by Addison Wiggin & Ian Mathias
- The China Sneeze Play, Redux… a “safety trade” replay of last week
- Byron King goes inside the “war room” where strategists plot to extract oil 5 miles deep
- The U.S. state even more broke than California
- Patrick Cox on how Google is driving a revolution in power generation
- Redefining middle-class comfort: A vital statistic shrinks for the first time since 1982
Barely a week ago, we called it the China Sneeze Play. Once again, world markets catch cold after China starts sniffling.
Rumors abounded yesterday that the China Banking Regulatory Commission asked several banks to stop making loans. The CBRC’s chairman denied it, but then the Bank of China -- one of the country’s biggest banks -- announced it is curbing its lending.
Today comes word that Chinese GDP grew an annualized 10.7% in the fourth quarter, moving China ever closer to eclipsing Japan as the world’s second-largest economy. Consumer prices jumped sharply in December.
All that stimulus is getting the world’s armchair economists hot and bothered… now they’re afraid Chinese authorities are going to start running a cold shower.
Lo and behold, the “safety trade” is back in play. The major U.S indexes fell over 1% yesterday, and continue to slip as we write. Gold tumbled the most in a month, slipping below $1,100. But Treasuries rose and the dollar index stands at 78.5 -- up a full point since Tuesday.
“There are two main emotions that drive investors -- fear and greed,” explains Bill Bonner. “Lately, greed drives them to buy emerging markets, stocks generally, and commodities. Fear drives them to dump all their risky investments and head for cover. They believe cover is found in the dollar and in U.S. Treasury bonds -- traditionally, the world's safest credits.”
Not that this alters the sell side of our new Trade of the Decade. Fear will overwhelm U.S. Treasury debt. Just not right away. Just remember how giddy everyone still felt about U.S. stocks in January 2000.
We’re naturally suspicious of all claims the economy has recovered… but one yardstick continues to point in that direction.
The Conference Board’s index of leading economic indicators jumped 1.1% in December, on the heels of a 1.0% increase the month before. That’s nine straight months of improvement. Eight of the index’s 10 components grew; the remaining two merely held steady.
Like capacity utilization, the LEI has a decent record of forecasting the end of recessions. But we remain vigilant… black swans are known to inhabit these waters.
“Wednesday, Jan. 20 was a holiday in Rio de Janeiro,” writes Byron King in a hot dispatch from Brazil. “A million Brazilians mobbed the beaches under a clear, blue sky, enjoying temperatures in the 90s.
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Gratuitous photo of Brazilian women enjoying the holiday at the beach.
“For better or for worse, I missed the entire spectacle of buff bodies romping in surf and sand. Instead, I met with two gentlemen at 6:30 a.m. for a 14-hour trek to the oil town of Macae, east of Rio, on the edge of the vast South Atlantic Ocean.
“There at Macae, I toured the extensive exploration- and drilling-support facility of one of the world's premier oil service companies. At the Naval War College, we used to say ‘Amateurs study battles. Professionals study logistics.’ The effort to drill in the far distant offshore of Brazil and tap into the gigantic oil resource of the deep, pre-salt layers is a masterpiece of logistics.
“At Macae, I laid hands on equipment that has been five miles deep, to the bottom of wells in the 12 billion barrel Tupi field. What goes down as polished, stainless steel comes back up corroded and pitted from the harsh temperatures and acidic chemicals at depth. The whole operation is coordinated in a massive ‘war room’ of computers and engineers.
“Indeed, if you don't know what you're doing in the offshore world, you had best stay home -- or go to the beach. But if you do know what you're doing, this is quite a business. The firm that I visited just received a major drilling contract from Petrobras, the state oil company of Brazil. Over the next few years, this company will drill hundreds of the most difficult wells ever dreamed up in any mind.”
Marcio Mello, the man behind the discovery of the huge Tupi oil field, and Byron’s guide around Brazil will be joining us in Vancouver in July. But if you want to take your position in this massive oil find, follow Byron’s expert opinion and advice in Outstanding Investments.
Oh, and here’s some shocking news. Congress has begun a new round of wrangling over the national debt limit. Treasury bumped up against the $12.1 trillion ceiling a couple of times late last year before an increase of $230 billion bought a few more weeks’ time.
Now comes a push to raise it by $1.9 trillion, a task potentially complicated by the Democrats’ loss of a supermajority in the Senate. Yawn.
"We have gone to the restaurant. We have eaten the meal. Now the only question is whether we will pay the check," says Senate Finance Committee Chairman Max Baucus. Never mind that the only way to pay it is to yet again run up the national credit card.
“Our total federal debt could double again during the next eight-10 years if we don’t change our fiscal course soon,” writes David Walker in his new book Comeback America.
(David is another confirmed guest for our Vancouver confab, by the way. And if you missed his interview this week with Jon Stewart on The Daily Show, it’s worth your while.)
We might have a new leader in our ongoing contest for “the next California.” A few weeks ago, we thought Arizona had a decent shot, with talk it might be issuing IOUs to its vendors.
But Illinois could be pulling in front. Vendors there are waiting more than 90 days to get paid. State employees (even legislators) have to pay their medical bills upfront because providers don’t want to wait for reimbursement from the state. And the University of Illinois warns it might not make payroll come March.
"We would like all the stakeholders of Illinois to recognize how close the state is to bankruptcy or insolvency," says Laurence Msall, president of the Civic Federation in Chicago, a fellow who serves the sort of function in Illinois that David Walker does nationally.
“While California has an even bigger budget hole to fill,” according to Crain’s Chicago Business, “Illinois ranks dead last among the states in terms of negative net worth compared with total expenditures.” Prairie State pride!
“Google has become a major force for innovation,” writes Patrick Cox. “This is especially true in the area of power generation, since electricity is its major raw material.”
Of course, Google is hardly the sort of off-the-radar company Mr. Cox finds ripe for opportunity in Breakthrough Technology Alert. But Google can still drive some mighty lucrative innovations among the microcaps that are his specialty. Thus, Patrick is about to recommend a company he says “could help solve energy problems we are facing. It is not doing so by generating power, but by creating components for the emerging ‘smart grid’ that will increase the efficiency of the power infrastructure.”
“Our energy problems are political problems,” Patrick explains, “that have prevented the utilization of nuclear, natural gas and other abundant energy sources. Because we have purposely repressed energy production for decades, it will take many years to get back on track. Because of this, there will be enormous pressures to utilize what we do have more efficiently.
“This will require an upgrade of power distribution networks from their current obsolete status. Much of the power we do have is currently unavailable to users who need it most. A significant percentage of power is dissipated through heat during transport. This creates opportunities for those who can reduce inefficiencies by creating an intelligent power distribution grid. I've got one of the leading candidates for you.”
If you want immediate notification when Patrick’s ready to make his recommendation, you can get it here for a limited time… at a substantially reduced price.
What’s this? The size of a new American home is shrinking!
The National Association of Home Builders says the average size of a new home in 2010 was 2,480 square feet, down from 2,520 the year before. The last time this figure fell was in 1982, during the previous “worst recession since World War II.”
We suspect this isn’t just a blip. Rather, it’s the beginning of a long-term downsizing -- a redefinition of middle-class comfort.
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What a tragedy to see these go, eh?
For keen students of the political economy, this will come as no surprise: Canada now has a freer economy than the United States. At least that’s the takeaway from this year’s Index of Economic Freedom, compiled by the Heritage Foundation.
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Heritage’s report cites “notable decreases in financial freedom, monetary freedom and property rights” in I.O.U.S.A. over the last year. Also of note: Only the top seven countries merit a rating of “free.” By this yardstick, the Land of the Free is only “mostly free.” Sigh.
“I've been reading with interest the comments on education,” a reader writes. “I think in the USA, there's too much emphasis on a university education. It's just supply and demand. Employers must be having a field day in the present economic climate with too many graduates chasing far too few jobs. In the U.K., more students go to universities now than ever before, but many are realizing that not everyone can have that well-paid job, as there just aren't enough of them. It's notable that many wealthy entrepreneurs left school with little or no qualifications.”
“Degrees, diplomas, certificates -- they're mostly overvalued and prove only that you have the capacity to pass an exam. Apprenticeships and on-the-job training are a much more valuable source of real education.”
The 5: You’re preaching to the choir. We’re big fans of internships and “sink or swim” job opportunities here at AF. Work it.
“Keep in mind,” another reader cautions, “Berkshire is not only buying those two thin steel rails and the freight cars traversing them on a daily basis. The Sage is eyeing up the railway's absolute rights of way to cross thousands of miles of private land between many major cities.”
“Do you realize how hard to accomplish it would be today, to try to get this large and comprehensive a right of way put together for something other than freight rail? Like, oh, maybe high-speed or light-gauge passenger rail lines, possibly built ELEVATED above the freight train tracks?”
“What else could he bury along these rights of way? Natural gas lines? High-speed data lines? Electrical distribution lines to handle the additional grid load of the impending electrified car revolution?”
“IMO, not until people see what he has up his sleeve will they fully understand that he outright stole the thing.”
The 5: Heh. At the very least, it’s a play that would make James Howard Kunstler happy.*
Regards,
Addison Wiggin
The 5 Min. Forecast
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*Kunstler, another Vancouver favorite, is a big fan of railroads, to put it lightly.
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