Mr. Market Moonwalks Toward Deflation

Gold is in a bull market. Stocks are in a bear market.

That is all ye know…and all ye need to know.

Stocks are being driven down by the market, in a natural, ordinary, inevitable correction.

And gold is being driven up by the central banks’ attempts to stop it.

Buy gold on dips. Sell stocks on rallies.

Simple enough, don’t you think?

No guarantees, though. Mr. Market can do what he wants. And if he wants to set off in the opposite direction, there is nothing we can do, here at The Daily Reckoning headquarters, to stop him.

All we can do is look out the window and see what direction he is heading now.

But what’s this? Is he doing the moonwalk? What bedevils so many investors and commentators is that it’s hard to tell which way he’s going. Mr. Market is clearly marching towards deflation – notably in the prices of houses and stocks. But the feds have a line on him. They’re pulling him in the opposite direction – inflating gold, oil and food prices. Which is it – boom or bust? Inflation or deflation? Prosperity or poverty? The combination of opposing ideas seems to rattle most observers. They can’t tell whether Mr. Market is coming or going. But here at The Daily Reckoning, we take ambiguity as comfortably as gin.

To the question: what’s it going to be, boom or bust? We answer: Yes. Both.

On the bust side, Martin Feldstein, says the coming recession could be “nasty,” unless the feds take decisive action. He wants “aggressive” rate cuts backed by fiscal policy too – say, a tax rebate – to stimulate consumer spending.

Forget it, says Forbes. By the time the feds figure out what to do the recession will be already upon us. It will be too late to stop it.

The BBC says the United States is already in recession. And Congress is out of session for the holidays.

But suppose the pols were already in Washington, with their fat derrieres in their comfy leather chairs and their pudgy, payola-stained fingers at this very moment ready to vote for more zany, FDR-style relief. What exactly could they do?

Well, they could give taxpayers back some of their money…thereby increasing consumer purchases. Well, yes, they could do that, couldn’t they? And they could get Ben Bernanke on the phone and pressure him to cut rates…and open up the central bank vaults so that the voters had more money and credit. Yes, they could do that too. And what would be the effect of all this new money and credit (created ‘out of thin air,’ for there is nowhere else it could come from)? Would it not create an even greater sense of urgency among gold buyers?

But our guess is that Forbes is right in the first place. The feds can’t stop a slump. All they can do is react to it. And their reactions are likely to lead to higher inflation levels.

Meanwhile, a bear market in stocks is underway. Whether it is an entirely new phenomenon…or the long-awaited continuation of the aborted bear market that began eight years ago…we don’t know. But stocks are going down.

Maybe – if the feds were able to inflate fast enough – the bear market in stocks could still be turned around. And maybe – if the economy goes bust fast enough – the bull market in gold could be arrested. But one way or another, with Mr. Market pushing so hard in one direction…and the feds pulling so hard in the other, either gold is going up…or stocks are going down.

One or the other…something’s gotta give…probably both.

*** The future in a single word: downsizing. Downsizing is going to be popular, hip, cool, fashionable and sensible. People are going to be proud of their small houses…their small cars…their low-impact vacations…and their modest spending.

More than that…people are going to turn against money. Yes, you heard that right. Lucre is going to be filthy again. No, we’re not going to explain…just remember our words.

Last week, in the International Herald Tribune, we saw a photo of a town that had been burned and destroyed in Kenya.

“Yes, there’s almost a civil war going on,” explained a lawyer we met yesterday. “I lived for many years in Kenya. There are different tribes there who don’t get along with each other. Barack Obama’s father is from Kenya. It’s his tribe that does most of the killing.”

But what was remarkable about the photo was the caption beneath it: “Investors hope calm will soon be restored.”

Today, practically every story is a money story. The casual reader is expected to be interested not in the fate of the people…the wailing of widows…the political evolution of the country…the religious or tribal aspects…the effectiveness of the local fire department…the rhetorical appeal of the local demagogues…or anything else. The reader’s primary concern is thought to be the money angle. “Gee, now that Kenya is in flames,” he supposedly thinks to himself, “maybe I should move my 401k money out of the All-Africa Fund.”

Speaking of downsizing, India’s Tata Motors (NYSE:TTM) just downsized the family car. Yesterday, it took the drapes off its new Nano – which it has put on the market for just $2,500. The photo makes it look like a slightly stretched Smart Car. Not bad really. As far as we know, the vehicle is only for sale in India, but if it were on the lots in the United States, we predict that it would find plenty of buyers. The little can gets 50 mpg.

*** Want to invest in India? Our colleague Chris Mayer says the best place to put your money is in hotels. Orlando, Florida, has more rooms than all of India, he says. And room rates on the sub-continent are actually higher than comparable hotels in New York or London.

“Unfortunately,” writes Chris, “there is no way for you as an investor in publicly traded stocks to do that.”

“At Capital & Crisis, we will pass on India for now, but I’m watching it carefully. Indirectly, of course, what’s happening in India affects the price of nearly everything in financial markets from the price of oil and sugar to the price of iron ore and grains. Plus, many of the companies in our portfolio are already working in India.”

Click here to see Chris’ portfolio, and to find out how you can get two free reports that show you how to place an automatic cash cushion under every investment you make:

“Catch-up” Stocks That Erase Years of Falling Behind

*** Our London colleague Merryn Somerset Webb has written a book for women: Love is Not Enough: A Smart Woman’s Guide to Making (and Keeping) Money. The book has been a big hit in England, with sensible advice on everything from credit ratings to credit crunches. It’s now available in paperback; just follow this link:

Love is Not Enough

Back in the U.S.A, meanwhile, old friend Michael Masterson, has a new book out – Ready Fire Aim. It’s taken the number one slot on Amazon already. When it comes to starting businesses and making them work properly, Masterson is the best…in fact, he’s the real brains behind our own publishing business.

Here’s the link to find out more about his new book.

Ready Fire Aim: Zero to $100 Million in No Time Flat

*** Our vacation…continued:

“You fell off a horse,” said a colleague in London.

“No, we wouldn’t put it that way,” we replied defensively. “Falling all implies carelessness or incompetence. We didn’t fall off. We were launched off…we were catapulted off… We went up in the air before coming down. We weren’t passive about it.”

It took a couple of days to recover.

Our next sortie was by truck, on springs and pneumatic tires. This time we were meant to go to Cafayate, a town about two and-a-half hours away, where we were going to meet a developer, and perhaps buy a building lot near a golf course.

One truck was not big enough for the entire family, so we took two. Your editor drove the lead truck. His son, Jules, who just got his driver’s license from the sovereign state of Massachusetts in October, drove the second one. The gravel road winds around hills, goes up through mountain passes and down along riverbeds. We drove for about two hours. During that time, we probably encountered two or three other vehicles, coming in the opposite direction. The odds of being in exactly the same place at exactly the same time as an on-coming car were vanishingly small. Still, that’s exactly what happened. Jules came around a turn…and there…was a Volkswagen! On the loose gravel, it was impossible for him to correct his position fast enough to avoid the other car. Or, more accurately, it was impossible for either of them to avoid a collision; so the Volkswagen ran into the side of Jules’ truck.

By the time we realized that we were no longer being trailed by the other truck, and returned to the scene of the accident, a middle-aged lady was already sitting beside the road, nursing an injured leg…and Jules and the other driver were already exchanging paperwork.

No one wants to have a traffic accident in a foreign country. Still worse is an accident in the middle of nowhere…far from any telephone service…tow trucks…or ambulance services. Still, your editor had with him one of the incredible Iridium phones – which works from anywhere on the planet (or so they advertise). He was able to get in touch with the local authorities and call them to the scene.

We were all waiting by the side of a very dusty road…under a very hot sun.

The couple in the other car were agreeable enough. The man was short, dark, about 60 years old, wearing a wife-beater T-shirt. The right side of his mouth bulged out, from a wad of coca leaves. He talked. But he talked fast, and with a Buenos Aires accent that we found difficult to follow.

Around the bend in the road was an adobe house, so simple and modest, we wondered if it was a house at all. It sat in dust, was covered in dust, and received a new coat of dust every time a car went by. In front, was an old car, covered with a tarpaulin. And under the shade of a makeshift porch, was a very brown, Incan-looking woman, with long, straight dark hair and skin like a western saddle. She was working with what appeared to be plastic balls, about six inches wide, each with dozens of pods sticking out from the center.

“What are those?” we asked.

“They’re onions.”

“They don’t look like onions.”

“No, they’re not the kind you eat…they’re seeds. They’re the seeds from onions. I’ll plant them soon and grow onions.”

Across the road was an oasis…a green valley, shouldered in between dry brown hills. In the valley, we could see a plot of land that looked as though it had been tilled – it must have been her garden plot. There were also fruit trees – including the largest fig tree we have ever seen…and what looked like a small corral, made up of crisscrossed logs, which was empty.

About an hour after we placed our call to the emergency services, an ambulance arrived. The medicos packed up the woman, chatted briefly with her husband, and took off. No one was particularly concerned about her…least of all her husband. She had what appeared to be a bruise on her leg and walked over the ambulance herself.

Then, the police arrived.

Again, the driver of the other car began talking. He talked to each of the police. The lead cop was a cute woman in her early 30s. She took notes.

“It is pretty obvious what happened,” we told her. “I don’t think there is any dispute about it.”

No one had any dispute about anything. Still, we had to wait…and wait.

We studied the two vehicles. Our truck had its drive shaft knocked loose. It was immoveable. But the other car merely had a flat tire and a dented fender.

“Why don’t you just change the tire,” we suggested to the other drive. “I’ll give you a hand. And then, at least you can continue your vacation.”

“No…we’ve got to wait. We have to have the car towed away. Otherwise the insurance company may not cover it. They may say I damaged it by driving it. And besides, we have to wait for the ‘recriminalistas.'”

“The what?”

“The recriminalistas…they need to take measurements and do a report.”

Another couple of hours went by.

Finally, the recriminalistas came…including a big man in civilian clothes, whose shoulders slouched, and who seemed to be in charge of everything.

More statements were taken. More time passed.

The recriminalistas got out their measuring tapes. They took their measures…carefully documenting the position of the cars, drawing detailed pictures.

“But you need to know where they were before we moved them,” said the man with the coca leaves in his jaw.

“What do you mean, ‘moved them?'” answered the Argentine Kojak.

Jules and the other driver looked at each other.

“Well, we couldn’t leave the truck in the middle of the road, so we pushed it to the side,” said Jules.

“Oh for Pete’s sake…we’re wasting our time,” said the head man.

He and his team mounted back into their squad car and drove off, down the dusty road. We turned to the policewoman who remained.

“What now?” we wanted to know.

“We just have to wait.”

“What are we waiting for?”

She gave no reply.

More to come…

Until tomorrow,

Bill Bonner
The Daily Reckoning
London, England
Thursday, January 10, 2008

The Daily Reckoning PRESENTS: If you live in a city, you’re probably familiar with exhaust from diesel engines. Buses and heavy trucks that constantly spew black clouds of pollutants into the air you breathe all require diesel – a fuel likely to keep rising in price. But there is good news about high diesel prices… Read on…

by Dan Amoss, CFA

High diesel prices promote investment in alternatives. It makes sense to replace diesel engines with natural gas engines in many applications. So several companies and cities are remaking their truck and bus fleets to run on natural gas. Waste Management operates a fleet of nearly 500 gas-powered trash trucks. Several cities are shifting their bus fleets to gas; 20% of all new transit buses on order have natural gas engines. This is a viable, rapidly growing industry and a few companies will benefit.

Clean Energy Fuels (NASDAQ:CLNE) is one of these companies. It’s leading the charge to promote natural gas as a transportation fuel. It builds the infrastructure necessary to store and dispense natural gas at fueling stations. It’s also backed by billionaire investor T. Boone Pickens.

Pickens is a great energy investor. He made his fortune investing in oil and gas. He’s often been right about the big picture in energy, spotting trends long before the crowd. Today, he expects a future in which oil and diesel prices remain very high and consumers will use natural gas to fuel many more types of vehicles. He controls 60% of Clean Energy’s stock, a stake worth $400 million. That’s a big bet, even for a billionaire.

But there’s one big hurdle to his vision. Pickens knows the U.S. natural gas market as well as anyone, and he says he expects it will remain tight. Domestic gas drillers are working as fast as possible to meet demand from power plants, chemical plants, and homes. A growing fleet of natural gas-powered vehicles would propel natural gas demand to another level, spurring huge investments in liquefied natural gas (LNG).

Most of the world’s natural gas reserves are located far from major population centers. When gas is too expensive to transport by pipeline, it’s called “stranded” natural gas. The only way to get stranded gas to market is to cool it until it reaches a liquid state and transport it on ships designed to carry LNG.

Pickens’ vision of the future, along with continued global growth in gas demand for industrial uses, sets the stage for a massive boom in LNG infrastructure. Douglas-Westwood, a leading industry authority, forecasts investment in the LNG supply chain to grow dramatically over the next four years and beyond.

The importance of natural gas extends well beyond its role as an emerging transportation fuel. It’s a vital feedstock in electricity and chemical production. Synthetic nitrogen fertilizers, which use natural gas as a feedstock, greatly enhance agricultural productivity. Other chemical compounds created from gas are the building blocks for electronics and plastics. Gas is also becoming a popular fuel for home heating. Natural gas furnaces are much more efficient than oil or electric heat furnaces. Without natural gas, many businesses would simply have to close their doors. Reliance on natural gas is a weak link in the global economy.

Because of its importance, governments and industrial companies will keep favoring policies that secure reliable natural gas supplies. Since the industrialized world no longer includes just North America and Europe, many more countries have entered the competition to lock up the most promising stranded gas reserves.

For decades, LNG has not been cost competitive with oil and coal. But continually rising oil prices are heightening the sense of urgency to develop a tradable LNG market. Also, climate change activists will keep pushing to tax, regulate, and eventually banish coal. This benefits LNG because natural gas electric power plants can replace coal plants. The financial and political incentive to develop the world’s stranded gas reserves is strong and growing. Energy companies are responding.

Even Exxon Mobil (NYSE:XOM) – a consistent optimist about plentiful future oil supplies – doesn’t assume the United States has enough domestic natural gas to meet growing demand. “Energy independence [within 20 years] is just impractical, and we will have to rely on additional imports of natural gas,” says Ron Billings, Exxon’s vice president of Global LNG.

The Wall Street Journal recently reported on Exxon’s plans to build a huge LNG re-gasification terminal 20 miles off the coast of New Jersey:

“Exxon said it expects demand for gas to rise in North America, outstripping the ability of gas drillers and producers to keep up. Globally, it said, LNG demand could more than triple, to 500 million metric tons a year, in 2030, from 150 million metric tons a year today. About 20% of gas consumed in North America could be imported by then, up from 3% today.”

Like the U.S., China produces almost enough natural gas to meet its needs. Both countries rely on LNG to satisfy the extra 2-3% of domestic demand not met by local production. China’s use of LNG is small, but it can grow dramatically. China is an underserved market. It’s consuming as much gas as its limited pipeline and LNG capacity will allow. Supply constraints and high costs force many Chinese provincial markets to use coal for electricity when they’d rather use gas.

Residents of Beijing and Shanghai would certainly prefer gas-fired power plants to the coal-fired plants currently ruining air and water quality. Until now, China has constructed coal-fired plants at a maddening pace simply because they were cheap. But the health costs resulting from coal-based pollution are growing to a critical level. As Chinese wealth grows, the country will look to secure a leading position as a consumer of LNG – much in the same fashion as Japan. It may be more expensive, but China will weigh the extra cost of gas over coal against the benefit of lower health care costs and better social stability.

Chinese land drillers are pushing very hard, yet still cannot satisfy demand. China’s onshore oil and gas basins are fairly mature. State-controlled oil companies have been scouring the country for decades. Offshore drilling may eventually bring more gas supplies online. A few promising underexplored basins exist in northwestern China. But the pipelines necessary to deliver this gas to coastal cities will take years and tens of billions of dollars to build.

Chinese leaders have signed long-term gas supply agreements with the leaders of Turkmenistan and Kazakhstan, two Central Asian countries endowed with plenty of untapped reserves. But Gazprom, the Russian gas monopoly, also wants access to these reserves. The pipelines required to transport this gas would be very expensive and risky from a geopolitical perspective. The Chinese would probably find it easier to safeguard LNG supplies sourced from emerging exporters like Qatar, Malaysia and Australia.

I expect China will increasingly turn to LNG to satisfy growing natural gas demand. But it must compete with the rest of Asia, the U.S., and Europe to invest in the most promising LNG projects. Many European countries are looking to diversify away from politically risky Russian gas supplies. They’re investing in LNG projects that strengthen connections to longtime suppliers like Algeria.

Since natural gas provides the building material for so many modern products, its consumption grows as living standards improve. According to the BP Statistical Review, the entire Asia-Pacific region consumed just 3% of global natural gas in 1975. This figure expanded fivefold, to 15%, by 2006, and this trend should continue on its current course.

Japan was the first Asian country to invest heavily in LNG facilities. After suffering through the oil market disruptions of the 1970s, Japanese leaders decided it was wise to diversify supply of hydrocarbons. South Korean gas demand accelerated from a low base as its industrial machine matured in the 1990s. There’s an interesting aspect about the natural gas market in these two economic powerhouses: Neither of them has a viable domestic gas resource. They both rely on imports. Japan relies on LNG for 97% of its gas and South Korea relies on it for 100%.

Japan consumed 39% of the world’s LNG supply in 2006. South Korea came in second, at 16%. Both countries have a huge stake in LNG, so they will keep expanding their LNG re-gasification and storage infrastructure. LNG equipment companies have the opportunity to meet this demand over the long term.

Recent events have caused Japanese LNG demand to accelerate. Japan suffered a powerful earthquake in July 2007. It reignited fears of radiation leakage from nuclear power plants, forcing the shutdown of a major nuclear reactor. Ever since the shutdown, Japan has had to make up for the lost electricity with gas-fired power. Utilities have been importing as much LNG as storage facilities will allow, paying premiums of about 50% over benchmark U.S. natural gas prices.

After this scare, it appears that the Japanese government is rethinking its commitment to new nuclear reactors. In a recent research note, Bernstein Research described this important policy shift, which remains below the investment community’s radar screen:

“As a result of new [Japanese government] guidelines, nuclear plant operators will now have to analyze seismic events over a 130,000-year period, in stark contrast to the current mandated 50,000-year period. Geological faults screened to be active… would nullify greenfield site proposals, and could lead to closures of operating nuclear capacity…”

Nuclear power supplies 30% of Japan’s electricity. Regulators may delay or cancel some of the 10 gigawatts in new nuclear capacity slated to come online by 2015. If this happens, Japan’s LNG and gas-fired power facilities must expand.


Dan Amoss, CFA
for The Daily Reckoning

P.S. Investment in LNG facilities is accelerating worldwide, and this month’s recommendation dominates the LNG equipment market.

It is a unique company that has a head start in building this infrastructure. Relative to its growth potential, it’s cheap. I think you could make 50% by mid-2009 – more as the years go by. Find out more in this month’s issue of Strategic Investment.

Editor’s Note: Dan Amoss, CFA is managing editor for Strategic Investment and a contributing editor for Whiskey & Gunpowder. Dan joined Agora Financial from Investment Counselors of Maryland, investment advisor for one of the top small-cap value mutual funds over the past 15 years.

Dan brings to Strategic Investment the unique experience of an institutional background and a drive to seek out the most attractive investments within favored “big picture” trends. He develops investment ideas for SI readers with a global network of geopolitical and macroeconomic analysts. Dan holds the Chartered Financial Analyst designation, a professional designation widely recognized within the investment community.

The Daily Reckoning