We are half-way through 2010 and maybe it’s time to think of how the rest of the year might shape up both in farming and the stock market. The price of oil, interest rates and international economies now affect you and other farmers a lot more than perhaps 50 years ago. Here are my thoughts on the next six to 12 months.
Most countries face tougher economies, but the countries that bit the bullet some years back now will have a much better economy than the countries that have lived beyond their means. I think Canada will have a good economy, partly because (and this might tick some readers off) of the GST the government is collecting on consumption. A lot of governments would love to have that tax grab but don’t dare set one up. Europe has what is called a VAT (value-added tax) which is much like a GST but the money from that has been abused and when people stop buying stuff, that tax income drops.
People in countries such as Greece, Italy and Spain and so on will discover that people working less than half of their life is not sustainable. This business of having many years of non-productive living just can’t support the lifestyle they have enjoyed. As you’d expect, the strikes and riots in Greece are scaring away tourists, one of the main industries in that country. It means more people will go to other countries or stay at home and spend their money. Not all bad, depending on where you live.
Many countries in the G20 more or less used debt to manage the economy out of the recent recession. Most countries don’t have enough debt-servicing capacity to do that again anytime soon. So while the overall economy might need more spending from people and governments both have maxed out their lines of credit. Plus now people and countries need to service the debt they just took on. Of course since most countries use paper money, they can print more of the stuff if need be. They have and they could print more. The big fear is that will trigger inflation down the road; it usually does.
If you Google the words “This time it’s different” you will find an essay by two guys who studied recessions/depressions going back 800 years. This past recession was triggered by too much debt. The process of paying down that debt is called de-leveraging. The recessions caused by de-leveraging usually take five to seven years which takes us to about 2017.
Which begs the question: is inflation a threat? Sure … eventually. But with 9.5 per cent unemployment in the U. S.; hundreds of thousands of people quit looking for work; flat or falling house prices; shrinking money supply; people saving more and the likelihood of higher taxes I don’t see how inflation can be a serious problem for years to come. But we should still be careful and watch for signs that inflation is starting up. We could see where the price of necessities such as food and energy go up but the cost of computers and cars come down for example, so the inflation stats stay almost flat when in fact it will cost more to live.
One more thing: In the fall of 2011, something like $165 billion worth of real estate mortgages come up for renewal. Odds are the price of real estate is not going to go up by then, so odds are the U. S. government and central bank will want to keep interest rates low until that mess has worked its way through the economy. Stock markets look ahead so we should not be surprised if many stocks drop sometime in the next 18 months.
Banks and insurance companies are being forced to hold more cash in reserve. So while President Obama and others keep saying they want banks to lend more, at the same time governments are putting in regulations that force banks to hold more cash so lenders lend less. Plus U. S. banks can borrow money from the central bank for close to zero per cent interest and collect three per cent or more with long-term U. S. bonds so why bother lending the stuff out to someone who might not pay the money back?
Our Canadian banks and insurance companies likely are some of the best financial businesses in the world but the price of their shares has been held down due to the new regulations.
The price of oil has more reasons to go up than down. The blow up in the Gulf of Mexico will cut into future supplies sooner or later. At the same time people in China, India and the BRIC countries will use more. And us North Americans will be hard to wean from our addiction to oil. Once the Gulf issue is fixed, drillers will face more regulations which leads to higher costs and that will reduce drilling. Tighter supplies with rising demand likely will keep a floor under the price of oil and that floor likely will be sloped upward.
We own shares in PetroBank (PBG) and we did own Suncor (SU) and might again. I usually sell covered calls on these stocks.
The outlook for natural gas is not bullish. There is lots of natural gas around. The Americans have discovered trillions of cubic feet of the stuff in huge shale beds and the stuff is quite cheap to bring to the surface. Plus with Liquefied Natural Gas (LNG) natural gas can move around the world quite easily if prices get too high in any country.
We own a stock with symbol GAS but it might be a mistake. Talisman might have been a better choice and of course we can change. Still, I paid $4.06 for a couple of thousand shares and sold a call for 40 cents cash. If I can do that twice a year that money will bring 20 per cent per year.
Production of grain and oilseeds is up these days, but ethanol and biodiesel is taking some of the supply. It looks like the prices that used to be a ceiling are now a floor but the viciousness of compounding costs is cutting into profits.
Meanwhile, the low interest rates and bullish outlook for food prices are diverting money into farmland to the point where land can’t pay for itself at today’s prices. But that’s nothing new. Owing some farmland that is paid for can be a good part of a retirement plan.
INTEREST RAT ES
Many believe that interest rates have to rise a lot because sooner or later the countries like China that have bought U. S. bonds will get tired of owning greenbacks that keep dropping in value. I’m not so sure rates will rise. I think the markets understand, if that is the right word, that big debts are more affordable/tolerable/manageable at low rates of interest. Back in 1929 many owed money to the U. S. one way or another. Now the U. S. owes money to many one way or another. I doubt any lender will be stupid enough to cause rates to rise a lot and trigger a massive economic meltdown.
I expect interest rates will stay low for years to come. Long term, interest rates should stay low until money that is parked at those low rates decides to come out of hiding and put into circulation.
I expect the price of gold and silver to keep rising. Gold will be part of more and more people’s long-term investment plan. People in India have used gold for that for years. Expect China to do the same.
Silver is used in electronics but is not expensive enough yet to reclaim so it gets used up. The price should keep rising. We own shares in Barrick Gold, Yamana, Silver Wheaton and Osisko and I sell calls on most of them.
The price of precious metals usually runs in cycles. We expect the price of gold to rise towards the end of July perhaps for three or four months until money decides to go into other stocks which often is towards the end of October. But these moves in price can change.
COPPER, COAL AND IRON ORE
Copper has new markets. Buildings in China will need some and electric cars will need some, too. These are new users of copper. There is lots of copper in the world but there is new demand, too. Coal is used to make steel and lots of steel will be needed to build buildings, roads, nuclear reactors and such. Demand for coal and iron ore should be strong. But the price of these commodities does move up and down with the mood or perception of how the Chinese economy is going to be. Looks like three dollars a pound for copper is a ceiling.
Theoretically the cost of fertilizer should be low because natural gas is cheap. But producers often shut down production if the price is too low until they create shortages. Russian producers do sell cheap fertilizer from time to time, likely just to bring in cash which has helped to bring down prices.
Keep in mind speculators are an important part of these markets. They are the middle man, so to speak, between suppliers and users. But they do get carried away from time to time and drive up the price of one commodity or another to some irrational price and then drive the prices down so they make money both ways.
Andyismostlyretired.Hemanageshismoney andpublishesanewslettercalledStocksTalk whereheexplainsindetailwhathedoeswith hisstocks.Ifyouwanttoreaditfreeforamonth gotoGoogle,typeinStocksTalk,clickonfree month,clickonform,filloutfourlinesandclick submit.SendAndyanemailat [email protected]