by The Mogambo Guru
This week's entry into the Most Pithy Investing Advice Contained In A
Headline Or Title contest is "Profiting From Companies That Sell What China
Wants" by Michael
Dawson of TheTimeAndMoneyGroup.com. The title says
it all!
There used to be a song that went "Whatever Lola wants, Lola gets", which
implied that this Lola chick was so enchanting that men gave her presents,
which she greedily took, and kept demanding more, which I gave her, too,
always more and more, until all my money was gone and I was forced to loot
the employee retirement fund, steal money out of my wife's purse and invent
reasons why the kids wouldn't be getting an allowance this week ("Sunspots
made the money radioactive!") so that I could give it all to her. Only her
name wasn't Lola, and in fact as I remember it, they went by various names,
none of them Lola, but the point is that
1.) This title says it all, and 2.) The case is made
when I point out that both Lola and China have
two syllables.
And, I expect, they will both end up with all my, and
our, money, and then it's, "So long, sucker!" just
like always.
If you are tired of my constant, irritating harangue to buy oil stocks, in
one way or another, based solely on my Stupid Mogambo Say So (SMSS), then I
proudly present John Loeffler, appearing with James J. Puplava on the
Financial Sense Newshour, who buttresses the "Peak Oil"
case by saying that, when looking at oil production, "If we look at the
number of countries that have peaked versus remaining, so far 64 countries
have peaked in oil production; 36 remain."
I know what you are thinking: You are scratching your chin and thinking
"Down by two-thirds? Hmmm! Maybe that Stupid Mogambo Idiot (SMI) is onto
something significant here with his recommendation to buy oil!"
And you would be right!
But if you went on to think to yourself, "Maybe that SMI is not as dumb as I
thought!" then you would be, I am sorry to say, wrong.
I'm sure you've already heard that the Bureau of Labour Standards reported
that the Consumer Price Index for all urban consumers, also known as the
CPI-U, increased by 0.3% in January. Or perhaps you heard my loud scream of
anguish and subsequent Hysterical Mogambo Violent Outburst (HMVO) at the
report; in a lot of places it made the front page!
Either way, the latest report shows that, on an annual level, the January
reading of that index, 202.4, was 2.1% higher than in January 2006.
Actually, nobody believes that inflation is really that low, and the
government has already repeatedly admitted that they hedonically-adjust
inflation statistics in a lot of different, although equally slimy, ways.
This means that inflation is well over 3%, which is a number I choose
because it is, historically, the point where smart people are panicking in
the street; where shameful government and banking officials are being
sacked, and there is turmoil everywhere - most of it being instigated by The
Mogambo, who incessantly screams, "I am your king! Bring them to me and I
shall deal with them harshly!"
But, oddly enough, everything is still calm, even though overall consumer
prices rose 0.2% for the month.
This mainly reflects that the prices of food, air travel and medical care
went up a lot. And even core inflation (which excludes food and energy
prices, so it is supposed to have a calming effect on our nerves) was up
0.3% for the month, which was NOT calming in the least.
And stepping away from sterile statistics, we get the same thing from Sprott
Asset Management when they say, "In the real world, by all indications, the
Malthusian shortages that began a few years ago with the most recent
synchronised global economic expansion are continuing in earnest as we head
into 2007. Nowhere is this more evident than in the rampant cost increases
(a.k.a. inflation) that the companies we analyse
are experiencing."
George Ure, of the famous UrbanSurvival.com site, hears us talking about
shortages, especially of the Malthusian kind, and reports that his web bots
(which are looking for Internet references to "shortage" and
"scarcity") have, "for the first time since I
started tracking, passed the 20-thousand hits level."
So, two guys have noticed shortages appearing!
Shortages are up!
If you are wearing your Expensive Junior Mogambo Ranger Watch (EJMRW), the
on-board Supply/Demand Ratio Alert is beeping right now. If it is not, it is
probably broken, and there is nothing you can do, because while the
certificate of authenticity is certainly valid, the lifetime guarantee (like
the guarantees on all Mogambo Inter-Stellar Enterprises (MISE) products and
services) is not worth the paper it is printed on.
Hopefully, you will be consoled to learn that the value you received is not
in the watch itself (for which you obviously overpaid) but in the lesson you
just learned.
But as an astute Junior Mogambo Ranger (JMR), "you don't need no stinking
watch." This, of course, may explain why sales are down (and why repeat
sales are zero), and has already conjured up a mental image of the graph of
the supply/demand dynamic, which has been adjusted to reflect the change in
the supply curve to reflect these reported shortages, and says, "Eek!
Higher prices are coming!"
Mr. Sprott sends a nervous glance over at me to see how I am taking this
news about inflation. My breath is shallow and rapid, but I am not actually
screaming in fear or even twitching visibly. Thus emboldened, he goes on to
say, "The largest companies in the world in the mining and energy industries
are all stating, with nary an exception, that the cost estimates they made a
few years back for some of their biggest projects are now grossly
understated."
Reader George P read these same remarks from Sprott, and he thought that
this line was most remarkable; "We've heard estimates by knowledgeable
sources that global money supply grew 18% last year - so shocking as to be
almost unbelievable."
And if you are the least bit conversant with the bountiful plethora of
examples in the historical record of what happens from such cancerous growth
in a money supply, then your heart is undoubtedly beating like a
trip-hammer, although you are unsure exactly why.
If you are more educated than most, and are completely familiar with what
happens, then you are naturally thinking that although you have an Uzi in
each hand, a Bowie knife between your teeth, are sitting on your weight in
gold and silver, wearing a tinfoil hat and some cool shades, you still feel
exposed and defenseless! And you need more of each!
The Mogambo reassuringly says, "That's right! It's that damned terrifying!"
Until next week,
The Mogambo Guru
for The Daily Reckoning
Bill Bonner in London:
Today...and perhaps all week...the financial markets will be shaking off the
dust from last week's tremors... toting up the damage... and wondering what
to do next.
Daily Reckoning readers already know what to do - batten down the hatches.
Hold yen, Swiss francs, gold, property you want to own whether it goes down
in price or not and private businesses with good cash flow.
"Stock markets around the world entered a second week of volatility..."
reports the International Herald Tribune. Asian stocks continued to quake
and shake yesterday, while those of Europe and America either stabilised or
registered only modest declines.
So far, the slump in equities has sopped up some $2.3 trillion in excess
liquidity. This liquidity is a form of 'inflation.' Falling inflation means
falling prices.
Yesterday, just about everything went down. Stocks, oil, copper, the euro,
and gold too. Gold fell below $640.
What went up was the yen. Because the yen is the tap that has made much of
the world's liquidity possible.
Speculators, worried that their trades are going bad, were forced to sell
off their positions in gold, Asian stocks, and so forth in order to pay back
the yen they borrowed.
"Yen surges as carry trade unwinds," is the Financial Times' headline story
on the subject.
What does it mean? How far will it go?
As usual, we don't know.
"Goldman Sachs warns of 'dead bodies' after market turmoil," is a headline
in yesterday's London Telegraph. The paper quotes Goldman's chief global
economist, Jim O'Neill:
"There has been an amazing amount of leverage on currency markets that has
nothing to do with real economic activity. I think there are going to be
dead bodies around when this is over," he said. "The yen carry trade has
reached 5% of Japan's GDP. This is enormous and highly risky, as we are now
seeing."
The yen went up almost 6% against the dollar and the euro last week.
All of a sudden, the world that looked so calm...so risk-free...so serene,
is wiggling the seismographs.
People are beginning to notice a bit of movement beneath their feet. Risks.
Troubles. Last week was just a preliminary alarm. Our guess is that most
speculators will be reassured by the financial authorities. Prices will
settle down. Speculators will go back to sleep.
Then, the real quake call will come.
"Seven years after the stock-market bubble busted, the troubles in the
housing market look strikingly familiar. In fact, everything is going
according to the textbook - the textbook in this case being Charles
Kindleberger's 1978 classic, "Manias, Panics, and Crashes," says the Wall
Street Journal.
"Mr. Kindleberger found speculative bubbles tended to follow similar
patterns. First, there is some "displacement" - such as the development of
the Internet or a prolonged period of ultra-low interest rates - that
radically improves the outlook for some area of the economy."
People take advantage of the opportunity - by buying dot.com shares or
mortgaging their houses. What begins as a modest shift of financial emphasis
ends in a reckless, greedy, hell-for-leather chase for profits.
Investors begin to think that the opportunity is permanent, rather than
temporary, and that they can get away with anything as long as they are on
the right side of the trade. This attitude leads them to over- reach...and
to ignore warnings. Finally, when the dishes rattle and the gas lines break,
the roof caves in on them.
Stay tuned, dear reader...it's just getting interesting.
More news:
------------------
Rob Mackrill:
*** After the storm, the calm...and a change of mood.
- Markets are restoring some composure this morning with all the major
European bourses trading higher...for the first time in six days. The FTSE
100 is up 51 points at 6,110 this morning buoyed by higher closes in Asia
where the Nikkei closed up 1.2% on the day at 16,844 and Hong Kong up over
2.1% at 19,058.
- Prince Potemkin was reputed to have said that auditors are the people who
go out onto the battlefield after the war is over to shoot the wounded
(followed by the lawyers who go in to strip the bodies!).Given the leverage
pain reported these professions may find a few new clients amongst the hedge
fund community. The FT
suggests: "It appears likely there have been many losers in the sell off",
with multi-strategy hedge funds particularly badly affected when all their
assets got whacked at the same time.
- Elsewhere, the bulls are reappearing. One such, Spanish money manager
Joaquin Garcia Huerga, tells
Bloomberg: "Right now the European stock market is a buy...economic
fundamentals are positive. We rule out the possibility of a U.S. recession."
A view echoed by Deutsche Bank strategist Bernd Meyer in a report today:
"The bull case for European equities remains in place."
The correction provides "a good buying opportunity"
given growth prospects.
And Europe needs to grow as it has some catching up to do, according to a
report today by Eurochambres, a European business lobby. It asserts the EU
economy is 20 years behind the US on a gross domestic product per capita
basis. Adding the EU's employment rate and level of R&D spend were achieved
by the US in 1978 and its level of productivity reached in 1989. Worse yet,
the economic gap has been getting wider since the reports began in 2003.
- Meanwhile, currency strategist Benedikt Germanier at UBS reckons it look
like the resumption of business as usual for the Yen carry trade: "The
market could be coming back to short yen," he observes as, following its
rally during the market rout, it slid in mid- morning trade against the
dollar, euro and pound.
- George Finlay from stockbrokers Hargreave Hale, recalls some recent
history on the subject. A similar 'wobble' in the Yen carry trade happened
in late Spring
2006 he says. At that time fears arose of Japanese inflation and interest
rates and currency were all heading up after a decade of deflation. This was
given added weight by the fact that the core Japanese inflation number, to
its credit, includes the price of oil and at that time it was rapidly
heading higher.
The fear soon passed as the oil price peaked and inflation worries subsided.
Scroll forward to the now and Mr Finlay observes the 'almost comical' raft
of poor economic numbers that have come out of Japan barely two weeks after
their decision to raise rates to 0.5%...
"GDP 'growth' in January was minus 1.5%. Inflation petered out, workers
wages slumped, core consumer prices were at best flat year on year, and
deflation reared its ugly head."
- Commodities haven't escaped the downdraft and makes for a front page story
on the FT this morning. Brent crude fell $1.54 yesterday to $60.54 though
head of commodities at Soc Gen, Frederic Lasserre maintains market sentiment
towards oil remains positive. Copper is down 8% from its 2007 peak, nickel
fell 5% yesterday and zinc 3%.
In the gold market, investors have been cashing in positions to cover losses
elsewhere Barclays Capital analyst, Kevin Norrish tells the FT. A hedge fund
adviser adds: "The big theme of the moment is deleveraging and derisking".
Two unlovely words from the world of professional speculation... borrow big,
borrow cheap, take a punt, cross your fingers...
- Recent price weakness in copper and nickel does not appear to concern one
of London's largest listed mining companies today. Xstrata view the outlook
for metal prices remaining firm as it reported a thumping net profit for the
year to December of $4.89bn, beating consensus forecasts of $4.6bn.
- Elsewhere, gold fell $4 yesterday to a six-week low of $638 but has more
than recouped that loss this morning, up a little over 1% at $645.
------------------
And more views from rainy, dreary London:
*** Colleague Dan Ferris, editor of Extreme Value, has thrown down the
gauntlet. He calls it the "Billion Dollar Challenge."
"I challenge any money manager with $1 billion to outperform this
five-stock portfolio between now and February 12, 2010."
What are the five stocks? Wal-Mart, Home Depot, Microsoft, St. Joe, and
Western Union.
He may be right. It could be hard to beat those stocks over the next three
years.
If you have a billion dollars your goals and your constraints are a little
different from those of the average investor. You have such a large pile,
you need a large place to put it. You need to take large positions. So you
need large companies. Dan notices that these are very solid companies
selling for very reasonable prices. The billion-dollar investor is not
likely to go too far wrong, he guesses. And not going too far wrong is what
interests most billionaires.
They've reached the point of declining marginal utility - or diminishing
returns - on money itself. An extra buck or two doesn't mean
much....certainly not enough to warrant taking a big risk. What they want is
not to make more money, but more importantly, not to lose it.
But what if you only have a million?
There was a time when being a millionaire was a big deal. If you had a
million dollars other people would bend a little in your presence. They were
polite and deferential to you, perhaps hoping that you would buy them dinner
or leave them something in your will. Plus, they would think you an
intelligent fellow - 'if he's that rich, he must be smart,' they would say
to themselves.
Those days are gone. After the recent run-up in asset prices, if you have
only a million dollars your friends and neighbours will probably take pity
on you. "Poor Janet," they'll cluck at the bridge club. "She and Earl
probably don't have more than a million between them."
They might even take up a collection on your behalf.
One million doesn't even get you much more than a house in a decent
neighbourhood. And you'll have to cook for yourself. After you've bought the
house all you have is expenses - for maintenance, taxes, utilities...in
addition to all the regular costs of living. Forget living it up. For that
you need a lot more money.
Let's say you have $2 million. You can buy the house and still put $1
million in the bank...or a mutual fund. If you were lucky enough to get a 5%
return, you'd have a big $50,000 in annual income. Servants?
Forget it. Forget posh holidays in Europe too. Forget expensive diamonds and
works of art. Don't even think about a beach house. That kind of money
barely pays the expenses on the main house...it will never permit you to
live a life of leisure and luxury.
Yes, dear reader, the cost of living it up has gone up.
The bar has been raised. If you want to live like a wealthy person you
either need a very good job - with enough after-tax income to pay the
expenses. Or, you need capital - a lot more than you needed a few
years ago.
This is probably one reason why rich people are becoming desperate. While
the poor and middle classes have tried to keep up with the Joneses by buying
houses; the upper classes have been trying to keep up with the Joneses too -
by reaching for higher investment returns. Hedge funds, derivatives, private
capital, outrageous prices on works of art, Asian shares - why are so many
people with money willing to risk it so recklessly? Because they are
pinched. The status and luxury they crave is still beyond their means.
While asset prices have gone up, their spendable cashflow has barely
improved. Their house may be worth a lot more money, for example. But how
can they spend it? They still have to live somewhere. Unless they have a
very big pile, they have to stretch...to reach...and to take chances. In
this respect, many of the people who appear 'rich' today are no different
from the marginally poor. Instead of taking out subprime mortgages in order
to live in houses they can't afford, they take outsize risks to try to get
the money they need.
So far, taking chances has generally paid off. Property prices in the places
the rich live - Manhattan, London, Aspen, Malibu - have soared. Even as the
floor under the subprime market gives way, the housing market at the top end
still appears fairly solid. Art prices, to give another example, are still
going up.
"I feel sick," said a friend this morning. "Back in 2000, I found a piece I
really liked by an unknown artist. It was a light sculpture. I know you
don't like that sort of thing, but I found it really interesting.
It was at a local gallery for £3,000. So I told them to hold it for me...I
was just too busy to deal with it.
And when I went back after a couple of weeks they had sold it to someone
else.
"Well, this weekend that very same piece of art was sold. Can you guess how
much?"
After a couple of vain attempts, the answer was given:
"£353,000. (Almost $700,000). I have to go lie down."
Seven years ago, a person of modest means might have owned that light
sculpture. Now, only a rich person could have it.
Yes, dear reader, being rich has become much more expensive. And staying
rich is getting much harder.
Our advice: take the other side of the desperate rich
person's trade.
More to come...
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