Sunday, August 21, 2011

Why the Fed's Out of Options - Thanks to Crude, Food, and You

The markets presented quite the twist on Thursday, when the much anticipated relief rally got whacked in the face.  Despite the hysterics and fear, though, US stocks did not break through their previous near term lows.  If I were a betting/trading man (ha) - I may be tempted to take a short term flyer on the long side:

S&P 500 price chart september 2011
The S&P 500 appears to have some support around 1120 - for now. (Source:

Investors who rushed to get long a couple of weeks ago - even if they had timed the bottom successfully - were early, if they held their positions longer than 3 days.

Where have we seen this movie before?  How about the "flash crash" from the spring of 2010.  At the time, it was touted as a tremendous buying opportunity, thanks to some insane computers.  In reality, those "freak lows" were not only tested, but exceeded, within the next few months:

S&P 500 flash crash price chart
May "flash crash" buying opp?  There was no hurry to pile back in - a lower low was on the way. (Source: Google Finance)

With Jackson Hole just around the corner, Bernanke is in quite the pickle...he's out of bullets!  He can't reduce rates, because they are already at zero (and pledged to be there through 2013!).  Contrary Investing favorite Jon Lederer pointed out to me last night (over a few beers of course) the stark contrast from the early 1980's recession, when the fed has 15 whole points at their disposal.

QE has been tried - twice - and if not backfired, then at least failed.  While WTI crude has backed off, Brent (the goo that powers the rest of the world) is still over $100:

brent crude price chart September 2011
After all the carnage we've seen in the markets lately, Brent Crude still sits above $100. (Source:

The most disconcerting charts, though - especially to leaders and policy makers - should be the prices of food.  If QE2 did anything, it sure lit a fuse under the price of food - check out the rocket shots put in my corn and soybeans:

corn price chart since QE2

soybean prices since QE2
Corn, 'Beans have been rip roaring to higher prices since Crazy Ben starting printing a second time. (Source:

There's not much room for yet higher prices here, before we see some serious social unrest.  To paraphrase DailyWealth's Brian Hunt - people will put up with a lot of crap, but once they are faced with high food prices, they will take to the streets.

Exhibit 3 why QE3 would be a challenging call - the dollar.  I had thought that a return to these deflationary conditions would trigger a corresponding rally in the dollar - thus far, I've thought wrong:
US dollar price chart September 2011
Although the whole world seems to be short the dollar, it's not acting too well, given the deflationary carnage around us right now. (Source:

Finally your parting moment of zen - the gold chart.  It's rising for all the right reasons, I currencies are getting flushed down their respective sovereign toilets, there is a madman running the Federal Reserve, etc.  Still - the parabolic move on this chart is a tough one to buy into:

gold price chart parabolic move bubble
Gold gets parabolic. (Source:

The short term is setup for some potentially gnarly action.  The only thing I can think to do is to remain focused on our longer term strategies:
This piece was originally published on our sister site, The Contrary Investing Report.

Saturday, August 06, 2011

The (Second) Best Jim Rogers Interview of the Year

Of course I'm biased - by vote for #2 of the year is a lengthy Rogers interview with Frank Curzio, which is excellent, thanks to the length and depth that Curzio allows for Rogers.  Here's the link.

You can hear that Jim is quite cautious right now - citing very little enthusiasm for anything, except for North Korea, agriculture, and his trusty exercise bike.

This WSJ video is more entertaining and insightful, as Jim gets pretty worked up at the know-nothing girl who appears to be doing her best to infuriate him:

And I had the opportunity to sit down with Jim Rogers this April while in Singapore - here's my writeup of our discussion.

Recommended related viewing: Check out Porter Stansberry's End of America video

Why the Norwegian Krone is Set to Rally as a Safe Haven Currency

Why is the Norwegian krone the forgotten safe haven?

Big hat tip to Dr. Evil, who sent over this idea, pointing out that while investors are flocking to gold and the Swiss franc as safe havens, the Norwegian krone is not getting much love from European currency traders:
Norweigian Krone price chart year to date versus euro dollar swiss franc
The NOK, while up against the dollar YTD, has lagged the CHF, especially of late...and is only even with the EUR.
(Source: Google Finance)
One of our favorite currency analysts, Chuck Butler, concurs with Dr. Evil - last Monday, he wrote:
The Norwegian Krone slumped in early morning trading after the home grown terrorist attacks. Apparently the same sick person was responsible for both the bombing and shooting rampage which rocked the northern European nation. The stories of the survivors of the shooting rampage were chilling, and my thoughts and prayers certainly go out to all of those affected.

The Norwegian krone has long been a favorite of the desk, and I would look at any sell-off as an excellent buying opportunity. These attacks will not have any lasting impact on the government or economy of Norway, both of which are very strong and stable. Norway has excellent fundamentals backing its currency, and should be seen as another ‘safe haven’ in the volatile global markets.
Source: The Daily Pfennig

The Norges Bank currently has rates at 2.25%, and there are expectations that there will be more rate hikes later in the year, and into the future.

Norges Bank rate projections
Projections for the key policy rate (Source: Norges Bank).
The NOK sure looks like an interesting currency, given Norway's massive oil reserves, their government's responsible finances, and longer term demographic trends that look pretty favorable...especially by European standards.

Without an advanced trading account, the best way for an armchair investor to get exposure to the Norwegian Krone is to open an account with EverBank (as there are no ETFs or futures contracts available, at least that I was able to find, at this time).

Again, hat tip to Dr. Evil for important contributions to this piece.

GMO's Jeremy Grantham Newsletter: Serious Resource Shortages Coming

In his latest GMO Quarterly Newsletter, Jeremy Grantham (eloquently, as always) continued to channel his "inner Malthus" to deliver grave warnings on resource limitations that he anticipates humanity will face with increasing severity and urgency as the 21st century rolls on.  You may remember that Grantham's Q1 newsletter focused on what he called a "paradigm shift" in commodity prices, due to a 200-year hydrocarbon boom winding down.  (See: Jeremy Grantham gets bullish on commodities).

His Q2 letter is a quite a bit darker and more philosophical, too - he's genuinely worried that the planet may not be able to feed everyone soon.
This quarter, I would like to focus on the most dangerous parts of the coming shortages.  I will try to separate those that, for us rich countries, are merely going to slow down the growth rate of our wealth through rising prices, and those that will do not only that, but will actually be a threat to the long-term viability of our species when we reach a population level of 10 billion.  In all cases, poorer countries will be the most threatened.  Situations that will irritate some of us with higher prices will cause others to starve.  Situations that will cause some of us to go hungry will be for others a real disaster, and I believe this, unfortunately, will not be in the dim and distant future.
Investment implications?
The moral however, is clear.  As Jim Rogers likes to say: be a farmer not a banker – the world needs good farmers!  I might add: or become a resource ef?ciency expert and help the world save some of them for our grandchildren.  Farming will be a satisfying and enriching experience if, on a global basis, we rise to the longterm agricultural challenges.
In terms of efficiency, Grantham is especially concerned about the depletion of fertilizers (potash and phosphates) - which will, of course, provide money making opportunities for those with who produce and/or are sitting on reserves of these resources.

You can read Grantham's full Q2 2011 newsletter here.
Potash stock price chart 2011
Eponymous fertilizer play Potash Corp (POT) and its 3-year uptrend. (Source:

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