28 March 2009

2009 Outlook: Commodities

2009 Outlook - Commodities

The first thing we must understand when viewing this sector is the fact that commodities and precious metals went through a 25-year SECULAR BEAR MARKET, which ended in a double bottom that was formed between 1998 and December 2001. Just in time, inventories and international shipping severely reduced the need to hold inventory. Every bit of excess capacity and stockpiles were virtually eliminated worldwide. I have created a MONTHLY chart of the continuous commodity index going back to the 1976 period to emphasize the period where anyone who tried to build a commodity business was ground to dust as every rally was false, and expansion of supply was punished in the marketplace from 1980 through 2001:

1976 1980 1984 1988 1992 1996 2000 2004 2008

Please notice how the BULL market has corrected a Fibonacci .619 of its move off the 1998-2001 lows, which implies that we have just witnessed the first wave up of a 20 to 25-year SECULAR BULL MARKET (and the first corrective wave down of the bull move), and when it turns higher and gives a buy signal, we are most probably staring at the next leg up in commodities directly ahead. The creation of commodity and energy supply is a long process, usually taking 5 to 10 years, and whatever capacity was being built up until the credit crisis began has now been shut down. So, very few new sources of commodities can be expected to emerge. Oil supplies are falling almost 10% a year; a rate faster than the rate of decline in demand.

After the relentless secular bear market and base building period, population growth and the emergence of the BRICS (Brazil, Russia, India, China), as G7 deindustrialization and new found capitalist economies based on Austrian economics, created rising incomes and middle classes in many formally impoverished regions. These societies are based on SAVINGS (as they know the government is good for nothing), producing more than you consume (as not to do so leads to personal demise), and the work ethic to provide a better future for their children. Wealth creation is alive and well in the emerging world. Once they learn to “smell the roses” of their success and consume more (as they are doing daily), these societies will become the wealthiest in the world as the wealth of the world continues to rotate from the Western developed economies to the emerging world. Any historian can tell you this long pattern of wealth rotation has been in place for centuries.

There are BILLIONS of people emerging into higher standards of living, and they live in the MOST economically competitive areas of the world. They are masters of providing “MORE FOR LESS” to their customers, and thus will be the provider of choice for income-constrained western consumers. The formerly Austrian G7 capitalist economies have evolved into quasi-socialist asset-backed economies, where wealth is an illusion of misstated inflation of assets (which we now see reverting back to the real, not nominal values.) They now live in de-industrialized shells of their former economies, incapable of producing more than they consume and creating the savings necessary for rising middle classes and capital investment, which is the seed corn of future wealth.

So the governments of the G7 have resorted to what all empires do as they reach the end of their histories: borrow and print money to support their spending since wealth creation no longer does so. Gold is at or near a new high against every FIAT currency in the world and that is no coincidence. It is a reflection of the declining purchasing power of the currencies in which it is denominated. Take a look at these charts of world currencies and gold (courtesy of Mike Hewitt and www.dollardaze.org ) since 1971, when Breton Woods II forever tore G7 currencies from gold and silver reserve backing:

Thank you, Mike. Notice there is only one currency which has not lost purchasing power and that is the oldest currency in the world: GOLD. As the MONEY printing in the G7 accelerates to underpin the governments and financial systems, you can expect commodities to REPRICE higher to reflect the lower purchasing power of whatever currency in which it is denominated, putting additional buying power in them as investors increasingly seek shelter from the printing presses.

The temporary destruction of demand for commodities has been largely PRICED into commodity prices without disturbing the longer-term bull trend, caused by supply constraints which just recently began in 2001. You can count on the debasement of the G7 currencies to accelerate as investors and G7 currency holders increasingly shun buying paper that “melts in your hand and bank accounts” in favor of? The “Indirect Exchange” (as outlined by Ludwig von Mises) into the shelter provided by tangible assets, such as commodities, precious metals and raw materials. Look no further than the Chinese to see this in action, as they have embarked on a spending spree to rid themselves of the toxic G7 currencies and exchange them for tangibles of all stripes, including commodities.

In Conclusion: The G7 governments are at war with their citizens, only the citizens are largely unaware of it. Citizens have been dumbed down and the media spins the government line to dupe the public into believing that government is for them rather than against them in this period of time. The DARWINIAN struggle to survive and grow is now a showdown between the public sectors, government elites and special interests versus the private sectors and the public at large. As the governments increasingly DESTROY the ability to create wealth in the private sector, incomes have and will continue to collapse, as will tax receipts on the endless list of taxes and fees now imposed.

As these sources of income recede, the only options will be to borrow from future generations through treasury issuance to the central banks, aka “PRINTING THE MONEY”. Since there is this little timeless truth known by non-governmental economists as “there is no such thing as a free lunch”, we are headed toward the demise of the G7 financial systems. And of course, this does not include the FREE healthcare and new energy REGULATIONS and TAXES which they are about to impose.

On another note, FASBY 157, which mandates mark-to-market accounting, has succumbed to political pressure and has been eviscerated, effectively allowing the banks to misstate their assets values to models, rather than to market prices. So expect the losses to once again be HIDDEN from view and profits to appear when marked to model, i.e., lying with numbers with government approval. The profits are ILLUSIONS, courtesy of corrupt public serpents, banksters and now the accounting OVERSIGHT board. Insolvency is not cured with the stroke of a pen, it is fixed by NEW CAPITAL!

Look no further than recent LOUD outbursts by the G7’s largest creditors such as the Chinese, Russians, Indians and Brazilians, illustrating their dismay. They should, because when the debasement occurs, it is a theft of the purchasing power they store in G7 currencies and bonds. The rallies in stock indexes are nothing more than bounces in ongoing bear markets. Here is an analogue chart of the 4 biggest bear markets in history:

This is a powerful signpost of future price action. The only thing which may keep us from going to lows at the 3000 to 4000 level in the Dow is the rapidity of the monetary debasement process. Stocks are in many ways TANGIBLE investments and will re-price HIGHER to reflect the diminishing purchasing power of the currency in which they are priced. So the faster the G7 debases their currencies, the more buoyant NOMINAL prices will be. But don’t be fooled, they are declining in real terms “purchasing power” as this chart of the S&P 500 denominated in gold illustrates:

1980 1990 2000

Notice how the rally to new highs from 2002 to late 2007 DISAPPEARS when measured in REAL MONEY. That rally was an illusion of growth provided by FIAT currency and inflation. The true picture of the value of your stocks is displayed in this chart. If you look at bonds, the picture is WORSE…

I believe the recently unveiled public/private partnerships fail because the worth of the toxic assets is ZERO (this is what investors are willing to pay if not offered loans by the government and Fed), and after last week’s debacle in congress does anyone believe they can partner with the government and trust they will honor their agreements?

There is no way to avoid the unfolding, ultimately inflationary great depression because public servants are incapable of doing what is right for their constituents, rather than what is politically beneficial. But profits and opportunities will abound for the astute and informed investor. The abuse of the ability to issue debt and print money will be abused until such time that the financial, currency and banking systems collapse and are shunned by the world publics. Learn how to make money in up and down markets using absolute return alternative investments and seek the “indirect exchange” as outlined by Ludwig von Mises. So it is once again: Hi ho, Hi ho, off to the printing press they go; selling treasuries to create the money and sending you and your children the obligation to pay for it.

Charts and full article

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