Put Your Crash Gear on For This Soft Landing

The Daily Reckoning – Weekend Edition
October 28-29, 2006
Baltimore, Maryland
by Kate "Short Fuse" Incontrera

VIEWS FROM THE FUSE: PUT ON YOUR CRASH GEAR FOR THIS SOFT LANDING

If you are like us, you have probably been a little confused by all the contradictory statements we’ve been getting lately about the current state of the U.S. economy. Just take a look at these headlines from this past Thursday and Friday:

"Greenspan Sees A Soft Landing"… "New Home Price Plunge Biggest Since 70"… "The Bubble-Proof Economy"… "Economy Weakest in 3 Years"…

Hmmm…hard to decipher what’s really going on, no? Well, why don’t we ignore the headlines and just look at the facts…

First up, housing. The mainstream press has finally acknowledged that we may have had a tiny bubble in the housing sector on our hands, but most refuse to believe that this will have a major effect on the economy. And why should we even worry? The Maestro himself, Alan Greenspan, announced – good news! – we are out of the woods as far as housing is concerned.

We weren’t aware that we had even fully entered the woods yet, but according to Greenspan, "Most of the negatives in housing are probably behind us. It’s taking less out of the economy."

These comments from the lovable ex-Fed head came right after a barrage of data pointed us in the opposite direction. In September, new home prices took their biggest hit since 1970, tumbling 9.7 percent from last year. Not only that, but home sales have slipped for the sixth straight month.

Since everyone and their pizza delivery boy seems to have purchased a home in the past few years, homebuilders are having a pretty tough time unloading new homes, despite all the incentives they are offering.

And unfortunately, foreclosure rates are soaring all over the nation. Subprime borrowers are having a hard time keeping up with their payments due the interest rate hikes of recent months. In addition, Lou Barnes, a mortgage banker with Boulder West Financial Services in Boulder, Colorado, reports, "Overbuilding has dampened price appreciation, which has contributed to high foreclosures in those areas because homeowners have less equity and aren’t able to sell quickly."

But not to worry. Greenspan assures us that "A lot of people are going to lose their homes. It’s a family tragedy. It’s not an economic – or macroeconomic – tragedy."

Well, let’s see. Has housing really had any effect on the economy? CNNMoney.com reported on Friday that the economic growth slowed to the weakest pace in more than three years in the third quarter, as GDP, the government’s main gauge of the strength of the economy, came in much lower than analysts had forecast.

The Commerce Department reported that GDP grew at 1.6 percent in the third quarter, down from the 2.6 percent rate in the second quarter. This weaker growth was partly due to a rising trade gap (which subtracts from GDP), as well as the cooling housing sector and weaker consumer spending.

Even so, some economists are arguing that the "threat" of a housing slowdown has been exaggerated (not by your friends at The DR, of course…we hate hyperbole).

"It’s a bee sting, maybe a couple of bee stings," said Robert Brusca of FAO Economics. "Yeah it hurts, but there hasn’t been the allergic reaction many feared would cause worse problems."

While many argue that housing has hit the bottom already, via a ‘soft landing’; here at The Daily Reckoning, we think we still have a ways to fall. Of course, we don’t have a crystal ball, but we would get the crash gear on – just in case.

Short Fuse
The Daily Reckoning

P.S. Our advice to you, dear reader: steer clear of investing in anything that has to do with housing…or stocks for that matter. Dr. Richebacher, who was once described as "the man who predicted the Asian crisis," won’t touch either sector with a ten-foot pole…but he does have some suggestions of the most profitable places to put your money to end 2006 with a high note.

— Daily Reckoning Book Of The Week —

Hot Commodities: How Anyone Can Invest in the World’s Best Market
by Jim Rogers

Commodity investing has gotten a bad rap. Everyone seems to have heard of someone who "lost his shirt" trading commodity futures. What are commodities? Commodities are "things," the essential raw materials that go into making everything from bread to automobiles. This includes foodstuffs such as sugar, wheat, soybeans, and coffee; the fossil fuels crude oil and natural gas; and industrial materials such as lumber, copper, lead, gold, and silver. As a group, they typically do well when stocks are doing poorly, and vice versa. But unlike stocks, the price of commodities can never go to zero.

Rogers, known for his world travels, his ability to size up any market, and his contrary approach to investing, says we are in the beginning of a multiyear bull market in commodities. Although he is promoting his new commodities fund, he makes a very good case that commodities belong in any balanced portfolio, particularly now. Rogers walks us through the sometimes obscure language of commodity trading, and shows us how to get involved without "losing our shirts."

THIS WEEK in THE DAILY RECKONING: The Federal Reserve opted to not raise rates for the third month in a row this week…what exactly does that mean? Two of our essays, from Dr. Richebacher and Puru Saxena look to answer just that. Find them below…

Iwo Jima      10/27/06
by Bill Bonner

"Clint Eastwood’s latest film, Flags of Our Fathers, tells the story of the men who raised the stars and stripes on Mount Suribachi at Iwo Jima…and the three of them who survived. Bill Bonner explores the amount of courage – and sheer stubbornness – displayed in World War II…"

Restructuring the U.S. Economy – Downward 10/26/06
by Dr. Kurt Richebächer

"After yesterday’s announcement that the Fed will not be raising rates for the third straight month, everyone assumes it’s because the economy is in such great shape. But Dr. Richebächer recommends that Americans remove the rose-colored glasses to see the U.S. economy for what it really is…"

Endless Creit-Creation   10/25/06
by Puru Saxena

"The Fed decided to hold rates steady today, pausing for the third consecutive meeting so they can determine the direction of the U.S. economy. But will inflation behave without the Fed heads stepping in? Puru Saxena explores…"

India Rising   10/24/06
by Charles Sizemore

"The dawn of the Information Age has allowed, among other things, India’s economy to flourish – while providing the West with a seemingly never-ending supply of skilled workers at a fraction of the price it would cost at home. Charles Sizemore explains…"

Minimum Wage Wins Nobel Prize   10/23/06
by The Mogambo Guru

"If you are tired of listening to the Mogambo scream and scream and tell you how important it is to pad your portfolio with gold and silver…too bad. Because he’s doing it again. Read on…"

FLOTSAM AND JETSAM: There is plenty of money to be made in the commodities market…even in sugar. Jim Rogers shows us that if you put sugar to work for you at the right time, not only your morning beverage, but your profits will be a bit sweeter…

SUGAR HIGH

When I was one of the lone voices talking up commodities and China heading into the new millennium, I ran into much skepticism among the press. The writers, reporters, and anchors around the world, the so-called business media who ought to have known better, were more likely to raise an eyebrow or even turn hostile when I wanted to talk about oil, lead, and sugar more than about the "next big thing" in stocks.

Occasionally, I like to tease these media types. During one breakfast interview in a Paris hotel, a congenial writer from a French business magazine who was much more eager to discuss the falling dollar and the surging euro-for obvious reasons (Vive la France!) asked me what I would recommend for an ordinary investor like her. I plucked a wrapped sugar cube from the bowl on the table and handed it to her. She looked at me as if I had gone mad. "Put this in your pocket and take it home," I advised, "because the price of sugar is going to go up five times in the next decade."

She laughed, eyeing her sugar with skepticism. I told her that the price of sugar that day was 5.5 cents per pound, so cheap that no one in the world was even paying attention to the sugar business. I reminded her that when sugar prices last made their all-time record run-soaring more than 45 times, from 1.4 cents in 1966 to 66.5 cents in 1974-her countrymen were planting sugar all over France. She nodded-"Supply and demand," she said – and pocketed her sugar. But I suspect that she has not put any of her money where her mouth – or her pocket – is.

No one had for years, which, of course, was my point. Sugar prices were so low for so long that it was the last business enterprising souls around the world would be likely to enter in the 1990s and early 2000s. If you are an ambitious young farmer in Brazil (or Germany or Australia or Thailand, also major sugar producing nations), do you choose to produce sugar at 5.5 cents a pound or soybeans, which closed 2003 near $8 a bushel, a six-year high? Even in the U.S., which has its own protected domestic sugar market at two to three times the world price, only the most efficient producers are surviving.

The History of the Sugar Market: Another High Likely

Sugar has had its boom times in the past – that 1974 record, and another spike in 1981 during the last bull market in commodities. And if I’m right and we’re in another long-term bull market in commodities, we’re likely to see another sugar high. Historically, nearly everything goes up in every kind of bull market, whether it’s company shares, commodities, or apartments on Park Avenue. And with world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong. To those of us who have been here before, it is promising to note that similar supply and demand imbalances are shaping up that could push sugar prices upward over the next decade.

The prices of a commodity usually move for a good reason, and the savvy commodities investor must be familiar with past trends and have an eye out for new ones, along with potential glitches, fundamental changes, and anything else that might affect the price of sugar. Between 1966 and November 1974, sugar made the astonishing climb, from 1.4 cents to 66.5 cents.

How do sugar prices go up more than 45 times? By the end of 1972, there had been four straight sugar seasons with record crops. Yet consumption actually outpaced supplies in 1972, literally eating into sugar inventories over the next year. The 1973-74 sugar season began with extremely tight supply conditions worldwide; demand continued to rise. There was evidence that some big industry users were stockpiling sugar in anticipation of higher prices. Soon people were grabbing sugar off the shelves in armloads to offset rising prices. Others were grabbing cubes off restaurant tables for home use. Dinner guests were arriving with five-pound bags of sugar instead of the traditional bottle of wine or bouquet of flowers. Even people who had never given the sugar futures markets a moment’s thought knew something was up when they walked into the local coffee shop and noticed that the sugar had vanished from the table. Quite simply, global demand for sugar had exceeded supply, and before long the price of sugar headed for the roof.

The History of the Sugar Market: Why So High? Competing Theories

Everyone had a theory for the high prices. Sugar traders had no idea where prices might be when the U.S.’s long-standing price supports expired at the end of 1974; some blamed the high prices on a "scarcity of cheap labor to harvest sugarcane"; others pointed to the failure of the European sugar-beet crop. Others even suspected that both the Soviet Union, which had just suffered two bad production years in a row in its own sugar crop, and "Arab oil money" (remember that oil crisis of the 1970s?) had moved into the sugar futures markets, along with a rise in speculation by others looking to make money from rising prices.

Significant, too, was the fact that Americans had come to see cheap sugar as a birthright. Even those consumers (and food and beverage companies) who might have turned to the newest artificial sugar substitute, cyclamate, and thus decreased demand, quickly returned to the real thing when the FDA pulled cyclamate off the market in 1969 after reports that it might cause cancer.

Over the next few years, companies put sugar back into their products, boosting demand. U.S. consumption did not slow down much until September 1974, when the reality of high prices finally kicked in. Soft-drink prices increased and candy bars got smaller. But before the White House published the "Presidential Proclamation" of 1975 protecting U.S. sugar producers with the same duty rates and establishing a global quota for sugar imports into the U.S., prices were heading back down.

By December 1976 and January 1977, world sugar prices were ranging between 7 and 9 cents a pound-figures that were, according to the CRB Commodity Yearbook report at the time, "below their reported cost of production in some countries." And many, many Johnny-come-lately sugar speculators lost their money-proving, once again, the perils of rushing into a market where prices are rising 45 times, whether it’s sugar or dot-coms. The forces of supply and demand put hysteria in its place, once again.

While three straight bumper crops assured plenty of sugar in the world – prices averaged 7.81 cents per pound in 1978 – the next season saw a few glitches in the supply chain, as a result of events around the world.

For the next 20 years – during a bear market in commodities – sugar remained plentiful, with bearish prices zigging and zagging at the low end with a few minor spikes, as typically happens in bear as well as bull markets. Gradually, sugar had gone from a respectable commodity that fed the world and supported entire economies to a victim of changing fashions in diet and health: sugar was bad for you; it made you fat, it made kids hyper, and it rotted their teeth. Meanwhile, in labs all over the world chemists were looking for substitutes, preferably noncarcinogens.

In 1981, the U.S. Food and Drug Administration approved the artificial sweetener aspartame, and in a flash this newcomer replaced sugar in cookies, cakes, and other favorite snacks sold around the world. Diet colas were becoming more popular because they had less sugar, and if the sugar’s competition had not become tough enough, in 1983 the major soft-drink companies started using literally millions of tons of high-fructose corn syrup to sweeten their beverages. Bad for sugar. (But good for corn, and a great example, by the way, of how researching one commodity might turn up some moneymaking possibilities in a different one.)

By 1985, the price of sugar had made it all the way down to 2.5 cents. No one wanted to be in the sugar business. They were giving away seats on the sugar exchange at the New York Board of Trade.

Sugar prices stayed in a bear market for the next 19 years, and were still bearish that day in early 2004 when I was teaching the French business writer about her future as a sugar baroness. World production of raw sugar had reached a record level in the 2002-03 season, and the next season produced almost as much. Brazilian exports were also at a record high. That French writer had reason to be skeptical: The price of sugar, after all, at 5.5 cents per pound at the time was not that removed from the 1.4 cent figure of 38 years earlier and a lot closer to that 2.5 cent number of 1985. In fact, most prognosticators were saying, as one analyst for the Australian and New Zealand Banking Group put it at the end of 2003 in a brief report about the market that I read, "sugar prices were likely to remain under downward pressure."

So why was I, a few months later, confidently telling someone to buy sugar? Supply and demand. Of course, I was already a firm believer in the fact that a bull market in commodities was under way, and if, as I’ve noted, the history of past bull markets tells us that nearly everything makes a new all-time high, why not sugar?

Regards,

Jim Rogers
for The Daily Reckoning
October 28, 2006

P.S. Resource Trader Alert’s Kevin Kerr recently said that although sugar has been a bit wild lately, once the energy complex begins to rise, so should sugar. There is a lot of bearish talk out there about sugar, but it’s not that bleak and the funds know it.

Editor’s Note: Jim Rogers helped found the Quantum Fund with George Soros. He has taught finance at Columbia University’s business school and is a media commentator worldwide. He is the author of Adventure Capitalist and Investment Biker. He lives in New York City with his wife, Paige Parker, and their 18-month-old daughter, who is learning Chinese and owns commodities but doesn’t own stocks or bonds.