Taipan Daily: Does China Want a Lower Gold Price?

Online Version | Mobile Version Wed., February 10, 2010 42 Times Better Than Gold Download Your Free Report Now! Taipan Daily: Does China Want a Lower Gold Price? by Justice Litle, Editorial Director, Taipan Publishing Group As you have no doubt heard, Beijing is sitting on something like $2 trillion in excess reserves. It's actually more than that. According to Michael Pettit, a noted in-country China watcher, the figure is "pretty close to $3 trillion" depending on how you account for it. This massive sum is no guarantee against a China market crash. Pettit goes on to point out that China's huge reserves amount to "5-6% of global domestic product." This is the same rough percentage as the total central bank reserves accumulated by the United States in the 1920s. It was fashionable to sweat the hoard of U.S. reserves back then, just as it is fashionable to sweat China's hoard now. In the late ‘20s, John Maynard Keynes spoke of "all the bullion in the world" piling up in America's coffers. And yet, despite all that backstopped loot, 1929 still happened. The 1930s still happened. Get a Full Year Free! An unprecedented decision just handed you a full year of our revolutionary new service – Currency Profits Trader (valued at $5,000) – absolutely FREE! But you must be among the first to claim your "free slot" today. Reserve your space here… More evidence that even a rich-as-Croesus central bank can lose control, perhaps... or never had true control in the first place. This makes sense when you think about the monetary "pipes" analogy we used just recently in these pages. It's no easy to trick to pump a vast quantity of cash into the system without seeing it pool stagnantly – or making the boiler explode. Bernanke and crew are like plumbers wearing oven mitts. Are the Fed's Beijing counterparts really that much smarter? Of Gold and the Dollar But anyhow, moving on to today's inquiry: Does China want a lower gold price? In the long term, almost certainly not. But in the short term, maybe so. Consider the following: Via its mountain of excess reserves, China has the biggest "long dollar" trade on the planet. China hopes to build a far larger "long gold" position than it has right now. When building a long-term position, lower buy-in prices are preferable to higher. On balance, a strengthening $USD is a mixed bag for China. The stronger the greenback gets, for one, the more that U.S. politicians squawk. (American exporters of manufactured goods want a weak currency, not a strong one, and they see China as "cheating" by holding their currency down to spur exports. This creates a natural correlation between a rising dollar and rising trade tensions.) A firmer buck is a good thing for China, though, in that the dragon has such a huge pile of them to dispose of, i.e. to exchange for more useful assets. When the dollar gets stronger, all kinds of things get cheaper in relative terms. Like South American farmland, for instance... or metal mines in Africa... or coal and LNG from Australia... or gold. One Stock Every Month is All You'll Ever Need For the entire 2009 calendar year 100% of my trades have been winners. All of my stock picks are up with an average annualized return of +116.2%. I'm putting my money where my mouth is -- I've got $100,000 in these picks. My subscribers are making money hand over fist alongside me. D. Wernette of Hinsdale, IL has made $10,272. And J. Reisman of Cambridge, MA has made $46,002. Get my latest stock pick now. The Long-Run Perspective In the long run, China craves power (or at least the mandarins who run the place do). Economic power, financial power, military power, you name it. In getting from here to there – from a world where America is top of the heap to a world where China is – China will have to do a few key things to see its geopolitical ambitions met. It will have to dig out from under a mountain of paper dollars. And it will arguably have to build up a massive stash of gold, much bigger than the one it has now. The strategic nature of this endeavor creates some odd incentives in the short term. Think of two large investors: one who is trying to quietly buy up the shares of a small public company, and another who is trying to get rid of a massive stake. Gold is like the small public company in this analogy. The total "float" of gold available for purchase is tiny – a few trillion dollars' worth at the maximum. (Much of the world's gold is in private hands and not for sale.) China is like the large investor trying to quietly buy up shares. Given the intimate knowledge of its own long-run plans, China likely wants to exchange dollars for gold at the most favorable price possible – which, here and now, means a lower gold price. This is no different than a large investor wanting to get the best average cost on his position. China is like the other large investor – the one who wants to get shed of a massive stake – in terms of its divesting its mountain of dollars. In this case, it is a higher price (i.e. stronger dollar value) that is desirable, as it means a better rate of exchange on greenbacks going out the door. Playing the Game This is why, your editor would argue, China is predisposed to a lower near-term gold price, not a higher one. As a large buyer with a very long-term outlook, Beijing wants to get the best prices it can... both on the dollars it sends out and the metal it takes in. This is also why, from an investment standpoint, your editor is not perturbed by a near-term weakness in gold. To the degree that the gold price falls (and the dollar rises), we are witnessing a giant geopolitical chess game in progress. The endgame, when it comes, will look very different. Warm Regards, JL Government Conspiracy Ignites Historic Profit Opportunity! If you don't mind making money at the U.S. government's expense, I urge you to read the following Investigative Exposé immediately. It will make you mad as hell. It could also make you very rich, very soon. Follow this link for all the details… Taipan Daily - a free e-service of Taipan Publishing Group - is easily the most profitable 5 minutes of your day. To become a Taipan Daily member sign up here. For more information, about Taipan Daily and Taipan Publishing Group, visit our home page. 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China or Bust

The Daily Reckoning Weekend Edition Saturday, December 19, 2009 Taipei, Taiwan --------------------------------------------------------------- What if China goes pop? Cracks appear in the Great Eastern Hope, Could equity and property markets there "do a Dubai?" Plus, the word on nuclear and geothermal energy and those violent golden dips... --- The Agora Financial Reserve: Offer Expires New Years Eve* --- We'll Pay You $5,909 to Cancel Your Agora Financial Subscription Right Now We know it sounds preposterous, but it's true. Not only that... If you act now* you'll receive every one of our elite publications... And that's in addition to the nearly $6 grand we just mentioned. Just give us 10 short minutes out of your day, and we'll explain everything. *The doors to the Agora Financial Reserve are only open a few short weeks out of the year. We suggest you take advantage while you can. --------------------------------------------------------------- Joel Bowman, entertaining Black Swans in Taipei, Taiwan... When Dubai's debt bubble burst a few weeks ago, few expected that it would precipitate, by itself, a complete collapse of the global economy. Even those who foresaw the mounting and crippling debt loads there weren't that imaginative. After all, the Swarovski-clad emirate's portfolio, packed with high-end New York retailers and Las Vegas casino projects, represented, in many ways, more super speculative hedge fund than measured, robust investment stratagem. Likewise, when Greece, laboring under a deficit not dissimilar to that in the United States, fell prey to the ratings agencies' wrath, few investors conjured up apocalyptic scenarios of mile-long soup lines around the world. The government there had a "poor history" of debt management, the agencies observed. What did we expect? These two debt-addled sovereigns are far from out of the woods, of course. Abu Dhabi might have thrown its meretricious cousin a $10 billion lifeline, for instance, but the emirate's leader must still find a way to meet up to $80 billion in additional debts and liabilities. With soaring interest rates on bonds issued by the emirate and shattered investor confidence, that won't be easy. The Greeks face similar problems, and already their fate weighs heavily on both the Eurozone and its currency. But in any high stakes game, it is always the weakest hands that fold first. That is to be expected. The same casual indifference cannot, however, be indulged when one considers the possibility of a China bust-up. And with investors like Jim Chanos employing – possibly hyperbolic – descriptions like "Dubai times a thousand" to describe the Middle Kingdom's economy, the possibility that we may see a spectacular collapse there is worth, at the very least, a moment of contemplation. Prima facie, China appears to be nursing along the world's nascent recovery rather well. Forecasts of GDP growth around 10-10.5% for 2010 are not infrequent and, judging by the inflow of liquidity into the Asian region as a whole, most investors expect nothing less. According to Nomura Holdings Inc., persistently low interest rates in the US, coupled with the perception that Asian economic growth is a one-way bet, is driving a "tsunami" of capital into the region. Data compiled by the Japan-based financial group show a half-trillion dollar reversal in foreign cash flows over the past year alone as investors pile their bets on a China-led economic resurgence. In the three quarters leading up to March of 2009, widespread economic meltdowns in the west saw some $262 billion vacuumed out of Asia's red hot "tiger" economies as beleaguered funds in The City, Wall Street and elsewhere repatriated capital to meet crushing margin calls closer to home. However, over the past six months, almost all of that cash ($241 billion) has found its way back to Asian shores. Even in a region as populous as this one, that kind of cash does not stay inconspicuous for long. Coupled with ample stimulus spending by local governments, those funds have helped inflate prices from equities through to the local property markets. The MSCI Asia-Pacific index (which excludes Japan) is up 62% for the year, en route to its best twelve-month performance in over a decade and a half. China's own Shanghai CSI 300 measure is higher by more than 65% for the same period. Again, such a strong market performance one year does by no means guarantee a retracement the next, much less a total collapse. But in and of itself, a past rally does not support unbridled optimism for future rallies. Indeed, some fissures are already starting to appear. The same Shanghai index that boasts such impressive year to date numbers slid over 4% last week, and several components of the China Stocks and ADRs Index have slipped by 10% over the same period. Real estate prices in China are also looking rather frothy. A recent editorial that appeared in China Daily ought to inspire at least some skepticism amongst once-bitten investors: "If there is anything more spectacular than the amazing V-shaped recovery of the Chinese economy this year," the paper reads, "it must be the jump in its housing prices which, after dipping for a while, are breaking records in many cities." Statistics cited by the paper indicate prices in 70 major cities (yes, they have 70 major cities) are rising at an incredible pace, outstripping even their parabolic climb in 2008, before the last "dip." "It has been reported that prices for commercially built new residential units in Beijing, Shanghai and Shenzhen have jumped above 50 percent so far this year, outpacing the growth of local economies by more than 5 times," the paper continues. On Friday, Zhang Xin, chief executive officer of property developer SOHO China Ltd, warned that prices in the red hot real estate market may already be overheated. "The government needs to realize how serious the asset bubble is," Zhang told newswire, Reuters. "It cannot control the asset bubble by just saying a few words. The most fundamental solution is to tighten credit." "There is a bubble in every city," Zhang added. That's the problem with central governments' stimulus spending, of course: one never knows when enough is enough. According to Forbes, "More than 1.6 trillion yuan, or about one-sixth of China's new loans, went to the property sector in the first 11 months, including mortgage loans to home buyers and lending to developers." All this is not to say that China will implode, of course, only that it might. Any recovery the world may or may not be experiencing is, at best, embryonic and, therefore, extremely fragile. In an era where Nassim Taleb-style Black Swans darken the skies and "six-sigma" events seem to defy conventional mathematics, it would be foolish to expect only the expected. Join us next week when we'll take a look at a few of the possible geopolitical fractures a China bust up might inspire. In the meantime, this week's regular DR reading is archived for your perusal below. Please enjoy and, as always, feel free to fling any comments or thoughts you have to your managing editor at joel@dailyreckoning.com --- Outstanding Investments Metals Report --- From Hulbert's #1 Ranked Advisory Letter Over a Five-Year Period... Even if Gold hits $2,000 by the end of this year... here's a hidden way you can get in for less than one cent per ounce Over the next two years, you'll witness the greatest surge in gold prices in market history – at least 119% above where gold sits today, as I write this. But even better, I've just discovered a way for you to sneak into the soaring gold market for next to nothing, with what I call "penny-per- ounce" gold. That is, doing this is a "backdoor" way to own as much of a position in gold as you like... for the equivalent of paying a single cent per ounce. --------------------------------------------------------------- ALSO THIS WEEK in The Daily Reckoning... The Yellowstone Syndrome By Chris Mayer Gaithersburg, Maryland Most people in finance operate under a giant self-deception: they think future economic trends are much more knowable than they actually are. The economy is like a complex ecosystem. You cannot alter one piece of it without causing effects elsewhere in the system. Investors who understand this reality can also understand (and avoid) the hazards of over-confident investing. Financially Befuddled By Bill Bonner London, England Poor Silvio Berlusconi. He was hit in the face with a heavy statuette of the Duomo – Milan's famous cathedral. To our knowledge, this is the first time the image of a major religious building has been used to try to assassinate a head-of-state. China as a Nuclear Power Play By Romeo Dator San Antonio, Texas China is aggressively preparing for its energy future in order to accommodate rapid economic growth for decades to come. The foundation of the nation's electricity generation plan is coal, but with loud calls coming from around the world for China to cut its output of greenhouse gases, a significant portion of new power will be nuclear. A Hot Future for Geothermal By Marin Katusa Vancouver, British Columbia Capturing energy from the earth's heat is pretty easy pickin's for geologically-active areas of the world like Iceland, Indonesia, and Chile. In some locations, hot fluids are so near the earth's surface that naturally occurring hot fluids can be directly circulated through buildings for heating. Iceland, in particular, takes advantage of this low-hanging energy fruit. Depression on Wheels By Bill Bonner Paris, France When the price of oil hit $150 a barrel, the first major alarm sounded. Something was wrong. Now we have a clearer idea of what it was. To make a long story short, leading economists have a one-stop solution for just about everything: stimulate consumer spending. But $150 oil warned us: continue down that road and you will run out of gas. There isn't enough oil in the world to allow US-style consumption for everyone. --------------------------------------------------------------- The Weekly Endnote: As always, please feel free to email us any thoughts you have regarding this week's topics. We can't possibly reply to each and every email, nor can we directly answer financial questions regarding specific stocks or recommendations, but we do enjoy your thoughts and insights all the same. Until next time... Cheers, Joel Bowman Managing Editor for The Daily Reckoning The Daily Reckoning - Special Reports: The US Trade Deficit: Fort Sumter...And The U.S. Trade Deficit US Recession: By far the Weakest Recovery "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history. AGORA Financial Resources: The Daily Reckoning Is: Economics & Politics Crisis & Opportunity Gold, Oil & Energy Growth, Tech & Medical Options Investing Founder: Bill Bonner Editorial Dir: Addison Wiggin Publisher: Eric Fry Managing Ed.: Joel Bowman Web Ed.: Greg Kadajski About The Daily Reckoning: Now in its 10th anniversary year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists.

Bob Irish Reporting: Delray Beach, FL. Friday December 18, 2009

Al was more excited than usual last night when I met him and his wife for dinner at a local pizza place in Delray Beach. "I can't wait for tomorrow," he said. "Why is that?" "I'm buying a multi-family apartment building." "Cool. What made you pull the trigger?" "It's time, that's all." "You think, the market has bottomed?" "Oh, I don't know about that. I simply look for properties that can wash their own face." "Say what?" "A property can wash its own face if the rental income covers the mortgage, taxes and insurance." "Okay. I get it. And if real estate dives again?" "No sweat, I'll be holding onto this property for 2-3 years at least. And, as I said before, it can wash its own face. So I'm not worried about that." Should You Worry About a Bad 2010? Al isn't impulsive and he's not a big risk-taker. I'd call him a non-adventurous opportunist. He has a good head on his shoulders. And a nose for opportunities that make him money in the long term. I wish more investors were like Al, taking the long view. Most don't, because they have trouble separating their emotions from their investing decisions. This past year, fear dominated. Even as the markets trended up, there was no mad rush into stocks. Apparently, many investors don't know what if feels like to buy low. They've been gun-shy and willing to invest only selectively and only in the safest securities. Here at IDE, we think that's a good thing. The overall market is no longer a bargain. However, some stocks are still priced to buy. Mr. Market can act in mysterious ways. Over the last half year, it's rewarded speculative small companies much more than the bigger and deep-pocketed companies. As a result, many blue chippers are relative bargains. As scared investors gradually gain more confidence in the stock market, these companies should attract the lion's share of investment dollars. Even if 2010 turns out to be an economic bummer, blue chips should still do well because of... The "$10 trillion riptide" of boomer money looking to repair their nest egg. The low yield in many money market funds. A portion of that $3 trillion will be looking for a new home. Attractive dividends. In the absence of an appreciating market, dividends are the only way investors make money. China's Appetite for Commodities Will Send Prices Soaring Gold. Silver, Uranium, they will all rise in prices as China hoards supplies. This is great news for you if you are a member of Resource Windfall Speculator. The portfolio is built for opportunities like this. Click here to learn how you can involved in the bull market coming in 2010. Do You Believe in China? All you need to know is that BHP Billiton believes in China. That's better than getting two dozen so-called "official" numbers from the government indicating that China's robust growth is continuing. BHP is the giant mining company hailing from Australia. Its in-house knowledge of China is better than the CIA's. I'm serious. BHP has more people in China than the CIA. And it has far more people following China. BHP has good reason to keep close tabs on China. It sells them more than $10 billion worth of rocks (from coal to diamonds). How China goes, so goes BHP. BHP recently reported that it expects global steel demand – led by China – to double in the next 15 years. That's a long-term trend that even "Man of the Year" Bernanke can't sabotage. If steel is going up, so are the other industrial metals (like iron ore, copper, and nickel) in the long run. So what if China's recovery is coming from all the "lending and spending" its government is doing. China can afford it. Look at it this way. They're spending the hundreds of billions of dollars we pay them for their products to prop up their economy. Nice arrangement there. Other Long-Term Trends Apart from China, here are two other long-term trends to keep an eye on... Agriculture. IDE's Steve McDonald says "Farmers worldwide have had a double-whammy from a drop in food prices. It has reduced the incentive to plant as much as they had been planting during the boom years. Plus, framers have not been able to borrow money to finance their operations. The result is that most farms have had to cut back on just about every aspect of production." Steve, who edits The Bond Trader, says to expect shortages – and that will lead to plenty of investing opportunities. Health Care. Globally, per-capita spending on health care has increased by more than 80% in the last 25 years – way more than the 37% increase in GDP. Look for that trend to continue. IDE's Ted Peroulakis took a hard look at Washington's latest spending package... its trillion-dollar-plus new health care plan. And he says it'll be a boon for hospital operators. "Additional revenues will come from an extra 30 million Americans getting health insurance coverage. Currently, hospitals take billions in losses every year due to uninsured patients not paying their bills after they receive care. Hospitals will get a significant boost in revenue if millions more Americans are insured." By the way, Ted made a 38% gain in less than a week with an option on a health care stock. If you're interested in Ted's Options Power Trader, click here. Invest Safely, Bob Irish Investment Director Investor's Daily Edge We want your feedback! Let us know your thoughts on this article. Email us at: feedback@investorsdailyedge.com Market Window FINANCIAL ADVISORY BOARD Bob Irish - Investment Director Andy Gordon - Editor Jon Herring - Editorial Contributor Ted Peroulakis - Editorial Contributor Christian Hill - Managing Editor Dr. Russell McDougal - Editorial Contributor Steve McDonald - Editorial Contributor Michael Masterson - Consulting Editor

Crossing China’s “Great Wall� Barrier

Andrew Gordon Reporting: Baltimore, MD Thursday October 22, 2009

China Can Chew You Up From my days in international business, I learned that Asia can make you a lot of money. It can also chew you up and spit you out. I remember as if it were yesterday, hanging out with a couple of my favorite clients, Ben and George, in Singapore. Ben was in the fuel-tank business. He and I would hop over to China to catch some business meetings. George worked for an environmental firm. He was always pushing China with his CEO. He once told me that China would give his company tons of business and make him rich. After about two years of traipsing back and forth between Baltimore and China, George closed just one tiny project. He had spent a bundle and the CEO wasn't happy. George was fired. Ben's products went viral after the first couple of years. Crossing the "Great Wall" Barrier The big difference between the two guys? George never got beyond the "Great Wall" barrier. And Ben did. What is the "Great Wall" barrier? It's the line of respect and reciprocity. Until you cross the "Great Wall" barrier, it really doesn't matter how much demand there is for your services or products. It doesn't matter how well funded you are. Nor does it matter how bright your prospects are. None of it matters until you get the respect and cooperation you need from the Chinese government. Until then your business is completely speculative. But once you cross this "Great Wall" barrier, your success is almost inevitable. You've been admitted into their system. Instead of fighting you every inch of the way, the bureaucracy has your back. It's like you've been given an official stamp of approval to do business in the country... Only there's nothing "official" about it. It's invisible to the outside. But if you know how the "system" works, it's obvious when your sales will explode. So, how do you figure out if companies are on one side of the "Great Wall" barrier or the other? Well, take it from an old China hand, I can tell you when a western company has been "greenlighted" by the Chinese government. One of China's "Untouchables" Some companies are too big and important for China to mess with. It doesn't happen very often. Even in such cases contracts aren't signed the first time you show up in China. But the cooperation you get from crossing the "barrier" is evident almost from the beginning. It helps when you're one of a handful of companies in the world that can help the country modernize certain critical sectors. China is woefully behind the curve in its aerospace development. The Chinese government was more than happy to usher this company past the "Great Wall" barrier to get the help it needed. In no time at all, the company got big-buck contracts to help develop... China's helicopter-producing industry Its passenger planes- manufacturing industry And hundreds of its airports The company is Honeywell and it's part of my INCOME portfolio. I have a bunch of other companies in this portfolio which have crossed the "Great Wall" barrier. If you'd like to find out more about my INCOME recommendations, click here. There's No Need to Buy Gold and Bury It in Your Backyard… You don't need to buy a single ounce of gold to make money in the soaring gold market. If gold goes nowhere, you should still make money. If precious metals continue to rise (even slowly) you could make a fortune. And if the metals soar? Let's just say your grandchildren will be thanking you… Discover the secret behind this "No-Gold Gold Rush" right here. The Dumbest Thing We've Heard All Week… We're adding a new segment to IDE. Every week, we're going to feature "the dumbest thing we've heard all week." There are a lot of really bad ideas out there, so we won't have any trouble coming up with content. But we want your help. The next time you read a stupid quote… a dumb idea… a financial reporter who's totally off base… an investment manager taking on too much risk… or a regulator with his head up his… well, you get the idea. Send the "dumbest thing you've heard all week" to feedback@investorsdailyedge.com So… What Is the Dumbest Thing We've Heard This Week? We have been warning you about this for some time. And now it's official. Due to the surge in bank failures, the Federal Deposit Insurance Corporation – the government insurance fund designed to protect consumer bank deposits – is out of money. And it will likely be in the red until at least 2012. But don't worry! In a prepared statement before the Senate Banking Committee last week, FDIC Chairman, Sheila Bair said, "The problem we are facing is one of timing." A problem of timing? Hmmm… I've had that problem before. When I was young and broke, I used to run out of money about two weeks before my next paycheck was due. "Don't worry," I told the landlady. "It's just a problem of timing… I don't get paid for two more weeks." The truth is that a fractional reserve banking system can never be insured. Banks today can loan out $10 for every $1 on deposit. As we have pointed out before, the idea of "deposit insurance" is a confidence scam. It holds up only as long as the depositors have confidence in the system. You Can't Look Back, But You Can Look Forward To A Safe Retirement Steve McDonald is on a crusade to save the baby-boomer generation from living out their retirement near the poverty level. You don't have to risk your nest egg when, historically, 99.7% of these types of investments have paid out as promised. It's worth your time to read this report and learn how Steve can help make your golden years shine. How the FDIC Is Solving Their "Problem of Timing" Part of their plan is to ask the nation's already under-capitalized banks to prepay their deposit insurance premiums for the next three years. In other words, the "insurance company" is asking its own customers for a bailout. How would you feel about your homeowners insurance if the company that wrote it asked you to pre-pay for three years of coverage… because they were running a little short on funds? At the end of June, the FDIC had $10.4 billion to insure some $4.5 trillion of reserves. Now the FDIC is broke. That doesn't exactly inspire confidence, especially considering that some analysts – including the Royal Bank of Canada – are predicting another 1,000 U.S. banks will fail in the next few years. But the US Government Will Never Let the FDIC Go Bankrupt… They will simply charge the member banks exorbitant fees... And print up more dollars... And the taxpayers will foot the bill by way of inflation. While your bank deposits might be relatively safe… the dollar is not. The government will print as many dollars as it needs to fund their programs – FDIC "insurance" included. And that's why you should protect your wealth and savings by holding a percentage of your assets in gold and silver bullion. Bullion is for savings and a store of wealth. To grow your savings, look to the precious metals miners, royalty companies and select exploration outfits. And IDE analyst Rusty McDougal has put the best of the best of these stocks into his Resource Speculator portfolio. Invest Safely, Andrew Gordon Investor's Daily Edge We want your feedback! Let us know your thoughts on this article. Email us at Email: feedback@investorsdailyedge.com Market Window FINANCIAL ADVISORY BOARD Bob Irish - Investment Director Andy Gordon - Editor Jon Herring - Editorial Contributor Ted Peroulakis - Editorial Contributor Christian Hill - Managing Editor Dr. Russell McDougal - Editorial Contributor Steve McDonald - Editorial Contributor Michael Masterson - Consulting Editor

China Holds the Key to Understanding This Rally

Online Version | Mobile Version Tuesday, October 13, 2009 Tiny Micro Cap Poised to Soar! Read All the Details Here. Taipan Daily: China Holds the Key to Understanding This Rally by Justice Litle, Editorial Director, Taipan Publishing Group "[China has] built more factories, shopping malls, condos, roads and bridges than could ever be put to good use, even assuming a dramatic upswing in global growth... Growth in actual wealth has dramatically lagged growth in credit, growth in money supply and growth in GDP. This is not sustainable." – Mark Hart III, Corriente Advisors LLC Why did Bernie Madoff finally get caught? After years (decades) of pulling off a multibillion-dollar Ponzi scheme, why did it all come crashing down overnight? One might chalk up Bernie’s undoing to a sudden absence of liquidity. During flush times, client withdrawals were always covered by new incoming funds. But then came the credit crunch, too many clients made withdrawal requests at once, and poof... that was that. Keep that in mind – you’ll see how it ties in momentarily. “Too Big to Fail,” China Style Source: PBS Video "The World's Largest Shopping Mall" “The largest mall in the world,” PBS reports, “turns out not to be the famous Mall of America in Bloomington, Minn. It’s the South China Mall outside of Guangzhou, China.” Outdoing the techniques of American consumerism, South China Mall is Disneyland, Las Vegas and Mall of America rolled into one. There are carnival rides, mini-parks, canals and lakes amid classic Western-style buildings with space for hundreds of shops. But along with the glitz and glory of middle-class shopping, the mall’s Chinese developers seem to have imported something else — a cautionary tale of capitalist hubris. Alex Hu, a local Guangzhou boy who made it big in international business, wanted South China Mall to be a hometown monument to his success — even though Guangzhou has no major airports or highways nearby. And four years after its construction, the mall sits virtually empty of both shops and shoppers. But the Chinese have imported yet another concept familiar to Americans — South China Mall is considered too big to fail. So, employees line up for flag-raising ceremonies and pep talks about “brand building” before going off to maintain the deserted concourses meticulously. The above picture and commentary come from a fascinating (and rather eerie) 13-minute PBS video segment on the world’s largest shopping mall. You can watch the video here of "The World's Largest Shopping Mall". “The area that the mall occupies now was farmers’ fields five years ago,” mall consultant Ted deSwart reports. “And now, in the middle of a town that nobody in the West has ever heard of, is the largest shopping center in the world. So this really is sort of a very colorful illustration of how fast China is not only catching up with the West, but surpassing the West too.” As Sarah Palin might say, you betcha! Trouble is, the Chinese dragon has not only glommed on to the “best practices” of Western capitalism, but the very worst practices too. As a glittering monument to folly, the South China Mall is as foolish and expensive as anything America could have dreamed up. (Actually, scratch that. The South China Mall is far bigger than any monstrosity America could have dreamed up. The Mall of America in Minnesota, the previous record holder, is less than half the size of this new beast. And the MOA at least has visitors...) Landslide Coming? Other “boots on the ground” type reports from China deliver similar verdicts. The construction is out of control. Buildings sprout like weeds, only to stand empty or even be torn down again. Mark Hart, a money manager with Corriente Advisors out of Forth Worth, Texas, sees China as a “communist propaganda machine” according to The Dallas Morning News. Unlike those who see China as invincible, Hart believes the dragon’s success is a false front, born of even more aggressive Keynesian policies – i.e. government spending gone wild – than the U.S. has implemented. Investment Resources Latest Taipan Daily Issues Can China Survive "The Hummer Syndrome"? Lessons From the Big Rich Texas Oilmen, Part II What Happens When We Raise Expectations Beyond Belief? Market News Articles Search for Recovery as Q3 Earnings Season Continues 3Q Earnings to Reveal the Importance of Sideline Money View More Market News Articles The hundreds of billions that China has rammed down the throat of its economy have shown up in some very odd places. By some estimates, at least a quarter of it has made its way directly into speculative plays – aggressive bets on commodities and the stock market. Billions more have no doubt been funneled into “Too Big to Fail” projects like the South China Mall. Hart thinks the complacency surrounding China will only make the break that much worse when reality hits. “It’s like the mudslide after a heavy rain,” he said at an investor conference. “The more it rains, the more unstable the hillside becomes. Eventually, a landslide ensues.” The Perils of Complacency China’s big advantage in all this is an overflowing war chest. Unlike, say, the U.S. or Great Britain, China is not forced into a pattern of “borrow and spend.” Instead, the dragon can draw down its huge cash surplus. But could this major advantage also be China’s Achilles’ heel? There is nothing quite like a few trillion in reserves (or so your editor speculates) to make a country feel invincible. So invincible, in fact, that boondoggles like the South China Mall can be propped up all over the country for a seemingly indefinite length of time. Why, China is so rich they can afford to do anything! Heck, they can even afford to replicate the exact same mistakes foisted upon the world by Alan “Easy Money” Greenspan and the ensuing subprime crisis. Chinese banks can be forced to lend in stunning amounts to any business that can fog a mirror, with the government backing their every move. Bad loans can be rolled over in perpetuity, postponing the day of reckoning for as long as Beijing likes. And everything will be just fine because, just as U.S. housing prices can never fall – the central conceit that drove the entire housing bubble – the Chinese government can never run out of cash. Right? To be clear, the major risk here is not that China squanders its pocket money on sixteen-million-square-foot vanity projects (though such projects are by no means cheap). No, the major risk is that China itself has become a retail ghost town... a manufacturer to the world plagued by deadly overcapacity. Hugh Hendry, the head of Eclectica Asset Management, put it well in a Financial Times interview earlier this year: My fear is that China and its contemporaries have built productive capacity not only to service a $14 trillion dollar U.S. economy, but to service an economy and an America that they believed would be $20 trillion dollars in seven years time. My fear is that it could be closer to $15 trillion dollars... Think of all China as a single giant factory: Billions of square footage, covered with workers and industrial machines. Now imagine that, like the South China Mall, the problem on the whole was overbuilding... a failure of the “build it and they will come” ethos... and that much of the great factory that is China has actually gone silent (due to a mass shortfall in projected customer demand). As long as the factory owners (i.e. Beijing) can keep up appearances via rampant stimulus spending and reckless bank loan creation, how would we even know anything was wrong? If it is true that China has overestimated long-run customer capacity on a grand scale (as Hugh Hendry and others fear), not even Beijing’s pockets will be deep enough... “A Rolling Loan Gathers No Loss” Circling back to this exquisitely bizarre market rally, here is your editor’s take: Beijing has directly emulated the stimulus plans of the U.S. Fed and Treasury. The hundreds of billions of dollars’ worth of rainy day funds pumped into China’s economy, combined with forced loans doled out by China’s banks, have created a huge, yet temporary, multiplier effect. As far as bad loans go, Chinese banks and U.S. banks are running the same stall-and-delay playbook. In the United States, banks are hiding a veritable tsunami of losses on residential and commercial real estate loans. This not hard to do, especially given current lax accounting practices. Even the Federal Reserve has recognized the problem. A Federal Reserve presentation obtained by the Wall Street Journal observes that “Banks will be slow to recognize the severity of the [CRE] loss – just as they were in residential.” China is also emulating the U.S. Fed and Treasury in terms of directly propping up shaky institutions. “China’s $300 billion sovereign wealth fund said it will continue increasing its stakes in the nation’s three biggest lenders,” Bloomberg reports, “seeking to bolster investor confidence after Chinese shares fell last quarter.” “A Rolling Loan Gathers No Loss.” In its October communication to shareholders, money management firm Hayman Advisors coined the pithy phrase just noted. As Hayman further observes, “In an environment where credit is unlimited and underwriting standards are all but non-existent, it is pretty hard to default or be delinquent on a loan when it can be constantly refinanced or termed out to an even larger one... the current situation is only sustainable as long as credit continues to expand at a dizzying pace. [The Chinese lending situation] feels eerily similar to credit markets in the United States in 2006-2007.” The perpetual hiding of loan losses and state-sponsored bidding up of assets have lent false weight to the bulls. Evidence of true economic recovery is still very thin on the ground, while evidence of pain and trouble continues to mount. For regional banks, small businesses, and the average U.S. consumer, the state of affairs has passed beyond “dire” and headed into the realm of “catastrophic.” Yet this has all been successfully ignored – deliberately swept under the rug – by way of the supposed healing taking place on Wall Street, a process in which the megabanks use government funds to profit from asset inflation at taxpayers’ expense. As various wise men have observed, that which cannot go on indefinitely must stop. To the degree that this global market rally is perpetuated by stall-and-delay tactics, mass stimulus schemes, and uncritical bad loan extensions in both China and the United States, the true state of the global economy gets worse, not better. The longer that euphoric falsehoods are celebrated as true, the more disconnected markets become from underlying reality – yet again. Expose the $50 Billion Shadow Syndicate! At this moment, a ruthless government conspiracy is cannibalizing American jobs… crushing hopes for an economic recovery… and setting up the single greatest profit opportunity of the last 83 years. Act now, and you could be $97,500 richer by March 2010. Here are the details… I’m a Madoff, You’re a Madoff In sum, China holds the key to understanding this rally because Beijing has joined hands with Washington. Both power centers have rewarded mass speculation and a mass squandering of wealth by pouring good taxpayer money after bad, pretending that the best medicine is more of the same. Meanwhile the bears have been tortured by logic, watching feats of impossible levitation unfold before their very eyes, because the key underlying driver for this extended run of global euphoria has been more deceptive, and more Madoff-like, than just about anyone could have imagined. To wit, it has not been the impact of stimulus alone (nor positive investor sentiment alone) that has kept the raucous party going, but a frank willingness to “extend and pretend” to an astonishing degree... a concerted, sustained effort on the part of Beijing and Washington to keep the illusion intact as long as possible, violating every conceivable free market tenet under the sun while doing so. And thus, at some point the extend-and-pretend merry-go-round will come to a jarring halt... just as it did for Bernie Madoff. On balance, it’s more fun to be an optimist. It feels better when one has reason to be bullish on America, on China, on the global economy at large. (And in the longer term, your editor does count himself an optimistic bull in many respects.) But episodes like this just do not end well. They end, in fact, in crashes and chaos. When the powers that be force us all to become complicit in a giant Madoff scheme, the bullish logic becomes toxic... like a feel-good drug that takes you high as the heavens now, only to crash you down into the gutter later. To stall, delay and deceive is to invite future ruin – just as Bernie Madoff delighted his clients for years before wiping out their hopes in one stunning reveal. Warm Regards, JL P.S. What do you think about our new Web site? As you might have noticed, we rolled out a new design of the Taipan Publishing Group Web site a few weeks ago. We hope that you like this new layout and would like to know what you think. Please take a minute to complete this short survey to give us your thoughts. We look forward to hearing from you! 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