The Shadow Stock Trader
Friday, November 14, 2008
By Horacio Marquez
Email – #31
** Expect some global consensus to come out of the G20 meeting
In every single situation where I’ve witnessed some financial excess lead to the implosion of an economy, just like we’re seeing right now, the policy-makers have responded with a “never again” mantra. This appears to have worked in a few cases, like the former Central Bank of Germany, the Bundesbank. It had a single focus on inflation, which translates into the ECBs’ similar focus today. But it came at a price. Unfortunately, the cost of achieving that objective has been decades of lost growth opportunities.
Today, the ECB is officially in recession (albeit still mild), validating the IMF’s forecast. The ECB was very slow in seeing the depth and reach of the current crisis, and it dragged its feet in lowering rates and easing monetary policy. They believed that the current global malaise was “made in America,” as a former member of a Latin American government recently told me. The unfortunate result is that the Europeans are behind the curve in addressing all the problems of over-leverage and structural reforms needed to address a new, de-leveraged world.
What’s likely to come out of this G20 meeting? A homogenization of financial regulatory standards across the globe within the parameters of the Basle II Agreement. The Basle II Agreement, an initiative coordinated by the Bank of International Settlements, establishes the mechanics needed to limit and monitor the level of risk that a bank takes, based on both the riskiness of its exposures, as well as the amount in each of them. And the probable new enforcer will be the International Monetary Fund.
I can tell you, given my decades of experience in emerging economies, that the IMF is not a loved entity for Wall Street nor for many world governments. Its recipes tend to be harsh and conservative. Yet, there have been many notorious successes, like the rescue of Mexico in 1995. Also, its focus on structural reform and tight monetary and fiscal policies throughout emerging markets, resulted, for example, in Brazil’s and Indonesia’s success stories.
With respect to the US and other housing bubbles, let me point to one of three key IMF charts that I have been using since mid-1994:
http://www.moneymorning.com/images2/horacio.JPG
Here’s what they said: “…some housing purchases may have been motivated by the expectation of capital gains…” and went on to demonstrate with this and other similarly compelling charts, showing the inflated ratios of price-to-rent and of mortgages as percentage of GDP, how the US was way over-extended and other European countries like Spain were getting there. The problem? There was simply too much money, going too fast into one sector, and nobody was listening to the voice of reason. We now all weep. If only we had listened to the IMF back in 2004!
It’s such a shame. The “big boys” in our legislature cannot behave when left alone to exercise their representative duties, such as imposing non-economic entitlement programs on the “free” market, disguised under quasi-fiscal mammoth dinosaurs (Fannie Freddie). But now they unfortunately call upon themselves the needed super-vigilant panacea.
The result of this intervention will be a more level playing field globally in terms of accounting standards and permitted (lower) risk by banks, which should allow for a more stable, less leveraged and therefore less profitable global banking system.
Another outcome will certainly be coordinated global stimulus. Now, world leaders, you had better get this one right, because after this calamitous failure, the next time China, Brazil and the other beneficiaries of the recent commodities bonanza will not be there to stimulate the global economy while the “advanced” economies restructure decades of pilfering social security funds in bridges to nowhere and skyrocketing health care costs. Both social security and healthcare costs are greatly exacerbated by the “ME” society of low-birth rates and abortion on demand.
What We Should Do Now
In this environment, we are going to wait to get some clarity on G20 plans, but be mindful that there are three weeks left for shorts to cover and take their profits before the liquidity totally disappears.
At the same time, China’s 22% jump in retail sales last month tells us that their stimulus is already restarting their economy. And we have yet to see the effect of their recent interest rate cut to 6.66% (which is lucky number in Chinese culture), nor the beginning of their massive $586 billion stimulus package. These steps will work.
Likewise, Brazil, Chile and other emerging markets that acted prudently during the commodities boom will also do well next year. On the other hand, the US will see a bad beginning to 2009, with a reacceleration in the second half of the year. So get ready.
The good news is that all of this stimulus, along with China’s reacceleration, is going to help commodities. And within these, agriculture and commodities deserve special attention. Under the radar of most of the media, China launched a massive overhaul of its agricultural system. Its collectivized system has an average parcel of half an acre per family. But China’s government recently took major steps to reform this, in order to achieve economies of scale and higher investment. Here are a few highlights:
- Farmers will be able to sell, rent or use as collateral their land rights. This will allow them to get their capital out and give the land to major agricultural corporations that will operate it more efficiently.
- At the same out, farmers will move with their capital to cities (urbanization), which will drive infrastructure spending
- China will end the destruction of farmland to development, freezing arable land
- Taxes on agriculture and farmers will be zero –you heard it–this is how to incentivize economic activity.
The result of this agricultural revolution will be great efficiency gains in Chinese agriculture. China will also see huge increases in their use of fertilizers.
It’s no coincidence that we are already ahead of this mega trend with our position in Market Vectors Agribusiness ETF (MOO). The market tested the October low and held nicely yesterday. I’ll have more for you next week on some new additions to take advantage of the G20 meeting announcements.
Enjoy and Profit,
Horacio Marquez
All Shadow StockTrader recommendations will be posted on the Money Map Press website. Simply go to http://www.moneymappress.com and click on “Money Shadow Stock Trader.”
Current Portfoli
Name: Biotech Holders Trust (AMEX: BBH)
Current Price: $172.56
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Name: Powershares DB Agriculture Fund (AMEX: DBA)
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Name: Market Vectors Agribusiness (AMEX: MOO)
Current Price: $25.27
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Market Watch
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