Of all commentaries that we have ever written, those dealing with ethanol and the subsidies that they enjoy have been our most controversial and have generated the most criticism from readers.  It seems that our anti-ethanol comments in early 2007 were the most criticized.  It is more than a little ironic that this was also one of the several times we warned our readers about the coming rise in food prices…and look what has happened in just fifteen months.

May I include an excerpt from our commentary written on January 26, 2007?


Theme #1: Much more food will be consumed per capita in coming decades.
Wealth creation in the emerging world will change global eating habits.  More costly foods will be consumed by those in emerging countries as they grow in wealth.

They will eat more vegetables and grains, and they will eat more meat.  The increased consumption of meat will dramatically increase the global consumption of grains.  Feeding an animal, to later eat the animal, requires many times the number of kilos of gains to produce a kilo of meat protein.  Vegetarian cultures consume much less food per capita than meat eating cultures.  In our opinion, the percentage of meat in world diets may expand dramatically in the coming decades. This is bound to increase the demand for and the cost of food globally.
Theme#2: Global energy policies will consume grain to create energy, which will further increase the cost of food and create inflation.

The U.S. initiative to promote the use of more ethanol, in our opinion is an unwise policy for the economy, and for U.S. citizens’ tax bills.  It is however, very popular with politicians and farm state voters.  The U.S. presidency and most of Congress will stand for election in late 2008, and the campaigning is already underway.  Part of the campaigning is focusing on ethanol as a substitute for gasoline.

The obvious beneficiaries (many of which have risen in price) are fertilizer manufacturers, farm equipment makers, ethanol refining equipment makers, those who construct ethanol refineries, companies that transport and store grains and ethanol, as well as those who grow the grain. Grain prices will head higher as soybeans and other animal feed products will be demanded to substitute for the corn supplies that are raw materials for the manufacturing of ethanol.
Those likely hurt by the shift are: U.S. taxpayers (big handouts from taxpayers’ wallets), oil producers (as the tax breaks formerly going to oil companies may be transferred to ethanol producers).  The ethanol production will be subsidized.  As we have written in the past, this is costly and unwise, even if it is politically popular.”
(End of excerpt from January 26, 2007)


It now turns out that consumers of fuel are now seeing the lack of wisdom in the policies, and all manner of groups from consumers to manufacturers and transportation companies are being greatly disadvantaged solely to pander to farm states, which had a big role in the primary election process.

It is pretty simple, when gasoline and diesel prices rise, all your costs are likely to rise.  Transportation (of materials to production facilities…of products from production facilities to market…and eventually to the consumer) is a big cost component in the prices of almost all goods.  Travelers pay more to travel, and eaters pay more to eat.

Ethanol has always been a politically motivated program and now people are experiencing firsthand why ethanol is a flawed and expensive alternative energy modality.  Nuclear, solar and wind are all superior technologies.  Even natural gas (CNG) is a better automotive technology.


Hey gang, remember when China was exporting disinflation to countries who imported their goods?  We have mentioned it in these memos on several occasions.  Those days have passed. Today, a combination of higher raw material costs, higher Chinese wages and a higher Chinese currency are increasing the cost of China’s exports to the rest of the world.  Chinese prices still remain among the lowest worldwide, so they will continue to export as much as ever until their costs rise a great deal more.

China’s biggest export customers are 1) Non-Japan Asia, 2) Japan, 3) Europe, and 4) North America.  All of the previous should expect continued inflationary pressures from their Chinese imports.


Not surprisingly, for the first quarter of 2008 strong earnings are being seen in China, India, energy producers, energy services, fertilizer, seed, farm equipment, precious metals and base metals companies.  Demand remains very strong in all of these areas.


1) The Chinese people have increased their consumption and have the potential to become much more active consumers in the style of India, and the developed nations.

2) Global demand for deep water oil and gas rig services and equipment has never been bigger. Major discoveries offshore Brazil, India, Africa and in other difficult environments assures strong demand for years to come.  The most in-demand will be high tech operating equipment and tools that can withstand immense temperatures and pressures.

3) Fertilizer prices for potash and phosphates continue to skyrocket as Asian farmers enjoy high crop prices and begin to use much more fertilizer per hectare.  They still use very little compared to farmers in the Americas and in Europe.

4) Demand for gold by central banks in the Middle East and Asia is rising as gold pulls back from $1030 per ounce to the current $870 per ounce.  More and more countries are abandoning the old tradition of holding their currency reserves exclusively in U.S. dollars.  They are shifting more and more to Euros, other currencies and gold.

5) Some Bolivian departments (a political subdivision or province of which Bolivia has nine) are tiring of Bolivian President Evo Morales’ Venezuelan style socialist autocracy.  Several departments are considering voting on establishing regional autonomy.  Four capitalist minded and richer departments in the East of Bolivia are planning referendums on regional autonomy.  Two other departments are considering the same path.  IF all six voted for autonomy it would represent two thirds of Bolivia’s states and the great majority of its wealth.  Such a succession may eventually lead to the break up of Bolivia as the public tires of government expropriation and corruption.

6) Last but not least, inflation is everywhere.  Many countries profess surprise when they have to announce that inflation is way above plan.  It is obvious why this is the case, and if you have read us you know why: Irresponsible governmental monetary and fiscal policies in nearly every region of the globe.  Are governments getting any more responsible as the inflation they wrought appears for all to see (in spite of their manipulative data)?  No.  Are they continuing to mismanage, and then manipulating the data to show a rosy scenario? Yes.  What else can we expect from governments?  Unfortunately, little else.

There is a wonderful article about how economic data is managed for political gain.  Click the following link to view it.


Inflation will be with us for many years.  It is spreading back from Asia to the developed world.  It is a product of irresponsible economic management, mostly by legislators (parliaments), and aided and abetted by their executive branches of government.

Here at Guild Investment Management, we will use declines in oil, gold, farm products and other valuable commodities (and the companies that extract them) to acquire and add to investment positions.  We expect volatility, and a lot of news reports about how it’s all over for the inflation beneficiaries.  In our opinion, it is far from over.  It will be volatile and those who don’t like volatility should consider other investment alternatives.  Those who can keep their head while many of those about them are losing theirs will do very well.  It is our opinion that these inflation beneficiary investments are in multi-year bull markets.  It is our further opinion that the bull has years yet to run.

Thanks for listening.

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