After the recent wild fluctuations in the Dow, many investors have lost faith in the market and the banks. Bank deposits have decreased an average of $500 million a day over the last 90 days. Meanwhile the stock market has shed around $8 trillion in value. Those are difficult numbers to wrap your head around.
One thing is for sure, people are sick of losing money. In the current climate, many investors have given up trying to make their capital grow. They are solely focussed on keeping it safe. As it turns out, spooked investors are taking the notion of “safe” literally.
SentrySafe, the nation's top safe manufacturer, reported that sales have surged 50% in the past three weeks. Home Depot (NYSE: HD, Stock Forum) reported a big spike in the sales of safes and some stores are running low.
“People are looking to gain control,” explains Doug Brush, SentrySafe's business manager, “They are bringing things that are valuable and important to them home."
The paranoia isn’t just about the markets and the financial institutions anymore. Some high-end safe buyers have requested 2 a.m. deliveries to keep neighbors (or domestic staff?) from knowing that their homes are storage facilities for gold and cash.
But money will only stay hidden so long. When the storm passes, money will return to the markets. Once we get the first whiff of an upturn in the economy (which could be a year or so away) the markets will slowly come back to life.
Now is the time to start figuring out where the “safe money” will be headed. My hunch is that investors – still feeling the sting from this savage bear market - are going to turn to solid “practical” companies. They’ll stay away from financial shenanigans and find industries with very little demand destruction.
It’s a safe bet that one of the first places the herd will move back into is agriculture. The “Peak Soil” story is real, and the demand for fertile land will intensify. Regardless of how long this recession lasts, farmland will be one of the most valuable assets to own over the next few years.
Cornell University’s David Pimentel explains:
Soil erosion is second only to population growth as the biggest environmental problem the world faces. Yet, the problem, which is growing ever more critical, is being ignored, because who gets excited about dirt?
Erosion is a slow and insidious process that nickels and dimes you to death. One rainstorm can wash away 1 mm of dirt. It doesn't sound like much, but when you consider a hectare, it would take 13 tons of topsoil - or 20 years if left to natural processes - to replace that loss. And that kind of loss occurs year after year by wind and rain around the world.
Who gets excited about dirt?
I do.
More people; less farmable land. You know the story. Folks still need somewhere to live and something to eat. Middle-class Chinese and Indians, having developed a taste for meat, are not likely to go back to a diet completely dominated by rice.
I’ve been in South America for a few weeks now. I’ve been doing research, meeting geologists, farmers, politicians and business leaders. There is a lot going on here. One South American company I visited strikes me as a likely destination for some of that “safe money.”
Cresud (NASDAQ: CRESY, Stock Forum) is based in Buenos Aires, Argentina. It owns about a million acres of farmland and 50,000 head of cattle. It buys up marginal farmland and then ramps up production.
In a way, Cresud is a leveraged play on farmland. It’s like a copper mining company that mines low-grade copper. When copper prices are high, it’s worth a lot. When copper drops, profit margins shrink.
Since we’re in the correction phase of a long-term bull market in agriculture, Cresud’s aggressive strategy should pay off big over time. Just last year gross profit increased by around 60%. But it’s not from just grain prices rising. Milk revenues grew 80% compared to last year.
The company recently raised $280 million to go shopping across South America. Cresud has been buying up farm land in Paraguay and Brazil. They buy the land and add value to it by improving water supply for instance. In other words, when you buy shares in Cresud, you get meat, milk, soy beans, corn, all sitting on rapidly appreciating land.
Cresud also owns shopping centers in Buenos Aires, a safe Latin city founded by the Spanish. Buenos Aires feels like a cross between Rome and Manhattan. It boasts world-class cathedrals and art, but it has a young hip musical vibe. I’ve been staying in a beautiful old Colonial home called the Boquitas Pintadas, on the outskirts of San Telmo. It costs $45 a night. You could buy the entire hotel for around $400,000. The same building would be worth $15 million in Soho. Sometime in the near future, that price tag is going laughably cheap.
Cresud is buying up Buenos Aires real estate while the rest of the world is sleeping. In fact, one of the things I learned directly from Cresud’s executives is they consider themselves primarily a real estate development company.
A year ago, Cresud shares hit $24. Since then they’ve fallen about 75% to the $6-to-$7 range. There are three main reasons for this decline. First, they got caught in the downward drift of a vicious bear market and got pummelled like almost every other agriculture stock. Second, the price of soybeans has fallen dramatically on the world markets. Finally, Argentina has been hit with a series of strikes by farmers protesting the high export duties on soy and meat.
The bear market is something everyone is dealing with. Commodity prices are notoriously volatile even in “normal” times. It’s the labor unrest that is creating the crisis investing opportunity here.
Striking workers make investors nervous. I think it’s fair to say that there is considerable scepticism about Argentina’s political system built into Cresud’s stock price – probably too much.
Currently, Argentina’s President is a left-leaning business pragmatist called Cristina Fernandez de Kirchner (“Cristina” as the local media calls her). She’s attempting to create a fair distribution of wealth without stifling the economy or enraging the voters. She appears to be failing. The upper middle class are furious with her for fudging the unemployment numbers, and the less advantaged voters feel betrayed that she hasn’t delivered on her social promises.
I spent two weeks in Buenos Aires, mixed with a diverse group of people, including taxi drivers, social workers, bankers, house cleaners, business leaders. I only met one person who thinks Cristina is doing a good job. Her approval rating is 22%. Lower than George Bush’s. The next Presidential election in Argentina is a couple of years away, and my crystal ball isn’t perfect, but the political winds in Argentina are definitely shifting direction.
Vice President Julio Cobos defied Cristina and voted against her last proposed export tax hike. His vote killed the bill. They no longer speak to each other. Everywhere he goes, Cobos is greeted by cheering crowds. His approval rating is 77% - triple his boss’s.
While the current crisis plays itself out, billions of dollars are going to remain sidelined, some of it literally locked up in people’s basements. After getting burned so badly in this bear market, it’ll take a while for investors to wade back in. But eventually – when the stocks get cheap enough and the economy shows signs of recovery – the money will move back in.
Over the next 24 months, there are going to be buying opportunities in “practical” companies that produce goods (like water and food) that are impervious to demand destruction. That’s where my safe money will be going.