Shutting the Golden Door: No Room at the Inn

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. Kevin Kerr explains…

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.


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…

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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

The Daily Reckoning