Bad News for Homeowners – Good News Concerning Water, Food, and Energy

Joel Bowman, reporting from Manhattan, New York City…

The tide is rising…and American homeowners are strapped into their concrete boots.

According to a new report by Deutsche Bank half of U.S. mortgage- holders will be “underwater” or “upside down” on their loans by 2011 – that is, they will owe more on their loan than their property will be worth. And it’s not just those risky subprime borrowers who will feel the pressure of the rising debt waters (although the report suggests up to 69% of home “owners” in that category will be submerged).

As it turns out, prime conforming loans, those ordinarily considered to be the safest bets, will sink the quickest. The report suggests that 41% of these relatively “safe” home loans will be underwater by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009. Furthermore, forty-six percent of prime jumbo loans (those greater than $417,000) will be larger than their properties’ value, up from 29% over the same period.

Partly, this equity to debt inversion will be due to continued fall in home prices. Covering 100 U.S. metropolitan areas, the bank predicts home prices will tumble another 14% through the first quarter of 2011, for a total drop of 41.7%. The problem is exacerbated when people simply give up on their loans, knowing full well that, without jobs or a rise in the value of their home anywhere on the horizon, they might just be better abandoning the whole situation and starting from scratch (with a demolished credit rating, of course).

It goes without saying that your editors have no idea what home prices will do tomorrow. Maybe the government will bulldoze excess inventory to stimulate prices on the supply side. (That sounds just dumb enough for them to undertake, come to think of it.) Or maybe they will fall another 14%, as Deutsche Bank forecasts. Either way, the days of the ARM ATM seem to be over. And, without a job to supplement that home equity “income,” consumers might find the going tough for some time.

This dour news, however, has nothing to do with the column below in which Rude favorite, Chris Mayer, offers some unusually uplifting news for commodity investors. Please enjoy…

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Oil and Water Do Mix
By Chris Mayer

The oil price is stubborn, like a two-year-old who refuses to eat his mashed peas. Despite all evidence that the market is well supplied, oil is over $70 a barrel again as I write. Taking the view out to the horizon, though, I think it will go higher and will drag the price of most commodities higher in its wake.

Part of the reason for the rise is weakness in the dollar. People often say that oil is denominated in dollars. But maybe it is the other way around; dollars are denominated in oil. A dollar is worth how much oil it can buy. Part of oil’s rise is simply marking down the value of the dollar. Weak dollar means higher oil prices.

People will blame the higher oil price on speculators, but something interesting is happening in the markets for minor metals like molybdenum. Prices are rising, too. The silvery metal, used to strengthen steel, is now $15 a pound — nearly double the $8 and change it fetched in April. This is significant, because there is no futures exchange for “moly.” It trades on a physical spot market. Speculators play a very small role here. The buyers of the metal use the metal.

So there is a demand story shaping up here, too, mostly focusing on a fragile recovery of some sort and mostly centered on China and the emerging markets. The market is looking ahead.

For instance, over the weekend, South Korea reported numbers that show signs of a recovery in that country. Industrial output fell less than expected, and trade volume surged to $60 billion. That was its best showing since last October. Also, South Korean companies have been reporting better-than-expected results.

The biggest buyer of South Korean goods is China. Still, it’s a confusing time because of all the stimulus money that governments around the world have been spending. So it’s hard to say what’s real and what’s just an illusion created by a temporary spending binge.

Another piece of the puzzle from last week: Spot iron prices in China (meaning iron ore for immediate delivery) topped $100 per ton. That’s the highest level since October 2008. The other breakthrough in iron ore last week came when BHP Billiton, the world’s largest miner, announced that a third of its customers were moving to prices linked to the spot market.

This is big news for the industry. The old way was to have annual contracts with a negotiated price. This was bad for iron ore companies because the contracted price lagged the increase in iron ore prices. And when iron ore prices fell, steelmakers just reneged on their contracts. As the iron companies found out, having contracts was a great way for iron ore producers to cap their upside and leave them with all the downside. Not so good.

The industry now looks like it is moving toward more spot pricing, which is a good thing for the producers. Iron ore prices have rallied too, along with crude oil and moly.

Every rally, like every bottle of beer, has a finite life span. There will be lots of bumps along the way, but the prices of many commodities — such as oil, iron ore and moly — will tack higher, in my view.

The price of water is also rising — at least in China. I’ve long watched for this, as it affects companies like Hyflux (HYFXF:pink sheets) – a stock I recommended to the subscribers of my investment service, Mayer’s Special Situations. Water rates in China are well below average. One cubic meter of water in China costs about one tenth of what it does in Germany, for example.

Yet as we’ve covered here, China has a serious water crisis. Mother Nature did not smile on China when it came to water. The amount of water available per capita is only a third of the global average. Low prices only make that worse. Raise the price and people will get smarter about how they use water.

So finally, many cities are raising the price of water. The WSJ points out several places where water prices could rise 25-48%. Shanghai, for instance, raised water rates 25% in June and plans another 22% increase next year.

This is all good for Hyflux, which is in great position to capture those increases. The fact that those water prices are now rising partly explains why the stock is up 80% from its lows.

The stock was too cheap before, anyway. As I pointed out in an e- mail alert on March 16, Hyflux had gotten about as cheap as it has ever been on an earnings basis when it hit $1 per share. I continue to believe that Hyflux has a great future and enormous growth potential ahead of it.

One other note on the news this week: Japan is shifting its focus to investing in agricultural commodities. Japan is the largest importer of food in the world, with an annual bill of more than $40 billion. Now Japan’s big trading houses are looking to invest in assets that produce soybeans, wheat, corn and more. They are eyeing grain elevators and export terminals and grain processors. Some of them are investing in their own farmland.

Mitsui, for example, has nearly 250,000 acres of farmland in Brazil. Itochu, Japan’s fourth largest trading company, aims to double the amount of grain it handles. (All of this from the Financial Times piece this weekend titled, “Japan Thinks Global to Fix Food Shortage” by Javier Blas).

Years of underinvestment in food production around the world is now catching up with us. So I continue to believe that some of the best performing stocks over the next few years will come from the ranks of commodity companies that keep the world supplied with water, food and energy.

I like to say that now is a good time to invest in those things that keep civilization a going concern. The budding economic recovery may prove to be a mirage, but dwindling water and food and energy resources certainly will not.

Fall of the West

Fall of the West

Neville Bennett

Is the West in long time decline relative to the rest of the world? I believe it is, and will indicate some sources bearing that out. It is not a new question for me as in my youth I enjoyed reading Toynbee, Spengler and others.

Many of my generation received a broad liberal education at a state grammar school. Science was very strong at my school, where many friends later became engineers, but we were all taught to love literature, art, music (you had to play an instrument), history and 5 years of at least two languages. At school we debated the rise and fall of Rome, plus the British and other Empires.

West below 50% world GDP

“The Greater Depression (NBR 12 June ) has accelerated the decline of Western GDP of 60% to 64% of global GDP over 1995-2004. A British think-tank, CEBR, had earlier forecast 2015 as the date when the West’s GDP would go below 50% of world GDP, but the credit crunch and changes in foreign exchange has brought the date forward from 2015 to 2009. Defined as US, Canada and Europe, the West’s share of global GDP is predicted to decline further to 45% by 2012.

The report identifies an inventory-led recovery conforming to my bullish attitude to oil and metals (NBR May 29). They predict some bounce in 2009, but in 2010 recovery will be held back by fiscal retrenchment and the impact of structural deleveraging. They conclude, the West “has to get to grips with the fact that we are no longer dominant and cannot expect to have things our own way”. China’s recovery is having a marked effect on oil and commodities.

Oil as an indicator

Crude oil prices have increased by 120% since February, at a time when the IMF confirms a recession in the world economy. Normally, falling crude prices would be expected. Actually, the price is about $72 p.b. and the futures market is predicting $88. So the prices defy “demand destruction”, or the idea that price rises lower demand. BP’s statistical review has shown that for the first time in history, emerging market demand has outstripped the West’s. This is significant in our oil-based civilization.

Until now traders have tended to look at US conditions for oil market leads. Henceforth, Western demand can slump while overall consumption is rising. Perhaps this is one reason why oil prices are strong now. 2008 oil consumption fell in the US by 6.4%; in the BRICs consumption grew y-o-y by 3.3% in China, 4.8% in India, 5.3% in Brazil, and 3.1% in Russia.

The BRICs

The BRICs now muster 20% of global GDP, about the same as the USA. These are rapidly changing societies with a large propensity to consume oil and commodities. Presumably their oil demand will burgeon, as industrialization proceeds at pace. One tends to think of them as financially undeveloped, but they have at least one huge advantage: they save.

Collectively their currency reserves are half of the global total. A recent Telegraph article said G7’s reserves’ (excluding Japan) has only 6% of world reserves. This makes it a little odd that the US dominates the IMF, World Bank etc. How can that last?

The BRIC’s are holding their first formal summit this week in Yekaterinburg, Russia. Curious that it gets little reported because the BRICs could stop lending the West money and deepen the recession. Their agenda includes ways to reshape the financial system and perhaps produce a new reserve currency. The Brazilian President wants the BRICs “change the political and trade geography of the world”.

The Chinese premier arrived as I went to press. I imagine that China will be much less confrontational than Brazil and Russia. China holds the most US Treasuries and does not want to undermine the dollar. It merely wants to supplant the USA as the world’s biggest economy, as it may do in 20 years.

World Economic Forum

Readers may recall an earlier article in which I outlined the briefing for the upcoming Davos meeting. The article specifically questioned the western model of development, and adopted the spirit of Asian capitalism with stronger central direction, saving and heavy capital investment. The report went beyond extending current trends and explicitly discussed “critical uncertainties”, and “potential discontinuities”. It also stressed rapidly shifting geo-economic power. (NBR Jan 23). Changing demography is a factor: “western” populations are shrinking, but emerging country populations are not.

Philosophers: Oswald Spengler

Spengler insisted in the 1920’s, when he was extremely influential, that we were living in the winter time of the Faustian civilization. His description of the Faustian civilization is where the populace constantly strives for the unattainable—making the western man a proud but tragic figure, for while he strives and creates he secretly knows the actual goal will never be reached. His “unattainable” is materialism.

Spengler asserted that democracy is simply the political weapon of money, and the media is the means through which money operates a democratic political system. Politics becomes an unprincipled struggle for executive power. Instead of conversations between men, the press and the “electrical news-service keep the waking-consciousness of whole people and continents under a deafening drum-fire of theses, catchwords, standpoints, scenes, feelings, day by day and year by year.”

Philosopher: Arnold Toynbee

Toynbee wrote magnificent Annual reports during the 1930’s are which I often set as required reading for graduate students. I had the joy once of meeting him. He dropped into Hong Kong University and asked if he could help. I took him to a tutorial, where unforgettably he raged against the state but lauded the polis (city).

Toynbee predicted the decline of the west. All civilizations are surrounded by peripheral countries of greater resources. Once the periphery absorbs the civilizations superior technology, especially military technology, it conquers.

Conclusion

Two centuries of western dominance has passed. The emerging world has caught up in terms of development. The West still has cutting-edge technology and military power, but it is being challenged on every front.