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With the current action in the markets, there are two main questions that every investor is asking: Has the subprime crisis passed? And is the commodity boom over?
In this issue, I’ll give you my answers, plain and simple, to both questions — via the fundamental forces behind each and some old-fashioned common sense. So let’s get started …
First, Has the Subprime Crisis Passed?
No. I think it’s far from over. Here are five reasons why …
#1: We’re only nine months into the crisis.
Financial crises are rarely ever that short. And the sheer size and scope of the subprime crisis makes this larger than any crisis seen since the Great Depression, almost guaranteeing that it’s not even remotely over.
#2: Banking experts put the losses at more than $600 billion. But only $180 billion has been written off so far.
Even if the bankers are wrong, and there is only a total of $300 billion in losses, then we’re still just slightly more than halfway through the crisis, with more losses and surprises surely to come.
#3: The Federal Reserve has pumped at least $800 billion of new money and credit into the economy.
This rush to artificially stimulate the economy indicates the Fed fears that the crisis is even bigger than the $600 billion loss estimated by the banking industry.
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#4: The big surge in home foreclosures is yet to come.
There are 1.5 million loans, representing 40% of the outstanding subprime adjustable mortgages, scheduled to reset this year.
Already, more than one in every 20 home mortgages and one in every five subprime mortgages are delinquent, while foreclosures are at record highs.
#5: No one knows the extent of the damage in the derivatives markets.
There could be $100 billion or one TRILLION in losses.
Bear Stearns could be the only investment banker to collapse, or there could be more casualties and more Fed bailouts.
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| Nobody knows if Bear Stearns will be the only major casualty or just the first! |
Therein lies the problem: No one really knows for sure how much bad debt there is, nor is anyone entirely sure where it is.
Today’s complex derivatives markets involve tens of thousands of players, hundreds of thousands of transactions, and all sorts of loopholes that have taken the losses off of balance sheets. So it’s like trying to find a cancer that is moving around all the time.
The Fed may have found some of the malignancy with Bear Stearns and cut it out. But who knows if, when, and where the cancer will appear next.
Personally, I think the crisis is much deeper than most are willing to admit at this time …
Otherwise, the Fed would not have opened its lending to investment bankers, effectively throwing out the rule book on central banking and becoming the true lender of last resort for virtually all financial institutions, not just commercial banks!
Second, Is the Commodity Boom Over?
I don’t think so! In fact, I believe commodity prices are just beginning to move into position for an unprecedented spike to the upside. Here are five reasons why …
#1: Commodity prices have not yet caught up to their inflation-adjusted prices, and remain cheap.
Gold, as I’ve pointed out many times, would have to trade over $2,200 an ounce just to equal the 1980 high of $875 in terms of today’s devalued greenbacks.
At $900, it’s not even half way there!
Sugar would have to more than QUINTUPLE from its current $.1179 per pound to $.5895 to reach its inflation-adjusted high.
Wheat would have to soar almost 400% to more than $48 a bushel, from its current $10 level. Corn would have to increase almost 600% to $34 a bushel, from its current $5.07. Tin would have to jump more than 400%.
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| Wheat prices would have to quadruple just to reach their inflation-adjusted high. |
Nearly every natural resource under the sun would have to gain anywhere from 200% to as much as 600% just to catch-up with inflation.
And those gains do not factor in that …
#2: The Fed is pumping in money like there’s no tomorrow, which will continue to devalue the dollar as far as the eye can see.
As I mentioned earlier, the Fed has already pumped some $800 billion of new money and credit into the economy, with more money pumping surely ahead.
Even considering that the economy is in a credit contraction in the private sector, this new fiat money is sure to expand the money supply, by as much as 5 to 1 in my estimate (in a normal economy, each $1 the Fed prints creates on average $10 of new money via lending and relending).
That’s at least four trillion new dollars that will eventually work its way through the economy … depressing the value of those dollars.
That’s not to say there won’t be short-term rallies in the dollar, like we’re seeing now. Of course there will be. But the long-term trend for the dollar is clearly DOWN. That, in turn, will push commodity prices even higher.
#3: Demand remains at record highs for almost all commodities.
There’s not one shred of evidence that demand is slowing for any of the world’s major natural resources and commodities, even as the U.S. economy sinks.
To the contrary, demand for oil, copper, grains, and base metals remain at record highs, with no let up in sight.
#4: Supplies remain tight as a drum.
Not just in oil, but also in copper, where there’s only three days worth of global supplies on the shelves … in gold … and in grains, where supplies are at 30-year lows.
Almost every commodity on the planet is experiencing severe supply constraints for a variety of reasons. From soaring demand … to underinvestment in infrastructure … to disruptions due to terrorism and geo-politics.
#5: Major commodity booms tend to last at least 11 years, with super booms lasting as long as 21 years.
Historically, most commodity bull markets tend to span 11 years, with super cycles stretching out as many as 21 years. That means the current boom in commodities should not peak until at least 2012, indicating four more years of prices rising MUCH higher.
But odds are high that we are in another super cycle commodity boom, which would mean we wouldn’t see the top in commodities until 2022!
So as you can see, the commodity boom is far from over, in my opinion.
Right now we’re merely witnessing a pause in the uptrend, and being given an opportunity to add to positions.
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Indeed, if there’s one chart that says it all about the commodity boom, it’s gold. Notice on this monthly chart how gold remains well above breakout levels. Gold’s chart action is exceptionally bullish for the long-term.
What Should You Do Now?
A rudimentary understanding of historical precedents and common-sense analysis dictates that you should …
A. Assume the subprime crisis is not over. That means you should continue to steer clear of U.S. real estate, and almost all stocks (with the exception of natural resource plays). Also continue to steer clear of corporate bonds and U.S. Treasuries, which I believe are disasters waiting to happen.
B. Use pullbacks in commodities to buy. That’s especially true if you’re not already in these markets. In my opinion, everyone should own …
- Gold through the streetTRACKS Gold Trust (GLD and gold stocks via mutual funds like the Tocqueville Gold Fund (TGLDX).
- Oil via the United States Oil Fund ETF (USO), which tracks the price of oil, and a solid oil fund like the Fidelity Select Energy Fund (FSENX).
- Diversified natural resources through a fund like U.S. Global Investors Global Resources (PSPFX).
Finally, if you’re a Real Wealth Report subscriber, be on the lookout for a new round of great profit opportunities in natural resources!
Best wishes,
Larry
P.S. If you’re not yet a subscriber, join now to get all my buy and sell signals, recommendations and flash alerts!
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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