Yesterday, the Dow was up 90 points. But gold hit a new record high. So did the commodity index, the CRB.
What should you do with your money now?
Today, we take a break from our usual cogitations to bring you something useful. A suggestion.
“Sell the U.S.,” we have said.
“Sell the U.K.,” say our colleagues in London. The English have very similar problems to the United States – too much debt, too little profitable output, high costs, too little energy, too little food. What’s more, the U.K. economy relies far more on the financial industry than America does.
But today we are feeling positive… helpful… almost earnest. We offer some buy-side advice.
Our colleague in Buenos Aires has persuaded us that Latin America is a buy. (Spanish speaking readers are invited to go directly to moneyweekes.com to read his reports unblemished by our bad translations.)
The whole region is booming, says our man in South America. GDP growth is solid to spectacular. Currencies are rising. These economies are relatively unburdened with the high costs and legacy obligations of Britain and America. And they produce what the world seems to want most – food and energy.
“The economy of Peru is gathering momentum,” writes Horacio Pozzo. “GDP growth reached 8.99% in 2007, with a strong growth in consumption (rising at a 7% annual rate) and with outstanding growth in capital investment, at around 23.4%.
“Wherever you look, the Peruvian economy is healthy – with a fiscal surplus of 2.6% of GDP and an external surplus of 1.5% of GDP, with record foreign currency reserves of $28 billion, unemployment of 6.9% and an inflation rate, which reached 3.9% last year, under control.”
By almost every measure, in other words, Peru has a more solidly growing economy than either Britain or America.
In Brazil, meanwhile, consumer spending is rising too – up 5.5%, compared to an average of only 2.4% in the ’90s. How come consumers are spending more? Simple… there’s more money in the country and they have more jobs. Earnings have gone up 148% in just the last five years – to a per capital level of $2,794 in 2007. Unemployment has been going down too. It ran into the double digits in 2001 and 2003. Since then it’s been coming down, to the lowest level in the last ten years in 2007 – at 7.4%.
Inflation is still running a bit hot in the Amazon. But the authorities are turning on the air conditioners. The key lending rate of Brazil’s central bank is 11.25% and may go up, as officials try to hold down price increases. And unlike the U.S. president, Brazil’s top man is actually becoming more popular – with approval ratings above 50% and rising.
Money is flowing to Brazil because the country is a major supplier of raw materials and soft commodities – the very things whose prices are rising so sharply. Just last week, for example, Brazilian suppliers got South Korean and Japanese buyers to accept a 63% increase in the price of iron ore. Wheat, of course, is off the charts.
But how do you take advantage of the boom in Latin America… and without getting whacked by a downturn in commodities? Here at Markets and Money, we are suspicious of commodity prices. As soon as you notice a big spike up in a commodity – such as wheat, currently – you have to expect a big spike down. Commodity producers – with some major exceptions – react quickly to price increases. They produce enough to meet the demand… and then, typically, a lot more. Bust follows boom, sometimes so quickly that an investor has little time to get into position.
The 1970s, for example, were boom years for commodities, generally. But the price of sugar actually peaked out at 70 cents per pound in 1973 – at the very beginning of the boom. Marc Faber explains:
“Despite accelerating inflation rates, sugar thereafter failed to make a new high in the 1970s. After 1981, when interest rates fell, the price of sugar continued to decline and bottomed out at 2.5 cents per pound in 1985. And although interest rates continued to decline in the 1990s, sugar was still selling for just 5 cents a pound in 1999… very simply because supplies exceeded demand.”
A boom in commodities is almost always followed by trouble. That’s why our old friend Rick Rule says, “most people can’t believe how cyclical commodity markets are.” He goes on to say that in commodities, “either you are a contrarian or you are a victim.”
But Horacio makes a suggestion for how to profit from Brazil’s boom without getting on the wrong side of a commodity cycle.
TAM is an airline with nearly 50% of the domestic Brazilian market. Air transport in Brazil is rising at 10% per year. Yet, TAM sells at a price that is only 4 times earnings. And it has a price to book value of only 1.14.
Buy TAM, says Horacio.
Latin America is booming. And our colleagues in Buenos Aires, Argentina are well placed to help you profit from the many value opportunities south of the border. They have launched an email report service entitled Informe Moneyweek that covers both Latin American and international investment opportunities. It’s written daily in Spanish by South American market experts, Horacio Pozzo and Paola Pecora. If this is something you would be interested in, I encourage you to click here … and by the way, it’s free!
Markets and Money