Sugar High
The Daily Reckoning
Nicaragua, Central America
Wednesday, March 02, 2005
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*** Speculating in houses...buying without an intention of ever owning...
*** Don't ask, don't tell...baby boomers dream of surfin' USA...location, location, location...
*** Trouble in paradise...the grass is always greener...the commodities market offers up the sweet taste of success... and more!
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Lash us to the mast. Put wax in our ears. Poke our eyes out.
Save us! We're thinking about buying more real estate!
Don't we know that property worldwide is in a huge bubble? Don't we know that a bust is coming?
Today's news tells us that last year, residential property prices rose 11.17% - the fastest rate of increase in 30 years. The Washington Post tells us that the middle class is speculating in houses - buying second and third homes, sure that they will go up in price. The New York Times tells us that people in Florida are making hundreds of thousands of dollars by "flipping" condos before they are built. Entire condo developments are sold out before a backhoe ever appears on the property. Then, they are sold...and resold...all before construction begins.
Buyers have no intention of ever actually owning. It is merely a speculation - on credit, of course. In beach areas, particularly, real estate has become the surest, fastest way to get rich.
Every bubble pops. And there are signs that this one may be approaching its pin. Bond yields are rising. If this continues, mortgage rates will rise too...turning off the easy money. Personal incomes are falling - down 2.3% in January. How are people going to pay for all these new houses? Don't ask; don't tell. And house prices actually fell in the latest reported month - sharply.
And yet, here we are in this paradise...and we are thinking of buying real estate. What could we be thinking?
Well...for one thing, we're thinking that there are 70 million baby boomers in America alone - and every one of them is thinking about how he will organize his retirement. These are people who grew up on the dream of "going to the beach." They listened to the Beach Boys. They went to Ft. Lauderdale for spring break. They worked on their tans...and now dream of walking hand in hand with their true loves along the beach until they finally drop dead.
And we're thinking that while there is an almost infinite number of houses that could be built around major metropolitan areas, the supply of actual oceanfront property is limited, like the supply of gold, by nature. And then, most of the oceanfront property in the world is not very desirable. It is too cold, or too remote, or too hot...or simply, not very attractive. You could walk hand in hand along the beach near Vladisvostok, for example, but you will freeze to death. Location, location, location - as they say; the supply of really good beachfront property must be very small.
The other thing we're thinking is that a lot of people who want to live near the beach are going to need to find cheaper ways to do so. The middle class may be forced to sell their Florida condo, but they won't give up the dream. So, while the million-dollar condo in Florida could fall 50%, we wonder if a $150,000 condo would fall as much.
And then, we approach real estate investing as we approach stocks. We pose the question that Warren Buffett asks: if this investment fell 50% in price...would we still want to own it?
Hmmm... well, we will certainly regret having bought at the higher price. But real estate is not like stocks. When you need a place to live, you need a place to live. And your choice is sometimes particular, rather than fungible; you want to live in a particular house in a particular place. If you are buying as a speculation and you think prices will fall...you wait. But if you are buying a house to live in, you may want to pay the price...and not worry about what price the house would fetch in the future. After all, it is not really an investment at all - it is a consumer item.
Right now, millions of people have huge gains in their houses. But in order to "unlock" those gains, they have to sell. And then, they still have to live somewhere. The ideal thing would be to sell high...and buy low. But nothing much is low in North America - especially not at the beach. Here, prices have gone up, but they are still very low in comparison to those in Florida or California. Even if prices collapse in America, the baby boomer might still be able to sell his house and get enough money to buy here. In fact, this might be one of the few places where he could still realize his dream of retiring at the beach.
Down here in Nicaragua, we have never been sure why we bought. We discovered a little paradise...of sorts. We decided that we wouldn't mind owning it if it fell to half the purchase price. But then, as Joni Mitchell put it, we paved paradise...we put up a parking lot. It became a commercial venture.
And now we have an opportunity to buy more. And again, we probably wouldn't mind if it fell by 50%. It is still paradise, after all.
More news, from our team at The Rude Awakening...
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Tom Dyson, reporting from Baltimore:
"You never make money by investing in rumors and tips. But I had to learn my lesson the hard way..."
For the rest of this story, see today's issue of
The Rude Awakening
http://dailyreckoning.com/RudeAwake/Articles/RA030205.html
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Bill Bonner, back in Nicaragua...
*** Crude oil rises to $52.30, coming quite close to the Nov. 04 high of $52.50.
"With the explosion in crude oil today my phone is ringing off the hook," our commodities expert, Kevin Kerr, tells us.
"I will be doing a live broadcast at 4pm today on KNX Los Angeles...The Business Hour with Bob McCormick to discuss the future for crude pricing and Greenspan's comments. I also am slated for WGN radio and WCCO radio Minneapolis both tomorrow during the noon hour central time."
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*** "You know, life is funny," said an Italian friend who has lived here for the last 10 years. "This really is paradise. White sand beaches. Palm trees. You can fish all day. People earn five dollars a day...so you can hire one to drive you around...and another to bring you a drink. My friends in Italy think I have gone to heaven without dying. They tell me how they dream of coming here.
"You know, I'm 60 years old. A lot of my friends had the same dream as me. They retired. They bought their own places in paradise. And then, after a few years, almost all of them were sick of them. They sold their retirement homes - you know, the places they had been dreaming about for many years - and moved back to the cities. Paradise drove them crazy.
"It happens to you down here too. You need a really strong brain to resist it. You come down here...the first few months you think you are in paradise. And then, you begin to complain about the very things you once wanted so much. 'It's too hot...' 'They sun is shining too much...' 'The local people, you can't have a conversation with them...' 'The roads are dusty...' 'Everyday is the same...sunny and warm...'
"Really...a funny thing happens to you when you move to paradise. You change. You have to get away after a while or you go crazy.
"Me...I'm going back to Italy."
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The Daily Reckoning PRESENTS: There is plenty of money to be made in the commodities market...even in sugar. Jim Rogers shows us that if you put sugar to work for you at the right time, not only your morning beverage, but your profits will be a bit sweeter...
SUGAR HIGH
by Jim Rogers
When I was one of the lone voices talking up commodities and China heading into the new millennium, I ran into much skepticism among the press. The writers, reporters, and anchors around the world, the so-called business media who ought to have known better, were more likely to raise an eyebrow or even turn hostile when I wanted to talk about oil, lead, and sugar more than about the "next big thing" in stocks.
Occasionally, I like to tease these media types. During one breakfast interview in a Paris hotel, a congenial writer from a French business magazine who was much more eager to discuss the falling dollar and the surging euro-for obvious reasons (Vive la France!) asked me what I would recommend for an ordinary investor like her. I plucked a wrapped sugar cube from the bowl on the table and handed it to her. She looked at me as if I had gone mad. "Put this in your pocket and take it home," I advised, "because the price of sugar is going to go up five times in the next decade."
She laughed, eyeing her sugar with skepticism. I told her that the price of sugar that day was 5.5 cents per pound, so cheap that no one in the world was even paying attention to the sugar business. I reminded her that when sugar prices last made their all-time record run-soaring more than 45 times, from 1.4 cents in 1966 to 66.5 cents in 1974-her countrymen were planting sugar all over France. She nodded-"Supply and demand," she said - and pocketed her sugar. But I suspect that she has not put any of her money where her mouth - or her pocket - is.
No one had for years, which, of course, was my point. Sugar prices were so low for so long that it was the last business enterprising souls around the world would be likely to enter in the 1990s and early 2000s. If you are an ambitious young farmer in Brazil (or Germany or Australia or Thailand, also major sugar producing nations), do you choose to produce sugar at 5.5 cents a pound or soybeans, which closed 2003 near $8 a bushel, a six-year high? Even in the U.S., which has its own protected domestic sugar market at two to three times the world price, only the most efficient producers are surviving.
Sugar has had its boom times in the past - that 1974 record, and another spike in 1981 during the last bull market in commodities. And if I'm right and we're in another long-term bull market in commodities, we're likely to see another sugar high. Historically, nearly everything goes up in every kind of bull market, whether it's company shares, commodities, or apartments on Park Avenue. And with world sugar prices at 85 percent or so below their all-time high, the chances of moving higher are strong. To those of us who have been here before, it is promising to note that similar supply and demand imbalances are shaping up that could push sugar prices upward over the next decade.
The prices of a commodity usually move for a good reason, and the savvy commodities investor must be familiar with past trends and have an eye out for new ones, along with potential glitches, fundamental changes, and anything else that might affect the price of sugar. Between 1966 and November 1974, sugar made the astonishing climb, from 1.4 cents to 66.5 cents.
How do sugar prices go up more than 45 times? By the end of 1972, there had been four straight sugar seasons with record crops. Yet consumption actually outpaced supplies in 1972, literally eating into sugar inventories over the next year. The 1973-74 sugar season began with extremely tight supply conditions worldwide; demand continued to rise. There was evidence that some big industry users were stockpiling sugar in anticipation of higher prices. Soon people were grabbing sugar off the shelves in armloads to offset rising prices. Others were grabbing cubes off restaurant tables for home use. Dinner guests were arriving with five-pound bags of sugar instead of the traditional bottle of wine or bouquet of flowers. Even people who had never given the sugar futures markets a moment's thought knew something was up when they walked into the local coffee shop and noticed that the sugar had vanished from the table. Quite simply, global demand for sugar had exceeded supply, and before long the price of sugar headed for the roof.
Everyone had a theory for the high prices. Sugar traders had no idea where prices might be when the U.S.'s long-standing price supports expired at the end of 1974; some blamed the high prices on a "scarcity of cheap labor to harvest sugarcane"; others pointed to the failure of the European sugar-beet crop. Others even suspected that both the Soviet Union, which had just suffered two bad production years in a row in its own sugar crop, and "Arab oil money" (remember that oil crisis of the 1970s?) had moved into the sugar futures markets, along with a rise in speculation by others looking to make money from rising prices.
Significant, too, was the fact that Americans had come to see cheap sugar as a birthright. Even those consumers (and food and beverage companies) who might have turned to the newest artificial sugar substitute, cyclamate, and thus decreased demand, quickly returned to the real thing when the FDA pulled cyclamate off the market in 1969 after reports that it might cause cancer.
Over the next few years, companies put sugar back into their products, boosting demand. U.S. consumption did not slow down much until September 1974, when the reality of high prices finally kicked in. Soft-drink prices increased and candy bars got smaller. But before the White House published the "Presidential Proclamation" of 1975 protecting U.S. sugar producers with the same duty rates and establishing a global quota for sugar imports into the U.S., prices were heading back down.
By December 1976 and January 1977, world sugar prices were ranging between 7 and 9 cents a pound-figures that were, according to the CRB Commodity Yearbook report at the time, "below their reported cost of production in some countries." And many, many Johnny-come-lately sugar speculators lost their money-proving, once again, the perils of rushing into a market where prices are rising 45 times, whether it's sugar or dot-coms. The forces of supply and demand put hysteria in its place, once again.
While three straight bumper crops assured plenty of sugar in the world - prices averaged 7.81 cents per pound in 1978 - the next season saw a few glitches in the supply chain, as a result of events around the world.
For the next 20 years - during a bear market in commodities - sugar remained plentiful, with bearish prices zigging and zagging at the low end with a few minor spikes, as typically happens in bear as well as bull markets. Gradually, sugar had gone from a respectable commodity that fed the world and supported entire economies to a victim of changing fashions in diet and health: sugar was bad for you; it made you fat, it made kids hyper, and it rotted their teeth. Meanwhile, in labs all over the world chemists were looking for substitutes, preferably noncarcinogens.
In 1981, the U.S. Food and Drug Administration approved the artificial sweetener aspartame, and in a flash this newcomer replaced sugar in cookies, cakes, and other favorite snacks sold around the world. Diet colas were becoming more popular because they had less sugar, and if the sugar's competition had not become tough enough, in 1983 the major soft-drink companies started using literally millions of tons of high-fructose corn syrup to sweeten their beverages. Bad for sugar. (But good for corn, and a great example, by the way, of how researching one commodity might turn up some moneymaking possibilities in a different one.)
By 1985, the price of sugar had made it all the way down to 2.5 cents. No one wanted to be in the sugar business. They were giving away seats on the sugar exchange at the New York Board of Trade.
Sugar prices stayed in a bear market for the next 19 years, and were still bearish that day in early 2004 when I was teaching the French business writer about her future as a sugar baroness. World production of raw sugar had reached a record level in the 2002-03 season, and the next season produced almost as much. Brazilian exports were also at a record high. That French writer had reason to be skeptical: The price of sugar, after all, at 5.5 cents per pound at the time was not that removed from the 1.4 cent figure of 38 years earlier and a lot closer to that 2.5 cent number of 1985. In fact, most prognosticators were saying, as one analyst for the Australian and New Zealand Banking Group put it at the end of 2003 in a brief report about the market that I read, "sugar prices were likely to remain under downward pressure."
So why was I, a few months later, confidently telling someone to buy sugar? Supply and demand. Of course, I was already a firm believer in the fact that a bull market in commodities was under way, and if, as I've noted, the history of past bull markets tells us that nearly everything makes a new all-time high, why not sugar?
Regards,
Jim Rogers
for The Daily Reckoning
Editor's Note: Jim Rogers helped found the Quantum Fund with George Soros. He has taught finance at Columbia University's business school and is a media commentator worldwide. He is the author of Adventure Capitalist and Investment Biker. He lives in New York City with his wife, Paige Parker, and their 18-month-old daughter, who is learning Chinese and owns commodities but doesn't own stocks or bonds.
The essay you just read was taken from Jim's recently released third book, Hot Commodities. You can order your copy here:
Hot Commodities
http://www.amazon.com/exec/obidos/ASIN/140006337X/dailyreckonin-20
By way of illustration, sugar went up 60% last year...in fact, over the past two years, commodities have done more than eight times better than traditional stocks. The opportunity for profit is enormous...and there is no end in sight. To learn about the simple system that allows you (and your wallet) to benefit from commodities, see here:
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