Agoracom

Good morning to you all. Jim Rogers, co-founder of the Quantum Fund along with billionaire investor George Soros and whom we covered on AGORACOM quite extensively, was on Bloomberg TV this morning discussing every financial crisis under the sun.

I am writing this as I watch the interview, so don’t mind my form but do mind the facts.

UPDATE: Video is now up on Bloomberg.

Rogers was one of the first to go on record with a $200 oil call, saying $100 oil was a forgeone conclusion, as well as, $1,000 gold. He is also one of the biggest US bears out there, having announced that he is selling all of his US holdings and dollars, as well as, going short on the entire financial sector. Read our coverage from November 2007 here.

On the other hand, he is the biggest Agricultural bull anywhere, telling investors at every opportunity to buy Agriculture due to demand out of Asia.

Given what has happened to oil, gold, US markets, the US dollar and Agriculture, we make sure to pay attention to anything he has to say. You don’t have to follow all of his advice - but you should consider his comments at the very least.

*NOTE - This was an interview via Satellite so the notes below are more like shorthand notes…but they’re well worth your time tor read.

(more…)

In a CNBC special feature this morning discussing solutions to America’s energy crisis, Boone Pickens (and Byron Wein, Chief Investment Strategist at Pequot Capital) predicted higher gold prices as Chinese and other large holders of US dollars “look for alternatives”.

Why? Their extensive dealings with investors around the world reveals they are beginning to feel “skiddish” about the size of the $US holdings and looking for alternatives. Gold was the first and only alternative they mentioned.

During the interview, Boone and Byron make it pretty clear they’ve been around and seen it all, including the oil shock of the early 70’s. As such, when they speak we should listen. To this end, you can view clips of his extensive energy solutions on Squawk Box this morning. Some interesting tidbits:

• Cars Per Thousand People (USA = 750; World = 120; China = 4)
• Barrels Per Person Per Year (USA = 25; China = 2)
• $US 700 Billion Is Heading Out Of The USA This Year To Pay For Oil

Wow. China clearly has years of increased oil consumption in front of it.

Regards,
George

I’ve been unequivocal in my predictions that US housing is doomed …. and that we still have yet to see its worst days. Until now, the market/pundit/banker/speculator solution has been “drop interest rates”. Again, something I have labeled as an exercise in futility from the outset.

Now that we’ve arrived at 2% interest rates and real estate only continues to decline, the proof is in the pudding.

Moreover, things have gotten worse. Lower rates have:

• Created a lower US Dollar that is >>>
• Leading to sky rocketing oil prices that are >>>
• Eating away at consumer wallets that is >>>
• Leading to corporate layoffs that is >>>
• Bringing the economy to a grinding halt that is >>>
• MAKING THE REAL ESTATE CRISIS WORSE

Bottom Line: Where once only sub-prime borrowers were terrified of losing their homes, we now have everybody scared of falling home equity, losing their jobs and even losing their homes. “Scared” is the operative word. Scared is the reason why otherwise secure feeling consumers just a year ago will no longer stretch their resources to acquire depressed real estate - no matter how “cheap” interest rates get.

It is psychological now. Look for home inventories to climb and prices to fall quite dramatically over the next 12 months.

Regards,
George

As all of you know by now, I’ve been calling checkmate on the US Fed for 7 months now. In fact, I think it’s safe to call checkmate right now and it appears the folks over at Barclay’s and RBS would agree.

As such, I’m now making another call - Big Ben’s days are numbered. To be fair, he didn’t have a chance. He inherited a pretty perilous credit/sub-prime situation that required forced him to keep rates low despite watching the inflation train coming right at him. I say “forced” for two reasons:

• White House pressure from an administration that didn’t want to see epidemic foreclosure and subsequent homeless rates;
• Wall Street pressure from a parade of bankers on CNBC that demanded lower and lower interest rates to save their hides.

Now, he has an inflation problem to add to the housing/credit/banking crisis that he could not solve despite super human efforts. Inevitably, one or both of these dominoes are going to tumble (no, they haven’t tumbled yet) and everyone is going to point the finger at Ben.

He won’t completely deserve it - but somebody has to take the blame. Ben will be replaced by the next US President.

Regards,
George

p.s. Gold closed at $941 today, with a high of $947.

Clearly, the US consumer and economy are in trouble. Inflation in food and oil costs are sucking real money out of consumer pockets, re-financing homes is no longer an option and the markets had their worst June since the Great Depression. All of this adds up to a 28-year low in US consumer sentiment.

In this environment, it doesn’t take a rocket scientist to conclude that discretionary spending is going to get hit hard in 2008 and I can’t think of a company with more discretionary products than Apple. Consumers may still want to buy MP3 players and smart phones but there are plenty of cheap alternatives to the iPod, iTunes and iPhone in the marketplace.

I am going to exercise PYMWYMI (Put Your Money Where Your Mouth Is) and call for Apple to revisit $110 - $120 over the next 3-6 months. To capitalize on this, I am going to buy October puts in AAPL.

I’ll let you know how it goes.

Regards,
George

My friend, Barry Ritholtz, made a great point on Friday when he stated:

We learned today that consumer spending upwards by 0.8% in May. However, that appears to be primarily inflation driven consumption, fed by stimulus checks, and higher food and energy prices.

To illustrate his great point, consider the fact that you aren’t actually buying more gas, you are simply paying more for it. Buying more gas would imply that you are doing a lot more traveling related to business, travel, etc. and that you are filling your tank more than usual, which would be a good sign for the economy.

On the other hand, simply paying more for gas means you are driving the same (perhaps even less) but spending more money at the pump. Nobody should mistake this as a sign of a robust economy.

If he is right, then what is the actual state of consumer spending? It is an important question and, thankfully, Merril Lynch’s David Rosenberg provides the startling answer via the chart below:

For a great read on the state of consumer confidence, be sure to read Barry’s latest post.

Regards,
George

Good morning to you all. US CPI numbers are out and the news isn’t good except for those buying furniture, women’s clothing and PC’s. Otherwise, the scene is pretty bad. If you like to eat, drive, drink, get an education and get medical attention when sick, life just got a whole lot more expensive.

Rather than giving you raw data, a graph is worth a thousand words:

(Thanks to Barry and Jake for the great graph)

This isn’t a pretty situation. The economy isn’t growing, yet inflation is on the rise. The government can report inflation “ex-food, ex-energy” to soften the blow - but they can’t hide the fact your pockets are still getting depleted every time you step up to the cashier and the pump.

The Fed continues to delay check mate but the fact of the matter is increasing interest rates to control inflation is only going to continue hitting real estate where it hurts. This isn’t good when foreclosures are up 48% in May and 1/483 households received a foreclosure note in May.

In addition, the resulting stronger dollar is only going to weaken exports and further slow the economy, which by most accounts (except for cheerleaders) is in a recession.

So will the Fed increase rates? Fed Funds Futures are now pricing in:

• A 100% chance that the Fed raises rates by a total of 50 bps by the October meeting.

• A 24% chance of a 75bps increase by October.
  

• By the January 2009 meeting, we have a 98% chance that Fed Funds rate will be raised by a total of 100 bps

In my opinion, I don’t think they have the guts to do it for the very reasons I outlined back on January 3rd. Here is the key excerpt:

Unfortunately, you can’t fight inflation and a credit liquidity crisis at the same time. Fighting one only makes the other problem worse. In this case, cutting interest rates will also lead to higher inflation. Afterall, the purpose of interest rate cuts is to get people to spend. Anybody want to guess what happens to gold when inflation starts climbing?

If you are a chess player, you understand the analogy that the Fed is about to sacrifice its Queen to save the King. Unfortunately, cutting interest rates to help save the real estate market is only going to delay the inevitable pain the US economy must suffer for years of excess and greed. They have picked their poison and thy name is inflation. Checkmate.

For now, the dollar is gaining strength and gold is off on sentiment that interest rates will have to increase. I think it’s far from a foregone conclusion. The Fed can argue”Core CPI” is in line with expectations - but the public outcry is going to buy it and should result in significant political pressure. Let’s see.

Regards,
George

Good evening to you all and sorry for being away from the blog for a while. I’m back in full force now and wanted to start off light with my new favourite acronym to describe the ridiculous criteria used by mortgage lenders, which ultimately contributed to the sub-prime mortgage mess:

No Income, No Job, and No Assets loans (NINJA)

More than just a joke, the term has made its way into Wikipedia.

Bottom line: “Easy money” is actually very hard money when you make it by acting stupidly. Just ask the 262 major US lending operations that have imploded since 2006.

If you listen to inflation figures reported in both Canada and the US, you wonder one of two things:

1. Life sure seems a lot more expensive for me..what am I doing wrong?
2. The Government is on crack!

For the record, I’m in camp #2. Come on! Gas and food prices are through the roof and the government tries to tell citizens that inflation is under control?

In Canada, they attributed much of this to the fact that the price of cars dropped by 7.1%, which only applies to that small percentage of consumers buying or leasing a car this year. What about everybody having to pay astronomically higher prices to fill up their cars?

In the US, my friend Barry Ritholtz demonstrates how the CPI (Consumer Price Index) is incorrect … no, WAY OFF. You can view the complete article here but here is the key point:

“…for 80% of the country’s populace, the CPI weightings are dramatically understates what the average American is experiencing in terms of their inflation versus the official CPI measure.“

WHY?

I’m not about to point to conspiracy theories, blah, blah, blah but politics means never telling people the truth when it hurts.

Interestingly enough, my father had a pretty interesting point of view on the underreporting of inflation as well. Specifically, higher inflation leads to higher wages, especially government employees that will demand to keep up with the rate of inflation. Imagine what that would do to government deficit targets?

Hmmm.

Regards,
George

Good afternoon, folks. The US Fed announced their decision on interest rates, as well as (more importantly), its statement about the state of affairs. I’ve provided highlights below via bullet points. Don’t mind the lack of form, the meat is what counts.

• Fed Funds Rate decreased by 25 basis points (.25) to 2.0%.  Was at 4.25% on Jan 1.

• Little to no reaction to Fed statement. There was no real movement in the US Dollar, Gold, Oil or Equities Markets following the news at 2:15.

• The statement was not as strong as the markets were looking for.

• “Uncertainty about inflation outlook remains high. Seen as moderating but will be monitored carefully.”

• “Fed is still ready to act to provide stability.”

• “Financial Markets are under stress.”

• “Economic activity currently remains weak.”

• “Easing to date should provide growth”

• “Labor markets have suffered”

Regards,
George