Thinking ahead - planning your investment game

The last time I wrote, it seemed like the global economy generally, and the American economy in particular, was in for a serious bout of greacession.

However, the coordinated global attack on the economic slowdown and banking sector crisis appears to have had some effect with, most importantly of all, confidence being restored. That's not to say there won't be some washouts in the road ahead, but most commentators seem to agree that "The Great Depression, Redux" just won't happen at this time. Opinions on the severity and remaining length of the recession in front of us, and the inflation to follow (or not!) now seems to be the subject of debate, rather than the collapse of the economic system itself.

With all that in mind (or not) and remembering that the most important aspect of investment is the right temperament, here is an investment clock that can suggest various investment timing to be had in the cycle in front of us. Whereas it can often be quite difficult to tell exactly where in the cycle we are, at this time it is unusually clear, at least to the extent of knowing that we aren't in the boom phase, nor have we really reached recovery yet. We appear to be, undeniably, in the recession phase at this time.

Therefore, if you like sector rotation and feel you can use it to your advantage, then this Merrill Lynch clock should be very handy at this time.

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JW

The Confused Capitalist

Agricultural, it's all about the diet ...

Agricultural-related investments remains one of the big, visible, themes going forward over the next ten years. While there's been some mainstream acknowledgement of these major food issues going forward, for the most part, the media has been relatively quiet about the food inflation.

Maybe that's because many countries focus on "core" inflation, which ignores volatile changes in energy and food. These, especially food pricing, are likely to continue to ramp upwards over the next five to ten years.

Feeding the world continues to develop into one of the biggest stories of this century. The supply and demand curves for food, especially due to changing diets in the Far East to have more dairy and meat, continues to favour higher prices for these commodities. Other drivers of agricultural prices are:

- Strong population growth, expected to reach 7 billion by 2013;

- Rising income in developed markets and increased demand for soft commodities in developing markets;

- Climate changes challenging agricultural production processes and product quality;

- Arable land per person is decreasing;

- Demand for agricultural products from Bio-energy (sustainable energy resources) market adds an important and competitive new demand source. Agricultural commodities are getting
more and more important for energy generation.

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This is something I have written about here (provides some specific suggestions, which I continue to support) and here. I re-iterate those calls to make agriculture-related an important part of your portfolio. In Canada, you can now also consider a recent Claymore Investments ETF product, COW, which invests in agricultural companies.

Despite recent run-ups in prices of companies serving the agricultural sector, and the underlying commodities themselves, I consider that this investment theme is still just early in the third inning of a ballgame; a ballgame that itself may even go into lengthy overtime.


JW

The Confused Capitalist

The Upside of Declining Consumer Confidence

The Conference Board reported that consumer confidence dropped in August, giving up nearly all of its July gains.

As the Conference Board reported it ...

"A softening in business conditions and labor market conditions has curbed consumers' confidence this month. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."

(Note: If you're on a blog aggregator, you can visit The Confused Capitalist here (or here: http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content! )

It was reported that this was a prime cause of weakness in the stock market today. Despite notions to the contrary, declining consumer confidence is a good, healthy response to the indebtedness of both the consumer, and the federal government.

Acting otherwise would be a denial of reality. For those soundly in the bullish camp, let's review some facts:

1. Household debt at unprecedented levels;
2. A negative household savings rate, something never seen in the midst of an economic expansion;
3. Federal government debt at the highest levels in recent memory, and still growing;
4. The continuing trade deficit;
5. The prospect of a continuing decline in the currency, meaning the Fed has to continue to walk the tightrope between importing inflation on the one hand, and managing the orderly decline of the currency on the other. All the while trying to massage the debacle in the credit markets. An undertaking fraught with short and/or long term risk. Take your pick.

Yes, there's times to be confident, like when things are humming along really well. This isn't one of those times. Then there's the confidence that comes from having been in a place of despair, but when the trends are moving in the right direction. This isn't one of those times either.

Now is a time to make sure you get your own financial house in order.

Start with the basics - your household budget. Review it for unnecessary expenditures. Trim your debt levels, with the most expensive interest rates first. Save some money! Use a high yield account, or find some solid blue-chip stock prospects, or broad-based ETFs. Save (anyone remember the word?) ... save ... save ...

In short, the upside of declining consumer confidence is the ability to not to be a monkey brain - to recognize the potential for trouble (like now), and put some preventative personal actions in place. While the trouble may or may not materialize, planning and acting like this will serve you well in any case. Now isn't the time to be an overconfident consumer - its' the time to be a confident saver!

Don't be blind to reality - open your eyes, look around, think, plan, and act. Are you a monkey?

JW

The Confused Capitalist

Food Shortages and Food Inflation: Malthusian future?

Image: Food skyscraper of the future?


Although Malthus has long been laughed at by those convinced that technology will solve any problem, in any finite system, one must reach some sort of system limits, as demand for a resource outstrips that method of producing it.

Although it may happen for slightly different reasons than postulated under the Malthusian catastrophe scenario, it appears this is starting to happen with food and will soon be found in a supermarket near you, via food inflation.

There is a confluence of forces that make serious food inflation, at the minimum, particularly likely over the next five to ten years:

Factor number one is the bee die back, and the effect it is likely to have on food prices over the next few years, as yields are curtailed due to a reduction in pollination. One economist figures that this will put over $15 Billion in North American crops at risk, all adding to potential for food inflation.

Factor number two is the growing wealth of emerging markets, and their propensity to emulate a western-style meat-heavy type diet, as wealth grows. This puts increased pressure on grain crops in particular, as it takes anywhere from about 5-20 pounds of grain to produce a single pound of meat. As large populations in China and India move further away from vegetarian or semi-vegetarian type diets, this strains limited global food stores even further, adding to food inflation.

Note: If you're on a blog aggregator, you can visit the Confused Capitalist here or here (http://confusedcapitalist.blogspot.com/) for additional articles and exclusive content!

Factor number three is the changing climate. Scientists have long known that food yields can come under pressure in at least two ways as global temperatures climb. Firstly, at higher temperatures, some plants - despite ample water - either cease production, or lower production. In either case, yields are lowered. Secondly, changing climate results in more extreme weather, including droughts, hurricanes, extreme rainfall etc. Total yields are obviously reduced under those circumstances too. (Alt citation, PDF)

This was recently brought home to me by an Australian cousin, who laments the drought his country has been going through for some time: he tells of kids in some parts of the country now entering high school, who have never seen rain.

Factor number four is the number of lunatic politicians, in their bid to never offend anyone while running for office, avoid telling the truth about ethanol from corn: it's doubtful it actually produces any additional (net) energy after it's energy inputs are calculated, AND it's going to (in fact, already has) further increased food costs.

I watched a shameful 20/20 series where every single presidential candidate at a town-hall type meeting claimed that ethanol was part of the solution, rather than more likely to contribute to an even bigger problem. Whatever happened to a "give 'em hell", Harry Truman style candidate? Are they all too meek, too bland, and too gutless for even one of them to stand up and tell the truth? And the truth is, is that ethanol, bio-diesel, or any other fuel made from food sources is only going to add to food inflation, possibly to serious food inflation.

One article also discusses many of these issues and interestingly points out that China, to feed itself, should be adding a quantity of arable land equal to Maine, every year. Instead, it has lost that amount every year over the past decade. Another article, in the respected Popular Science magazine, discusses these looming food questions.

There are, of course, always those head cases who are convinced that technology will solve any problem. However, increasing technological solutions have coincided with increased energy demands and, in a global warming world, one of these trends most likely has to give.

I read a recent article suggesting that food skyscrapers may be the way of the future - but these won't be coming any time soon and, due to costs, may end up with all those other strange Popular Science ideas that never see the light of day due to cost or technical issues that can't reasonably be overcome.

The Confused Capitalist will provide some practical and investment advice on how to deal with this over the coming while.

More reading sources:

• Vertical Farming Dream


• Deeper Thinking About Serious Issues


• Making realistic interim changes


• For the more personally ambitious


• What changes are really needed & how to go about it

JW

The Confused Capitalist

The problem with forecasting - a call for scenario thinking

I'm reading a very interesting book relating to risk management, Upside Downside: Simple Rules of Risk Management for the Smart Investor. It's a light read and a rather small book - nevertheless, it has some good ideas.

In the section discussing why investors should lay out different possible scenarios, rather than simply forecasting, it makes the point that forecasts are too often simply the present extrapolated into the future. It uses some rather famous statements by prominent individuals and organizations to make the point:

• One day, there will be a telephone in every major city in the US - Alexander Graham Bell, circa 1880.
  
• There will never be more than 1,000 cars on Europe's roads, "because that is the limit on the number of chauffeurs available" - Daimler Benz spokesman.
  
• "Stocks have reached what looks like a permanently high plateau" - Irving Fisher, professor of economics, Yale University, 1929.
• "I think there is a world market for maybe five computers" - Thomas Watson, chairman, IBM, 1943.
• "There is no reason that anyone would want a computer in their home" - Ken Olsen, chairman, Digital Equipment, 1977.
• "... with over 50 foreign cars already on sale here, the Japanese automobile isn't likely to carve out a big slice of the U.S. market" - Business Week, 1979.
  
• "640K ought to be enough for anybody" - Bill Gates, Microsoft, 1981
  
• "Television won't be able to hold any market it captures after the first six months. People will get tired of staring at a plywood box every night." - Darryl F. Zanuck, 20th Century Fox, 1946.

or how about this one that I recalled ...

• Oil: Under the heading "Drowning in Oil", The Economist magazine predicted the world - then with $10 a barrel oil, was heading towards $5 a barrel oil - 1999. Today, forecasts here are quite different.
  

I hope you got a chuckle out of some of these - but as investors, we need to be diligent in thinking about both risks to our investments, but also potential opportunities that can arise - if the future turns out different from the past - i.e. one does not need a chauffeur to pilot an automobile around.

The book points out that laying out the possibility of a number of different scenarios, requires some thinking about the situation, and considering that differences in the future may arise. By laying out a number of different possibilities - some perhaps even seemingly far-fetched, it allows us to better consider the risk/reward potential of an investment.

By doing so, we avoid the blind reliance on the "most likely" forecast, and to therefore protect ourselves to some degree against other, seemingly obscure, possibilities.

Scenario thinking - worth considering in your own investing.



JW

The Confused Capitalist