Sound Money, Geothermal’s New Era, The China Bust Catalyst and More!

by Addison Wiggin & Ian Mathias

  • A lesson in (un)sound money: Venezuela devalues currency by 50%, introduces euro-style “sucre”
  • Byron King on why geothermal investing has entered a whole new paradigm
  • China goes Western: Imports soar 55%, banks getting rich valuations
  • Dan Amoss on the most probable catalyst for a China bust


  If all the money you have today would be worth 50% less tomorrow, what would you do?

Black Friday, Socialist Style

That was the scene over the weekend in Venezuela — packed stores, everywhere. Presiden-tator Hugo Chavez unveiled a “dual exchange system” for the Venezuelan bolivar. Mind you, this is the same “strong bolivar” that had three zeros magically chopped off two years ago.

This round of currency devaluation is an equally hot mess. The new system essentially doubles the cost to import “nonessential” goods, thereby cutting Venezuelan purchasing power on most goods in half. Chavez, in return, gets to trim his budget gap while still maintaining the public spending programs that keep him politically viable. (Heh, sound familiar?)

His people… well, they’ll just have to deal with it for the sake of the “greater good.”

  Venezuela, along with some other Latin and Caribbean nations, has founded a new euro-like currency called the sucre. Chavez, clearly an expert on sound money, masterminded the plan. Members of the Bolivarian Alliance for the Americas, which include Venezuela, Cuba, Ecuador, Honduras, Nicaragua, St. Vincent and the Grenadines, will use the sucre for trade between nations. In theory, it will remove the dollar’s status as reserve currency in the region.

“My first reaction is to say, monkey see, monkey do,” notes Doug Casey, who always draws a crowd at our annual Investment Symposium. “In imitation of the European Union, these people are monkeying around with what should be money…

“[These nations] are really nonentities and everyone would like to secure the advantages the U.S. dollar has for their own countries. When other countries use your currency as a reserve, or even as their own currency, you can print the things up by the truckload and ship them overseas in exchange for valuable goods. You can essentially export inflation…

“Hell, I’d like to have a government and print up my own currency too. And Chavez and his cronies in these nothing-nowhere countries like Honduras and Cuba would love to have a central bank that gets that kind of respect. The Cuban peso has zero value outside of Cuba, and almost zero value inside Cuba. Cubans don’t use it if they can possibly avoid it, and never hold it. It’s like the Old Maid card. And that’s within a police state, where everyone has been indoctrinated over three generations about how their governments paper was actually better than gold. Lenin quipped that it’s best used for constructing urinals in an ideal socialist world. And of course, if you’re very wealthy, or a fool, you can certainly use it that way.

“But it’s not going to work. I guarantee that where these things don’t turn into total disasters, they will come to nothing. Anyone who is holding assets in sucres, just like euros and dollars, is going to be left with nothing when the game of musical chairs stops.”

  The U.S. dollar has been in steady decline since we wrote to you last. The dollar index opened Friday at 78 and goes for 76.9 as we write. The worse-than-anticipated jobs report on Friday didn’t help, and a speech from Fed President Bullard over the weekend gave traders the impression that the Fed’s 0% interest rates will stick around for the rest of 2010.

  While the dollar stumbles, commodity currencies are the monies du jour. The CRB Commodity Index is just off a 14-month high and the U.S. dollar index is near a one month low — music to the ears of Canadian and Australian dollars. Both are near one-year highs this morning and threatening dollar parity. The loonie goes for 97 cents, the Aussie for 93. The Aussie is getting an extra kick in the pants after China reported soaring imports for December… more on that data in a few minutes.

“All this talk of reaching parity to the dollar by the A$ and C$ is fine,” reports Chuck Butler in this morning’s Daily Pfennig. “But the first currency to get there just might be the Swiss franc, which we’ve seen at parity on more than one occasion in the past.”

  Gold is roaring back to its 2009 highs today. The spot price is up $25, to $1,160. That’s a good $60 higher than its New Year’s price.

  Oil’s up a buck to $83, also on dollar weakness. It happens to be abnormally cold in just about the entire U.S., too, which only helps prices higher. At $83.65 just before the stock market opened this morning, oil’s found a new 52-week high.

  “The pre-crash business model of the geothermal industry is no longer appropriate to the tight-credit world in which we live,” Byron King reports. “Post-crash, it’s clear that most publicly traded geothermal companies are too small. Back when credit was cheap, money flowed more easily and you could "afford" to be patient over a five-to-eight-year time frame. The same small team of developers was prospecting, leasing, drilling, finding, assessing, fundraising, developing, building, stringing electric line and selling power. Holy smokes, Batman! Where’s the point where we can MONETIZE this?

“But in our new economic world, the small, mom and pop business approach just won’t cut it. Geothermal power takes too much upfront capital to make things work. It requires too many different management skill sets. Like many things in life, bigger is better with geothermal. In fact, the world’s largest geothermal producer is Chevron Corp. Is that big enough?”

Byron’s latest issue of Energy & Scarcity Investor is brimming with the best-in-class geo names for the new post-crash paradigm… many of which are old ESI picks rolled up into larger cash-rich entities. For details on how you can invest in these newly capitalized conglomerates, look here


  The stock market might break from its dull trend this week. Having gone effectively nowhere last week, stocks could snap the norm today as Alcoa kicks off earnings season. We’ll keep you posted.

  Take this for what it’s worth (contrarians hark!): The collective view of the nine biggest Wall Street banks forecast a 9.5% gain for the S&P 500 this year. Research firm Birinyi Associates combed through the 2010 forecasts for all the heavy hitters on the Street and averaged out this 12-month forecast:

· S&P 500 to 1,222 (up 9.5%)

· Gold rises to $1,213

· Oil: $80

· GDP: up 3.1%

· Dollar/euro: $1.45 (down just a little from today)

  Horizon Bank gets the prize for the first bank failure of 2010 — and it was a big one. The $1.3 billion bank failed late Friday, costing the FDIC some $539 million. (BTW, if you lost track, the U.S. lost 140 banks in 2009. All things considered, that’s surprisingly good.)

  Last today, two more notable milestones for China:

First, Chinese banks are now the most highly (over?) valued banks in the world. If you measure a company’s worth by price-to-book value, there’s been a remarkable changing of the guard. There’s quite a few different ways to take in this chart… we’ll let you come to your own conclusion:

Second, China is now the world’s biggest exporter (according to their data, anyway). The Red nation announced over the weekend that 2009 exports exceeded $1.2 trillion, edging out Germany’s current forecast for the No. 1 spot. Exports rose in China by 17% over that last year, beating foreign estimates by fourfold. Chinese import numbers are even more staggering — up a whopping 55% in 2009. Australians, which now count China as their No. 1 trading partner, have to be pumped about that… so long as China keeps it up in 2010.

  “It’s likely that the growth we saw in emerging markets in 2009 will decelerate,” opines Dan Amoss. “China’s infrastructure-heavy stimulus package put Chinese people to work and boosted commodity imports from resource-rich countries like Brazil and Australia.

“The potential catalysts for a correction in China are many, but the most likely would be continued escalation of trade protectionism. This protectionist trend could offer several attractive short ideas in 2010…

“The interference of governments into free trade — in the form of both subsidies and tariffs — is not good for the future of globalization. Many of today’s big transnational corporations are built on the assumption of unending globalization. These big corporations are establishing closer ties to politicians around the globe, and many are seeking to game the system or pursue government subsidies, rather than serve their customers.

“Rising trade protectionism also threatens to transform many of the capital investments made over the past decade into losers. You may have noticed a consistent theme among most of our 2009 short ideas: high asset growth. Many global companies that expanded their balance sheets to add capacity were reacting to false market signals during the credit bubble. But now that demand for these companies’ products or services remains well below supply, losses will persist and industries must shrink capacity to match a new level of austerity.”

Of course, Dan’s Strategic Short Report readers will be well armed for such a correction. Have Dan help you hedge your bets, too, right here.

“Although I respect Mr. Jim Chanos’ often accurate calls in the past regarding Enron, U.S. real estate, etc.” a reader writes, “when it comes to China, how does he explain his use of the words ‘credit excesses’’ when Bloomberg reported back in November 2009 that China’s top four banks increased their savings rate by four times, to 4.3 trillion yuan, whilst loans from the same banks increased three times, to more than 3 trillion yuan, in the first half of 2009?

“Wouldn’t that indicate that the Chinese banks are loaning out $3 for every $4 they take in as deposits? Where’s the credit excess in that?

“I take the calls regarding China, which Mr. Chanos has made for about eight weeks now, with spoonfuls of salt. Perhaps he will be proven right years from now, but until I see the Chinese savings rate drop substantially, like down to 10 cents for every $4 they loan out, I will reserve judgment on whether or not that country is in a ‘credit excesses’ bubble.”

The 5: Personal debt isn’t an issue, as you did a fine job explaining. “China has a fair amount of public debt,” Dan Denning recently wrote in the Aussie version of The Daily Reckoning. “There are local government liabilities ($680 billion), loans for public infrastructure projects ($350 billion), debts guaranteed by government ($400 billion) and bonds from the 2003 banking system bailout ($260 billion ). All up, the government has $1.7 trillion of off-sheet liabilities. This means a public debt-to-GDP ratio of 62%, which is similar to many Western countries.”

  “I started reading your e-letter about two years ago,” another reader wrote over the weekend. “A year ago, I started investing via Resource Trader Alert with Alan Knuckman. I’m also a member of Capital & Crisis — just haven’t taken the plunge yet on any of those recommendations (and yes, I see that I would have profited handsomely there, as well).

“Based upon just info from your newsletter, I bought gold bullion from the Perth Australia mint when it was in the low $900s.

“As 2009 closed, I was up 25% in the gold bullion buy and up 61% in RTA.


Our pleasure,

Ian Mathias

The 5 Min. Forecast

P.S. There’s no better way to get the scoop on our “New Trade of the Decade” than right from the Chief himself. Addison’s been out spreading the word lately, and you can listen in on some unique interviews with him here and here. Both are solid investment primers for the new year and the decade to come.



Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More