Trade of the Decade: Sell Everything, Part II

America’s economic hegemony is fraying at the edges. The “Land of the Free” is shackling her citizens to multi-trillion dollar debts that neither they, nor their children, nor their children’s children, can repay. This inconvenient reality may not cause a big problem anytime soon, but it will burden the American growth engine for decades to come.

The global financial news is not all bad, however. In the Developing World, we have some shining stars. And as an investor, I would be putting my capital there. Emerging Market economies now represent about half of world GDP and their share of world GDP is growing rapidly.

Global GDP

Brazil is one of those rapidly growing emerging market economies. Brazil was a basket case. Everyone knows that. And it still is in some ways. But it is a basket case that is improving. And the trend is your friend…at least that’s what I’ve heard.

This country is self-sufficient in many, many important natural resources, like energy, like water, etc. And it is a prolific exporter of all things agricultural and increasingly, technological, like civilian aircraft. Brazil is the world’s leading exporter of sugar, coffee, beef and orange juice. This country is so bountiful it exports just about everything…including supermodels.

Giselle Bundchen

So let’s take a look at some important economic comparisons between Brazil and the US. In 1959, Brazilian GDP was equivalent to 3% of US GDP. Fast-forward 50 years and Brazil’s GDP soars to 11% of US GDP.

The fiscal picture of Brazil relative to the US has improved even more dramatically. The trends depicted in this next chart are absolutely shocking. The yellow line is the US government’s annual budget surplus or deficit since 1999. The blue line traces the same data for Brazil. And what you see is a complete flip-flop of their respective fiscal conditions.

US vs. Brazil Government Budgets

Back in 1999, Brazil was running a budget deficit equivalent to 9% of GDP, while the US was running a budget surplus. Today the US is running a budget deficit greater than 9% of GDP, while Brazil is running a very slight deficit. (Although Brazil is running what’s called a “primary budget surplus” – i.e., a surplus before interest payments).

And not surprisingly, when you get to debt-to-GDP levels, you see the same story. US debt-to-GDP is soaring. Brazilian debt-to-GDP is falling. The picture here is very clear.

US vs. Brazil Borrowing Costs

And yet, reputations die hard. If the Brazilian government wants to borrow money in Brazilian reals, it pays roughly 12% interest per year. If it wants to borrow money in US dollars, it pays at least 1% per year more than the US government does.

I think ten years from now this chart will look dramatically different…in favor of the Brazilians. Which brings us to the long side of my trade of the decade: Buy uranium. This unique energy source is a “backdoor play” on the growth of Emerging Markets.

There are 436 nuclear reactors in 30 countries around the world. But here’s the important thing; there are over 200 new plants in some stage of planning, engineering or construction. And most of these new plants will open in a Developing World nation.

But there’s not even enough uranium coming from the world’s mines right now to supply the current power plants across the world, let alone a couple hundred more. Thus, the uranium story is really quite simple. It is a supply and demand story. There is a lot of demand and not much supply. Any questions so far?

Mined supply of uranium satisfies only about 55% of total demand. The rest of the supply comes from somewhere else. These secondary sources of uranium come primarily from old nuclear warheads. But no one really knows how this enormous supply gap will resolve itself in the future. This is what we do know: when you get a supply deficit, prices rise. And I think that will be the case with uranium.

Uranium demand is on its way to hitting 226 million pounds per year. Yet last year, the top dogs of the uranium mining industry – which make up 90% of the market – produced only about 110 million pounds of uranium.

A sidelight to this statistic is the fact that 63% of all mined uranium comes from just 10 mines. This means that the global supply of uranium is susceptible to supply shocks. If one big mine floods or goes down for whatever reason, it’ll make a big wave in the uranium market.

Uranium Prices

The current spot price is around $45 a pound. In the summer of 2007, the spot price hit $136 a pound. But the uranium price collapsed, along with many other commodities, during the credit rises. The uranium price has not yet recovered, but I believe very much that it will, as supply/demand trends start to operate on the pricing of this commodity.

One way to participate in a long-term rise in the uranium price would be to take a position in the Market Vectors Nuclear Energy ETF (NYSE:NLR). Most of the holdings of NLR are on foreign exchanges. So it’s a great way to play nuclear energy on the New York Stock Exchange, yet obtain exposure to the international nuclear market without the hassle of foreign trading.

This ETF is one of Byron King’s recommendations. So if this trade works, I’ll be back in 10 years to accept my high-fives; if it doesn’t work, talk to Byron King about it.

Thank you very much. It’s been a pleasure.

Eric Fry
for The Daily Reckoning

The Daily Reckoning