Gold World News Flash |
- Strong, Steady Accumulation In Gold
- Richard Russell - Rising Gold Signals Death Knoll For US Dollar
- Byron King Plays Gold, Silver and REEs
- How Much Further for Gold?
- 5 Alternative Investments to Bonds
- Gold Market Update
- Gold Bubble?...Not By This Fiat Measuring Stick
- Got Gold Report – Gold, Silver Now Defining ‘Resistance’
- Day 2 - Casey's Gold & Resource Summit
- Not Doom & Gloom; Cyclical & Opportunity
- Let Bullion’s Doubters Try to Explain Why
- Golden Secrets (III) Yamashita’s Gold
- Still Turning to Gold
- Asian Metals Market Update
- Tangible and Irreplaceable Assets
- Who Owns The Media? The 6 Monolithic Corporations That Control Almost Everything We Watch, Hear And Read
- Lundeen’s Market Trends: Foreign Holdings of US Treasury Debt
- Gold Stocks, SP500 & the Dollar – What’s Next?
- The US dollar is plummeting
- Got Gold Report – Gold, Silver Now Defining ‘Resistance’
- Update 8:30PM EST
- Jim?s Mailbox
- In The News Today
- An Evening With the Chinese Intelligence Service
| Strong, Steady Accumulation In Gold Posted: 03 Oct 2010 10:00 PM PDT  From time to time we put a chart on the blog to give KWN readers globally a look at the big picture in the gold market. Besides helping professionals and private investors look at the big picture, this also helps to eliminate the noise that is so prevalent in the mainstream media regarding gold. This outstanding chart was sent to us by a listener out of Singapore, and is a classic look at stage II action inside of a secular bull market.
This posting includes an audio/video/photo media file: Download Now | |||
| Richard Russell - Rising Gold Signals Death Knoll For US Dollar Posted: 03 Oct 2010 09:10 PM PDT  In Richard Russell's latest commentary, the Godfather of newsletter writers stated, "At the very foundation of the US economy is the fiat dollar. If the dollar goes, the economy goes with it. Rising gold signals the death knell for the dollar." Russell sums up the US situation with frightening clarity...
This posting includes an audio/video/photo media file: Download Now | |||
| Byron King Plays Gold, Silver and REEs Posted: 03 Oct 2010 08:00 PM PDT Some people speak softly and suppress their opinions. Newsletter Writer Byron King is not one of those people. "We have to quit screwing around. We have to get back to basics, back to capital investments and making things—important things. Great countries mine metals and minerals," he says. In this exclusive interview with The Gold Report, Byron shares several precious metals companies that are making important things and some juniors that are well on their way.
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| Posted: 03 Oct 2010 06:48 PM PDT Clemens Kownatzki submits: You’ve read the news, Gold at $1320 this week and the analysts are beating each other over their heads as to where the next gold target might be. We heard everything from $1,500 to $5,000 within a few years. All that accompanied with the ongoing debate as to whether we will see continued deflation, inflation or possibly hyper-inflation. So what’s it going to be then? The short answer is: “It depends”. Let’s forget about semantics for a minute however, and look at the general cost of living and the cost of running a business. There are a myriad of factors influencing the overall cost of running your life or your business. The best assessment of a sort of felt-inflation is a comparison of the overall cost of living with your income. In that sense, on a macro level, the majority of consumers have experienced a significant rise in the cost of living, felt-inflation if you will... Complete Story »
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| 5 Alternative Investments to Bonds Posted: 03 Oct 2010 06:12 PM PDT Chris Mack submits: With interest rates flat lined near zero, investors of all types are competing with each other to chase yields ever lower in desperation of cash flow. Although bond buyers may think they are conservative they are really speculators because buying an asset far above its intrinsic value with the idea that someone else will pay even more is the basic definition of speculating. Even if yields don't fall from here, there isn't much to be made waiting 10 years for a 2 percent yield or less - ignoring that inflation is higher than that. This aberration has extended into the corporate bond market where large cap companies are now financing by using debt that pays less than their dividends. The end result is that millions of people who lost money over the past decade in stocks and housing are now buying bonds, annuities, and other fixed deposit credit based investments that are guaranteed to disappoint. Complete Story »
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| Posted: 03 Oct 2010 06:09 PM PDT Two of our three requirements for a major uptrend developing across the Precious Metals sector that were set out in the last Gold and Silver Market updates have now been met - first silver has broken out to clear new highs, then gold broke out above the top line of its potential bearish Rising Wedge - the only condition remaining to be fulfilled is a breakout by the stocks indices - and that may be imminent.
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| Gold Bubble?...Not By This Fiat Measuring Stick Posted: 03 Oct 2010 06:06 PM PDT Proclaiming a gold bubble has been the mainstream financial media's Pavlovian response to every incremental increase made by the yellow metal since it emerged from a two decade low in 2001. Appreciating an astounding 400%+ in USD's from its bottom, gold has handily outperformed all major asset classes over the past 10 years.
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| Got Gold Report – Gold, Silver Now Defining ‘Resistance’ Posted: 03 Oct 2010 06:05 PM PDT Gold at $1,300, silver at $22, Big Mining Stocks within inches of breaking out; the buck gets gutted (and skinned), oil pops above $80, copper above $3.65 and the Fed is worried about deflation? Really?
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| Day 2 - Casey's Gold & Resource Summit Posted: 03 Oct 2010 06:03 PM PDT Gather three hundred average American investors in a room, ask how many own physical gold and how many own physical silver - and you might see one or two hands raised.
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| Not Doom & Gloom; Cyclical & Opportunity Posted: 03 Oct 2010 06:03 PM PDT (snippet) From an investment standpoint a lot has changed from the relatively cool 80's and 90's. The above chart shows us the current decade long bear market in stocks. The warning signs of instability are everywhere and this is devastating for stock prices. 1) Trillion dollar currency markets that are thrashing up and down like small cap equities. 2) A soaring bond market with near zero interest rates. (investors seeking safety) 3) A skyrocketing gold price. (investors seeking safety) 4) An increase in the number of corporate scandals. 5) More corporate bankruptcies. 6) More unemployment. 7) Less available credit for consumers. 8) A devastated real-estate market in some nations and wounded markets in others. 9) Entire nations imploding and falling into bankruptcy. 10) An aging population wanting to retire, consequently there will be less of the population producing wealth. 11) An aging population requiring more medical attention, resulting in higher economic costs. 12) More government intervention in markets in the form of bailouts and regulations. 13) More government social programs. 14) More open frank and open discussion of market intervention by policy makers. 15) Wars. 16) A public that is more heavily dependent on the government to "fix" these problems, transfer wealth and intervene. The warning signs are there. The bells are ringing for those who are paying attention. None of these things are evidence of an environment that supports an expanding stock market.
The world's largest, trillion dollar currency markets bouncing around is not a sign of stability. In the above chart the US dollar, as represented by the black line, clearly trends sharply higher as the first green arrow illustrates, then down as the red arrow points out, and then again up.
Investors are fleeing stocks and putting money into bonds no matter what the return is. We believe this is clearly defensive and out of fear of the current market environment. People are looking for work at a time when it is harder to get credit. Clearly this makes it harder for the public to invest in stocks.
Investors are looking for the safety of hard assets such as gold. The important message in this article is that one needs to recognize: 1) Markets are cyclical and not linear. Change is inevitable. 2) Investors must learn to recognize change in market conditions. 3) Investors must learn to adapt to change to protect their wealth and possibly profit from it. 
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| Let Bullion’s Doubters Try to Explain Why Posted: 03 Oct 2010 06:01 PM PDT With December Gold closing on the $1340 target that we disseminated a while back, it's time for a fresh perspective. We wouldn't want readers to get the glum idea that $1340 is as good as we think it's going to get. Far from it. The way gold and silver have been acting lately, it feels more like bullion prices are just getting off the launching pad.
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| Golden Secrets (III) Yamashita’s Gold Posted: 03 Oct 2010 06:00 PM PDT
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| Posted: 03 Oct 2010 05:37 PM PDT Equedia Network Corporation submits: Last week, we mentioned that despite poor economic conditions and reports, the Dollar will sink and both precious metals and stocks will climb. This past week, all of those events came true. But will this rally continue? More importantly, will gold and silver's performance continue to beat the market? We have been extremely bullish on precious metals over the last few years. There are simply too many concrete reasons why gold and precious metals will most likely continue their run, despite market conditions. Complete Story »
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| Posted: 03 Oct 2010 05:04 PM PDT Traders and investors will be looking forward to (A) US September non farm payrolls (B) Third quarter corporate earnings from next week and future corporate outlook. (C) The US dollar (D) Stocks. These are the key factors which will dictate the financial markets in October.
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| Tangible and Irreplaceable Assets Posted: 03 Oct 2010 04:32 PM PDT Take a deep breath and relax. Today's issue of the Daily Reckoning is not about the Reserve Bank. Maybe it will raise the cash rate to 4.75% tomorrow and maybe it won't. But frankly we are tired of pretending to take the RBA seriously as it pretends to know how to perfectly manage the price of money. Instead, then, let's talk about the upcoming float of Queensland Rail. It's a great exercise in understanding how to value assets and why the private sector manages better than the public sector. The $7 billion float is the largest privatisation since the T3 float, where the Federal government sold its last chunk of shares in Telstra. And the whole deal raises a number of issues. The biggest issue is whether it's a good investment. The prospectus doesn't come out until October 10th. That should give you a good look at just what the assets of the company will be. It will also give you an idea of the capital structure, including how much of an equity stake Queensland government will retain and how much debt the new listing will take on at birth. But let's deal with the assets first. You can't get much more tangible than a railroad. It's a very difficult asset to replace. That alone makes railroads appealing, provided you get them at a good price. But there's also a pretty good argument to be made that railroad shares are inflation hedges. My colleague Porter Stansberry made this argument late last year with respect to Burlington Northern (more below). Why? Rail haulers can push up prices when commodity prices rise, passing on costs. If coal and iron prices continue to trend up, so too should the prices for moving them from the mines to the ports. It's a pretty strong competitive position. And when you're investor, that's what you're looking for with any business: does it have a durable competitive advantage? And that's not even mentioning how high the barriers to entry are to compete with an established railroad company. The quasi-monopolistic nature of the business - the massive capital costs for building a rail network rule out all but a few players - ensures pricing power and an incredibly strong competitive position. How many entrepreneurs do you know that decide to build start up railroads? All that said, you won't know if Queensland Rail is good value until you have a good look at the balance sheet. There is also the lingering matter of how much of the company will be owned by the state Government. It could be anywhere from 25% to 40%, according to Queensland's Treasurer Andrew Fraser. A prudent investor might worry about having the government as a partner/big brother regulator. Just ask Telstra how that's going. You are constantly at the mercy of meddlesome politicians who want to run your company like a charity. Of course there will be the usual motley crew of blabber mouths who decry the privatisation of State assets. But let's not confuse two issues. One issue is why the State Government of Queensland is forced to sell off $15 billion of assets. The answer to that is obvious: the government spends too much and can't live within its means so it has to raise cash somehow. This is low hanging fruit. Watch out for rising taxes later. But a more interesting secondary issue is why the government can't run the railroad business profitably. If it were such a good business, wouldn't it be throwing off gobs of cash to subsidise other government spending? Is it a bad business, or is just run badly? Our guess - and it's only a guess - is that Queensland Rail is probably an example of other enterprises run poorly by the government. Turn it over to proper custodians of capital who are accountable to shareholders and you'll probably get a better company. By "better" we mean a company that turns a profit because it delivers more efficient services to its customers. That's also a company that can employ people and deliver returns to shareholders too. For some reason, there is always a cadre of jackasses who view profit as evil or contrary to the public good. But running a large asset like a rail network for a profit is obviously a public good. Profits are reinvested in the network, improving services and keeping people employed and promoting trade and the flow of goods and services. Private owner/operators are generally better asset managers than bureaucrats. And better asset management is better for everyone. Besides, when public ownership of assets results in a loss, that loss is borne by the tax payer. It is, in effect, a stupidity tax, or a tax you pay for allowing inept managers to run large enterprises. Who benefits from a loss-making enterprise protected by a government monopoly? We'll give you two guesses. So far, the advertising campaign for the float has been pretty slick. It's turned a boring rail company into a symbol of Australia's future prosperity. Fraser has said in public that, "This is a once-in-a-lifetime opportunity. There is no other opportunity out there to leverage into the Asian region . . . and the resources boom. It is a unique proposition." In that sense, the float of the company raises our contrarian hackles. Flogging new shares to the public as a way of participating in a "can't miss" boom is usually a sign of the top in a market. It's a basic case of supply and demand. The finance industry's job is to supply the public with dreams of riches. And when the public demands a way to ride the Asia/Commodities boom, the public will get what it wants. But Bill's old "Law of Perverse Outcomes" comes to mind. The Law states that investors tend to get what they deserve, not what they expect. What you'd expect from Queensland Rail is a company leveraged to the Asia boom and a kind of proxy for Australia's future. This is an echo of the thinking that led Warren Buffet to buy Burlington Northern earlier this year in America. But you probably shouldn't buy a company because you're bullish on a country. You should buy a company because it has a strong competitive position, makes lots of cash, is well run, and has a capital structure that makes it immune to the vagaries of the debt markets. You'd also want to own a business that wasn't going to be endlessly tinkered with for political considerations by a large minority shareholder like the government. Tomorrow we'll get back on the global beat. China is worried about a bubble. The Fed will soon become the largest holder of U.S. Treasury debt. The gold price is going lunar. India wants to buy the Port of Brisbane. And the contest over rare earths is hotting up! More on the whole enchilada tomorrow! Until then... Dan Denning
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| Posted: 03 Oct 2010 03:53 PM PDT 
The six corporations that collectively control U.S. media today are Time Warner, Walt Disney, Viacom, Rupert Murdoch's News Corp., CBS Corporation and NBC Universal. Together, the "big six" absolutely dominate news and entertainment in the United States. But even those areas of the media that the "big six" do not completely control are becoming increasingly concentrated. For example, Clear Channel now owns over 1000 radio stations across the United States. Companies like Google, Yahoo and Microsoft are increasingly dominating the Internet. But it is the "big six" that are the biggest concerns. When you control what Americans watch, hear and read you gain a great deal of control over what they think. They don't call it "programming" for nothing. Back in 1983 it was bad enough that about 50 corporations dominated U.S. media. But since that time, power over the media has rapidly become concentrated in the hands of fewer and fewer people.... In 1983, fifty corporations dominated most of every mass medium and the biggest media merger in history was a $340 million deal. … [I]n 1987, the fifty companies had shrunk to twenty-nine. … [I]n 1990, the twenty-nine had shrunk to twenty three. … [I]n 1997, the biggest firms numbered ten and involved the $19 billion Disney-ABC deal, at the time the biggest media merger ever. … [In 2000] AOL Time Warner's $350 billion merged corporation [was] more than 1,000 times larger [than the biggest deal of 1983]. --Ben H. Bagdikian, The Media Monopoly, Sixth Edition, (Beacon Press, 2000), pp. xx—xxi Today, six colossal media giants tower over all the rest. Much of the information in the chart below comes from mediaowners.com. The chart below reveals only a small fraction of the media outlets that these six behemoths actually own.... Time Warner Home Box Office (HBO) Walt Disney ABC Television Network Viacom Paramount Pictures News Corporation Dow Jones & Company, Inc. CBS Corporation CBS News NBC Universal Bravo These gigantic media corporations do not exist to objectively tell the truth to the American people. Rather, the primary purpose of their existence is to make money. These gigantic media corporations are not going to do anything to threaten their relationships with their biggest advertisers (such as the largest pharmaceutical companies that literally spend billions on advertising), and one way or another these gigantic media corporations are always going to express the ideological viewpoints of their owners. Fortunately, an increasing number of Americans are starting to wake up and are realizing that the mainstream media should not be trusted. According to a new poll just released by Gallup, the number of Americans that have little to no trust in the mainstream media (57%) is at an all-time high. That is one reason why we have seen the alternative media experience such rapid growth over the past few years. The mainstream media has been losing credibility at a staggering rate, and Americans are starting to look elsewhere for the truth about what is really going on. Do you think that anyone in the mainstream news would actually tell you that the Federal Reserve is bad for America or that we are facing a horrific derivatives bubble that could destroy the entire world financial system? Do you think that anyone in the mainstream media would actually tell you the truth about the deindustrialization of America or the truth about the voracious greed of Goldman Sachs? Sure there are a few courageous reporters in the mainstream media that manage to slip a few stories past their corporate bosses from time to time, but in general there is a very clear understanding that there are simply certain things that you just do not say in the mainstream news. But Americans are becoming increasingly hungry for the truth, and they are becoming increasingly dissatisfied with the dumbed down pablum that is passing as "hard hitting news" these days. So what do you think about the state of the mainstream media? Please feel free to leave a comment with your opinion below....
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| Lundeen’s Market Trends: Foreign Holdings of US Treasury Debt Posted: 03 Oct 2010 03:52 PM PDT Lundeen’s Long Term Market Trends Wk 155 of the 2007-2010 Bear Market Issue ---: 39 Volume: 03 Focus Section Foreign Holdings of US Treasury Debt Central Banks US Treasury Positions Gold and US Treasury Long Yields Gold and the DJIA’s Relative Performance Mark J. Lundeen [EMAIL="mlundeen2@Comcast.net"]mlundeen2@Comcast.net[/EMAIL] 01 October 2010 Color Key to text below Boiler Plate in Blue Grey New Weekly Commentary in Black BEV chart for the 1929-32 & 2007-10 DJIA Comparison. Here’s the story of the stock market for the past year: Grind, Grind, Grind. The DJIA goes up, and then the DJIA goes down. But six months later, nothing much changes. But it’s a bear market, and someday people are going to regret they didn’t close out their positions in the general stock market in early October 2010. I keep a close watch on how the NYSE Financial Index is doing. Currently it’s having a harder time staying above ...
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| Gold Stocks, SP500 & the Dollar – What’s Next? Posted: 03 Oct 2010 03:52 PM PDT Investors around the globe are concerned with the economic outlook, not only with the United States but with virtually every country. This has caused not only investors but banks and countries to start buying gold & silver in order to be protected incase of a currency melt down in the coming years. While the majority is concerned about the eroding economy, we have seen the opposite in the financial market. Gold and equities have risen… That being said the volume in the market remains light simply because the average investor is no longer putting money into the market for long term growth. Instead individuals are now focusing on saving and paying down debt. That being said we all know light volume market conditions allow Wall Street powerhouses to bid the market up. Not to mention with quantitative easing taking place I’m sure that has also helped the market of late. While we don’t know for sure that QE is taking place as we speak, the sharp drop in th...
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| Posted: 03 Oct 2010 03:52 PM PDT FGMR - Free Gold Money Report October 3, 2010 – Since observing in my September 22nd commentary that the US Dollar Index is “staring over the edge of the precipice and is ready to plummet”, it has been basically all downhill for the dollar. The Dollar Index over the past seven trading days has dropped 1.74 points, or 2.18%. That is approximately an 88% annualized rate of decline. Clearly, it has fallen over the edge of the cliff. The US dollar is plummeting. The following chart of the US Dollar Index indicates that it has further to fall. I do not expect the green uptrend line in the above chart to hold. If it doesn’t, the Dollar Index will then fall toward its record lows. Given that the Dollar Index in within a major downtrend and given that Federal Reserve policies continue to debase the dollar, it would not be surprising to see the record lows in the Dollar Index tested before the end of this year. For my specific trading recommend...
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| Got Gold Report – Gold, Silver Now Defining ‘Resistance’ Posted: 03 Oct 2010 03:52 PM PDT By Gene Arensberg Esse quam videri – To be rather than to seem. Silver surges to 30-year highs, as expected. ATLANTA (Got Gold Report) – Gold at $1,300, silver at $22, Big Mining Stocks within inches of breaking out; the buck gets gutted (and skinned), oil pops above $80, copper above $3.65 and the Fed is worried about deflation? Really? Hey, wait a minute. Isn’t this the scenario we thought would happen in 2008 when the dollar was under so much pressure then? You know, just before the July Massacre and the world plunged into the 2008 panic from hell? We are witnessing the process of liquidity fleeing the dollar and trying to find some kind of “stuff” that will hold its value. This, as confidence in paper and in the governments that print that paper evaporates as the global sovereign race to cheapen most all fiat currencies accelerates. It’s just great for gold and silver mavens to be alive. We worry though, a...
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| Posted: 03 Oct 2010 03:52 PM PDT The following is automatically syndicated from Grandich's blog. You can view the original post here. Stay up to date on his model portfolio! October 03, 2010 04:41 PM U.S. Stock Market – I noted in my September 23rd post that despite poor fundamentals, the technical picture of the market was much brighter. A run to the upper end of the trading range was possible and even more likely now that we’ve broke above the previously mentioned neckline. The trading range I've spoken about continues and it appears we can now test the top of it. If this occurs, it may offer speculators a chance to implement some bearish callspreads. Stay tuned. Gold and Silver – I noted about midday last Friday that I was booking some profits as some overbought readings were showing up on my charts. This is in no way anything remotelyclose to some bearish stance but rather 25+ years of experience* has taught me to take something off the table during the times you have been on target. A day, a week or eve...
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| Posted: 03 Oct 2010 03:52 PM PDT View the original post at jsmineset.com... October 03, 2010 07:07 AM Money Flow Footprint For Silver Has Changed CIGA Eric The "normal" money flow footprint has been smashed as silver pushes to new highs. Connected money has been buying rather than shorting strength. The footprint of control for silver reveals a pattern of shorting strength and buying weakness since 2001. Buffett better have another secret supply of silver to introduce to the market or the subtle change could portend a significant shift of control. Keep an eye on this one. Silver London P.M Fixed and the Commercial Traders COT Futures and Options Stochastic Weighted Average of Net Long As A % of Open Interest: More… Meredith Whitney Says U.S. May Face Bailout for States: Video CIGA Eric The bailout will be ongoing. Congress recently passed a $26 billion jobs bill to plug holes in state payroll budgets. The move was intended to save thousand of teacher and government jobs. "Free money" is...
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| Posted: 03 Oct 2010 03:52 PM PDT View the original post at jsmineset.com... October 03, 2010 07:18 AM Jim Sinclair`s Commentary Clearly anything is possible, but let’s take this one step at a time. $1650 will come first, more later. Clearly this article in China will have an effect. $10,000 Gold? By Kenneth Rogoff (chinadaily.com.cn) Updated: 2010-10-02 10:59 SAN FRANCISCO – It has never been easy to have a rational conversation about the value of gold. Lately, with gold prices up more than 300% over the last decade, it is harder than ever. Just last December, fellow economists Martin Feldstein and Nouriel Roubini each penned op-eds bravely questioning bullish market sentiment, sensibly pointing out gold's risks. Wouldn't you know it? Since their articles appeared, the price of gold has moved up still further. Gold prices even hit a record-high $1,300 recently. Last December, many gold bugs were arguing that the price was inevitably headed for $2,000. Now, emboldened by continuing appreciation, s...
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| An Evening With the Chinese Intelligence Service Posted: 03 Oct 2010 03:37 PM PDT
I normally avoid the diplomatic circuit, as the few non committal comments and soggy appetizers I get aren’t worth the investment of time. But I jumped at the chance to celebrate the 61st anniversary of the founding of the People’s Republic of China with San Francisco consul general Gao Zhansheng. When I casually mention that I survived the Cultural Revolution and interviewed major political figures like premier Deng Xiaoping, who launched the Middle Kingdom into the modern era, and his predecessor, Zhou Enlai, modern day Chinese are enthralled. It’s like going to a Fourth of July party and letting drop that I palled around with Thomas Jefferson and Benjamin Franklin. Five minutes into the great hall, and I ran into my old friend Wen, who started out her career with the Chinese Intelligence Service, and had made the jump to the Foreign Ministry, as all their best people did. She was passing through town with a visiting trade mission. When I was touring China in the seventies as the guest of the Bank of China, Wen was assigned as my guide and translator, and we kept in touch over the years. I was assigned a bodyguard who doubled as the driver of a tank like Russian sedan. The Cultural Revolution was on, and while the major cities were safe, we ran the risk of running into a renegade band of xenophobic Red Guards, with potentially fatal consequences. I asked Wen when China was going to float the Yuan? She explained that this is something China knew it had to do, but it wasn’t going to be rushed into by some opportunistic foreign politicians. If it moves too soon, millions will lose jobs, creating political instability, something the central government wants to avoid at all costs. Many of the largest scale employers were only marginally profitable, and a hike in the renminbi of only a few percent would force them out of business. I pointed out that that was exactly what was happening in the US. I warned that if the Middle Kingdom waited too long, Washington would force them into an appreciation through punitive import duties and anti dumping actions, as we did with Japan 40 years ago. It was Nixon’s surprise ban on textile imports in 1971 that finally persuaded Japan to float the yen, then at ¥360. If that didn’t convince the Chinese, then imported inflation would. The longer China delays, the bigger the pop when their currency is finally set free. Wen then went on the offensive, claiming that Chinese workers were being exploited by American companies keeping wages low. The product that China made for $1, and sold for $2, was then sold by Wal-Mart (WMT) for $20, which kept all the profits. She pointed out that the Walton family had a combined net worth of $100 billion, more than the total worth of the lower 40% of the US population. This could never happen in China. I told her that by selling the product at $20, Wal-Mart wiped out another US company that used to make that product domestically and sold it for $40, throwing those people out of work. I then asked Wen what were her country’s plans for its massive foreign exchange reserves, now at $2.5 trillion? She agreed that this was a problem because the reserves were pouring in so fast, at an embarrassingly high rate of $10 billion a month, and that it was the most rapid accumulation of wealth in history (click here for the data at http://www.chinability.com/Reserves.htm ). While it had more than enough Treasury bonds, any attempt to sell might cause their value to collapse and freeze relations with the US. I suggested China should start hedging its gigantic holdings without selling them, or some managers would be facing a firing squad in the future. China has therefore begun directing new reserve inflows into other instruments, like gold, Japanese government bonds, and PIIGS bonds in Europe. While the Europeans were more than happy to take the money, the Japanese were complaining that China’s modest purchases were driving up the yen, further depressing their own economy. We all know what has happened to gold. China tried to recycle its surpluses by buying foreign companies that produce the natural resources it desperately needs. But takeover attempts were fought tooth and nail as a foreign invasion, or on national security grounds, such as the attempt to buy California’s Unocal in 2005 and Australia’s Oz Minerals last year. It was now using a strategy of buying low profile minority stakes in foreign resource companies. China took a big stake in the recent Petrobras (PBR) secondary equity offering, and Wen would not be surprised if they took a run at Potash (POT), now that it is on the table (click here for “BHP Billiton Develops an Appetite for Potash” at http://www.madhedgefundtrader.com/august-19-2010.html ). I asked her about the real estate bubble in China that was causing so many foreign investors to lose sleep. She said it was true that sales were slow at some luxury buildings in Beijing and Shanghai, but the great majority of developments were aimed at working people, and were filling up as soon as they came on the market. The 40% down payment demanded by the People’s Bank of China headed off the rampant speculation that brought the American financial system down. Wen then complained about the aggressive military stance the US was taking towards China, ringing it in with the Seventh Fleet. Holding a knife so close to the country’s foreign supply line jugular vein made them nervous. China was basically indefensible. All it would take was the sinking of a few grain ships, and 100 million would starve within a year. President Bush was rattling his saber as soon as he moved into office, until 9/11 diverted his attention to Afghanistan and Iraq. Wen told me there is a school of thought in Beijing that as the country’s economic power grows- it is passing Japan to become second in GDP this year-- that the US will increasingly perceive it as a military threat. That would lead America to mete out the same hostile treatment to China as it did Russia during the cold war. I assured her that the Seventh Fleet was there to watch and listen, but to do nothing. It was really in position to provide a security blanket for allies, like Japan and South Korea, but nothing more. China wasn’t engaging in the belligerent behavior that Russia was at the height of the cold war, like blockading Berlin, basing missiles in Cuba, stationing fast attack nuclear submarines off our coasts, and invading Afghanistan. I argued that if China truly has no expansionary intentions, the more we know about you, the better. It is always prudent for a potential adversary to conclude you are not a threat, and that no action is needed. The more you help the US do that, the better. China is decades behind the US in military technology, and you really have nothing we want. Little more than 200 nuclear weapons without an ICMB or submarine delivery systems were hardly viewed as a major threat. Wen seemed perturbed that I was aware of her country’s nuclear stockpiles, and asked how I knew this. I said CIA director Leon Panetta told me (click here for “Lunch With the CIA” at http://www.madhedgefundtrader.com/august-12-2010.html ). She said “Oh.” I asked what was that test downing of a satellite in space about, anyway? She didn’t answer. In any case, with our military fully committed fighting two wars in the Middle East, we lacked the resources for an Asian offensive if we were so inclined, even against a piddling, mismanaged, rogue state like North Korea. But looking at the world for the next 30 years, who is the Pentagon going to model and war game against, but China, with its 2.5 million man army? Wen countered that the People’s Liberation Army was purely a defensive force. With a 12,000 mile land border, an 11,000 mile coastline, and dubious neighbors like Russia, Iran, and India, they have no other choice. Its ability to project force over great distances, as the US can, is virtually nonexistent. Its 1979 invasion of Vietnam was about reclaiming ten miles of lost territory. China got involved in Korea only after general Douglas MacArthur threatened to rain atomic bombs on the mainland, losing 2 million men, including Chairman Mao’s son. China could have done a lot more in the Vietnam War, but didn’t, limiting its participation to a supply, logistical, and advisory role. I then warned that if you really are worried about the Pentagon, you should stop hacking into our computers. She replied that the US started this by emptying out Chinese mainframes many times, and they were only responding in kind. I said yes, but that China was targeting private companies, like Google (GOOG), Hewlett Packard (HPQ), and Oracle (ORCL), that without military grade software, were unable to defend themselves. The Chinese agencies involved then used the data to their own commercial advantage. By the time Wen married, China had already adopted its one child policy. As much as she wanted more children, she understood the government’s need to adopt such a drastic policy. Without it, the population today would be 1.6 billion, not 1.2 billion, and all of the money that went into buying capital goods would have been spent on food imports instead. The country would have stagnated at its 1980 per capita income of $100/year. There would have been no Chinese economic miracle. She was very proud of her one son, who was a software engineer at Microsoft (MSFT) in Beijing. Her husband, a mid level official at the Ministry of Commerce, fared less well, dying of lung cancer at a relatively early age. The US and Europe had exported their worst polluting industries to China to take advantage of lax environmental controls, turning the air in Beijing into a choking haze. Sometimes her son would come home from school coughing and wheezing so badly that he couldn’t play outside. The two packs of cigarettes a day her husband smoked didn’t help either. I asked if she recalled our first trip together and a dark cloud came over her face. We were touring a section of Fuzhou when three policemen marched up. They started shouting at Wen that we were in a restricted section of the city where foreigners were not allowed. They started mercilessly beating her with clubs. I was about to intercede when my wife, Kyoko, let go with a blood curdling tirade in Japanese that froze them in their tracks. I saw from the fear in their faces that she had ignited their wartime fear of Japanese authority, and they beat a hasty retreat. To this day, I’m not exactly sure what Kyoko said. We took Wen back to our hotel room and bandaged her up, putting ice on the giant goose egg on her head. When I left, I gave her my copy of HG Well’s A Short History of the World, which she treasured, as the book was then banned in China. Wen mentioned that she was approaching the mandatory retirement age of 60, and soon would be leaving the Foreign Service. I suggested she move to San Francisco, which offered a thriving Chinese community and home prices that had recently dropped by half. She laughed. No matter how much prices had fallen, she could never afford anything here on a Chinese civil servant’s salary. Wen told me that China was grateful for the billions of dollars that foreigners had poured into her country as a result of my writings. I replied that I was simply trying to show my readers where to make some money, nothing more. One of my recommendations, for Chinese search engine Baidu (BIDU), was up nearly tenfold in less than two years, (click here for the call at http://www.madhedgefundtrader.com/december_23__2008.html ). Did she happen to know about any more future Baidu’s? Wen said that she wasn’t that close to the stock market, but that she would get back to me. I asked Wen if she still had the book I gave her nearly four decades ago. She said it had become a family heirloom, and was being passed down through the generations. As she smiled, I notice the faint scar on her eyebrow from that unpleasantness so long ago. In view of Wen’s comments, I think you have got to buy the Chinese ETF here (FXI), which is the principle lagging emerging stock market this year. You also better revisit my stock picks in the area, including Baidu, China Mobile (CHL), Build Your Dreams (BYDDF), and China Telecom (CHA). Wasn’t it Deng Xiaoping, the Chinese general who launched the country’s modern economy in the seventies, who said “To get rich is glorious”?
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