China Passes Japan, Bad Credit Worse Than Terror?, Chavez Keeps Being Chavez, and More!

By Addison Wiggin & Ian Mathias

  • Markets slide worldwide… U.S. traders read Fed minutes, throw tantrum, tank indices
  • Chinese stock market surpasses Japan’s… why you should care… and three new plays on the Hong Kong exchange
  • Chavez to chop three zeros off Venezuela’s “strong” bolivar… similar scheme in Nigeria blocked…
  • Are “bad credit” and “looming defaults” scarier than terrorism? Study says yes…Bonner’s take on the mob
  • Startling U.S. electricity stats…
  • What’s your home worth when it’s priced in gold? Got any more ‘nutty’ questions? Bring em on.


Asian markets felt the sting of domestic selling overnight. Major indexes in Japan, Hong Kong and Singapore all fell over 2%. Australia, South Korea, Taiwan and Shanghai fell well over 1% as well.

And yet… After the close of trading yesterday, the Chinese stock market settled in with a higher market cap than Japan’s. If you include the Hong Kong exchange, as of yesterday, the Chinese markets are valued at $4.72 trillion in China. In Japan, the market is valued about $200 billion less.

This Hong Kong exchange is about to get very busy…

“That’s pretty amazing,” comments Chris Mayer, “especially when you consider what the world looked like as recently as 1989. Few would have bet that by 2007, China’s stock market would exceed that of Japan’s. Japan’s economy is still 63% larger than China’s. There is a lot of room to go yet in China.

“In any case, it is further validation of our long-term thesis, that we are in the early part of an Asian century — in which countries such as China and India play big roles,” concludes Chris. “Asia now has two stock markets with nearly $5 trillion in market cap.” For a complete rundown of that long-term thesis, we recommend the audio CDs from our Rim of Fire investment conference , held in July in Vancouver

Earlier this week, we told you that mainland Chinese can now invest their $2.2 trillion in personal savings directly in the Hong Kong market . Christopher Hancock called it “the most important development since the Chinese were allowed entry to the WTO.” Since that time, Mr. Hancock has added three new companies to his Hong Kong portfolio . If you want to know more, there’s still time to get in these positions.

Also, you can meet Christopher, in the flesh, this October at International Living’s “Ultimate Event.” Sounds like a great location too… click here for details .

Here in the land of the red and blue states, the Dow, Nasdaq and S&P 500 all shed over 2%. This week’s dreadful housing stats and plummeting consumer confidence were blamed for the sell-off.

Traders were also miffed and confused when the minutes from the Aug. 7 Fed meeting didn’t reveal a group of grumpy old bankers eager to cut rates.

“A further deterioration in financial conditions could not be ruled out,” the Fed admitted, “and to the extent such a development could have an adverse effect on growth prospects, might require a policy response.” But the statement was not enough of an alarmist diatribe to convince the Cramers of this world that 5.0% is right around the corner.

Still, the broader U.S. citizenry seem concerned. “Bad credit has surpassed terrorism as the gravest immediate risk threatening the U.S. economy,” reports Bill Bonner this morning.

According to the latest research from the National Association for Business Economics, 32% of its members thought loan defaults and excessive debt were the predominant national economic concern, while only 20% cited terrorism. While this should seem normal to any reasonable person, members of the NABE ranked terror as the No. 1 concern back in March, when the survey was last conducted.

“Terrorism poses a tiny statistical danger to Americans…but never any real danger to the USA,” comments Bill. “Instead, the Bush administration correctly identified it not as a threat, but as an opportunity…to spend more money and boss people around. Trouble was, the money being spent hadn’t been earned yet; we wonder if it ever will be.” Bill unpacks this idea in his new book Mobs, Messiahs and Markets, which is currently Amazon’s No. 1 financial and investing book — and it hasn’t even been released yet. If you’re interested, you can preorder your copy here.

Our favorite South American dictator, Hugo Chavez, announced this week that he plans to knock three zeros off the Venezuelan bolivar.

Turns out Chavez has done such a fantastic job “protecting” his people, a black market for U.S. dollars has spiked in the streets of Caracas. Chavez has doubled government spending since 2003 and instituted countrywide price controls.

The result has been staggering. Currently, the “official” exchange rate is one dollar for 2,150 bolivars. But on the black market, the average Venezuelan citizen has to pay upward of 4,000 bolivars to get one dollar’s worth of goods.

What a nightmare…

Starting in 2008, the new “strong bolivar” will be instituted. “Strong”… yeah, OK… strong like Chavez “dynamic” democracy.

The Central Bank of Nigeria has been blocked by that country’s president from pursuing a similar scheme to knock a few zeroes off the naira. The legislature recently passed a law forbidding Nigerians from “abusing” the national currency. Some reports suggest the law was intended to prevent people from using the paper nairas in strip joints.

“Between 1975-1999,” reports the WSJ this morning way in the back, “the U.S. spent on average just $83 million per year on power lines and facilities to deliver electricity to end-users. But since 1999, increases in transmission spending have been enough to meet just one-third of new demand.”

The decrepit electrical grid is back-page news for now… but not for long. For example, the State of California spends only 3% of its state budget on infrastructure, compared with 20% in 1960, even though the state’s population has grown rapidly. Spending on transmission lines is going to have to go up. Chris Mayer is tracking a company right now in Capital & Crisis that isn’t even public yet, but has a proprietary advantage in helping to build out new transmission lines.

“I’ve been reading your hype on jatropha and wanted to add a couple points,” writes a disgruntled Aussie reader. “As some background, I own a plant nutrition company, an environmental management company and a renewable energy company that we operate as a group. As such, we have been and continue to research oilseed crops for biofuels, among other things.

“Jatropha is not the panacea you are reporting, and your recent reader obviously hasn’t looked very far, either. The reason it doesn’t compete with food crops is because it’s poisonous to humans, domestic animals and wildlife. It is also a very invasive environmental weed, and quite a few countries/states have completely banned (or are in the throes of banning) its production because of this. Western Australia in my country comes to mind.

“The comment it doesn’t need much water and no fertilizer is complete crap. This may be true in its native state, but as a commercial crop, it must be irrigated (albeit less than canola or other commercial oilseeds) and it must be fed (fertilizer) in order to get the 40% oil content needed for the 1,800-plus litres of oil per hectare (that’s around 195 gallons per acre) needed to ensure long-term viability.

“This is not a huge bad thing, but requires significant management of the crop, which adds significantly to the cost, particularly on a large-scale cultivation program, certainly something Chris Mayer has not calculated in his cost comparisons when he claims equivalence to US$43 per barrel.

“On the good side, though, it also has uses in malaria treatment and constipation remedies and has possible links to Alzheimer’s and Parkinson’s treatments.

“You can save your weary analyst’s time and money as well: The “big secret” BP partner is, of course, D1 Oils, which anyone who gets a newspaper well knows. This company is cutting a living on hype, but not very well. In early 2005, it really hyped the media machine and stocks and rocketed to around 450p. Most in the know realized it was hype, and it got smashed 60% over the next year. It’s ticked along OK since then, had another good spike recently with the BP news, but again, as the hype subsides, it’s dropped 30% in the last month (to around 180p). This may be a buying opportunity, but there is lot more that needs to be learned on jatropha before I’d be throwing my money at it.

“On last point, if you’re looking for a better/alternate crop than jatropha, wild radish is generally easier and cheaper to grow on a large scale and contains 48% oil (20% more than jatropha).”

The 5 responds: Nobody’s hyping the jatropha. We just like saying the word around the office. We didn’t realize it would be so annoying to everyone.

“I was just having a nutty thought, so I felt compelled to e-mail you,” writes a different reader. We approve e-mailing of any nutty thoughts, by the way. Bring it on…

“Reading What You Should Know About Inflation by Henry Hazlitt, the subject of the post-Civil War fate of the greenback came up. It turned out the U.S. decided to enact the Resumption Act, effective 1879.

“Basically, the greenback was a bust, so the country went back on the gold standard, and various measurements were made to set its price.

“Let’s say the U.S. inflates the dollar to near extinction when some epic event happens, even maybe a nuke goes off. Worldwide financial systems implode. Paper money literally goes up in smoke. It doesn’t even need to be a nuke… just maybe Israel and Persia start a rhubarb in the oil patch and an Arab-Yankee melee shuts down energy production and shipments. The unthinkable happens. The world is forced into a new gold standard.

“What about all the Ludwig von Mises advocates sitting on their heaps of gold previously valued in dollars and other erstwhile paper currencies? How would the value of gold be measured?”

The 5 Responds: You’re asking the question ass-backwards. When we were in Vancouver, we met a gentleman by the name of Charles Vollum. Charles was wandering around the conference for the better part of four days wearing a pith helmet. So he was definitely on our list of people to meet and talk to. Charles, it turned out, was and is the editor of a Web site called .

If, as you suggest, the worldwide financial system were to implode, no one’s going to give a rat’s patooty how many dollars your gold will fetch… they’ll be worth less than the paper they inkjetted on. The real question you’ll be asking is what can I buy with this yellow stuff?

That’s where Charles comes in. Here, for example, is a chart showing median home prices in the U.S. from 1968-2006… priced in gold.

“Watch your profits,” Charles writes on his site, “and don’t be fooled by a shrinking dollar — make sure your real wealth is increasing!”

And just by way of suggestion, you might also want to read the book we published in June: Gold: The Once and Future Money .


Addison Wiggin,
The 5 Min. Forecast

P.S. By the way, we fully endorse any nutty thoughts you may have. In fact, if you click here , you can respond directly to anything you’ve read in today’s 5 by entering your nuttiness on the blog. A short registration is all you need, and it’s free. There are a number of registrants already. Bring it on.


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