2009 Preview

The world hurtles onward. Last year on January 1st we characterized the coming year 2008 as being “America’s Most Dangerous Year.” 

A 2008 fraught with potential issues that would include $1000 gold and high commodity prices. Great for us, great for our subscribers.

And also a year characterized by potential traps, including a global banking crisis. Not good for anyone.

And by continuing and worsening problems with a US dollar, a currency we viewed then and still do now as damaged beyond repair by the USA’s debt loads and failure to back its currency with anything tangible: a danger to us, a danger to Europe, a danger to China, a danger to the world economy.

Our overriding concern had for several years been that the United States had no exportable product it was selling to the world except “money”—the creation of “credit” which when used becomes“debt”—a commoditized debt the United States banking industry could then package and sell to the world at a profit. Which could then be used as collateral to create more debt to sell. The US had been earning a living on this game for a decade.

Which is one of the several reasons we had begun investing in the Brazilian economy in 2004. Our position going into 2008 was that the way to negotiate 2008 as an investor was with gold ETFs, big global mining companies that pay big dividends and will benefit from what’s called the “Commodities Supercycle,”global steel, and oceanic shipping. Companies with low P/E’s high quarterly dividends and revenue from a global base rather than from the United States economy.

The banking/credit/debt “money” crisis came at a time when the United States has been, for some time, becoming a Third World Country: poorly-educated, colonized by other wealthier countries with the cash to buy its assets (Anheuser-Busch, for example, now is owned by the Belgian InBev) 95% poor, 5% rich, with no middle class and no manufacturing base from which to create wealth.

The combination of Third World America, the failure of the US “money” occupation, and the failure of the US government to address its failing currency, which is increasingly losing its position as the world’s reserve currency, made 2008 a deadly year.

There is no question that US banking problems were more far-reaching and far more devastating to the American economy than anyone could have realized until it was too late to try to get out from under its falling shadow.

Thanks to Henry Paulson and Ben Bernanke and their gamble to save the banking industry, get the country back to its status quo of selling “debt” and “money” and re-establish the dollar as the world’s reserve currency, a gamble to save Wall Street rather than to try to save the country and the American people, we are probably worse off than we might have been as we enter 2009.

The world is currently confronted now with a “strong” US dollar. We are very skeptical about this. The “strong” US dollar could have been based on the value of all the foreclosed property in America, which the Treasury originally set out to buy. Instead, the Treasury saved Wall Street. Now, the strength of the US dollar is based solely upon the purchasing power of America’s Consumer Culture. A culture which is based on a vigorous, prosperous middle class and a prosperous economy. The US is becoming a Third World Country and no longer HAS a prosperous middle class to spend money and support both the US dollar…and the world economy.

An enormous surprise late in 2008, in response to the US economic crisis, has been the re-emergence of a sort of modified Marxism/Socialism not just in the United States but throughout most of the civilized/industrialized world as well.

The United States of America is fast becoming the Unified Socialist America, owner of American National Motors, The Bank of the United States, and the Real Estate Corporation of America. In 2009 it will become America Inc, employer of everyone who does not have a job.

It is likely that Karl Marx and Herbert Marcuse are rollerskating through heaven arm in arm with big grins on their faces, watching all this. It is also possible to argue that the USA is becoming the Union of Soviet Socialist Republics, the former USSR, whom we were supposed to have vanquished two decades ago.

As we enter 2009, theme music might be in order. 2008’s might have been Bach’s the well-tempered Clavier prelude XVIII.  2009’s is Tchaikovsky’s Slavonic March in B-flat minor. More commonly known by its French name, marche slave.

The party is over. The US will no longer be able to magically create “money” by pressing “send” or pushing “enter.”  The United States is going to have to get a job.

The first job of course is the enormous American public works programs that will begin almost immediately in our country. The second job is that the United States must come up with a new industry and a new industrial base that provides a product or products the USA can sell to the world. We suspect that it may be electricity. But it may also be something else. Or two or three things. Fortunately, our people have always been good as this.

It’s important to understand, however, the difference between “money” and “wealth.”
Here is what creates wealth. Here is what creates value going forward. Here is the dirty dozen:

  1. companies which mine and bring to market gold silver copper iron ore uranium aluminum etc
  2. companies that can manufacture steel
  3. companies that can make something from the steel: ships, bulldozers, agricultural machinery
  4. companies that can provide building materials: cement,etc
  5. companies that can provide agricultural fertilizers like phosphates
  6. agribiz companies that can provide food lumber etc
  7. companies that can create products via practical scientific apps: Danaher, IBM, Intel, etc
  8. fisheries and other ocean-harvesting operations
  9. energy companies: the people who bring you petroleum gas wind solar oil-from-algae etc and the companies that provide the R&D for energy
  10. pharma companies that can create medical products that serve humanity from hard science and ideas: penicillin, malaria vaccine, useful genetic breakthroughs
  11. hard-science and engineering companies that create products that lead to new industries and broad new socio-economic advancement: Corning, Dow Chem, Northrop, NVidia, etc
  12. raw agricultural property: what is called arable land.

That’s it. That’s all there is.“Money” ie “credit” that can be turned int o“debt” and resold, is NOT wealth. To create wealth you can only to dig it up, grow it, or brainstorm useful and valuable products into existence. All else is commentary.

The surprise to everyone has been that this “New Socialism” is global, and it may not be temporary. It may be what the 21st century actually will look like. One powerful immediate effect it will have though is that in response to the global economic crisis which the United States caused, we’re seeing the creation of huge public works programs throughout the world. This means jobs, economic flow, and use of raw materials. It also means that the foundation of the entire new century is, this year, about to begin.

And that means that the demise of the Global Commodities Supercycle has been greatly exaggerated.

The drivers of the commodities supercycle are Urbanization, Industrialization, Global Infrastructure Buildout in the less-developed parts of the world, and Regeneration of Longstanding Regional Economies.

As these massive public works projects proliferate, the commodities supercycle is not only not going to stop, it is not only not even going to slow down, it is in fact going to speed up and grow broader.

As we write this, a pound of copper is cheaper than a dozen eggs. This is a comic situation and not one that will remain in effect for long. A window of opportunity that exists now to buy shares of these various commodities companies at Once-In-A-Lifetime prices is one that will not last more than a few more months. Possibly a few more weeks. See our Once-in-a-Lifetime BUY lists and take advantage before this window closes. The new century has 91 years to go,but this will not happen again. Nearly seven billion people are out there. They all want a piece. As we are fond of saying at MW: too many ants, not enough picnics.

We expect gold to trade in an $800-1100 range in 2009 but for gold mining shares to do very well both in 09 and afterward in a world that is steadily moving away from the US dollar and toward a standard global value system based on gold and sooner or later upon silver as well. Iran converted its financial reserves into gold in November 08. Various Arab countries are moving toward similar economic stances. China remains strongly invested in US T-bills but this is (a) political expediency and (b) China has large quantities of natural resources including big proven gold mining reserves.

Gold demand exploded in 2008. Customers are queuing up at coin shops worldwide to empty the shelves. Mints from Perth to Ottawa have been running 24/7 and still are forced to ration coin and bar gold shipments to dealers. Gold ETF vaults are bulging as savvy investors use gold ETFs, not overnight money markets, as a piggybank, and arbitrageurs trust fewer and fewer paper currencies. Q3 2008 world demand for gold was a record $32 billion, up 45% from a previous record set in Q2.

Adding to this demand: gold production in Australia will fall to a 20-year low in 2009. Also adding to it: the overreaction to a global economic slowdown (which won’t last as long as even the experts think) on the part of mining and steel companies which means big mining companies and steel mills will have to reopen mines, rehire workers, restart projects to ensure enough gold silver copper iron ore and I-beams.

Who benefits the most? Big Gold. BVN and PCU, two of several companies that understand this, already have begun a new $1 billion joint gold and copper project in Peru. Gold @ 800 is worth ore than twice that much in US dollars. This is like picking up money off the ground.

And Big Mining. These giant mining companies are the backbone of the new century. The companies that provide iron ore, industrial platinum, aluminum, and copper. And their shares are selling for prices you’ll never again see in your lifetime.

Back in the United States? This is not a cyclic downturn. Things are NOT going to turn around, and they will NOT be what they were before, as they have been in the US since post-WWII. 1950s BBQ grill/bass-boat USA.

The United States is not going to “right itself from a cyclic downturn” and be what it was before. Tens of thousands of jobs are vanishing, and these are white-collar jobs. Jobs with high salaries that provide middle-class lifestyles in middle-class suburbs with two car, kids who text-message and have college funds. That’s going away. And it will not come back. In 2009 Americans will be far too busy looking for work, filling out government job applications, and trying to find the money to buy a sandwich to spend a lot of time text-messaging, picking out cell phone ring-tones, or hanging out at SBUX.

That means consumer tech won’t do well this year. But demand I-beams and the kind of steel that goes into highway construction will be very strong, and in 2010, demand for railroad tracks will be very strong as well. We are entering the New Age of Steel. We’re probably at the start of a New Age of global shipping and expanded rail freight, as well.

We continue to stay away from most NASDAQ stocks, from almost all retailers, from stocks that have high P/E’s and from stocks that pay no dividends. In an era of questionable cash flow, dividends can provide income, and they can be used to buy more shares in first-tier companies.
This doesn’t mean we think consumer technology is over. But it’s oriented toward basics now, and it’s global. We’ll be talking a lot about it this year. An interesting thing to contemplate: the “21st century laptop” is a cell phone.

Real technology is even less “over.” The world must come up with the machinery to manage its water, to travel fast and economically without trashing the planet, and to provide more and cheaper energy. These are probably jobs that only the United States can do.

America’s problems are disruptive, but they are not fatal. The USA that Americans have idealized and tried to maintain and pretend still exists as it was in 1957 is gone, a vanishing remnant of a century that already has vanished.

View America not as a fixed entity, but as the social experiment-democracy- that it always has been. Experiments change en route, and they don’t often have fixed outcomes. 

For Americans, 2009 is the start of a Brave New World but it will not be a world devoid of familiar objects and treats. There will still be Twinkies® there will still be Whoppers® there will still be Intel processors, and there will still be Corvettes®.

A note from Bart, in southern California, from a few days ago:

I keep watching National Treasure and wondering if we are going to make it. I have the sound track to the film in my car, a Volvo station wagon w a $3000 sound system.
At times the sound track upsets me. It so strongly speaks to the greatness and majesty of what we were, of how we started, as opposed to the wretchedness and moral squalor of what we became by the end of last year.

I did the whole Virginia Patriot thing last spring: Monticello, the University of Virginia that Jefferson designed, The National Archives, the Corcoran, the Smithsonian, all of it.

It really DOES matter. WE are still IT. WE are still the beacon and the lighthouse for everybody.
Are we going to make it? The answer is: we must.

Keep the faith, everyone. We are the USA.
We are the American people.
Come along with us, and we’ll negotiate 2009 at a profit.

Read our preview of 2008 >

Read our preview of 2007 >

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