Saturday, February 26, 2011

The Driving Force Behind MidEast Unrest

As per usual, the mainstream media is missing the primary driving force behind world events. In this case, we are talking about the political unrest and turmoil in the oil-rich areas of North Africa and the Middle East.

Don't get me wromg, political freedom is one of the main driving factors. But the spark that set all of this off is the price of food.

The cost of food has ballooned by some much (to record highs, according to the United Nations) that many people in this part of the world can no longer afford to feed themselves. And simply put, hunger feeds revolution.

In this part of the globe, the average person spends about half their meager income just to eat. And food prices this year in these countries has risen by nearly 30 percent! And with no corresponding rise in income.

Please keep in mind that the countries in this region are the biggest importers of food, especially grains, on the planet. That is because as their populations have mushroomed, their food production has remained stagnant.

Some of the rise in food prices is due simply to bad weather luck. Key food growing regions of the globe have suffered either a drought (Russia) or flooding (Australia).

Ben Bernanke - Revolutionary

However, another major cause of the sharply rising food prices globally has been the fall of the currency that most commodities are priced in. That currency is, of course, the global reserve currency - the US Dollar.

And Ben Bernanke and the Federal Reserve have been actively driving down the US Dollar by his massive money printing efforts. Efforts whose sole aim is to keep the casino on Wall Street going.

Even the International Monetary Fund (IMF) has publicly acknowledged that the inflation in developing markets is being caused by the Fed's quantitative easing policy in the United States.

Mr. Bernanke's policies are leading to the end of the global dollar standard and have led to instability in commodity prices along with instability in autocratic regimes in the strategic area of the Mideast. But he doesn't seem to care.

Mr. Bernanke was asked recently about his multi-trillion dollar money printing policies and the terrible inflationary effect it is having on global (especially developing) economies.

To be polite, Mr. Bernanke thumbed his nose at the rest of the world. He said in not so many words that the high inflation in those countries was their problem, not his. And he added that his main concern as head of the Fed was that US financial markets stay up.

Who would thought that Ben Bernanke may go down in history as one of the great revolutionaries? A revolutionary who inadvertently led revolts in countries throughout North Africa and the Middle East?

But that is exactly what is happening.

Saturday, February 19, 2011

The Middle East and Oil

With revolution fermenting in Egypt and elsewhere in the Middle East, it's time to look at the energy situation in the region.

For most of 2009 and 2010, the oil market ignored the sparks in the Middle East. Traders said that spare global oil production capacity was more than enough to cover any disruption in oil supplies.

But now as demand for oil hits record levels, the market seems to have re-discovered geopolitical risk. Oil demand surged by 2.7 million barrels a day last year, the second biggest annual increase in 30 years.

The pace of the demand increase is exceptional. Oil consumption in the 2010-2011 period will increase by almost 5 million barrels a day. That is equivalent to more than half of the current production of Saudi Arabia!

However, there are more than just geopolitical risks in Egypt and elsewhere to the flow of oil from the nations in the Gulf region.

The Middle East also faces tremendous social pressures, as do many other emerging economies. The region's economies need to be able to create enough jobs to absorb the explosive growth in population.

High unemployment and poverty are playing as big a role as political freedom, if not bigger, in the protests across the various countries in the region.

And guess what? To get strong economic growth, you need energy. Lots of it...which means that oil exports from this critical area of the globe may drop in the years and decades ahead.

Gulf Region's Energy Investments

Due to these mounting pressures, the Gulf region has begun to shift its energy investment focus away from oil production. Investments are increasingly centered on domestic electricity and water developments.

Saudi Arabia alone plans to spend $80 billion over the next eight years in power generation and transmission capacity to keep pace with industrial and desalination needs.

Darren Davis, managing director and head of HSBC Middle East's resources and energy group, says these areas are likely to dominate energy investments in the coming years because of an increasingly acute power shortage.

He says, “It's less about developing new oil capacity in the Gulf these days and more on how to deal with rapidly rising domestic energy demand.”

The region's rapid population growth and rising affluence has put pressure on power production. The power is needed mainly for air conditioning and water desalination. These are vital in a region with little rainfall and sweltering sun for much of the year.

Not surprisingly, the electricity shortage is most acute in the summer months. During this season, many countries are forced to burn crude oil to meet demand for power.

This was pointed out in a report from Credit Suisse last July. According to the report, global demand for oil fell by 1.7 per cent in 2009. But demand in the Middle East for oil rose 3.8 per cent in 2009, partially due to the need to fuel power generation.

Saudi Arabia

The Credit Suisse report specifically pointed to Saudi Arabia as an example. During the peak of the summer heatwave in 2009, the country burned close to 1 million barrels of oil per day just to keep those air conditioners humming.

Saudi Arabia sits on a quarter of the world's oil reserves. But with no rivers or lakes, the kingdom is facing a challenge in keeping pace with rising energy demand for power and desalinated water for both home and industrial use.

Demand for electricity in the desert country is expected to rise sharply in the years ahead. It is expected to rise at an 8 per cent annual rate and is expected to triple to 121,000 megawatts by 2032.

Senior Saudi official, Hashim Yamani, president of the King Abdullah Atomic and Renewable Energy City, spoke about the country's current oil consumption patterns.

He said that the country currently burns a total of 3.2 million barrels of oil a day. If the current consumption growth rate continues, he warns, the world's largest oil exporter will need 8 million barrels a day of oil by 2028 to meet its domestic needs. This is roughly equivalent to its current production!

The Future for MidEast Energy

This would be a disaster for the large oil consuming nations like the United States and Europe. Think about it – most Middle Eastern oil would be consumed domestically and not exported.....

The take away for investors? First, we have rising demand for oil, especially from emerging economies. Add to that the lack of investment into increasing oil production and rising domestic oil consumption in the Gulf. The result is that oil prices will stay elevated at much higher levels and for longer than most on Wall Street expect.

The best way to play this trend is through the purchase of an exchange traded fund from US Commodity Funds. It is the United States Brent Oil Fund (NYSE: BNO) and it based on a Brent oil futures contract. London-traded Brent oil recently traded over $100 a barrel and much more accurately reflects global oil market conditions than the US-traded WTI oil contract.

Saturday, February 12, 2011

Investors' Psychology - Red Flag

As many of my regular readers know, I have been in the investment business for over three decades.

I spent many years in the retail end of the business working for Charles Schwab, so I know and understand the small investor pretty well.

And to be truthful, I am worried about the current state of the stock market. For the first time in years, I am raising the warning flag for investors.

This warning is based on what I see in the current psychology of the small investor. This to me is a key indicator for the direction of the stock market, because the "little guy" is almost 100 percent wrong on the market.

I have seen many anecdotal pieces of evidence of the small investor's ultra bullishness, but this past week clinched it for me.

As many of you also know, I've been writing for several years about investments and investment themes. I do most of my writing now for a subsidiary of Agora Financial, the largest publisher of investment newsletters in the world.

The subsidiary is called Investment U and can be found at My articles are published there and then also sent out to other investing sites such as Seeking Alpha -

I wrote an article about Apple and Steve Jobs a few weeks ago when the announcement of his recurring illness become known. By the way, all the best to Mr. Jobs and a speedy recovery.

The article ( was generally positive about Apple despite some possible succession questions. By the way, the title I used was changed by the editor to one I did not like.

I even compared Apple favorably to other successful companies like Disney. The feedback on the Seeking Alpha site surprised me.....

You always expect negative feedback and you get used to it. But the hate spewed towards me was overwhelming from what I call the Apple cultists.

The kindest remarks were that I was stupid and knew nothing about Apple, how dare I compare it to Disney, and how could write such an article. I guess I should have known that to the cultists, Steve Jobs is a "god" who will never die and Apple can do no wrong.

I repeat, it was a positive article on Apple and all the information I used to write the article came from the Wall Street Journal, Financial Times, Bloomberg and Reuters.

The vitriol came because I was not uber-bullish on Apple. I said that it was a very richly valued company but that it should still do fine.

The venom spewed my way was very reminiscent to me of the talk about Cisco Systems around the turn of the century when it became the most highly valued company in the world at that time at about $555 billion.

I warned investors at that time about Cisco, but was ridiculed as a fool. And we all know what happened shortly thereafter as the tech bubble burst. And even though Cisco has done decently as a business afterwards, it has never again attained those lofty stock market valuations.

I do believe that Apple is much better placed than Cisco was, but it too will peak out. Trees don't grow to the sky and stock valuations don't go to infinity. But you can't reason with people in the grip of a bubble mentality and talk to them about historic valuations.

And honestly, I have not seen this type of bubble mentality in stocks for about 10 years. So look for a crash to happen.

Exact timing is impossible since the Federal Reserve keeps meddling in the financial markets, distorting the prices. But I would expect it to happen some time this year.

Saturday, February 5, 2011

The Rise of Asia's Middle Class

Many times people are told that the emerging economies in Asia are totally dependent on the US economy. Nothing could be further from the truth.

The upcoming few years will be very significant for the global economy. These years will see great change in Asian economies. Asia's future economic growth will become self-generated, not reliant on stagnant Western economies, thanks to the rise of its middle class.

However, many still remain skeptical about the idea that China, or any other emerging Asian economy, could have a sizable consuming class arise from the mass of poverty in these countries. But that skepticism is beginning to fade.....

China's Rise

Arthur Kroeber of Dragonomics was one of those skeptics. A few years ago he put out a report which poured cold water on the “fairy tale” of a Chinese middle class on anything like an American scale. He estimated that at most, a mere 20 per cent or 110 million people will have significant discretionary buying power.

But he has now changed his mind. More quickly than expected, many Chinese have reached a “threshold level” of income. This is the level where consumption really begins to take off.

Dragonomics now estimates 300 million people, or 23 per cent of the population, have significant discretionary spending. In addition, they live in cities large enough to be accessible by big multinational companies.

Furthermore, Mr. Kroebner says the real level of Chinese income is higher than captured in official statistics. This assumption, long held by China's bulls, has been corroborated by recent research.

Consulting firm McKinsey is in agreement. McKinsey expects the middle class to expand from 29 per cent of China's 190 million urban households to 75 per cent of 372 million urban households in 2025.

Not Just China

The emergence of an Asian middle class is certainly not limited to China. Other countries including India and Indonesia are following in China's footsteps.

Look at India. Its 1.2 billion people can be divided into roughly 250 million households. Currently, just 2 million households enjoy the same living standards as their counterparts in the US.

According to Ireena Vittal, a retail specialist at McKinsey, that is about to change in a big way. She says the interesting segment from a retail standpoint are the 14-15 million households with an annual income of $7,000-$10,000.

These households spend a lower proportion of income on food. They devote more of their income to items like housing, healthcare, education, clothing and items for the home like appliances, etc. Ms. Vittal says the number of these households is set to explode to 40 million households or 200 million people within five years.

Even if India's economy grows at an annual 7.3 per cent rate – below the current 8.5 per cent – McKinsey reckons that by 2025 it would have a middle class of 580 million people.

The middle class is growing in Indonesia also. Market research firm Euromonitor expects the number of Indonesian households with annual disposable income of $5,000-$15,000 to rise from 36 per cent today to about 58 per cent in 2020. That's a middle class of about 100 million people.

Asia's Future

Obviously, incomes for much of Asia's people has yet to reach the American gross median household income of $50,000. Still, much of developing Asia seems to have reached a tipping point. A point where consumption really begins to take off.

The emergence of a middle class in Asia beyond the prosperity that already exists in Japan, South Korea, Taiwan, Singapore and Hong Kong will have far-reaching consequences.

It will have enormous economic and commercial implications. Not to mention environmental ones as a new consumer class puts further strain on the world's resources.

Already today, Chinese consumers purchase more cars and mobile phones than Americans. Soon they will buy more computers too.

Nomura reckons that by 2014, retail sales in China will surpass those in the United States. Think about it – in a few short years, the shop-until-you-drop American consumer will be surpassed by Chinese shoppers.

Consumer Investment

The Asian middle class is not quite yet in a position to power the global economy. But the day is fast approaching when it will drive a greater share of Asia's own economy.

Needless to say, this is an incredible investment opportunity. And one that has not been fully exploited yet due to the skepticism of Wall Street and many investors.

For investors wishing to participate in the rise of Asia's middle class, exchange traded funds offer a quick easy way to do so.

One specific ETF for investors to consider adding to their portfolio is the Global X China Consumer ETF. It holds 40 stocks in the various consumer sectors in China including retail, food, household goods, travel, healthcare and autos.