This past weekend, I went into my local bookstore
and saw Alan Greenspan's The Age of Turbulence prominently displayed
in front of the store. When Alan Greenspan retired, just over a year ago, CNBC
auctioned off a painting of the former head of the Federal Reserve, and
financial pundits around the world were lauding his achievements.
Unfortunately, as I read the news surrounding housing, our economy,
inflation, and the dismal outlook for the US dollar, I cannot understand why
most people view him as such a prominent economist.
After all, it was during his watch that:
...the money supply (m3) grew
exponentially...creating the inflationary problems of today
...the dotcom bubble was created
...interest rates were held artificially
low...creating the present day housing bubble/burst
...the US dollar lost its foothold as
the world's greatest economy
Nonetheless, most investors (and historians) will
likely point to Alan Greenspan as being one of the greatest economists of our
time. Why is this? Perhaps, because they are looking through the wrong
lenses.
ECON 101
All of this hoopla surrounding Greenspan's new book
has led me to pose the following question: Where have all the parrots gone?
What do I mean by this? Well, Thomas Carlyle once said, "Teach a parrot
supply and demand...and you have got an economist". Unfortunately, most
economists today are failing to look at the most basic principles of
economics. Supply and Demand. They are so bogged down with statistics and
lagging indicators that by the time their indicators "scream
inflation" or "signal a recession" it is already too late.
The most obvious example of statistical myopia can
be seen with the inflationary outlook of the Federal Reserve and most
economists. I have talked about this in previous commentary about how
measuring a basket of goods (core CPI) that does not include increased cost
of food and energy, is a lagging indicator that gives investors a false sense
of wealth security. View Article
Indeed, if economists were to simply focus on the
supply and demand factors they would realize the byproduct of printing money:
the money one has in his pocket now has less value. In short, more money
floating around will ultimately affect the price of goods and the purchasing
power of one's wealth. A simple look at the money supply chart would back
this claim.
While I realize that the focus on supply and demand
might sound simplistic at first, it would have prepared you for the present
day market environment. Consider for instance, the following two issues-
housing and commodities.
Housing:
The main factor that fueled housing over the
previous 5 years was a growing demand for homes. While this demand was
artificial, it nonetheless served as demand. Individuals who previously were
not able to own a home at $350,000 were now able to buy a home at $500,000
simply because they were able to receive an interest only mortgage (at
historically low rates). In turn, housing prices escalated as the demand from
these 1st time home buyers (as well as from speculative home buyers who saw
prices rising) pushed prices into bubble territory.
Recently, housing prices have declined. Why? Because
demand for housing has waned in the midst of growing supply.
Supply Outlook: On the supply
side, foreclosures have risen to record levels, there are still an abundant
amount of homes and condos that are still coming on the market, and homes are
staying on the market a lot longer. If we continue to be forward looking,
there are over 2 trillion dollars of adjustable rate mortgages that are going
to adjust. The result? More foreclosures, more homes on the market, more
supply.
Demand Outlook: On the demand
side, the more stringent loan standards (post sub-prime meltdown), the
inevitable rise in interest rates (and mortgage payments), and the general
market sentiments, will keep buyers from coming to the market.
Conclusion: Housing Prices
Will Decline
Commodities
In my recent book, I talk about how even though the
commodity bull market has tallied prolific gains over the past five years;
many investors have missed out on the opportunity. The reasons, of course, vary.
But one of the main reasons has to do with the myths and misconceptions that
surround commodities. If one were to simply look at the supply and demand of
the commodity markets, the inevitable conclusion would have been a rise in
prices.
Over the past few months, commodity prices have
escalated to new heights. Gold has roared back to multi-year highs, oil
prices have hit their highest levels ever, as have wheat, soybeans, and
several other commodities. Interestingly, the media and Wall Street pundits continue
to be confused with the movements in the commodity markets. I believe that
they have collectively signaled the end of this commodity bull market every
few months for the past several years. However, this bull market is fall from
over. If they focus on supply and demand, the outlook is clear.
Supply Outlook: There are
simply not enough commodities to go around. This is especially true for hard
commodities that cannot be grown or replenished. Whether or not you buy into
the "peak oil" or "peak gold" theories, there is no
question that there are only finite supplies of hard commodities in the
world. The end result, of course, is less supply.
Demand Outlook: Question: What
do you get when you have 1/3 of the world constructing buildings, factories,
roads, and infrastructure? Answer: Demand for energy and materials. To be
honest, it should not take a rocket scientist (or a Federal Reserve chief for
that matter) to realize that demand for commodities will increase as
industrialization takes route in the remaining agrarian societies. It takes
cement, copper, aluminum, energy, lumber, steel, and a slew of other
commodities to build a city like Shanghai,
China. I was
recently in Shanghai,
and let me tell you....there is no end in sight when it comes to construction.
It's absolutely amazing. What is even more amazing, however, is that it is
expected that over 400 million Chinese will move into the city over the next
10-15 years. Again, it should not take a brilliant economist to figure out
the type of demand this will have on commodities.
Outlook: Commodity
prices are heading higher.
There are of course...many, many more factors to
this commodity bull market. If you are interested in learning more about the
commodity bull market or have a friend or family member that needs to be
convinced, I suggest that you order my new book, which Marc Faber called,
"an excellent, very compelling, and easy-to-grasp guides to commodities
and commodity-related investments....a must-read for your wealth
protection!"
Commodities for Every Portfolio: How You Can Profit
From The Long-Term Commodity Boom.
In conclusion, I want to urge investors to augment
the commentary they hear from the fed or other Wall Street pundits with
back-to-the-basics, economics. Because at the end of the day, theory and
statistics are one thing and the reality that affects your pocketbook is
another thing. So the next time you hear talk about inflation being dead,
make sure to send your congressman your grocery bill, gas bill, and the bill
for your kid's tuition.
This is what will ultimately protect your wealth and
allow you to profit from changing market conditions.
Emanuel Balarie
Jabez Capital Management
www.commoditynewscenter.com
Emanuel Balarie
is President and CEO of Jabez Capital Management. In addition, he is also
editor of www.commoditynewscenter.com
and the author of Commodities For
Every Portfolio: How To Profit From The Long-Term Commodity Boom.
Mr. Balarie's industry experience ranges from commodity stocks to futures to
alternative investments. He is a highly regarded advisor to clients and
institutions on the commodity markets, and has had his research published all
over the world. In addition to being a regular guest on CNBC, Balarie is
frequently quoted in financial publications such as, The Wall Street Journal, Reuters, Marketwatch from Dow Jones, and
Barrons. Mr. Balarie is a graduate of UC Berkeley.
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