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by Addison Wiggin & Ian Mathias
Here we go again. Markets have caught a chill after signs of inflation fever in China. And that’s not even the half of it. Let’s dive in…
Consumer price inflation in China hit a 16-month high in February -- a 2.7% year-over-year increase. China’s National Bureau of Statistics was quick to put out a statement reassuring everyone that "price rises this year will be moderate and controllable,” but that’s not enough to calm traders looking for excuses to feel jittery.
And any news that might, possibly, at some point in the future, signal monetary tightening in China… well, that’s enough to put the fear of God in them. Hence, the major U.S. indexes opened down about 0.2% in the first hour of trading. The news is also an excuse for traders to bail out of gold, which clings to $1,105 as we write.
So much for the short-term noise from China. But the Middle Kingdom is also making real news this week. We’ll get to that in a bit, but first, we bring you this item to help put it in context.
Right in line with analysts’ forecasts, Uncle Sam’s budget deficit for the month of February was $220.9 billion -- the largest monthly total in history. For the first five months of fiscal 2010, the total is $651.6 billion, 10% ahead of last year’s blistering $589.9 billion pace.
The details are even fuglier. Total revenues: $107 billion. Total expenditures: $328 billion. Yes, that’s only one dollar of revenue for every three dollars spent.
We have just two words for this: Banana. Republic.
So what does China make of numbers like this? As it happens, the National People’s Congress is holding its annual session this week. During the festivities, Yi Gang, the head of the Chinese State Administration of Foreign Exchange assured the world that U.S. Treasuries would remain a major component of China’s reserves.
We noticed he said little about whether China would actually add to its positions and soak up some of that additional debt racked up last month.
Yi also pooh-poohed any role for gold in China’s wealth management strategy: “It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves,” he said. “I have 1,000 tonnes now, and even if I doubled that holding, according to current prices, that would be about $30 billion…" barely a drop in the big bucket that contains $2.4 trillion of China’s forex reserves.
Of course, that’s what face the Chinese government puts on for the public. Yet “the volume of China's gold reserve in terms of its forex reserves only ranks fifth in the world, and is well below the global average,” says Russell Hsiao of the Jamestown Foundation.
Hsiao rounded up some interesting stories from Chinese media that shed additional light…
However it turns out, “the long-term implications of Chinese debates to increase its gold reserves,” Hsiao concludes, “will have far-reaching impact on the stability of China's forex reserves and the yuan's ability to become the next reserve currency of the world. The question for Chinese leaders now appears no longer if, but how, that will come about.”
So how do you make money from this? Other than buying gold, of course? We return to Chris Mayer’s thesis: Buy what China needs. And we’ll show you just what we mean in a bit, but first, we need to take another roundabout… to the oil market.
Oil is holding on stubbornly to $82 a barrel this morning. It briefly topped $83 yesterday after OPEC forecast world demand to grow by 900,000 barrels a day in 2010 -- a slight increase from its estimate a month ago.
Also fueling a rising oil price -- the U.S. government’s weekly oil inventory data. Crude inventory is up, but less than expected. Gasoline inventory is down, more than expected. According to the Energy Information Administration, domestic oil demand is up 3.8% year over year. As if any of this really matters long term…
“Exactly why oil traders and speculators think the data has anything to do with the state of world oil demand is beyond me,” says Jeff Rubin, who walked away last year from a cushy post as chief economist at CIBC World Markets so he could speak his truth.
“While the U.S. oil inventories data pertains to the largest oil-consuming nation on the planet, it is no more indicative of world demand than U.S. oil production numbers are indicative of world supply. Both are in terminal and irreversible decline.
“It certainly wasn’t U.S. fuel demand that took oil prices over $100 in the first place, and it won’t be U.S. fuel demand that will push them back into that range anytime soon. U.S. oil consumption is almost 3 million barrels per day short of its pre-recession peak.” And it will never return to that peak, Rubin asserts.
Result? “As China moves from consuming 8 million barrels a day to 10 million barrels, and OPEC ramps up its own daily consumption from 10.5 million to 12 million barrels, somehow, somewhere else in the world, there must be a corresponding decline in oil consumption. That somewhere else just happens to be the U.S. market and the oil markets of the other OECD economies.”
“That’s why Saudi Aramco is far more interested in securing long-term supply contracts with rapidly expanding domestic oil markets in countries such as China and India than in supplying shrinking oil markets like those in the U.S.”
There’s China again. As we mentioned a month ago, China has now eclipsed the U.S. as Saudi Arabia’s biggest oil customer.
“Last year, China passed the U.S. as the world’s largest market for cars and trucks,” says Chris Mayer. “There are over 40 million vehicles in China now, and the Chinese bought 13.5 million vehicles last year. They are car crazy in China.”
“That means the world will need to boost refining capacity. In fact, world refining capacity got a big boost from 2006-2008 as it grew from 5 million barrels per day (mbd) to 8.6 mbd. That’s a 72% increase. By 2013, based on what’s in the hopper now, another 68 mbd will come online. Of that, only about 6 mbd is net new capacity, as the rest replaces existing capacity that is closing down. Still, that’s a 70% net increase -- nearly equal to the prior boom.”
Most of this new capacity is coming from Asia, followed by the Middle East, as this next chart shows.
“Over the next few years in China alone, there are five-six big new refineries planned. Each will have the capacity to produce at least 200,000 bpd.”
But refining is a low-margin business. “I’d rather own the businesses that the refineries have to spend all their money on,” says Chris.
Just yesterday, he told readers of Mayer’s Special Situations about a maker of essential refinery equipment he figures is set to triple. You can access this recommendation for just $1… but only through 5 p.m. EST today. That’s then the window closes on trial memberships in Mayer’s Special Situations. For instant access, go here.
The latest Forbes 400 list of billionaires is topped by Mexican telecom magnate Carlos Slim Helu. At $53.5 billion, his net worth just barely eclipses that of Bill Gates.
Americans make up 40% of the list this year, down from 45% last year. Chinese are the second most-dominant nationality, making up 16% of the list.
Foreclosure filings dropped for a second straight month in February. That’s the good news. But the monthly total of 309,000 is still 6% higher than a year ago. That’s actually the smallest year-over-year increase since January 2006. Looked at that way, of course, we’ve now had 50 straight months of year-over-year growth in foreclosures.
"This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure,” say the folks who crunched these numbers at RealtyTrac, “but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity -- albeit at a historically high level that will likely continue for an extended period.” Sounds about right.
As long as we’re on the subject of foreclosures, we’ll wrap up with a curious spate of “wrong house” repossessions at Bank of America.
This week, Angela Iannelli of suburban Pittsburgh sued BofA for repossessing her house, even though she had a near-spotless payment history and never received a notice of default.
Last October, according to the suit, a BofA contractor changed her locks, cut the utilities, poured antifreeze down the drains, and even made off with her pet parrot -- which she later recovered.
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No parrots were harmed in the making of today’s 5
BofA has issued a statement that basically says, “Oops, wrong address.” Which sounds plausible enough except BofA did the same thing last summer to a couple north of Tampa -- who paid for their home in cash.
Similar cases are documented in Texas and Kentucky, all with Bank of America. These miscues are so stupid, we’re not even sure we have a comment on them.
“Some of your readers are such arrogant and ignorant knuckleheads,” writes a reader. “Regarding the complaint about the letter notifying us that a Census form will be arriving, innumerable national advertisers (especially those involving huge giveaway prizes) use this strategy year after year. Their only interest is to increase responses to make more money, so if it did not prove useful to increase response rates, the market place long ago would have told us so. Wise up.
“Another reader’s response only shows his or her abysmal ignorance of the use of the Census. Congressional seats hang on the outcome, as does extensive funding to districts, since the doling out of federal pork is indeed contingent on these numbers. Your reader will later only be complaining about how much pork -- ‘entitlement’ when you receive it -- flowed his way once the numbers are in. Informed taxpayers should care more than a squat. Unfortunately, your reader isn’t one of them.”
The 5: Well, at least you’re a humble genius.
"Before the income tax, the Census was also used to apportion taxes," writes another. "That it has come down to who will get the most loot is a travesty."
“I, too, received the worthless ‘pre-Census’ letter,” another writes. “As huge a waste as that was, consider the really terrifying aspect of this Census program -- GPS.
“Every residence’s front-door is now recorded with the latitude and longitude coordinates. Why, you ask? Well, ask any serviceman or -woman why they use GPS coordinates. Those little black boxes the Census folks carry around recorded the precise location of your front door. What might that portend for the future -- especially if you get out of line as might be determined by the powers that be. Paranoid? You bet I am! And you should be too.”
The 5: Hmmmn…
“Loved Chris Mayer's expose on this great Chinese jobs road program,” writes a third, “but he overlooked one important fact: Nations build roads not just for commerce, but for war!
“China is building to the perimeters of all the southern countries and establishing supply depots along them. India and Pakistan and the neighboring ‘little’ kingdoms should be looking at the situation with alarm. Their commerce is infected even now with Chinese control, and when this network is done... well, I think even myopic ‘capitalists’ should understand!”
The 5: While on the flight back from Tampa yesterday after visiting the Odyssey Marine HQ located there, I read this interesting little tidbit in Vanity Fair magazine:
“While Washington poured billions into propping up the banks that brought the economy to its knees, the Chinese spent their stimulus billions on an epic 19,000 miles of new railroad track.
“Nearly half that total will go toward completing a web of more than 42 interprovince hyper-speed rail lines that will link almost every major city in the country. The fastest of the new trains travels at 220 miles per hour. That’s speedier than both Japan’s bullet and France’s TGV -- and half again faster than the quickest train in America.
“So China comes out of the economic crisis with a rail system that will be the envy of the world, and America soldiers on with an infrastructure that is resolutely last century -- or, worse, the one that preceded it.
“The crisis also crippled pension funds and the endowments of universities and arts institutions and hobbled the fortunes of cities and states, not to mention small and midsized companies. About the only industry that has recovered from the economic calamity is Wall Street itself, which, thanks to government support and a soaring stock market, regained its footing quickly…”
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. The law firm in Washington, D.C., that is representing Spain in the Black Swan case against Odyssey Marine will get 5 million euros (roughly $7.5 million) this year alone for legal services trying to prevent Odyssey from selling the coins it’s recovered from the site. In order to pay them, Spain says if it wins the case, it’s going to sell the coins!
The attorney representing Spain also has his own shipwreck outfit. Coincidence?
More to come…
P.P.S. Time’s running out for half-price access to Options Hotline -- the offer is still good from now through Monday. Steve Sarnoff is now in his 11th year of delivering consistent triple-digit winners. See the evidence for yourself here.
