Agora Financial’s Rude Awakening

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Dubai, UAE

• The US: Retracing mistakes of yore from economies south of the border,
• The push of deflation, the pull of inflation and the misery caught
  between,
• Peak Oil and the new buzzword around the banana stall and more…

Joel Bowman, from the Arabian Gulf…

Folks around the Gulf had a little extra pep to their step today. Venezuela’s
threat to cut off oil supply to the US, a decline in production from Nigeria
and the North Sea has bolstered the price Gulf nations’ favorite export to
$92 per barrel in early trading.

The American SUV driver, conversely, was a tad sluggish in his gait. Once
again his pocketbook has been pinched. The hefty drive from his suburban
McMansion to work in the city and the heating in his Connecticut vacation
home just became a little more expensive.

But it is not only gas for his car that is causing the US consumer grief…he
is staring at higher prices across the board. From the technology he imports
from Asia to the Bananas he sources from south of the border, he is forking
out more and more to continue along the life he has become accustomed to.

In fact, just about the only thing that is not going up in price is the house
he is trying to sell.

And while the value of the dollars earns to pay for these costlier items
continues to whittle away, the rise in prices for the “stuff” he must buy are
on ever increasing upward trends.

Agflation, or agricultural inflation, has become a buzzword around the banana
stall just Peak Oil must be around the oil derricks. The producers are
laughing…the buyers are languishing.

In today’s column, Bill Bonner takes a look at some of those banana stalls
south of the border and issues a gringo-latino trade every incendiary
contrarian ought to enjoy…

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——————————————–

Sunny Places, Sunny Finances
By Bill Bonner

In this issue of The Daily Reckoning we turn our eyes back to the former
‘banana republics’, partly for opportunity…and partly for instruction.

On the opportunity side, we find companies with little debt and huge
potential. It is not exactly a virgin market — but more like one that has
been in a women’s detention center for the last five years; it’s ready for a
new dress and a drink.

But we first we take up our lessons:

Run huge deficits and borrow the money from overseas? “Si, we tried that…”
Try to stimulate a debt-saturated economy by printing more money? “Si, that
too.” Bail out the banks…giveaway money to the people…hand out special
favors to cronies and campaign contributors? “Doesn’t everybody?”

Argentina tried a few other things too – such as locking up the
banks…starting a war with England…and creating a whole new currency. The
inflation rate hit more than 1,000%. Nicaragua brought in the Sandinistas,
and sent the whole economy into reverse for an entire decade. Peru thought a
Japanese president might give it some of Japan Inc’s magic…then they chased
him into asylum in the embassy. Strongmen…juntas…revolutions…mob
democracies… defaults…devaluations…is there any trick the Latinos
haven’t tried?

But the world is a topsy-turvy place. The clouds of mismanagement that once
cast such long shadows over Latin America have drifted into the higher
latitudes. Suddenly, the banana republics look like good places for you money
as well as your holidays.

In a nutshell: the United States and Britain have been victims of their own
good luck; the banana republics had the good fortune of bad fortune. In the
last twenty years, for example, the world rushed to lend the Anglo-Saxon
tribes money. North of the Rio Grande and the Isle of Wight, credit was as
abundant as calories. But when lenders visited the tropics, they hid their
money in their underwear, and left their watches in the hotel safe. Our man
in Rio sweated and counted his change. Our man in London or New York splashed
out, and bought a $5 million house…and another one as an investment.

In the air-conditioner zone there was no one to borrow from. Residents of the
banana republics were spared the lure of debt, thanks to the near universal
agreement on the part of lenders everywhere, who wouldn’t give them a dime.

And now, England and America are caught in the debt trap, while the Latinos
swagger down their avenidas with hardly a care in the world. The price of
soybeans is at an all time high…and their balance sheets have some of the
lowest debt ratios in the world.

An investor in Latin America has the trade winds at this back; the rainbow
currencies are rising; so is the price of food. Most of these countries are
net exporters – of bananas and other agricultural commodities, often of
metals as well. Like China and the oil exporters, they are building up large
piles of dollar reserves and watching their own currencies go up against the
greenback. Several have had to intervene in foreign exchange markets not to
protect their local currencies…but to keep them down.

But nothing seems to be able to keep down the worlds growing appetite. There
are more and more people in the world; most of them are getting richer.
Naturally, they expect a little more butter on their cabbage…and a little
more meat in their soup. But where will it come from? You can print as many
dollar or pound notes as you want. Add a nought and you have multiplied the
money supply by ten. But how fast can you increase food production? Where do
you get the land? The water? Some analysts believe the world is already close
to a peak in food production. For every new acre put into service, they say,
another acre is taken out. In America, for example, farmers are switching
from producing grain for food to planting grain – particularly corn – to be
used as biofuel.

Thirty percent of the past summer’s crop was thus destined for the gas tank
rather than the stomach. In other parts of the world, notably China, farmland
is being taken over for urban development, or destroyed by pollution,
drought, or over use. Farm prices are at record levels…and may go higher.
Corn stocks are nearing a 33-year low…wheat stocks are approaching 60-year
lows.

What better time to invest in one of the world’s top food producers? says
legendary British investor Jim Slater. Writing in the Investors Chronicle ,
Slater says, “Brazil has an abundance of the four major commodities that the
world is short of,” which he identifies as water, arable land, energy, and
mineral wealth. Brazil, he points out, has 90% more recoverable water than
its nearest rival. It is the world’s largest exporter of soybeans, beef,
chicken, orange juice and sugar. Its leading oil company has recently struck
a huge deposit. “Before long,” he predicts, “Brazil will be a net exporter of
oil.” Finally, the country is also a huge producer of iron ore, quartz,
chrome ore, industrial diamonds, gold, nickel, tin, bauxite, uranium and
platinum.

Sell the gringos; buy the Latinos.

[Joel's Note: To understand how this farcical continental interplay came
about, and how it changes the way you should be thinking about your
investments, we’d like to recommend Bill’s latest book, Mobs, Messiahs and
Markets: Surviving the Public Spectacle in Finance and Politics. We consider
it required reading around Rude headquarters…perhaps you might take a look
too.

————————————————-

[Rude Endnote: From our friends south of the border, to some on the northern
side…

“I just read your article in the Rude awakening, the Echo-Bust February 7,
2008″ writes one Rude reader. “Thank you for the interesting commentary.

“I live in Central British Columbia, and in the last 6 years things have
gotten out of hand, concerning a housing/real estate bubble.

“Houses that cost 100,00 five-six years ago are now selling for 500,000-
750,000.

“All the neighbors tell me ‘hey Al, maybe you didn’t notice but they aren’t
making any more property in B.C.’ When I refer to the housing foreclosures in
Nevada an Florida, they tell me that B.C. is different, we have a natural
resource based economy, and it won’t happen here.

“Besides, they state that our Canadian banks are more fiscally responsible.
(I did note that our Royal Bank and the Bank of Nova Scotia have both
invested in hedge funds that are troubled, and being investigated). I have
stepped from the common stride and started to invest in precious metals. I
look around and see all of the credit card debt, housing mortgage debt, and
even though the sawmills are closing at an alarming rate, nobody gets excited
when the stock market takes nosedives or shoots up mysteriously. I am trying
to prepare myself for what I perceive to be ‘COMING –OPPORTUNITIES.’”

Thanks to all our Rude friends that wrote in with their comments on Eric’s
commercial real estate mini-series. If you’d like to have your say on this,
or any other Rude matter, simply send along your thoughts to the address
below.

Cheers,

Joel Bowman
Rude Awakening