InvestorPlace Blogs is powered by Marketocracy. Marketocracy has authorized Investor Place Blogs as an official registrar for voting through Marketocracy's Investment Research Rating service. Registered members of InvestorPlace Blogs are linked with a Marketocracy account to establish voting power based on their performance of trading and posting on stocks.
I do not believe we are in a similar pattern to the 70s stagflation era even though there are some similarities. Growth is slowing, inflation and unemployment is rising and commodities especially energy is nearing an all time high (adjusted for inflation.) But, the unemployment is still well under 6%, no where near the levels of the 70s. The inflation, although rising, is not comparable either. In the 70s, the oil crisis was due to a number of factors including price controls and a short supply thanks to OPEC.
Today, thanks mainly to Regan, we no longer have price and wage controls and much less industry regulation which reeked havoc on the economy. Thus, the slow down in economy is different. Today it is caused mainly by a home market bubble bursting and the inevitable fall out in the financial and credit markets that ensued. Reckless? Yes. But, eventually the market will work it all out although we will still be in some pain for a while.
As far as inflation goes, you have to look at two things, energy and food. Almost everything comes back to these two items. The food commodities have broken out to all time highs and show no signs of retreating. The energy prices are not caused as much by a lack of supply but geo-political concerns and an ever growing demand from emerging markets. I think we may see a reduction in price below the $100 oil soon but we won't see $50 oil any time soon, if ever.
Here's where the rubber meets the road. It's all about "agflation"!
Again, there are a number of reasons for this. The most obvious reason is the increased demand for food, particularly meat (beef, pork, poultry and fish) in emerging markets. As the people in these countries earn a better wage, they learn about protein from meat and once they eat meat, they never go back. (That reminds me of a joke that would not be appropriate here. /grin) As far as the cost of meat is concerned, it takes many times the number of grams in grain to produce 1 gram of meat depending on the type. For example, I believe it takes something like 7.5 grams of grain to produce 1 gram of beef.
The less understood reason for agflation is that we are burning 35% of our corn crops in the US to create ethanol! This should be a crime. Ethanol is a terrible fuel. I do remember working through school at a gas station and I remember when the first gas that "contains up to 10% ethanol" was introduced at the pumps. Many cars could not handle that type of gas for a few years until the automakers made some big adjustments to their combustion engines. If anyone remembers correctly, this was shortly after the laws about new cars using unleaded fuel only. (Anyone remember the nozzles of unleaded pumps were smaller so leaded gas could not be pumped into newer unleaded gas tanks?) The first gas pumps that contained ethanol were the unleaded pumps as the older cars could not handle it. It burns too hot for one and is more corrosive causing all kinds of problems with things melting and gumming up inside the engines causing poorer mileage performance if not complete break downs.
Ethanol is also a terrible product to make. Consider how ramifications of the new government laws promoting this fuel affect the economy. The most obvious is that more and more land is needed to grow corn (remember food and animal feed?) just so it can be converted to fuel. These means less land is being used for soy, wheat and other grains that would normally be planted in fields next to the corn. The effect is the rising commodities prices for almost all kinds of grain foods which then filters into almost all areas of the food industry. The restaurants, the prepared food makers, the snack food makers, the meat producers, and the raw grains have all gone up in cost at the stores due to this. Take a simple taco and work it out. Corn for the shell, the feed for cows for both beef (or meat of choice) and the cheese from cows have all gone up in price.
A lesser known fact about ethanol is that it takes huge amounts of clean water to produce. This will even raise the prices of things that need to be watered as well as your bottled water from Costco. Clean water is shrinking commodity in this world as well and we will soon wake up to that fact. So, we listen to Al Gore trying to "save the planet" buy polluting more of our drinking water supply to save us from the evils of oil by mandating ethanol production be increased? (BTW - I can't back this up but I have heard it takes a huge amount of power to do the conversion from corn to ethanol as well, lessening the effectiveness of ethanol as an alternative fuel.) On a side note, Cargill, a private company that makes ethanol refiners among other things, just pulled the plug on the construction of a new 220 million dollar ethanol plant citing the high cost of corn is not making it a viable solution at this time. Now it's too expensive to make ethanol too!!! Need I say more on the ethanol topic? Please write your congressman.
The ethanol laws IMHO should be repealed and we should stop burning our food!
OK, back to stocks. So what stocks work for the agflation play? Here's the short list.
Monsanto (MON) creates genetically altered seed to produce a higher yield per acre. They aren't making land anymore and some of it is now used to burn fuel. You have to optimize the land you have to produce the most you can.
Mosaic (MOS), Potash (POT) and Agrium (AGU) are all fertilizer companies which again, help the farmers maximize the output of their land. Among these, I like POT (hmm... that didn't sound right) but since most of these are at or near a 52 week high, I am waiting for a pullback in any of these to buy into them. As I write this, they are all trading down right now.
The last piece of the puzzle after planting the seed and getting it to grow is finally getting it out of the ground. This is where Deere (DE) comes in. This company is by far the best in breed for large combines, tractors and construction equipment as well. In addition, they just bought into a Chinese company to continue their penetration into that market.
There are certainly other companies that can play into this theme as well including chemical companies like Dow Chemicals (DD) that produce liquid fertilizers and pesticides and other seed manufacturers.
None of these stocks are cheap by any traditional methods of valuation. But famine and growing populations that now have learned the joys of BBQing or at least some form of meat do not go away. The population is not shrinking and more and more people can now afford meat in their diets and will not go back. Add to this the idiotic laws on our books causing more than 1/3 of our corn crops to be used for ethanol instead of food and you will see this is a multi-year trend. I am waiting for pullbacks in any of these stocks to get into them. They are only going higher.
Good luck as always,
Uncle John
| 
RSS 2.0
