a prominent hedge fund that seems to be going bust] puts its offices up for sale," says another.

Meanwhile, Japanese financial regulators say direct losses from subprime troubles have risen to $215 billion. One estimate says they’ll grow to $1 trillion before it is over.

While the geniuses are taking their lumps so are the lumpen. That is, ordinary homeowners are being beaten up too – not only by falling house prices and high debt, but by rising consumer prices.

Yes, dear reader. This is a two front war. In the middle, the middle classes are taking incoming from two directions. The value of their main assets – houses and their own labor – are being deflated, while their cost of living goes up. In terms of oil, gold, Swiss francs, euro or pounds – Americans earn substantially less per hour than they did 5…10…or even 30 years ago. And they own less of their houses too. Americans’ percentage of equity in their homes has fallen below 50 percent for the first time on record since 1945, the Federal Reserve said last Thursday.

But while they have less…and earn less…they still have to pay more. Gasoline is up to $3.20 a gallon, we reported yesterday…and oil hit more than $107 a barrel today. The dollar lost more ground too; it appears to be heading for $1.55 to the euro (EUR) this week.

Producer prices are shooting up too. The PPI rose to 6.6% in China. And in Britain it’s at a 17-year high.

"Consumer gloom as spending power fails," says the headline item in the TIMES of London today.

The Fed is fighting back, of course. But it’s turned its guns only in one direction – against deflation. Inflation can run wild.

Investors have figured out what is going on. They’re still buying U.S. Treasury bonds, but now they favor the TIPS – bonds adjusted to inflation. TIPS have been bid up so high that they now produce a negative yield. That’s right, yields have fallen below zero…indicating how eager investors have become to protect themselves from defaults and inflation. Nothing is less likely to default than a U.S. Treasury bond…heck, the feds print the money used to redeem them. Ah, there’s the catch – they tend to print too many, which results in inflation. As long as the inflation was going into house prices and stocks, no one complained. But now, housing and stocks are going down – while consumer prices rise. These TIPS provide protection from both enemies – inflation and deflation. The feds won’t default. And the TIPS adjust to losses in consumer purchasing power – as calculated by, well, the feds themselves. But so great is the demand for this kind of protection that investors are willing to give up all hope of a current yield in order to own them.

*** Gold provides no yield either. All you get is asset protection. But with gold reaching up towards $1,000…and making huge gains every year…you might wonder why investors don’t favor gold over treasuries. We wonder too.

But imagine that you have a bill to pay…or a liability of some sort…also denominated in dollars. You don’t know how much the dollar will be worth when the bill comes due, but you know you can cover it with dollars. Gold, on the other hand, poses some additional uncertainty. While the price has doubled and doubled again since its bottom in 1999, you never know.

Gold doesn’t always go up. Sometimes its goes down. And after it has run up so sharply, it is reasonable to expect a correction. The price could go down 20%…or even 30%…before it resumes its upward march.

If that would worry you…don’t buy it. If, on the other hand, you want a way to preserve your wealth over the long term – even if it means giving up current yield and possibly taking a 30% capital loss sometime in the next year or so – gold is the ticket.

The price of the yellow metal will probably go to $2,500 before this bull market is over. If it goes down to $700 or so before – well, we’ll just wait it out, happy to be holding gold, rather than say, shares in Blackstone which went down 55% already…or shares in a hedge fund that may disappear altogether…or an extra house with a stopped-up toilet.

Our advice remains unchanged. Sell stocks on rallies. Buy gold on dips.

This is not advice for speculators, however. We offer no guarantees as to what either stocks or gold will do this year or the next. All we know is that we have faith in our fellow human beings. Given an opportunity to make a mess of things, they will. And nothing gives a richer opportunity than a pure paper money monetary system. One day, when the dollar is utterly worthless, gold will still have value.

And even though the price of gold has left our typical buying price in the dust, there is still a way that you can get gold on the cheap – for literally a penny per ounce. Our friends at Outstanding Investments have all the details…

To sweeten the deal for you a bit, for a very limited time, you can get all of our commodities and natural resources services – for life. That’s Outstanding Investments, Resource Trader Alert, and Energy & Scarcity Investor. And if you get into the Resource Reserve before midnight on this Thursday, March 13, you can get our brand-new service, Gold & Options Trader – for free.

But only if you sign up before midnight on March 13. After that, the doors of the Resource Reserve are closed. Learn more here…

*** Yesterday, the Wall Street Journal said the United States was probably already in recession. Comes anecdotal evidence from a Dear Reader in New York:

"A friend who works at United Stationers – one of the larger office supply companies – tells us that there’s a noticeable slowdown. People are being given days off with no pay, etc."

*** And here is our new friend David Fuller of Fullermoney with an insight:

"Despite China’s dependence on the ailing US, its economy continues to charge ahead. Recently, it was announced that China’s real GDP grew by a fantastic 11.2% in 2007. There is no doubt that China’s economy is booming and in 2007, its trade-surplus doubled when compared to a year earlier. Moreover, retail sales in China have been growing at 14% per annum for many years and in the past 12 months, total sales reached almost US$1 trillion. Interestingly, the number of US Dollar billionaires in China jumped almost 10-fold in the past year from 14 to 106 individuals. All of the above leads me to conclude that the Chinese consumer will be an extremely influential factor in the years ahead.

"Elsewhere in the region, India’s economy is also growing rapidly with real GDP growth clocking in at roughly 9%. Its industrial production has slowed down somewhat in the recent past but production of capital goods continues to soar.

"As far as the Asian region’s dependence on the US market is concerned, Singapore, Hong Kong and Malaysia are the most exposed to the American consumer. Their exports to the US are equal to roughly 20% of their GDPs, compared with only 8% in China and a miniscule 2% in India.

"Due to the slowdown in the West, exports to the US from Singapore and Malaysia have declined by roughly 15% from their peaks. Yet, it is worth noting that both these nations’ total exports have still managed to grow by 6% due to surging exports to Europe and the other emerging nations. This data suggests to me that we are slowly but surely moving away from a US-centric world."

Until tomorrow,

Bill Bonner
The Daily Reckoning

Shutting the Golden Door: No Room at the Inn originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

MARKET REVIEW: IS ETHANOL RUNNING OUT OF GAS?

Driving through the U.S. and being invited to several family farms over the last week or so has been enlightening, and fattening. At each stop, I got an earful of insight and knowledge on several topics, as well as a delicious piece of rhubarb pie and coffee. It’ s one thing to read about the ethanol debate and the challenges for farmers, and quite a different experience to actually meet and talk with them and walk around the fields. That’s exactly what I wanted to do.

I set out on my driving journey two weekends ago, and it has so far taken me to farms and ranches in six states and two countries. In candid interviews with various grain and dairy farmers, ranchers, workers at ethanol plants, etc., over the last week or so, I have gained new insight into what the future may hold for us as commodity investors.

Ethanol from corn has been a mixed blessing for farmers, and those that got in early have done well. In Minnesota, where I grew up, they have 16 ethanol plants and five more under construction. When the ethanol boom started, most ethanol plants were created by a formation of a co-op of farmers in the local area. Many still are run this way. Obviously, each of these farmers has a vested interest in the plant, as it’s where they take their grain to be processed into ethanol and taken to market. That all started back when corn was around 2.50.

The new plants that are being built today are mostly not co-ops but “private equity,” and the cost of these plants has skyrocketed. Of course, corn is now 4.00 a bushel. Farmers are concerned that simply can’t last. The farmer-owned ethanol plants are already moving into other alternatives, like biofuel made from soybeans.

The concern is that while much of the nation has a mandated 10% ethanol mixture with unleaded, it may not be enough demand to sustain all of these new ethanol plants. Supporters point to the E85 ethanol as the potential wild card; others doubt its realistic impact.

E85 ethanol is up to 85% ethanol and offered only at a few stations, almost exclusively in the Midwest. Automakers have been very slow to create a vehicle that is solely powered by E85, and they cite engine damage and sluggish performance as reasons why.

At one of the truck dealers in Waseca, Minn., near where I visited a farm, I saw some flex-fuel and E85 vehicles, but not many. It seems obvious that if these cars aren’t selling like hot cakes here in the heart of corn country, they are going to take a very long time to catch on in New York.

The corn-based ethanol craze is probably not being shown the door, but may be getting handed its hat. The costs for farmers in mounting food inflation is creeping up quickly: seed costs, fertilizer, fuel, irrigation, transport and leasing of acreage, etc. Costs of renting acres (for farmers who lease the land) have doubled in only a year. Most farmers I spoke with on my trip say it simply will reach a breaking point. They’ve seen it before.

In the commodities arena, corn has still probably got some room to the upside into 2008, but our gears will be shifting in RTA to look at soybeans, as biofuel seems to be getting much more interest and is likely a much more viable alternative. The other market that could be a real sleeper here is sugar.

The sugar market has been beaten down so badly and is in a significantly oversold position right now. As a key ingredient in ethanol from Brazil, as well as a food product, sugar is a commodity that should be at a much higher level right now. Yet temporary surplus supply has taken the price lower. That won’t last.

The ethanol craze almost seems like a game of musical chairs, and before the music stops, we will want to grab whatever profits we have on corn and move on to the next hot commodity.

Kevin Kerr
for The Daily Reckoning

P.S. From the organic dairy farm in Black River Falls, Wis., to the family grain and hog operation in Waseca, many conversations and pieces of rhubarb pie later, I feel very educated and plan to share all my knowledge with both my Resource Trader Alert and Outstanding Investment readers in the coming few weeks.

Meanwhile, Byron is off in Alaska, digging up more juicy information in our never-ending quest to bring you the best insights to make Outstanding Investments.

And, for a very limited time, you can get Resource Trader Alert, Outstanding Investments AND all of the other newsletters and trading services Agora Financial has to offer – for life. We only offer this exclusive membership twice a year…and this is the last time we will be offering the Reserve at this very low price.

— The Daily Reckoning Book of the Week —

Demise of the Dollar…and why it’s great for your investments
by Addison Wiggin

The DR’s own Addison Wiggin spent over a week in the #1 slot on Amazon’s bestseller list – knocking Harry Potter to number two. He then showed up on Barnes and Noble’s bestseller list and debuted on The Wall Street Journal’s Business bestseller list at #8!

The logical next step was for the book to get on the New York Times bestseller list…which it did, sitting strongly at #5!

The Demise of the Dollar examines the reasons for the dollar’s slide – including the nation’s historic trade deficit, the euro, government spending habits, globalization, and other international factors – and offers an up-close look at the Federal Reserve’s attempts to “manage” the dollar’s value.

To purchase your copy, see:

The Demise of the Dollar

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THIS WEEK in THE DAILY RECKONING: Every wondered how the Motor City became Murder City? Bill Bonner explores the rise and fall of Detroit in Friday’s essay, below…

The Life and Death of Great Cities                                    06/01/07
by Bill Bonner

“Once upon a time, Detroit was one of the world’s great English-speaking cities…but those days are long gone. Bill Bonner takes a look at the rise and fall of Motor City, below…”

The End of Dollar Hegemony, Part I                                     05/31/07
by Hon. Ron Paul of Texas

“In a speech before the U.S. House of Representatives, Congressman Ron Paul stated that the United States’ dollar dominance is coming to an end…and when this paper money runs out, wealth and political stability is lost. You can read the first part of his speech, below…”

A Flood in the World Markets                                     05/30/07
by Dr. Hans Sennholz

“Some people never learn from the past – and are doomed to make the same mistakes over and over again. Our Federal Reserve exemplifies this, as they continue to direct the credit expansion, which not only has turned housing into a large bubble and rekindled the stock market, but also has given rise to a voluminous foreign trade imbalance. Dr. Hans Sennholz explains…”

Alas, The Demise of the Dollar                                     05/29/07
by Addison Wiggin

“The greenback is in a sorry state of affairs, down against most major European currencies. This weak dollar trend looks like it is nowhere near wrapping up, and below, Addison Wiggin details how a declining value of the dollar has far-reaching effects. Read on…”

Fighting Off Cynics With Golden Gloves                         05/28/07
by The Mogambo Guru

“Given the rather direct tone of our dear Mogambo’s weekly musings, it is no surprise that he gets a certain level of equally, er…direct responses. This week, he rebuts one of these emails with the derisive wit that he is known for – and you won’t believe who it’s addressed to. Read on…”

———————

FLOTSAM AND JETSAM: In a speech before the U.S. House of Representatives, Congressman Ron Paul stated that the United States’ dollar dominance is coming to an end…and when this paper money runs out, wealth and political stability is lost. You can read the second part of his speech, below…

The End of Dollar Hegemony, Part II

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient.  Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars – due to their depreciation – will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble – generated by easy money – has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability.  Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged – as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein – though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries.  Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war.  Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony – it’s dominance as the world reserve currency – is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources – we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.

Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.

Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more.  The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system – like Iraq, Iran and Venezuela – become targets of our plans for regime change.

Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.

But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically.  That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.

It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.

The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.

But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.

Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.

And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros.  The sooner the better.

Regards,

Congressman Ron Paul
for The Daily Reckoning

Editor’s Note: You can read the first part of Dr. Paul’s speech in Thursday’s issue of The Daily Reckoning

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the “one exception to the Gang of 535″ on Capitol Hill.

To learn more about Dr. Paul, see here:

Congressman Ron Paul

Is Ethanol Running Out of Gas? originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.

OVERCOMING THE FEAR FACTOR

Early in my career there was one area of trading that I avoided like the plague – options, or options on futures, to be precise.  I thought they were too complicated, too expensive, too risky. It took me a long time to learn that all my fears were misguided. In fact, options have ended up being the most profitable part of my trading by far.

Now, I was no math maven in school. I’ve struggled since Mr. Richardson’s 6th grade math tests, especially the five-minute one. (I still wake up in a cold sweat over that one.) Let me tell you, his math tests kept me after school many a day and destroyed any interest in math that I may ever have had.  All through the rest of my academic life I always did exceptionally well in vocabulary, reading, and writing, but stunk at math in all forms except geometry, which my brain confused with drawing. Still, to this day, I’m a terrible mathematician and rely on all the modern-day conveniences, like accountants.

Anyway, if you spent a lot of time after school for math as well, then you may think you’re not able to trade options. Think again.

Some options books can be mind-boggling, with complicated mathematical equations and lots of detailed explanations that would mystify even Einstein, all to try and explain a simple concept.

We won’t go into great detail here; there are plenty of resources for that on the Internet or in your local bookstore. All you need to do is understand the basics of options and how they can immediately benefit your portfolio in ways you couldn’t imagine. Right about now you’re probably saying, “OK, how?”

? Options limit risk and give you unlimited profits.

? Options give you tons of leverage in an already highly leveraged market.

? Options can allow you to trade markets you may not otherwise be able to afford to trade due to extremely high margins (e.g., natural gas, gold, crude oil).

? Options limit risk and give you unlimited profits. Worth repeating this one.

Before you do anything, you simply must learn the basics of options, there are no two ways about that – even the Maniac Trader had to succumb at some point! Forget your fear – if this 6th grade math dropout can do it and be consistently successful, so can you.

So let’s begin.  A “call” option is what we buy when we think the market is going higher; a “put” option is what we buy when we think the market is headed lower. Either way, the goal is the same: to make money from the difference between the strike price of the option and the current market rate of the investment. Right now we’ll only discuss buying options.  Buying options, either puts or calls, involves limited risk and unlimited profit potential. You can sell options, also called “writing” options, but this carries with it limited profit potential and unlimited risk. Selling or shorting options is highly risky; if you’re new to trading and even if you’re not, many brokerage firms won’t even let you do it.  So let’s just focus on buying calls and puts.

When we buy a call or put we have to pay what is called “premium.” Premium is a fancy way of saying what you’re going to have to fork over for the option position. You can calculate what a fair premium should be in many ways, but at first it’s best to work with a broker who has experience in calculating what a fair value for the option is; get them to help you learn how to do it and don’t take no for an answer.

Most of the time you can find out where the option that you want to buy is trading just like you can get futures quotes-in the newspaper or on the Internet. If not, your broker can call the floor and get a fresh quote, much as they may do with spread orders. It’s a good idea anyway, because sometimes there are so many options they don’t all get updated and the price information on the screen may not be the most current. Always check first before trading.

Now I’ve gotten ahead of myself a bit.  Why exactly am I buying an option in the first place?  Why not just buy a cattle futures contract if I think it’s going higher? Great question. Answer: Two B-I-G advantages.

The first huge advantage is that when you buy options you’re not required to put up any margin.  Nope…zip, zero, nada.  In other words, for something like cattle futures you would need to put up around $945 per contract as a guarantee or margin, and that money would remain locked up for the length of the trade. If you were to buy a cattle option instead, you would not have to post the margin at all, and could use that $945 toward other trades or simply keep it liquid. This is one of the greatest attractions of trading options: not tying up capital with margins.

Second, options allow you to control a vast amount of a particular commodity at a ridiculously low price. Leverage again – we love leverage! As you know, futures allow you to do this, but to a much lesser extent. Also futures carry unlimited risk as I pointed out earlier, while the risk in options is limited to just the premium you pay, nothing more.  Now the trick is finding bargains in options and knowing what the risk/reward potential is. This is where many traders come unstuck.

Make no mistake, there are plenty of blunders people make when it comes to options, but a few really stand out and I’ll share them with you now.

First, chasing the market doesn’t pay. Never, never, never do this.  This holds true even more so for options than for futures.  Chasing after a trade in a market means you’ll end up paying too much or selling for too little. In options trading this can mean the difference between consistently making and losing money.  Remember, options have an intrinsic value when you purchase them and the time value is always whittling away.  The option is constantly depreciating, like some new car from hell. So avid overpaying for an option at all costs – it will be even harder to turn a profit when it comes time to close the position.

Time is on your side…don’t buy options with too little time value.  Time value is one of the most important things in options, and for that asset you have to pay more premium, but it can be worth it. The more time you have on your side the more chance your trade has of making money.  Buy too close in, say one or two months, and you may not have enough time until expiration for any real price movement. I don’t advise trading options with less than three months until expiration or more than 18 months.

Remember: “cheap” doesn’t always mean good. Also, stay away from way out-of-the-money strike prices. Way, way out-of-the-money strike prices for commodities may be cheaper but the old saying, “you get what you pay for” usually applies.  If the option is so far out-of-the- money, say in heating oil, that it will take an ice-age to get to that price level, then “cheap” is a relative term.  Try to buy a strike price that’s only slightly out-of-the-money unless you feel very strongly that the market is going to make a significant move in your favor; then you want to buy deep, way out-of-the-money options, as they’re called.

There are plenty more pitfalls. And as important as knowing what not to do is learning what you should do to get a decent entry point for an option, which I will discuss next time. Stay tuned…

Regards,

Kevin Kerr
for The Daily Reckoning
April 26, 2007

Editor’s Note: Kevin Kerr is the editor of two highly successful and acclaimed financial advisory newsletters, Resource Trader Alert and Outstanding Investments. A veteran commodities trader, Kevin uses his irreplaceable experience to advise his readers on a variety of commodities investments on a daily basis. Widely considered one of the nation’s top commodities gurus, Kevin’s expert opinions are routinely featured in the country’s premier media outlets.

The above was taken from Kevin’s newly-released book, A Maniac Commodity Trader’s Guide to Making a Fortune. In the book, Kevin dispels the common myths and misconceptions about these markets, offering an insider’s view of what he calls “the last bastion of pure capitalism on Earth.” Whether you’re a novice or an experienced trader, Kevin’s down-to-earth, clear-cut guidance will make you more savvy, more confident, and more able to jump right in and grab those profit opportunities that are waiting for you.

Two important milestones were reached yesterday.

The Dow climbed over 13,000 – a new world record, noticed by all.

Meanwhile, ignored by almost all, the dollar (USD) sank to its lowest level ever against the euro (EUR).

Of the two, the latter we consider more interesting. For the decline of the dollar – against euros, gold, and financial assets generally – undermines Americans’ wealth even as they see themselves living in the lap of prosperity. The decline of the dollar could also push forward the day on which the world’s big holders of the greenback look at their piles and begin to worry that they have a trillion or two too many. At that point (which we have been attending for so long we often forget what we are waiting for) you should see some real excitement in the world’s investment markets.

The most obvious consequences will be a further sell-off of the dollar, sparking an increase in U.S. dollar-yields. This, in turn, would disrupt millions of financial decisions, making lenders more wary and borrowers more prudent.

That there is still ample room for movement – towards wariness on the part of the former, and prudence on the part of the latter – is demonstrated in today’s International Herald Tribune. Yes, dear reader, the mainstream press is finally catching on to the imperial trend we spotted years ago – towards widespread, commonly accepted fraud. Today it is ‘fraud for housing.’

“Loans that require little or no documentation of income soared $276 billion, or 46 percent, of all subprime mortgages last year, from $30 billion in 2001,” says IHT. Now, these ‘liars’ loans’ are defaulting at eight times the rate of regular, fully documented prime mortgages.

According to the paper, many of the buyers didn’t even know they were lying about their income; the mortgage brokers lied on their behalf, inflating income figures in order to get the loans through the approval process.

“I saw account executives openly engage in conduct such as altering borrower’s W-2 forms or pay stubs, photocopying borrower signatures and copying them onto other, unsigned documents and similar conduct,” said a witness.

But the FBI is not on the case. The G-men aren’t interested in ‘fraud for housing.’ They’ve got bigger fish to fry – people who lie to get multiple mortgages with no intention of paying them back, known as ‘fraud for profit.’

And don’t expect the local DA or politicians to go after the small fish either. There’s nothing in it for them – no glory…no votes…no path to higher office.

Instead, they will move to ‘protect’ the hapless victims of mortgage fraud – in many cases, the very same people who lied to get loans. Every era produces its own special variety of fraud; and every great, shining fraud is followed by paler imitators. Typically, borrowers get themselves into trouble; and then the politicians thunder about ‘debt relief’ or a ‘moratorium’ on foreclosures.

From Grant’s Interest Rate Observer, we learn that in the midst of the Great Depression, many debt relief measures were passed. One of them was a clear interference with the right to contract, and was challenged in the U.S. Supreme Court. The Supremes affirmed the state’s power to meddle, saying it was justified by the economic emergency. But Justice George Sutherland, who was writing for the dissent (but who might have been writing for the Daily Reckoning), expressed the view shared by all economists who aren’t idiots – both of them.

“The present exigency is nothing new. From the beginning of our existence as a nation, periods of depression, of industrial failure, of financial distress, of unpaid and unpayable indebtedness, have alternated with years of plenty. The vital lesson that expenditure beyond income begets poverty, that public or private extravagance, financed by the promises to pay, either must end in complete or partial repudiation, or the promises be fulfilled by self-denial and painful effort, though constantly taught by bitter experience, seems never to be learned: and the attempt by legislative devices to shift the misfortune of the debtor to the shoulders of the creditor without coming into conflict with the contract impairment clause has been persistent and oft-repeated.”

But in the contest between the sanctity of contracts and debt relief, the forces are badly mismatched. For every creditor trying to get his money back, there must be thousands of debtors armed with voter registration cards, determined to stop him.

More news:

————–

Addison Wiggin, reporting from Baltimore, where spring has finally sprung…

“‘Our country has a fine future, economically,’ Warren Buffett recently told us in a rare interview. In 2003, Mr. Buffett penned a now infamous article for Fortune Magazine called Thriftville vs. Squanderville. The piece outlines the dangers inherent in the historic trade imbalance the US has with China. We’re animating the story for a documentary we’re filming on Americans and their love affair with debt. Buffet granted us an interview for the film. And, we have to say, we were surprised by some of his remarks.

“The Oracle is a productivity bull!”

To find out what else Mr. Buffett had to say – and for more insights into today’s markets, check out the inaugural issue of The 5 Min. Forecast

————-

And more views…

*** Something has been missing from our lives. Yes, it’s been weeks since we’ve had a good laugh. So, we turn to the editorial pages of the International Herald Tribune to find our favorite comic, Thomas L. Friedman, a man who wants to make a better world, in the worst possible way.

We used to enjoy reading his columns. You could always count on him to come up with such a damned fool idea, on any subject, that it would have been an embarrassment to a jackass. But what intrigued us was trying to figure out how the man thought – or if he thought at all. When we explore Friedman’s oeuvre we feel we are probing down clumsily, like a neurosurgeon with a kitchen knife, into the softest mush of the human brain. How does it work, we wonder?

Friedman is no idiot. He writes in complete sentences. Somehow he has gotten a gig not only as a columnist for America’s most prestigious newspaper, but as a semi-serious author, and celebrity speaker at business functions.

(His success has not made us jealous; it has only made us suspicious. We wonder what the rest of the world must be thinking if it can take Friedman’s ruminations seriously.)

It was Friedman, we recall, who pushed hard for the United States to invade Iraq, and who then described U.S. troops (the most lethal attack force the world had ever seen), as ‘nurturers’, and who, like midwives, were helping to deliver a baby democracy in the Mesopotamian desert. Then, when the war went bad, he blamed the Bush team, urging them to send yet more armed nurturers and spend even more money. It was he, too, who blamed terrorism on high oil prices; and he still urges the United States to ‘go green’ as a way to promote ‘reform’ in the Middle East.

The man has a plan for everything. That is what makes reading him so funny. He cannot seem to appreciate that the world is a product of many thousands of generations’ worth of evolutionary adjustments, compromises, and innovations that he could not possibly hope to know about…nor can he imagine that there is any situation – no matter how remote or complex – that his own little mind cannot improve.

Thus does he urge America’s voters to insist upon a “Green Election” in 2008. We won’t bother with the inane details (such as having a college student question the candidates because “young people will be the ones most affected by global warming”); What is appalling is the desperately shallow earnestness of it. Why would a college student have any more insight into global warming than anyone else? And why, if voters are so interested in global warming, don’t they ask the candidates themselves? How is it possible for an intelligent Homo Sapien to write such obvious hooey?

What we are beginning to suspect is that there is something wrong with the brain itself. In spite of all its pretensions to logical thought, the thing is barely functional. It will believe anything.

*** Ooh la la…now the old British rock band, the legendary Spinal Tap, has joined the fight against global warming. The group was initially known as The Originals, until it found out that another group had that name, whereupon it changed its own name to the New Originals. The band has just recorded a new song, says the TIMES of London; it is entitled “Warmer Than Hell.”

Spinal Tap was never a popular band. But it was on its way to mediocrity when its drummer, John “Stumpy” Pepys, was killed in a bizarre gardening accident. Nor is this the band’s first attempt at world improvement. The lead singer previously set up a charity called ‘On Your Toes,’ intended to help people with ‘high insteps.’

*** And this from Paris:

“Darling, I felt like telling you not to come home this week,” said Elizabeth by phone.

Marital tension? Connubial strife? Was our vacation really that bad?

“No…no…it’s just that the apartment is such a mess.”

“What? Didn’t the painters finish?” we asked.

“Finish? They didn’t even start. They must have walked out the door the minute we left for the airport. It is amazing; this country is supposed to have one of the highest unemployment rates in Europe, but it’s almost impossible to get anyone to do anything. We’re going to have to live for weeks more in this dust and mess. I don’t know if I can take it.”

We don’t mind the mess; but we’re not sure we can stand the expense. We saw nicer apartments in Buenos Aires selling for one-tenth the cost. In fact, we stayed in a splendid apartment, overlooking the broad avenue, on the 9th of July Avenue. That apartment is much nicer than our digs in Paris, and it would cost less to buy the place than it is costing to fix up our place in Paris.

Of course, we have no way of knowing, but we wouldn’t be surprised if prices between the two cities converge. Lower in Paris; higher in Buenos Aires.

“Maybe we should just move to Buenos Aires,” we ventured.

“Okay…now I really don’t want you to come home. It’s because of you, moving us around, that we’re in this mess.”

Overcoming the Fear Factor originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas.