 | | The Daily Reckoning | Thursday, April 7, 2011 |
- Dying welfare states lope gently, quietly into that dark night...so far,
- Is the opportunity in rare earths over...or has it just begun?
- Plus, Bill Bonner on government shutdown and the zombie's next move...
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|  | | | The Return of the Sovereign Debt Crisis | | Examining the Possible Impact of a Portuguese Bailout | |  | | Eric Fry |
Reporting from Laguna Beach, California...
The US stock market continued whistling past the graveyard yesterday, as the Dow Jones Industrial Average added 33 points to 12,427 - its highest closing level in nearly three years.
Sure, the US economy is showing signs of life, but these signs seem like mere weeds atop a mass grave of government stimulus efforts. Even from a distance - say, from wherever you may be to Washington, DC - you can almost smell the rotting of government finances.
The stench is unavoidable. The smell of dying welfare states fills the air, whether you be in Athens, Sacramento, Tokyo or Lisbon. As the weakest of welfare states drifts off toward that "dark night," the world's equity markets seem not to care.
The looming threats of a government shutdown here at home and/or a Portuguese default over in Europe are mere footnotes alongside an "upside earnings surprise" at Bed, Bath and Beyond...at least for now.
But investors do well to remember that dying enterprises - and the fatally flawed securities they issue - do not degrade in an instant. Decomposition takes time...sometimes much longer than most folks would imagine.
A little over one year ago, your California editor speculated that the Greek debt crisis of early 2010 would become a much larger phenomenon that would play out very much like the subprime-cum-Lehman-Bros.-cum- national crisis of 2007 and 2008.
In a speech early last year, he remarked, "Everyone thinks Greece will pull out of its mess with austerity measures and German bailouts. I'm not so sure about either assumption...
"Greece's finances are not unique; they are emblematic. Sovereign borrowers are out of control. Greece is just an icon for all of Europe, and also the US.
"So I view Greece as the Bear Stearns of the upcoming sovereign debt crisis. You may recall that in June, 2007, Bear Stearns stepped in to bail out two of its own hedge funds by pledging collateral for a $3.2 billion loan.
"Nine months later, in March, 2008, JP Morgan Chase took over a functionally bankrupt Bear. And at that point most of the official Wall Street elite believed that the crisis had been averted.
"But six months later, on September 15, 2008, Lehman Bros. filed for bankruptcy. And the rest is history. It is amazing to remember that 15 months elapsed between the first [overt] signs of difficulty in the US financial sector and Lehman's bankruptcy. So mark your calendars; the Sovereign debt crisis should unfurl by May 2011 - that would be about 15 months after the initial headlines about Greece."
Thus far, your editor's prediction seems largely misguided. After roughly 14 months into this potential crisis, there isn't one. Most European equity markets are buoyant and the euro hovers near a 15-month high against the dollar.
"Portugal's request for a bailout could mark the moment that Europe finally contained its debt crisis," the Associated Press triumphantly proclaimed this morning. "Unlike previous bailout requests, Portugal's has not been greeted by a chorus of concern in financial markets over which country will be next."
Despite this seeming calm, your editor is not prepared to abandon his "crisis timeline" just yet. Some intriguing parallels are developing between the current troubles in Europe and the US crisis of 2008.
For starters, note the strikingly similar trajectory of the Portuguese 5-year credit default swaps during the last 14 months compared to the Goldman Sachs 5-year credit default swaps from early 2007 through September 2008. [Simply stated, credit default swaps are "default insurance." Hence, their prices rise as the prospect of a default rises].
Both the Portuguese and Goldman CDS prices trended jaggedly upwards, reflecting increased anxiety, but no panic. Then, in the case of Goldman Sachs, anxiety became panic overnight, on the days following the Lehman bankruptcy.
Perhaps a similar fate is in store for the sovereign debt markets of Europe...and for the euro itself.
"Given how the crisis has unfolded over the course of the last few years, we struggle to see that the activation of help for Portugal will mark the end of contagion," says Nick Matthews, senior European economist at the Royal Bank of Scotland. "We therefore remain of the view that countries with high private and sovereign debt will remain at the mercy of further loss in market confidence."
Amen.
Despite the so-called containment of the Portuguese government's insolvency, Portuguese banks publicly refused yesterday to purchase any additional government bonds. Meanwhile, no one anywhere on the European continent can say what size or structure of bailout Portugal may or may not receive.
And even after receiving a lifeline, Portugal would still face capital markets that will demand usurious rates of interest to provide any capital whatsoever. This story is not over, folks.
Widespread sovereign insolvency, combined with the stench of decaying government finances, may not be immediately bearish for the financial markets, but we doubt they are bullish.
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| | The Daily Reckoning Presents | | China’s “Rare Earths” Exports Collapse, World Prices Soar | |  | | Byron King |
Let's think back to September 2010. Japan confronted China at sea in a dispute over fishing rights. The Japanese arrested a Chinese fishing boat captain. The Chinese soon imposed an embargo on rare earths exports to Japan.
Suddenly, rare earths - a relatively obscure set of industrial minerals, oxides and metals - became the stuff of high international attention and intrigue. It became common knowledge that China controls about 97% of the world's rare earths output. Overnight, the dire industrial and political implications of that geological monopoly became apparent.
Investors were - and are - right to be interested in this situation. Just last week, we learned that the value of China's rare earths exports has soared almost nine-fold, year on year. That is, a tonne (i.e., a metric ton) of Chinese rare earths - a weighted composite of 17 different materials - currently rings the cash register for just over $109,000. This is up dramatically since July 2010, when each tonne averaged buyers a mere $14,405.
In other words, China is raking it in. In fact, the prices of rare earths out of China have averaged about a $10,000 increase per tonne per month over the past year!
It gets worse for non-Chinese users. In February 2011 China reportedly exported a total of 750 tonnes of rare earths to a global array of buyers. This was slightly more than the 647 tonnes China shipped in January. Yet in just this one month, the average price for a tonne of rare earths leapt ahead by $34,000, according to a calculation by Reuters News Service based on data from China's customs office.
The rapid increase in price is due to the Chinese government's successful effort to restrict and reduce the volume of rare earths exports. Adding to the confusion, China has also changed the way it reports rare earths exports. This has artificially boosted the volume figures by including products made from rare earth metals in the total.
Could things get worse for Western buyers and users? Well, yes. Also last week, we learned that China might soon start importing some of the rare earths that its economy needs but doesn't produce in sufficient quantity.
According to Liu Junhua, the deputy secretary for China's Baotou Rare Earth High-Tech Industrial Development Zone Committee, "China may eventually need to import [heavy rare earths] materials." According to Mr. Liu, speaking at a recent conference, there's a "strong possibility of [China] importing heavy rare earths" in the next three-four years.
So here's the scenario: Chinese export volumes are down. World prices are rising, and fast. And China may soon be importing the heavy rare earths for its own industrial needs.
Let's review what this all means for investors...
The share prices for rare earths companies began to soar last fall. After the Japan-China dust-up in September, rare earths companies quickly became stock market darlings.
Many of the rare earths stocks I recommended to the subscribers of Energy & Scarcity Investor doubled in fairly short order. I suggested taking profits on two of those stocks, but still advocated long-term investments on selected stocks in this sector.
Looking back toward the end of 2010, pretty much any company with a "rare earths" tag line was a strong performer in the stock market. The investment community threw big money at a large stable of rare earths investment opportunities. But times have changed.
In the past six weeks or so, in the face of tight demand and fast- rising prices, investors have looked at the rare earths sector with even sharper, more discerning eyes. The rationale is twofold.
First, only a few non-Chinese companies will achieve output - and begin to generate cash flow - within the next three years. And second, only a small handful of companies will survive in the long-term race to supply the world with rare earths over the next decade or so.
One company I recommended should have a new mine up and running by the end of this year. Another company, one that I consider an excellent speculation, is modernizing a rare earths facility in Russia.
Meanwhile, there's Molycorp, a company that is reconstructing its mine, mill and other facilities at Mountain Pass, Calif. It's a major effort, with a sticker price in the vicinity of $500 million. The announced time scale is in the 24-month range. My concern about Molycorp is that the California project involves building a brand-new plant, with new equipment and bringing in a newly hired work force that's still in training. Anything could go wrong and cause delays. And considering that it's happening in mining-unfriendly California? I'm sure you get my point.
The larger point is the rare earths story is not going away. It is getting bigger every day and is sure to provide some outstanding opportunities for vigilant investors.
Regards,
Byron King,
for The Daily Reckoning
Joel's Note: When Byron first alerted his investment circle to the vast potential of the whole rare earth story, most folks in the mainstream financial press still didn't know their yttriums from their scandiums...to say nothing of their dysprosiums, ytterbiums and praseodymiums.
Geesh!
No wonder they were late on the scene, scrambling to take positions in companies that had doubled or tripled since the story broke...companies Byron's readers were by then busy unloading for handsome returns.
Right now, Byron is monitoring the sector with his characteristic attention to detail, awaiting the next profit opportunity. If you want to be in early, you'll want Byron in your employ.Check out his latest presentation here for more info on his Energy & Scarcity Investorservice.
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| | | | Bill Bonner | | The Coincidental Rise of Oil and the Monetary Base | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
"High oil prices start to apply the brake on drivers," says a headline in The Financial Times.
As predicted, the feds' easy money policies are turning into hard times for the middle and lower classes. Oil prices have gone up with the Fed's balance sheet. For every dollar the Fed added, the price of oil ticked up too.
Now, the Fed has three times the monetary base it had before the crisis. And oil is three times as expensive.
Of course, you'd be hard-pressed to prove a direct cause and effect linkage. We wouldn't even try.
But here's something else. Where's the price of gold? It hit a new record yesterday. $1,458. That's up about 3 times too? What a coincidence!
Yeah, just a coincidence. No real connection between the feds pumping up the supply of money and prices going up....
Yeah...just a coincidence.
And not a happy one for consumers. The FT article tells us that drivers are driving less. Especially those who are looking for work.
They're "home-bound." They're stuck with houses they can't afford to leave. And they're stuck in places where they can't find jobs - distant suburbs built for a different world. America was built on cheap energy. Now that energy is no longer so cheap, a lot of what was built no longer makes sense.
That leaves a lot of people in a fix. Many have been unemployed for so long they've stopped looking and the government has stopped counting them. They've disappeared into the vast mortgaged suburbs...the vast edifice of late, degenerate capitalism.
Uh oh...but what's this...there's trouble in Zombie City too. Yes Dear Reader, the zombies are getting nervous. They're worried....
"Washington Braced for a shutdown," says another headline in the FT.
Experts say a shutdown of the federal government would cost the economy $8 billion per week - much of it in the Washington, DC area.
Business leaders have expressed alarm. They're coming up with emergency plans. Zombies are in a state of "high alert," says the news report.
While they're worried about a temporary government shutdown, the bigger worry for the zombie world is that well-meaning budget cutters might actually succeed in cutting zombies off from their food supplies. Rep. Paul Ryan, looking either like presidential lumber...or easy-to-burn kindling... has proposed to take $5.8 trillion out of the deficit total over the next 10 years.
This is the first serious discussion of reforming federal finances. Could it have serious consequences?
The zombies are concerned. But they can sleep comfortably. According to our Daily Reckoningtheory of How the World Works, once a system becomes degenerate it will continue to become more and more degenerate until it finally falls apart. Clear thinking, earnest reformers can try to put it right. But can they do it? Can they cut the zombies off the payrolls? Or are they only volunteering for martyrdom and taking their places on the scaffold?
We'll see...
And more thoughts...
If it comes to that, Paul Ryan won't be the first reformer to sacrifice himself in vain.
The Gracchi brothers set the pace in the 2nd century BC. Born into a good family at a bad time, the Gracchis tried to reform the Roman economy in 123, which they must have thought was in as bad shape as the US in 2011.
They were actually the great grandchildren of Scipio Africanus, hero of the war against Carthage.
Older brother Tiberius began by reforming the system of landholdings, so small landowners could earn more money and employ laborers. But a mob caught up with him and killed him. Then, his brother Gaius took over. He was elected Tribune and tried to reform the judiciary...as well as continue his brother's land reforms. He didn't last long either. In 121 BC he was set upon by his enemies...he fled and then committed suicide. Three thousand of his supporters were rounded up and killed.
Regards,
Bill Bonner,
for The Daily Reckoning |
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