The global population is peaking and is consuming more food than it’s producing. This will make food scarcer and cause it to rise in price.

But there are more subtle reasons for investing in commodities right now. Rogers says that although stocks may touch crazy valuations in the near term, they may be in worthless currencies – a vista Notes readers will be familiar with. This from a recent interview with Rogers in the Economic Times:

Central banks all over the world have printed huge amounts of money, and the real economy is not strong enough for all this money to be absorbed… so, it’s going into stocks and real assets such as commodities. It’s a mistake what they are doing. It’s giving short-term pleasure, but there’s long-term pain as we are going to have much higher inflation, much higher interest rates and a worse economy down the road.

The American bond market is already beginning to go down dramatically as people realize that the American government has to sell huge amount of bonds, and secondly, there is going to be inflation, serious inflation, as it was always in the past when you had governments printing huge amounts of money.

The fiscal deluge is lifting stocks. But they’re getting frothy. And Rogers reckons the current upward trend won’t last.

It’s going to snap. Later this year, next year, we are going to have currency problems, maybe even a currency crisis. I don’t know with which currency — maybe with the pound sterling, maybe with the US dollar, who knows. It maybe with something none of us have at the moment. When you have a currency crisis, stocks will be affected, many things will be affected. It is not sound, what’s happening out there in the world.

In the 1930s, we had a huge stock market bubble which popped. And then politicians started making many mistakes. They became protectionist. They made solvent banks take over insolvent banks and then both banks failed in the end.

They are doing many of the same mistakes now. What’s different this time is that we are printing huge amounts of money which they did not print at that time. So, we are going to have inflation this time.

There are a number of ways to play this scenario with hard assets. But to keep things simple, you may want to focus on the following three market-beating commodities ETFs (hat tip ETF Trends).

1) The iShares S&P GSCI Commodity-Indexed ETF (NYSE:GSG), up 8.1% for the year

2) Notes’ old favorite, the PowerShares DB Agricultural Fund (NYSE:DBA), up 7.5% for the year

3) The Market Vectors-RVE Hard Asset Producers ETF (NYSE:HAP), up 25.9% for the year

Investors who have studied the global trade figures lately are no doubt also aware that East Asian countries are in an entirely separate mess since their exports have dropped 30%-40% – or even more – in the past few months, because U.S. and European consumers have stopped buying their manufactured goods.

However, there is a third global disaster, equally intractable, in Eastern Europe – and it has nothing to do with the housing bubbles, falling exports, or the massive layoffs that are becoming problems everywhere. This third global disaster is being caused by a regional balance of payments problem and a localized currency crisis.

Internationally, that disaster is this week’s worry.

As the Eastern European countries closed in on membership in the European Union (EU) after 2001, preparatory to entering it in 2004 or 2007, they kept their currencies as stable as possible against the euro. At the same time, the economies of these countries were growing rapidly, so Western banks bought local operations and expanded their lending.

Local consumers heard from their governments that their currencies were now stable against the euro and noticed that local currency interest rates were much higher than euro, dollar or Swiss francs. Naturally, they borrowed from local banks in euro, dollars or Swiss francs.

This would all have turned out fine if the local currencies had indeed been stable against the euro (borrowers in dollars would have made out like bandits until last summer, and lost since, as the dollar reversed course and strengthened). However, in addition to foreign currency consumer loans, foreign investment of all kinds flooded into these countries; after all, they were EU members – or would soon become so – and yet they were growing much faster than Western Europe.

With all this money coming in, local wage rates and other costs rose. As a result, many Eastern European countries ran huge balance-of-payments deficits: For Latvia and Bulgaria, for example, the deficits were more than 20% of each country’s gross domestic product (GDP).

This all didn’t seem to matter too much at a time when world trade was robust and lending flowed freely (although those of us familiar with periodic Latin American catastrophes sucked through our teeth in a suitably concerned manner – we had seen it all before).

Since last September, however, world lending has stopped flowing freely – as has world trade. European, U.S. and Asian companies that had been madly keen to invest in Eastern Europe put their expansion plans on hold, as they discovered they had big problems of their own at home. Naturally, the Eastern European currencies started to decline.

This brought a horrible problem for the local banks, most of them owned by Western European banks. If they lent to local borrowers in euro, Swiss francs or dollars, their borrowers are suddenly in trouble.

For example, the Polish zloty has dropped by about a third against the euro in the last six months. Even without any decline in local real estate prices, an apartment in Warsaw is thus worth 33% less in euros, so the euro loan against it has suddenly become subprime. What’s more, the salary of the borrower has also dropped 33% in euro terms, so his ability to service the loan has declined correspondingly.

Conversely, if the foreign-owned banks lent primarily in local currencies, they internalized the problem if they borrowed in euros from their parent to do so; in that case, the bank is directly insolvent or close to it, rather than merely having a bunch of defaulting borrowers on its books.

The solution everybody is looking at is a bailout, and it will again have to be a big one. World Bank President Robert B. Zoellick is putting together a $25 billion trade facility, but he wants the EU to help with more money. Austria has tried to put together a $200 billion loan for Eastern Europe – not unreasonably, as Austrian banks have about $300 billion in loans outstanding to that area – equal to about 70% of Austria’s GDP.

Total Eastern European debt is reckoned to be around $1.7 trillion, with about $400 billion of it maturing this year.

With the EU, Austria and Eastern Europe all looking for money, the eyes of the region automatically turn to Germany. Germany has an almost balanced budget, and the German finance minister called British stimulation policies “crass Keynesianism” as recently as December. If it weren’t for Eastern Europe, Germany would be in pretty good shape. However, with 10 Eastern European countries among the 27 EU members, Germany’s finance minister better be concerned about getting his pocket picked.

My own guess is, the less the EU and the unfortunate Germans are forced to subsidize their neighbors, the quicker the problem will sort itself out, albeit at the cost of a lot of defaults on Polish home mortgages. In a world where all major countries are providing “stimulus” and bailouts for everything, the ultimate winner will be the country that bails out the least.

Bottom line? You might look at Brazil …

Source: Eastern Europe’s Banks are Next in Line for a Bailout

Despite the current, volatile environment, though, the expert team at Casey Research maintain their core prediction: that a highly inflationary cycle is not far off. While we, along with several external experts, continuously review our assumptions and conclusions and encourage dissenting opinions and analysis to avoid biased conclusions, so far we keep returning to our views about what’s coming. That said, the hardest thing to predict is not what will happen, but when.

The way I see it, the swift, far-reaching and mostly ill-conceived reactions from most of the world’s governments under the leadership of two apprentice sorcerers (Bernanke and Paulson) have until now resulted in a widespread run for an exit to nowhere, a deep credit freeze, and total and indiscriminate mistrust in the market and all of its players.

The fact remains that in the last year, many principles that have long been rooted in the success of capitalism have been thrown out of the window.

• First, market players discovered that the longest-lasting asset bubble in recent history was made possible by poor regulations (as opposed to lack thereof), greed, and the misunderstood and misrepresented risks of credit derivatives.
• Second, we found out the real meaning of “too big to fail.” If a business is large enough and has enough clout, it doesn’t matter how poorly managed it has been, it will be bailed out at the expense of taxpayers (us) and investors (us again).
• Third, we found that the rating systems the financial markets had been relying on have been misleading investors and failing to identify some of the riskiest asset classes. As a result, investors and all other economic agents are left with no means of evaluating risk as they conduct business, hence the credit freeze and rush to cash.
• Fourth, to add to the confusion, the U.S. Fed and Treasury, followed by many other central banks, have been altering the rules of the game by the minute (buying toxic waste at face value, bailing out certain financial institutions but not others, becoming shareholders of several behemoths in the banking and insurance industry, and trumping all accepted rules of creditors’ and stakeholders’ priority, prohibiting the shorting of certain classes of assets on a moment’s notice).
• Last but not least, the U.S. presidency, weakened by almost eight years of mismanagement, has continued to show total lack of leadership. It has empowered a couple of technocrats to run the country’s finances without leadership until a new administration gets in and, hopefully quickly, figures out what to do. To make matters worse, the EU has shown its ugliest face and demonstrated a fact we all truly knew but didn’t want to recognize until recently — that economic unity and coordination is easy in good times but almost impossible when the going gets tough.

No wonder economic actors are wreaking havoc as they race for shelter.

Add to this the fact that all natural resources have been hammered by the combination of a credit freeze and lower real and anticipated demand from most industrial nations.

Finally, junior exploration stocks – being very thinly traded and rightfully considered to be in a higher risk class — have been hammered twice as hard as the rest of the markets (hence the performance of the TSX-V, which has lost 76% in the last year and 30% in the past 30 days alone). The fact that many hedge funds had to unwind large positions in such a small market certainly did not help values.

What does this mean for investors in this market?

We all have suffered significant losses in our portfolios, and although our choices may have reduced some of the downside, quality companies have been hit almost as hard as fly-by-night juniors with no future.

Several of our companies are trading at or below cash value and get no goodwill for the significant assets and outstanding management teams they have assembled.

Although there is no way to tell when we will hit a bottom in these markets, we believe that once tax-loss selling season is over and reality settles in, we will see the beginning of a slow recovery process for the best of the juniors. Investors who have the ability to stay the course and are invested in the highest-quality juniors will recover from their losses and benefit from what will eventually be another bull market in commodities.

Precious metals and agriculture, followed by certain segments of the energy sector, will lead the way to widespread price increases across the range of commodities. While we can’t predict the exact timing of this run, the fundamentals are in place once the world economies take a turn for the better or at least stabilize somewhat.

Here is why:

• The current crisis is taking tremendous amounts of needed capacity off the supply pipeline. Whether it be energy, base metals, or agricultural goods, projects to bring online expensive oilfields and alternative fuel sources are being shelved and will take years to get back on track. Mines are closing and projects are being canceled, thereby removing much of the supply; the credit squeeze is cutting down on agricultural investment, and working capital constraints will dramatically limit supply.
• The world’s demographics are not changing, nor are the aspirations of a hard-working, fast-growing middle class in emerging economies. The changes that drove commodity markets up for the last few years are long lasting and real.
• Peak Oil and peak-everything. There is limited supply for many commodities, and although there are alternatives (curbing consumption and finding alternative sources of energy), it takes large investments to do so. In current markets, many of these investments are going to be put aside until the next crisis/shortage hits – at which point we will have years of a commodities bull run before an equilibrium is reached.
• We anticipate that China, Russia, and India will take advantage of low commodity prices to secure very large, long-term supply commitments while the Western world licks its wounds and tries to recover. By the time we do, an even larger portion of the world’s available resources may no longer be available on the markets, for example oil and gas.In the last edition of Casey Energy Opportunities, Marin Katusa pondered how the U.S. is going to replace the supply of uranium when the HEU program with Russia is set to expire in 2013. The answer is that the U.S. will struggle to replace 40% of its needs, and this will benefit a handful of U.S. suppliers with proven reserves. Currently shares of these companies, which have the cash to develop resources or are already producing with positive cash flows, are incredibly cheap – a win-win situation. Eventually similar opportunities will come from copper and strategic metals.
• We can expect the world to continue to be a very unstable place, where regional conflicts can quickly spread and spin out of control, with obvious impact on the smooth supply of key commodities (Gulf region, Nigeria, former Soviet republics, to name a few). In fact, a widespread financial crisis could precipitate those events as conflicts are often linked to economic hardship.
• The unprecedented deficits, a wave of bailouts, and growth in the money creation by central banks in the Western world will eventually lead to massive inflation. In the U.S. alone, the monetary supply has increased by 50% since early September. This will unequivocally reverse the current short-term deflationary pressures and lead to a steep devaluation of the dollar and other major currencies. At that point, precious metals and all tangible assets are poised for a strong recovery.

So, if you ask me if I am still bullish on the resource sector, my answer yes, now more than ever. Juniors are juniors, and when things go wrong, they get beaten down. The strong ones with great teams and lots of cash will survive and prosper, the others will disappear. When commodities come back with a vengeance, there will be fewer companies, almost all with good projects… and those who are invested in these few companies will see a very sizeable appreciation of their capital as the broader public returns.

It’s very hard to be a contrarian investor, especially when all forces seem to be against you, but one thing the markets have taught me is that memory on the Street is unbelievably short, and they will come back.

Not only is the economy presently going haywire, there’s also still the boogeyman of Peak Oil looming on the horizon. While oil prices are at a low not seen for a while, it is all but certain that this sweet relief for motorists won’t last very long.

When oil prices come roaring back, the energy market will virtually explode… and,  if you are safely positioned in the right stocks by then, your bank account will too. Learn more about how being a contrarian investor can earn you a fortune – click here.

Source: Lost Principles

And it’s no surprise that gold prices are pulling back, either – we’ve been waiting for that pullback too.

But what is quite shocking is there’s now a general consensus on Wall Street and in the Federal Reserve that we’re approaching the end of this easing cycle.

Investors are growing increasingly optimistic that the United States will escape this recession quickly. They think this currency crisis will be similar to the 2001 recession. I think they’re dead wrong.

Never mind that housing prices are still plunging, job losses are mounting each day at major corporations and we’re in the middle of a contraction in credit for both companies and individuals. If you factor all that in, it’s lunacy to believe the Fed has reached the end of this monetary easing cycle. In fact, I am projecting the Federal Funds rate will head to at least 1% or maybe even 0% before this bear market is over in 2009.

The Biggest Sucker’s Rally Since April 2001

Why am I so bearish? This economic cycle marks the first time in the post-WW II period that inflation and deflation are running side by side. It is unprecedented. Consumers are spending less, losing their jobs and banks are denying credit. Also, soaring food and energy costs are killing consumers’ discretionary funds.

Housing, however, is my primary concern. New home sales tanked 8.5% in March to their lowest levels since 1991. Housing shows absolutely no signs of bottoming. In my opinion, that’s the biggest deflationary tug on the economy.

What we are seeing now is a long overdue bear market rally for stocks, including the homebuilders and REITs. This is the biggest sucker’s rally since April-May 2001.

After topping out earlier last month at US$1,033 an ounce intraday, the June gold contract has pulled back to US$887 an ounce Friday morning in New York, a 14% decline.

This marks the second time in six weeks that gold prices have corrected below US$900 an ounce on the heels of a U.S. dollar rally. The dollar, of course, has been dumped relentlessly for the last several years with a brief bear market rally in 2005. This time will be no different.

Central bankers are putting enormous pressure on the Fed to stabilize the dollar. You can understand why. With the cheap dollar, inflation is now spreading just about everywhere.

The Fed talks a good game, but in the end has no choice but to grow the money supply to arrest housing and credit deflation. The broadest monetary aggregate available to the public, M2, shows a massive 16% gain year-after-year. That tells me the Fed is desperate to grow inflation at all costs.

Buy Gold If It Falls Anywhere Near US$850 an Ounce

I would use any intermittent weakness in gold prices to accumulate positions. Gold should hold above US$850 on this correction. Supplies remain very tight, especially in South Africa. Plus, new mined supply is virtually nil. The major gold mining companies have to shell out huge input costs to replace declining reserves or net new supplies.

In 2005, gold prices rallied 18% even as the dollar posted a bear market reversal. I expect the same to happen this year, especially as the European Central Bank (ECB) starts cutting lending rates over the second half of the year.

As the ECB starts cutting, gold will head off to the races once again as that part of the world joins the Fed in reflating the money supply. Germany is now slowing and several other countries are faring even worse, because they’re already suffering from real estate deflation.

Investors have seriously miscalculated a bottom in financial markets. The Bear Stearns bailout was not a “buy” signal. Instead, it marked an acceleration of desperation as the Fed prints money like there is no tomorrow. The war is against deflation. Buy gold on weakness.

ERIC ROSEMAN, Investment Director