No one reads it. The mainstream media ignore it.

It’s the product of the best prognosticators in the Department of Energy. Okay, that may be what puts most people off. But if you’re patient enough to dig into it, it will cough up some fascinating nuggets of information.

The present edition is no exception. The report refrains from spelling out the conclusion that seems most obvious from its data. However, confirming a trend begun just last year, the 2009 edition clearly reveals that the government has been forced to admit that Peak Oil is coming. Moreover, it’s expected to arrive much faster than was believed as recently as two years ago.

This represents a remarkable turnaround in the agency’s opinion. Up until 2008, they were predicting unbroken growth in world oil supplies for the next two decades. But in ’08 and ’09, the rosy picture turned decidedly unrosier.

Before we look at the numbers, a couple of notes on terminology. The EIA makes its projections based on what its analysts call the “reference case,” i.e., average economic growth. It also provides estimates for better- and worse-case scenarios, but the reference case represents the best guesses they have.

Oil (as we generally think of it), upon which most of the world economy depends, is termed “conventional liquids,” i.e., the stuff that comes gushing up from under Saudi sands. “Unconventional liquids” – extra-heavy oil, bitumen, coal-to-liquids, gas-to-liquids, and biofuels – are also covered in the report, as we’ll see, but conventional is far and away the most important one at this moment in history.

With that in mind, by 2007 the IEO was in its final year of irrational exuberance, confidently predicting that world production of conventional liquids would be 107.5 million barrels/day (up from 81.9 in 2005). That dovetailed nicely with a forecast for world demand of 118 million b/d, with 10.5 million barrels of unconventional liquids taking up the slack.

By ’08, they had put the info into table form, and look what happened:

Same table, ’09:

Projected production, as you can see, is suddenly shriveling up. From 107.5 million b/d of oil projected for 2030 in 2007, to 102.9 million b/d in 2008, to this year’s meager expectation for 93.1 million. That’s a drop of 13.4% in only two years, and posits production growth of only 11.6 million b/d (14.2%) from 2006 levels.

If that isn’t an admission that the era of Peak Oil is upon us, what is?

The report assumes that some of this stunning shortfall will be made up by development of unconventional liquids to the tune of 13.5 million b/d, including a jump of 5.9 million b/d in biofuels. At the same time, while conventional liquid production from non-OPEC nations is projected to grow only 7%, OPEC is expected to substantially increase its contribution, ramping up output by almost 25%. (All figures are for the period of 2006-2030.)

Does this seem optimistic? Well, it presupposes some heavy lifting on the part of OPEC, a dicey proposition in the best of times.

And it means creation of the infrastructure necessary to exploit extra-heavy oils, tar sands, shale, ultradeep deposits and other unconventionals, all of which require sophisticated technological know-how and face significant environmental challenges.

Biofuel production could more easily be elevated. But to reach the lofty level of nearly 6 million b/d would necessitate a huge diversion of cropland from food to energy, certain to be attended by a rise in food prices, not to mention potentially serious food shortages. The need for food being rather more primal than the need for gasoline, politicians are going to be reluctant to risk loosing angry mobs into the streets.

Even if all of these developments proceed flawlessly, though, we’ll still have to face a widening gap between production and consumption. Or will we?

As it turns out, we’re in luck! Or so the EIA would have us believe. Because, accompanying that falling supply is – you guessed it – declining demand. In 2007, the IEO anticipated world demand for all liquids of 118 million b/d in 2030. This year, that estimate shrank to 107 million b/d, right in line with production.

The important point to take away from the IEO’s analysis is that the world is facing a decline in liquid fuel production and the government, after years of straight-faced denial, is now admitting it.

Does this mean we’re going to run out of oil? No. But supply constrictions mean that the good old days of limitless, cheap oil are gone. And, though viable alternatives eventually will be developed, there’s no way of putting a timetable on that. In the interim, we’re going to have to pay up if we want to keep the family jalopy on the road.

How much? The IEO report’s reference case calls for $130/barrel oil in 2030, but that’s based on relatively modest demand increases from India, China, and other developing nations, and we find it very optimistic. It easily could be twice that.

Regards,
Doug Hornig

Source: Washington Capitulates: Peak Oil Is Real

But it’s the fine print that’s really getting our attention. Here are the highlights… some serious investment trends, to say the least:

• 90% of the world’s youth, about 1.2 billion people, live in developing nations
• Africa’s population just passed 1 billion and is set to double by 2050.
• Half of the population growth in the U.S. and Canada over the next two years will come from immigration
• By 2050, India’s population will reach 1.7 billion, passing China as the world’s most populous nation.

That last one was a particular surprise to us. In fact, the whole rundown of world population growth by nation is worth a quick look:

To further illustrate this point, you have to check out this array of animated charts on “Future Human Capital”. They are too complex for our humble 5 Min., but shouldn’t be missed.

All these data point to the same conclusion: The world is becoming increasingly less Amero-centric.

“Populations are rising,” says Chris Mayer. “The amount of arable land is in decline, thanks to desertification, urbanization and other factors. Water tables are dropping fast — Beijing is sinking eight inches per year!

“As I said in Vancouver, I don’t see how, when we look at the world in three-five years, the market for irrigation equipment is not substantially bigger than it is today. The Asian countries have the money to build new irrigation systems. They just have to decide to make that a top priority. China already gives its farmers subsidies to purchase equipment. I expect we’ll see more of this from other countries too.

“That’s one example of a great long-term idea that this short-term market crunch could give you a great chance to own.”

Source: Another Global Megatrend

We begin a new week pondering the question that bedevils the conscientious market observer every day.Inflation? Deflation? Or as Agora founder Bill Bonner is wont to suggest, both?

“Inflation – rising prices, or a drop in the purchasing power of the dollar – will soon rise to the very top of economic concerns,” writes Chris Mayer. “I can’t understand why there are pundits who insist we can’t have inflation while the economy is weak. There are plenty of examples of weak economies with high inflation. After all, I don’t think they are hitting on all cylinders in Zimbabwe, where inflation is thousands of percent.”

Look at food prices, Chris says. “Soybean prices hit a nine-month high of $12.50 a bushel. The Department of Agriculture said that inventories would drop to only 110 million bushels – the lowest level since 1976-77, when inventories hit 103 million bushels. There were about 2 billion fewer mouths on the planet then. At today’s 32-year low, we can eat through that stockpile in about two weeks. Not a lot room for error; hence, the nine-month high in prices.

“We have a similar tight market in corn. In corn, we’re down to about a four-week supply, the lowest in six years. Corn has rallied also. In fact, the prices of a variety of grains are now at levels not seen since the last food crisis:”

“During the last food crisis, rice traded for $1,000 a ton and there were riots in different parts of the world. The financial crisis took the headlines away from the unfolding food crisis, but now we are looking at act II.”

To capitalize, Chris has some little-known agriculture plays in Mayer’s Special Situations – still available for a one-month trial for $1.

Neither are gasoline prices waiting for the deflation trend to go away. They’ve jumped an average 17 cents a gallon over the last two weeks. The Lundberg Survey puts the national average for self-serve regular at $2.66. San Franciscans are paying the most – $2.99 – while folks in Tucson, Ariz., shell out a comparatively paltry $2.41.

According to conventional wisdom, the numbers will be up because of rising energy prices, but “core” inflation for those of us who don’t consume food or energy will be mild. Forgive us for wondering if we’ve entered a time warp and it’s June 2008, instead of June 2009.

On the other hand… we’re looking still enjoying some deflationary crosscurrents. “Over the coming months,” says Dan Amoss, “as the Fed hints at restraint, we’re probably in for another bout of the ‘deflation trade,’ in which demand for Treasuries increases and most sectors of the stock market reverse their recent gains.”

The Fed, for the moment, is making hawkish noises, but it won’t last. “As the stock market falls and the economy weakens, we should expect the Fed to step on the accelerator again.”

“I find it useful to think about the Fed’s role in such terms; as fear of inflation grows, the Fed will tap the brakes on its monetary debasement, and as fear of deflation grows, it will push the accelerator to the floor, if need be. The endgame under this tragic scenario is the eventual destruction of confidence in paper money, rapidly rising import prices for U.S. consumers and lower standards of living.”

As far as markets are concerned today, it’s deflation, indeed.

Gold is down to a three-week low of $933. In large part, that’s a function of the dollar strengthening today. And that’s a function of comments from Russia’s finance minister over the weekend. At a summit of G-8 finance ministers in Italy, he said there’s “no alternative” to the dollar as the world’s reserve currency, and that right now the dollar’s in “good shape.”

With that, the dollar index has shot up to nearly 1%, to 80.9. The euro is down nearly 1%, to $1.38; the pound and yen have taken lesser hits.

“It sounds like, looks like and smells like a coordinated effort by those that have the most to lose should the dollar continue on its downward path of the last three months to put a lid on their losses,” writes Chuck Butler, his five senses as keen as ever.

“Makes sense… But you have to wonder about what they are really thinking and doing… I’m talking about China, Russia and Japan, who have ALL stated in the past weeks that ‘The dollar is fine, and there’s no substitute reserve currency’… These statements all give dollar bulls a boost, and tell them that these countries are not going to back away from dollars and dollar-denominated assets.”

“Now… there’s a BRIC meeting coming up soon… Brazil, Russia, India and China… And while the finance ministers of these countries are at the meeting, I doubt seriously that they will hold the same amount of ‘love’ for the dollar… But that sentiment will be kept to themselves, as they don’t want to send the dollar spiraling downward.”

“These BRIC nations had it all going for them until July of last year. They were sent spiraling downward like most assets until March of this year. I would have to think that the finance ministers of these countries would be interested in knowing how they can avoid another downward spiral caused by dollar buying… And… this… would be the key, folks… I don’t know what it would be, but if they did something like a currency swap/foreign exchange line between each other for trade, that would be colossal! Which is bigger than HUGE!”

The dollar strength has sparked a wave of deflation in commodities, too. Commodity indexes are down 2% today. Even oil is down $1.55 a barrel, to $70.49, traders unfazed by what sure looks like a stolen election in OPEC stalwart Iran, with the prospect of a power struggle there that could last weeks or months.

The tumble in commodities has cascaded into stocks. The Dow opened down more than 200. Every one of the 30 Dow stocks is down as we write.

China’s economic planners hope to pluck another strategic acquisition from Byron King’s Energy & Scarcity Investor portfolio. The state oil company Sinopec is bidding for a Geneva-based oil producer with a prime holding in Iraq’s Kurdish region.

The news comes about six weeks after the Chinese bid for another Byron pick – an Australian-based producer of rare-earth elements used in everything from flat-screen TVs to hybrid car batteries.

Byron recommended the oil stock last November when it sat below $15. It opened this morning over $45. A triple in seven months.

And he still has his eye on a basket of small gold stocks with similar potential. Officially, we have 356 copies of his special report, Set for Life: Eight Keys to Getting “Miserable Rich” With Gold remaining. But that was as of a week ago Friday, and we’ve sent roughly 100 copies out the door since then. You can get your own here.

An emendation to Friday’s edition: Household debt in the first quarter fell to $13.8 trillion, according to the Fed’s Flow of Funds report. Our thanks to a sharp-eyed reader for bringing the discrepancy to our attention.

While we’re on the subject, we’ll note that bloggers who’ve dug deep into the Fed report have reached a disturbing conclusion: Household debt is contracting, but the value of household assets is contracting much faster.

Still, don’t dismiss those falling household debt numbers out of hand, advises The Richebacher Letter’s Rob Parenteau. “Looking at the unique aspects of this recession, we find the sharp reversal of household financial balances from a deep deficit position to a net saving position quite important,” he writes.

“Households are reducing debt loads, in part with higher saving out of income flows, and this has implications for prospective bank loan volumes and sales revenue growth at consumer discretionary firms. Larger fiscal deficits are supporting the ability of households to net save, yet the shortening of maturity of Treasury debt issued, as well as the reaction of investors to a heavy calendar of issuance this year and beyond, is complicating matters. In addition, the shift toward inflation hedges like oil is draining income from households to foreign producers.”

Thus, “We can think of two sectors that have led the U.S. equity market charge – banks and consumer discretionary stocks – that can be questioned if we are correct that household deleveraging matters.”

Our friend and blogger Barry Ritholtz has been running the numbers on the General Motors bailout. How likely is it the Treasury will earn back its “investment”?

“GM has received $50.7 billion in taxpayer money,” Barry writes. When Government Motors comes out of bankruptcy, Uncle Sam will own 60% of it.”

“At its all-time high, GM’s market cap was $56 billion, which slid down to ~$7.3 billion prior to Chapter 11.”

“For the taxpayer to just break even on their investment , the New GM would have to have to reach a market capitalization of $84 billion – almost 150% of its all-time peak. That will be tough, even with the new GM’s better capital structure, employee contracts and much less debt . . .”

Barry is among the new faces you can see at this year’s Agora Financial Investment Symposium in Vancouver, along with familiar ones like Bill Bonner, Doug Casey and Marc Faber. Opening day is just five weeks away and slots are filling fast. Secure your access here.

Sign of the times: Name the best-selling car in the United States. Nope, not the Toyota Camry, although that’s a good guess. No, in these recessionary times the crown goes to…

No bailout money was used in the production of this automobile.

Yes, it’s the Little Tikes Cozy Coupe, a venerable model introduced in 1979 – earning itself a permanent spot recently at the Crawford Auto-Aviation Museum in Cleveland.

With an MSRP of around $60, the pedal-powered single-seater sold more than 457,000 units last year – more than any model of the gasoline-powered variety. It’s American-made in Hudson, Ohio, and free of the taint of bailout money or White House-engineered bankruptcy proceedings that hosed secured creditors.

As long as we have inflation on the brain today, a reader writes, “It seems there is an idiot academic at Harvard (only one?) whom Bernanke and Geithner have apparently been studying under, who says inflation is good because it induces people to spend their money before it loses value, rather than save for the future, and that creates jobs and prosperity. Yeah, just like in Zimbabwe.”

The 5: You could be referring to Ken Rogoff, the former chief economist at the International Monetary Fund, and Greg Mankiw, an adviser to Bush 43. Both of them, indeed, teach at Harvard and both of them went on record recently saying a 6% CPI would be just dandy “for at least a couple of years,” in Rogoff’s words.

We’ll just leave our remarks at that, lest our blood pressure rise to unsafe levels.

Source: Food Inflation Returns, Watching the Fed, Dollar Bulls Rampage, Bestselling “Car” and More!

Consider the course of the last 12 months, and then look at this chart… is China even part of the global slowdown?

We don’t want to get too excited about this growth, as much of these sales are a product of Chinese government stimulus. But I.O.U.S.A. is certainly throwing a bunch of money at this crisis as well, and the same measure of auto sales here fell 34% in May… so they must be doing something right over in Beijing.

Chinese property sales rose 45% in the first five months of 2009 compared to the same period in 2008, their National Bureau of Statistics announced today. Heh, notice a trend?

Again, these numbers are manipulated by government intervention… but 45%? That’s pretty big. We also note that real estate investment over the same period rose 6.8%, a rise the U.S. certainly can’t claim.

Thus, the market story today is “buy whatever China wants.” Namely, commodities. Oil’s up to $71, a 2009 high. Copper is at an eight-month high of $2.36 a pound. Aluminum, lead, zinc and nickel are all in the same boat.

Stocks like Alcoa (NYSE:AA) and Exxon Mobil (NYSE:XOM) helped the Dow to open up 1%.

“Buy what China needs, but can’t make enough of for itself,” Chris Mayer urges, taking this investment theme to the next level.

“In other words, as an investor, buy what the Chinese have to buy. Conversely, don’t compete with China. Sell what the Chinese make plenty of. This next chart captures the idea. It shows China’s ability to produce a commodity against its demand for that commodity.

“You want to be in the lower left-hand part of the chart. In short, the very best places to be are in potash, soybeans, iron ore and oil. In these commodities, China’s share of world production is low. For potash, China represents less than 5% of global production, as shown by the vertical axis. It is also not self-sufficient. As the horizontal axis shows, China’s production of potash is little more than 20% of its domestic demand.

“As for soybeans, China was once the world’s largest exporter. In 1995, it flipped to a net importer and has been the largest importer of soybeans in the world since 2000. Much of its supply is in the hands of companies such as Archer Daniels Midland (NYSE:ADM), Bunge (NYSE:BG) and Cargill.

“More broadly, this speaks to China’s growing demand for food, and its growing dependence on foreign suppliers to keep its rice bowls full. This is why we see China in recent months making deals for food.”

Source: Can the Far East Drive American Markets Forward?

For now, the “bottom” is in — that is, the bottom of this society’s ability to process reality. It may continue for a month of so, even after the “stress test” for banks is finally let out of the massage parlor with a “happy ending.” But events are underway that are beyond the command of personalities. We’re done “doing business” in all the ways that we’ve been used to, but we just can’t get with the new program. Let’s count the ways:

1) The revolving credit economy is over. It’s over because we can’t increase energy inputs to the system, which is one way of saying “peak oil.” Of course hardly anybody believes this right now because the price of oil crashed nine months ago, along with global manufacturing and trade. But nothing has changed on the peak oil scene — except perhaps that ever more new oil projects have been cancelled for lack of financing, which will boomerang on us (even if swine flu doesn’t) in the form of much lower future oil production. In any case, the credit fiesta is over, and the “consumer” economy with it, because industrial growth as we have known it is over. It’s over globally, too, though all regions of the world will not experience its demise the same way at the same rate.

The Asian nations may swap things around a while longer but China is basically screwed. They have less oil left than we have (which is saying, not much at all) and they won’t corner the rest of the global oil market without starting World War Three. Meanwhile, they’re running out of water and food. Good luck becoming the next global hegemon. Oh, and Japan imports 90 percent of its energy; India over 80 percent. Fuggeddabowdit.

Credit will not vanish everywhere overnight — even in the USA — because it is not distributed equally everywhere. But it will vanish in layers, and here in the USA a very broad layer of the lower and middle classes are now losing their access to it in one way or another — personally, in small business — and they will never get it back. Anyone who intends to thrive in the years just ahead had better plan on doing it on the basis of accounts receivable — and what they receive might not even necessarily come in the form of US dollars. It may come in the form of gold or silver or in the promise of reciprocal services rendered.

This has enormous implications for two of the items in which our credit-dispensing operations are most deeply vested: houses and cars. Unfortunately, these are exactly the things that economic life has been based on for decades in our nation, which leads to the next categories:

2) The suburban living arrangement is over, along with all its accessories and furnishings. Taken as “all of a piece,” the suburban expansion was one sixty-year-long orgasm of hypertrophy. We did it because we could. We won a world war and threw a party. We had lots of cheap land and cheap oil. It made lots of people lots of money and all its usufructs have become embedded in our national identity to the dangerous degree that the loss of them will provoke a kind of national psychotic breakdown. In fact, it already has. The completely unrealistic expectation that we can resume this way of life is proof of it.

The immediate problem is that we can’t build anymore of it. The next problem will be the failure of the stuff that already exists. The first stage of that is now palpable in the mortgage foreclosure fiasco and, just beginning now, the tanking of malls, strip centers, office parks and other commercial property investments. The latter will accelerate and become visible very quickly as retail tenants bug out and weeds start growing where the Chryslers and Pontiacs once parked. The next stage, which involves large demographic shifts in how we inhabit the landscape, has not quite gotten underway.

3) The Happy Motoring fiesta is over. You’d think that with Chrysler crawling into the bankruptcy court, and GM just weeks away from the same terminal ceremony, the news media would begin to suspect that the foundation of everyday life in this country was cracking. Instead, all we hear is blather about “market share” shifting to Toyota. News flash: not only will we make fewer automobiles in the USA, but Americans will buy far fewer cars made anywhere. We’ll keep the current fleet moving a while longer, but when it’s too beat to repair, we won’t be changing it out for a new fleet — despite all the fantasies about hybrids, plug-and-drive electrics, and so on. The masses will be too broke to buy these things. What’s more, they will be very resentful of the shrinking economic “elite” who can afford them. And, anyway, our roads and highways are destined to fall apart very quickly because there is no way we can sustain the necessary rate of normal maintenance. Meanwhile, we remain completely un-serious about public transit — even about fixing the vestiges that still exist. The airline industry, of course, will be toast inside of five years.

4) Our food production system is approaching crisis. There’s no way we can continue the petro-agriculture system of farming and the Cheez Doodle and Pepsi Cola diet that it services. The public is absolutely zombified in the face of this problem — perhaps a result of the diet itself. President Obama and Ag Secretary Vilsack have not given a hint that they understand the gravity of the situation. It is probably one of those unfortunate events of history that can only impress a society in the form of a crisis. It also happens to be one of the few problems we face that public policy could affect sharply and broadly — if we underwrote the reactivation of smaller, local farm operations instead of shoveling money to giant “agribusiness” (or Citibank -NYSE:C-, or Goldman Sachs -NYSE:GS-, or AIG…). I maintain that this may be the year that the crisis gets our attention, because capital is suddenly harder to get than fossil-fuel-based fertilizer.

All these epochal discontinuities present themselves, for the moment, as a season of muted “hope” and general apathy. The days are suddenly mild. We’ve resumed old and happy habits of grilling meat outdoors and motoring to those remaining places that were not blanketed with franchised food huts and discount malls. We have a new, charming president with an appealing family. Newly-minted dollars are flowing to the “shovel-ready.” The new bad news is less bad than the old bad news (or seems to be). And the year just past has been such a bummer that our hard-wired human nature tells us that good things must be just around the corner.

Personally, I think a lot of good things await us, but not the ones we’re expecting — not a return to buying slurpees on credit cards. It will be very salutary to leave behind the junk empire we’ve accumulated and move into an epoch of quality and purpose. For the moment, though, our hopes reside elsewhere.

Regards,
James Howard Kunstler

Source: The Bottom for Credit Thanks to Peak Oil

Here’s a curious development that may be worth watching: Bloomberg is suing the Federal Reserve.

Last week, we took a look at the Fed’s bulging $2 trillion balance sheet. And if you’re a long-suffering 5 Min. reader, you know our futile recounting of the weekly Fed lending programs… all the abbreviations and acronyms: TAF, TSLF, PDCF, CPFF, TARP, etc.

Well, the folks at Bloomberg dared to do the right thing last week: demand the Fed tell us where this money is going. With few exceptions (namely, the TARP, Fannie, Freddie and AIG), the Fed lends in secrecy. They’ll say how much they dole out each week, but never name names. Nor will the Fed reveal the specific loan collateral they’re now accepting, or their valuations of these toxic assets that no one else will buy.

Bloomberg is tapping the Freedom of Information Act to try to force disclosure. Good luck.

In the meantime, the Fed has given American Express carte blanche access to the array of Fed lending programs. Like Goldman Sachs and Morgan Stanley, the Fed will allow AmEx to call itself a “bank holding company” so it can gain access to both the Treasury’s TARP bailout and the Fed’s lending facilities.

The Fed fast-tracked AmEx’s application after it reported a 24% decline in third-quarter profit and said it will fire 10% of its employees. Hmmmn…

Let’s see, what else is the government doing with your money? Oh, here’s one…  Fannie Mae revealed a $29 billion quarterly loss yesterday.

Under the guidance of the government, Fannie lost $9 billion in housing-related losses, and then another $21 billion after the group altered its accounting practices. That must have been some alteration.

Fannie’s new executive team also warned that they will likely tap into the government’s $100 billion backstop next year. But if the company continues on its current trajectory, says CEO Herb Allison, “or to the extent that we experience a liquidity crisis that prevents us from accessing the unsecured debt markets, this commitment may not be sufficient to keep us in solvent condition…”

In other words, as with the restructured loan AIG and the Fed announced yesterday, Allison’s warning $100 billion probably won’t be enough to save Fannie’s bacon.

Are we detecting a pattern here?

“The credit crisis is even affecting the world’s ability to produce food,” warns Chris Mayer.

“It’s harder for farmers to get credit for next season’s crop, especially farmers overseas. They need fertilizer, seed, fuel and more. The net effect might be lower planting of key grains even as world inventories of these grains hover near historic lows. Bloomberg reports that global inventories of corn, wheat and soybeans are the second lowest they’ve ever been since 1974.

“All the while, the credit crisis threatens next year’s crop in many critical grain-growing regions. In Russia, for example, cash-starved banks have cut off funding for the industry. The head of the Russian Grain Union says, ‘Many farmers probably won’t be able to borrow money for the spring sowing.’ This is important because Russia is no lightweight in the grain division. It produces 9% of the world’s wheat, for instance.

“Even if demand growth for grains slows, it’s not likely that those low global grain inventories will improve. PotashCorp CEO William Doyle presented the nearby chart (‘Tight Grain Markets’), which might seem a little busy, but I think it shows you how much of a hole the grain markets are in. For instance, the five-year average growth rate in grain demand is 2.6% per year. Even if grain demand fell to 2% per year, we’d still need record production to keep grain inventories from falling further.

“I think the future is still bright for agriculture and all that it entails. I think the fertilizer companies look cheap again.” For a few worth looking into, see: The Endless “Paycheck Portfolio”

The credit markets are still showing some signs of improvement. The London Interbank Offered Rate (Libor) dropped again this morning. The three-month rate for banks to lend U.S. dollars to each other fell to 2.18%, from 2.24% Monday — less than half the 4.82% during the worst of the crisis a month ago.

But that’s far from an all-clear signal. The Fed’s target rate is 1%.  And the overnight Libor increased slightly again last night, to 0.35%, above Monday’s record low of 0.32%. Also, the Libor-OIS spread is still at 1.69%… a mite higher than the 0.1% back in September.

Starbucks announced today a venti-sized problem. Its profits had plummeted 97% from the third quarter of 2007.

For all its corner locations across this hot, flat and crowded globe, the company managed to book just $5.4 million in profits in the third quarter, awarding investors with a penny per share. The company said much of the increased expenses over the past three months came from closing 600 stores…

No, we prefer our coffee with a little anarchy on the side. Lately, we’ve been required to bring our own mugs to Red Emma’s. Otherwise, they won’t serve us.

The global package humper DHL bowed out of the U.S. market yesterday. The German-owned company said it will kick nearly 10,000 employees to the curb here in North America and exit the domestic-only shipping services.

Good thing we still have the American-owned, Memphis-HQ’d FedEx, huh? Yeah, that’s right… TEAM AMERICA! I think you know what that means.

Oops… the U.S. Postal Service is downsizing too. The government agency says it’s looking into 40,000 employee layoffs — or about 6% of its work force. “Just what we need, isn’t it?” we paraphrase Jay Leno, “40,000 disgruntled Postal employees?”

The commodities market showered love all over China’s $586 billion stimulus package we mentioned yesterday.

But then traders had second thoughts. “Hmmmn…” they seemed to say, “if the Chinese stimulus packages is as ‘successful’ as the U.S. variety, well, there’s not too much to get excited about.”

Just as quickly as they came back in vogue yesterday, commodities are out of style today.

Oil, for example, is back down to $59 a barrel — a new 18-month low. China gave oil a $6 boost early yesterday, but all gains were erased by the N.Y. Merc Exchange opening today.

Oil’s autumnal decline has landed like a salty finger in a frothy beer in the UAE: The Dubai stock market has fallen flat. Stocks are down 16% over the past two days… 7% today alone.

You’d think that the La-La Land of the “world’s biggest” everything, 24/7 air conditioning, Mercedes in every garage and super-sized (super-leveraged) building projects would be hit hardest during this global retraction… but up until this week, Dubai’s been showing remarkable resistance.

Booms this big always end in tears. Caveat emptor.

“The signal of oil supply constraints could become much louder after tomorrow,” forecasts Dan Amoss. “On Nov. 12, the International Energy Agency (IEA) will publish a very important report. Few media outlets have mentioned it yet, but it could have a huge effect on the 2009 stock market.

“This report, the World Energy Outlook 2008, will contain a thorough field-by-field analysis of production trends at the world’s 800 largest oil fields. Hopefully, the IEA will finally lay to rest the widespread misconception that oil producers can ramp up supply at the flip of a switch.”

The Financial Times recently secured an early draft of the IEA report. If you didn’t catch that sneak peak, here’s the gist: The WEO report will likely say that output from the world’s oil fields, even the most established and reliable, is declining faster than expected. This problem will require, according to the FT’s preview of the report, ‘a significant increase in future investments just to maintain the current level of production.’

“When the final draft of this report is published,” adds Dan, “its key conclusions will probably flood the media airwaves. An annual decline rate between 6-9% will spur trillions of dollars of new investment over the next decade.

“Depletion of the existing oil supply base — as an investment theme — may finally get the attention it deserves.”

Gold is getting slammed now, too. The spot price shot up almost $20, to $765, yesterday, but gave back all of its gains by the end of the session, and is even lower today. An ounce is going for $725 this morning… and falling.

The dollar index reversed trends yesterday and is quickly approaching a one-month high, trading at 86.6.

Thus, its competitors are getting a swift kick in the business end of their trousers. The euro is down 2 full cents, to $1.25. Ditto with the pound, down to $1.54.

And oh, the poor loonie… the Canadian dollar’s been suffering some huge swings lately as oil gyrates. It’s on the wrong side of that trade today, down more than 5 cents from yesterday’s high, to 83 cents.

The yen is hangin’ tough around 97.

The excitement over China’s stimulus package quickly fizzled yesterday in the world’s stock markets, too. Traders were high on the plans coming out of the Far East in early trading and pushed the Dow up over 150 points. But the buzz wore off as news from the likes of GM, AIG and Circuit City hit the wire. The Dow ended down nearly a percent. The S&P 500 and Nasdaq fared even worse, falling 1.2% and 1.8%, respectively.

Today, AmEx, Starbucks, Toll Bros. and Las Vegas Sands have added to the pall. The Dow continued down at the opening… a 250-point loss out of the gate. It’s still there as we write.

“It was very interesting to read your remarks,” notes a reader. “‘Why don’t [U.S. car manufacturers] just make cars people want?’

“Gee… why didn’t someone think of that before?  The American car industry did just that, built large SUVs and trucks that people wanted. That was the only way the companies could produce a profit, considering the cost of labor and benefits that were once heralded by our very own government as the wave of the future for all domestic companies.  Laws were passed protecting the unions, which still ensure pay and benefits for two full years even if a plant is shut down.  There is no way our domestic manufacturers can compete with cheaper imports, facing that kind of uneven playing field.

“Go into manufacturing facilities and look at the percentage of import vehicles, purchased at much lower prices, and then ask the poor individuals facing layoffs from overseas manufacturers why their jobs are at gone. They will look at you with blank stares on their faces.  Go to Japan. They will not drive an American vehicle, not because of price or quality, but because of loyalty to their own brands. Get real!!

“Yes, we probably will see the Big Three become the nonexistent three, along with all the banks and investment bankers. But it will not be because of poor quality; it will be because of unfair trade practices and inconsistent, displaced American loyalties.”

The 5: And poor quality… the hangover from planned obsolescence. We’re still driving a 1994 Honda Civic with over 200,000 miles on it. It needs very little maintenance, and when I turn the key, it starts. What can be more American than exercising a right to choose which product to buy?

The fact that high gas prices drove sales from 18 million cars down to 12 million cars in less than two years helps prove our point. The auto industry is too big, bloated and regulated to shift gears with market demand. Management has little recourse but to lobby for a bridge loan from another bloated, ill-fitting, wealth-leeching behemoth while they get their act together.

“Here in Michigan,” writes another, “we were making cars and trucks people wanted until high oil prices and the mortgage fiasco froze credit markets and reduced the American economy to a crawl. What’s the cause of high oil prices? Lack of a coherent energy policy that Washington has had more than 30 years to fix. How much time does it need?

“What’s the cause of the credit freeze? Primarily toxic mortgages loaned by bankers (with a gun held to their head by Bill Clinton in the late 1990s) to people who couldn’t pay them back. Include the banking industry and government-approved lending practices that rivaled the Chicago commodity market in terms of leveraging on-hand deposits and it was just a matter of time before the house of cards fell.

“Now add to this witch’s brew federal government regulation of the auto industry and a lack of right to work laws, which has enabled the UAW to hold OEMs hostage for health and retirement programs that foreign OEMs don’t have to pay. Since when does government know how to build anything except a pyramid of debt? Is it any wonder that the foreign car companies locate in the Southern U.S. and avoid unionized northern states like the plague?

“I’ve worked in this industry for more than 30 years. The people I know work their butts off but are hamstrung by the government and the unions. If the auto industry in America dies, the government will have killed it, and 10% of the nation’s economy will die with it.  For those who want the auto industry to die, be careful what you wish for. A nation without a manufacturing base is a third-world nation with no future.”

The 5: Amen to that. We covered your sentiments exactly in Empire of Debt.

Source: Sue the Fed, Dubai in Trouble, Coming Food Crisis and More!

Global wheat production will likely be 4.4% less next year, Dan Basse, president of AgResource Co. in Chicago, told Bloomberg News. Basse believes the world’s corn and soybean crops will also see declines.

“The credit situation is worrying even the biggest and best farmers,” Brian Willot, a former University of Missouri commodity analyst who now grows soybeans in Brazil, told Bloomberg. “For the financially weak, credit has dried up completely. For the strong, credit has been delayed and interest rates are higher.”

The risk-aversion of Wall Street is spreading out into other industries, as the main sources of lending for farmers – rural independent banks and crop processors such as Cargill Inc. and Archer Daniels Midland Co. (ADM) – tighten credit requirements by charging higher interest, demanding more collateral or in some cases, discontinue lending completely.

“We certainly could see tight credit having an effect on agricultural production,” U.S. Agriculture Secretary Ed Schafer said earlier this month. “The costs of farming operations today are huge, and that backs up to the banks that have balance sheets that are tight, it backs up to elevators that have credit stretched out.”

Worse, drops in agriculture yields could be devastating to more than just the agriculture industry.

“Stockpiles are going to be extremely tight,” AgResource’s Basse told Bloomberg. “The world cannot afford any dislocation in production next year, or there will be a real shortage.”

The United Nation’s World Food Programme says the world is already gripped in a “silent tsunami” of hunger. And every drop in production pushes more of the world’s hungry towards the brink of starvation.

“It is estimated that more than 100 million people in the world have been forced into poverty and hunger because of the dramatic increase in food prices,” said Benjamin Senauer, a professor of applied economics at the University of Minnesota, author and researcher, MarketWatch reported. “Millions of American families’ food budgets have been stretched to the limit and beyond. Food stamp enrollment is up and food banks are seeing unprecedented demand.”

Smaller crops could mean higher prices at a time when consumers were just starting to see some slight signs of relief in the grocery store checkout line.

The change in food and beverage prices, as tracked by the U.S. Department of Labor, had moderated slightly in August and September after the record-highs of the summer. But even off the summertime highs, the overall Consumer Price Index increased 4.9% for the 12 months ended September 2008. In the food and beverage category, the increase was 6.0% year-over-year.

Agriculture futures for corn, wheat and soybeans are trading lower from earlier 2008 highs, but a steep decline in crop yields could cause future prices to reverse course.

Source: Tight Credit for Farmers Leads to Smaller Crops, Higher Prices and More Hunger

Other factors are at play in the volatile agricultural industry. According to Chris Mayer, “Fertile soil – good dirt – may become more important to land values than oil or minerals in the ground.”

Chris says fertile farmland has been in decline since the 1980s due to urban sprawl and soil erosion. This makes it a lucrative asset. And it makes companies like Cresud (NASDAQ:CRESY), which owns large swathes of farmland in Argentina, a great stock play.

More from Chris on MoneyWeek:

The mainstream press focuses on issues such as population, dietary shifts, and the impact of biofuels. One thing that doesn’t get talked about much may be the most important thing of all: a growing shortage of quality topsoil. Call it the topsoil crisis…

Quality soil is loose, clumpy, filled with air pockets, and teeming with life. It’s a complex microecosystem all its own. On average, the planet has little more than three feet of topsoil spread over its surface. The Seattle Post-Intelligencer calls it “the shallow skin of nutrient-rich matter that sustains most of our food.”

The problem is that we’re losing it faster than we can replace it. And replacing it isn’t easy. It grows back an inch or two over hundreds of years.

This is not lost on certain far-seeing investors. Jeremy Grantham, the curmudgeonly head of the money manager GMO, wrote about soil depletion in his last quarterly letter. “Our farmers are in the mining business! Yes, the soil is incredibly deep, but it is still finite.” For every bushel of wheat produced, we lose two bushels of topsoil.

[...] In any case, it seems safe to say that good dirt is in short supply. The obvious investment conclusion: Buy farmland. That’s hard to do as an individual investor, although there are at least a few options. One is Cresud (NASDAQ:CRESY), which owns a million acres of farmland in Argentina. It trades on the Nasdaq. Another way into the idea is to own farming assets in grain-exporting countries, like Canada.

This from the Seattle Post-Intelligencer on the topsoil crisis facing the planet:

The planet is getting skinned.

While many worry about the potential consequences of atmospheric warming, a few experts are trying to call attention to another global crisis quietly taking place under our feet.

Call it the thin brown line. Dirt. On average, the planet is covered with little more than 3 feet of topsoil — the shallow skin of nutrient-rich matter that sustains most of our food and appears to play a critical role in supporting life on Earth.

“We’re losing more and more of it every day,” said David Montgomery, a geologist at the University of Washington. “The estimate is that we are now losing about 1 percent of our topsoil every year to erosion, most of this caused by agriculture.”

“It’s just crazy,” fumed John Aeschliman, a fifth-generation farmer who grows wheat and other grains on the Palouse near the tiny town of Almota, just west of Pullman.

“We’re tearing up the soil and watching tons of it wash away every year,” Aeschliman said. He’s one of a growing number of farmers trying to persuade others to adopt “no-till” methods, which involve not tilling the land between plantings, leaving crop stubble to reduce erosion and planting new seeds between the stubble rows.

Source: Cash in on the Rush to Secure Quality Farmland

The same forces that hurt the U.S. economy wreak havoc on developing nations. Groceries go up, fuel goes up and discretionary spending goes down.

Now emerging markets are taking on the U.S and other Western nations to curb inflation. Their weapon is food.

China, India and a host of allies are blocking U.S. foods from coming into their markets. At the same time, they are cutting exports and continuing the subsidies that ultimately provide cheaper food to the indigenous marketplace. These moves are aimed at keeping affordable food within their borders as a means of controlling inflation.

Rice, corn and cooking oils are the staples of the poor. Unfortunately, inflation is literally taking food off the table of the people who need it most.

The food riots that made headlines in 2007 are still going on in places in frontier markets such as Africa, Mexico and Egypt — countries that supply the West with raw materials such as oil, natural gas and grains.

The consensus is that 10 years of economic progress are about to be erased by inflation-induced starvation.

Thanks to the Bush administration, ethanol production will devour 30% of the U.S. corn crop by 2010. Over 40% of the increase in global maize consumption from 2000 to 2007 was also attributed to U.S. biofuel production.

Between March 2006 and March 2008 the international food price index nearly doubled — surging 82%. The price of wheat has jumped 120% in the past year, he said — meaning that the price of a loaf of bread has jumped more than 100% in places where the people spend as much as 75% of their income on food.

However, a recent development at the World Trade Organization reveals that emerging markets have won a major food fight. After intense negotiations, China, India and a coalition of about 30 emerging nations that belong to WTO have opted to raise tariffs on imported food and reduce — or eliminate — food exports.

While this could result in higher food prices in the U.S., it also means that lower food prices in emerging markets can reduce inflation and create investment opportunities.

For investors, the longer term implications are that lower inflation in these resource-rich nations could open the door again to windfall profits.

China and India are both textbook cases of triumphant emerging economies, which have made investors quite wealthy. But the price of food has staunched a consumer spending spree in the very same ways that the U.S. retail sector has suffered from inflation.

Despite the slowdown, the fundamentals of emerging markets actually look much stronger than the U.S. The growth in East Asia’s emerging economies will slow to 7.6% in 2008 and 2009, down from an average growth of 9% in 2007, according to the Asian Development Bank.

By comparison, the University of Michigan said the U.S. economy will expand in 2007 and 2008, but at a pace well below the 3.2% increase in real GDP growth of this year and last year. So as you can see, even in sluggish times, Asia outperforms the U.S. by some 137% over a two-year period.

That’s certainly impressive, but it could be much better.

If emerging economies can rein in inflation through domestic agricultural policies, it’s quite possible that they can resume their economic progress and return to their wild and wooly moneymaking ways.

And now that Russia has formed a state-run grain trader, analysts fear that Moscow is expanding these bare-fisted tactics to its agricultural sector. The new enterprise –The enterprise, the Agency for the Regulation of Food Prices, will take control of 28 government-controlled assets, including storage depots, grain elevators, flour mills and export terminals. The agency will control between 40% and 50% of the nation’s cereal exports by 2011.

“The aim of creating the company is quite clear. As grain trade becomes attractive, bureaucrats are looking for ways of making some extra money using government resources,” a market source, speaking on the condition of anonymity, told Reuters.

With food-and-energy commodities trading at near-record levels – even prompting the leader of the United Nation’s World Food Programme to warn that soaring food prices have caused a “silent tsunami” of hunger to sweep the globe – Moscow’s move is viewed with equal measures of concern and moral ire.

However, it is not yet clear whether the Agency for the Regulation of Food Prices will enter the market as a regular commercial player or whether it will simply serve as another state-run resource monopoly akin to Gazprom – Moscow’s energy arm.

“The idea is to manage the assets more efficiently and to generate profit,” a second source told Reuters. While the source didn’t offer a timeframe, some reports suggest the new state-run firm could be up and running as soon as this fall.

As with energy, Russia has the natural resources to give it the muscle – and the leverage – to carry this off.

Russia’s farming industry collapsed alongside the Soviet Union in the 1990s, but soaring commodity prices and increased foreign investment have triggered a revival in the nation’s agricultural sector, particularly in the Chernozem, or “black earth,” belt – a tract of particularly fertile soil in southern Russia.

The region used to be known as the “Bread basket of the Soviet Union,” as its nutrient-rich, black soil produced enough grain to not only satisfy the nation’s domestic needs, but generate lavish export revenue as well.

Russia, the world’s fifth-largest exporter of cereals, exported nearly 13 million metric tons of grain in the 2007-2008-crop year, generating $3.5 billion in revenue. Moscow expects to export at least 15 million metric tons in the current 2008-2009 season, and have export levels reach 25 million metric tons in the next five years.

“Russia has this black soil – it’s another resource just like oil and gas,” Victor Nageyev chief agronomist at Heartland Farms, a company that has 75,000 acres of the fertile land in its portfolio, told Sky News. “The land, plus new technologies, should make Russia a world leader again in grain production and exports. Just like it was at the beginning of last century.”

The introduction of modern farming methods has already resulted in a 300% increase in production at Penza – the region currently being worked by Heartland Farms. If such methods were implemented across the entire Chernozem region, Russia could be producing 300 million metric tons of cereals annually, BBC News reported. That would make it the world’s third largest cereal producer behind the United States and China.

However, analysts fear that if Russia does return to its prominent role as a global food supplier, a state-run monopoly like the Agency for the Regulation of Food Prices could use its exports as political leverage – the same way Gazprom has used its energy exports, to meddle in European politics.

Russia’s Export Leverage

Gazprom, which controls 25% of Europe’s gas supply, has routinely jacked up prices and cut off supplies to the region as a means of exerting political leverage over its customers.

Last year, Gazprom threatened to cut off gas shipments to Belarus, and the energy giant followed through with similar threats against the Ukraine as recently as March of this year.

Gazprom reduced natural gas deliveries to Ukraine by a full one quarter in March after accusing the country of failing to pay $600 million in gas bills for the year. After Ukrainian officials failed to turn up for planned talks aimed at ending the pair’s supply dispute, Gazprom threatened to cut supplies by another 25%, reducing the total amount of natural gas to the Ukraine by half.

It was the second time in as many years Gazprom cut gas shipments to the Ukraine, which in 2006 installed a pro-Western government in Kiev.

About 80% of Russian gas supplies to Europe pass through the Ukraine, which puts Naftogaz of Ukraine in a position to siphon off supplies intended for other customers throughout Europe. In January 2006, Russia cut supplies to Ukraine completely for a period of three days, causing gas volumes across Europe to fall, as Ukraine scrambled to satisfy its demand.

Most recently, Gazprom offered to buy all of Libya’s oil and gas exports just as the former terrorist state was beginning to look like a viable alternative for Europe to diversify away from Gazprom’s dominance.

A member of the Organization of Petroleum Exporting Countries, Libya produces 1.7 million barrels of oil each day. The country had total proven oil reserves of 41.5 billion barrels in 2007, and about 53 trillion cubic feet of proven natural gas reserves. Its oil and gas industries earned Libya more than $40 billion in revenue in 2007.

Prior to its offer to buy Libya’s gas exports, Russia agreed to write off $4.5 billion in Libyan Cold War-era debt in exchange for military and civilian contracts for Russian companies. A memorandum of cooperation between Gazprom and Libya’s state energy conglomerate National Oil Corporation (NOC) was one of ten trade, investment and political agreements reached during then-president Vladimir Putin’s two-day visit to Tripoli.

Stroytransgaz OAO, another Russian company, is in talks to build a network of natural gas pipelines on the Mediterranean coast of Libya.

Source: Moscow Seizes Control of Agricultural Exports