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Commodity Investing Shell Shocked
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New York: June 08, 2009
By John Stephenson

The sad announcement that GM has filed for bankruptcy protection and that its iconic Hummer division has been sold to the Chinese has done little to curb stock market enthusiasm. While North American manufacturing may have been decimated by the financial crisis, investors and economists are increasingly looking past the smoldering wreckage in the industrial heartland toward a resurgent economy in the later part of this year.

At first glance, the enthusiasm appears misplaced. Job losses are still high and likely headed higher. The North American consumer is heavily indebted and will be in the recovery ward for years to come — convalescing from decades of too much cheap and easy borrowing. Consumer debts as a percentage of income have soared as an unpleasant hangover of excessive borrowing to buy houses, cars and appliances comes home to roost.

And that might be just the first shoe to drop, as governments around the world pump trillions of dollars into the system to shore up their shoddy finances after the implosion of the banking sector. According to the U.S. Congressional Budget Office, Washington will likely tally-up over $14 trillion in debts between now and 2020, creating a massive debt-to-GDP ratio that will be well over 80%. Analysis from the Brookings Institute suggests that even these figures may be overly conservative and that these enormous amounts of government stimulus will also be accompanied by tax increases and spending cuts. With bankers reigning in credit and governments going deeply into hock, how can America 's consuming miracle continue unabated, even if global growth were to reappear?

Luckily, it may not have to as the composition of global growth appears to be in the process of changing. While American growth may not be what it has been, Asian growth is likely to accelerate in the years to come. China is a case in point. Its economic growth over the past decade has been driven by spending on capital investments and exports of manufactured goods, while its household sector accumulated huge savings.

The key to resurgent global growth will be a shift toward increasing consumption in Asia and the Middle East , where savings rates are high and consumption has taken a back seat to export-led economic growth. With plenty of money in the developing world, an increase in spending in Asia and the Middle East could more than offset increased savings in the West as European and American consumers rebuild the wealth lost in their stock and real estate holdings.

Figure 1: Savings in the Developing World Explode

Loose lending practices in the U.S. were only part of the reason why the American consumer was able to go on an extended spending spree. The other major reason for copious American consumption was an over-valued greenback that gave the American consumer tremendous purchasing power globally. With the U.S. Federal Reserve engaged in a massive program to grow the country's monetary base and stave off deflation, it looks increasingly likely that the U.S. dollar will continue to fall against other major currencies.

Commodity prices and the stock price of the companies that produce them are beginning to show the effects of U.S. dollar weakness, by staging an impressive rally. With no let up in sight to American efforts to get asset prices moving higher, look for a longer more sustained rally in oil, base metals and agricultural commodities.

With Asia beginning to pick up the global slack, investments in the emerging markets or in the multinational companies that sell in Asia look to be a savvy bet on the diverging economic paths between America and the developing world.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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