Bubble Island, Chinese Web Surfers, Two Commodities to Watch, Market Opinions and More!

by Addison Wiggin & Ian Mathias

  • The China bubble swells… amazing stats on Hainan Island, nationwide Internet use
  • Two commodities set to soar
  • Obama proposes offshore drilling, Byron King reports from… an offshore driller!
  • Plus, Dan Amoss on the dangerous-yet-growing consensus among fund managers


  Greetings from Bubble Island:

“I want to get it into the Guinness Book of World Records for the most spas anywhere,” beams one resident.

“There’s no real economy,” another man puzzled.

“It’s as if they’ve injected a growth hormone into the economic development here,” says a third.

“People are coming with entire bags full of cash,” says a golf resort manager. “I’ve seen this myself. A man had a bag and unzipped it. Boom. ‘Here’s the deposit,’ he said. ‘I want two apartments.’”

Those are all sound bites from a NYT profile of Hainan Island, billed as the “South Beach” of the South China Sea.


We traveled to Hainan Island a couple of years ago to look at, above all things, a rundown tilapia fish farm. Even if they’ve had 100-fold growth since then, there’s a helluva divide between Hainan Island and South Beach, condo bubble or no.

Still, markets make opinions. And people see what they want to see. Until it all comes crumbling down.

  A Chinese automaker picked up the Volvo brand from Ford today. Zhejiang Geely Holding Group, surprisingly not state-owned, bought the famous Swedish carmaker for “just” $1.8 billion.

Umm… that’s a hearty discount to the $6.4 billion Ford paid for it in 1999.

  “The total number of Internet users in China grew by 86 million in 2009,” reports Frank Holmes with yet another large China-growth number, “a 29% increase year-over-year.”

China now has 384 million Web surfers.

“That’s well more than the entire population of the U.S. and Canada combined,” Frank points out. “Of that number, 90% have broadband connections, according to the China Internet Network Information Center (CNNIC).

“Nearly 30% of Chinese now use the Internet, and this sets the stage for explosive growth in the years ahead. Once Internet penetration in the U.S. reached 20%, it took just six years to get to 60%.

“Japan needed only three years to go from 20% to 40%, and Brazil went from 20% penetration in 2005 to more than 35% by 2007.

“Two of the biggest growth areas for commerce in 2009 were online banking and e-commerce. UTline jumped 78% last year. A recent McKinsey report says a significant number of Chinese consumers ages 18 to 44 won’t purchase a product or service without first researching it on the Web.

“As the Internet continues to expand its reach into the lives of Chinese people, keep an eye on how users leverage the technology to improve their living standards.”

Frank will no doubt update us on the impact of increased Web commerce in China when we see him live and in person at this year’s symposium in Vancouver. Frank joins Marc Faber, Peter Schiff, David Walker, Bill Bonner and Doug Casey, among a host of your favorite 5 Min. Forecast luminaries, as we get together and try to figure out where to put our money in this roiling global economy. Early discounts still apply. Please consider joining us.

  One potential China bubble popper: steel prices.

Pricing terms for steel changed literally overnight, after a global consortium of miners and steelmakers agreed to start pricing the commodity quarterly and according to the iron ore spot market.

For the last 40 years, steel consumers signed yearly contracts and price was negotiable… no longer.

“The new price system will lift the cost of iron ore to Asian steelmakers to about $110-$120 a ton during the April–June period,” the Financial Times forecasts, “up between 80–100% from the $60 level at which the 2009–10 annual contracts were settled.”

That’s no joke. We’ll be watching names like BHP Billiton and Rio Tinto, which stand to profit handsomely.

  “Towards the end of this year, uranium prices will start to move higher,” says Amir Adnani, CEO of Uranium Energy Corp. “We are going to see some hyper activity. Prices will have a similar run-up movement that we witnessed in the summer of 2007.”

Of course, he’s talking his book… but to predict another 2007 is quite a forecast:

You’ve no doubt digested [our reasons for agreeing] with him thoroughly.

  The Obama administration may agree with him, too. In addition to advocating the construction of new nuclear plants, White House officials also announced plans this morning to open most of the U.S. coastline to offshore drilling. Soon the Atlantic, Gulf and Alaskan coastlines will be fair game for deep-sea drillers.

As with all things Washington, the bipartite move is political. Obama is willing to support nuclear power and offshore drilling if his opponents give in on “climate change” legislation.

Apart from sending our Byron King out on one of the deep-sea drillers in the Gulf, we’ll keep an ear to the ground for the quid pro quo the Obamanians are expecting. Could mean the rebirth of that crowd-pleaser, “cap n’ trade”…

  “This ship, the Transocean Discoverer Inspiration,” Byron reports from the deep, “is designed to drill the deepest of wells, in the deepest of oil-prospective waters. In fact she’s rated to drill in up to 12,000 feet of water, or about as deep as the wreckage of the Titanic.

“How deep can Inspiration drill? Down to 40,000 feet — just shy of eight miles — or some combination of water depth and rock depth that adds up to 40,000 feet. It’s deep…

“It takes a very big ship to do such things. Thus Transocean Discoverer Inspiration is just a hair over 835 feet long and 125 feet wide. She displaces over 100,000 tons. Her draft is 62 feet, fully loaded. That is, Inspiration’s keel is almost as deep down as the first oil well that Col. Drake drilled at Titusville in 1859.

“Just the hull of Inspiration is larger than that of a World War II-era aircraft carrier. And updating things to modern times, Inspiration’s hull is almost as large as that of a modern aircraft carrier as well. There are few ships larger on any ocean, outside of the large crude oil carriers. But big, bigger, biggest is what it takes to drill deep holes in deep water. It’s hard, and expensive. And that’s the nature of things in a world where there’s such a concept as Hubbert’s Curve.

“Better get used to it. Better yet, invest in it…” For Byron’s ideas on how, be sure to consult your upcoming issue of Outstanding Investments. If you’re not yet a subscriber, you can read a very long and titillating promotion here. Or give John Wilkinson a call at (866) 361-7662 and learn how to claim your lifetime subscription for a one-time fee, along with all of the long equity services we publish at Agora Financial. This limited offer is closing today. It’s one of the best we’ve ever assembled, so if you’re interested, give John a call right away.

  A weak dollar is nudging commodities up again today. With the dollar index hovering at yesterday’s lows around 81, gold is up to $1,115. Oil is up a buck to $83.

  Meanwhile, stocks continue to fight gravity. The market opened down this morning thanks to a weaker-than-expected ADP jobs report but is already back to breakeven as we write.

  “A consensus is forming that Federal Reserve policy will support stock and bond prices in perpetuity,” Dan Amoss notes from the last day of Grant’s Investment Conference. “Several speakers at the Grant’s Conference held this view. This new consensus view goes something like this:

  • The Federal Reserve will keep rates near zero for a long time, because inflation is only a very remote possibility; Paolo Pellegrini was the lone dissenter, implying that a loss of confidence in fiat money could force the Fed to tighten. (He said, “quantitative easing is a breach of property rights.”)
  • Corporate profit margins and cash flow will remain near record levels well into the future
  • Asia will continue to lead the global economic recovery 

“Several speakers were complimentary of the just-enacted U.S. health care legislation, reflecting the leftist view that ’this had to be done’ in an advanced industrialized economy. Wall Street views the world far differently than Main Street, believing that only government can solve certain problems.”

  “I am the daughter of a decorated Air Force officer,” a reader writes, responding to yesterday’s inbox. “My father and his lifelong friends, who served with him, have been great influences in my life by their understated example of what it is to embody honor and dignity. These people have ideals bigger than themselves, which allows them to undergo the hardship of separation from loved ones, poor pay, uncertain living conditions and potential loss of life. This is the ultimate in selflessness and service to others. This is something that merits respect and appreciation of the highest order.


“To label these fine men and women as ‘nut jobs,’ to, in essence, categorize the military as a bastion of whackjobs, is so utterly offensive I can hardly contain myself. It is your reader spewing such garbage who is the abusive one. The ignorance is palpable. I can’t believe you let his words see the light of day. It’s a painful irony that the military who fight to maintain the freedoms of speech and others we have are so reviled by any group, however small, of clueless, acerbic and undeserving beneficiaries.”

  “To think,” another reader adds, “that those Anti-Government ‘defendants’ from MI, IN, and Ohio asked for a PUBLIC DEFENDER to plead their case? Now who do they trust?”

  “Your advice to a 40-year-old to not pay for Social Security is very ill-advised,” a reader writes. “Social Security is a government program that is going to be with us for a long, long time. It serves a very vital function in this society. It is by far the best government program we have.

“A modification to the start date for receiving benefits may change that… and is an easy way to handle solvency. You should know that, and stop telling people it is bankrupt, implying it will go out of business. Shame on you.”

The 5: We never encouraged anyone to stop making “contributions,” nor said SS was bankrupt… though one day, it’s entirely conceivable both will be a reality. For the record, too, we cited CBO numbers, which is the very source of data legislators are supposed to use to modify the program as you suggest.

  “Discussing the depletion of the Social Security fund is just a perpetuation of the myth that a fund actually exists,”  another reader writes. “The ‘fund’ is a bunch of U.S. Government debt that’s designated in a ledger as Social Security assets. The reality is that it just means that the Government has to borrow or print that much more money to keep things going.”

The 5: Heh. You’re right. We can’t win today.


Addison Wiggin

The 5 Min. Forecast

P.S. We addressed a group of economics and finance students at Towson University yesterday. Oy. The divisiveness of mainstream politics was omnipresent in the room, replete with ignorance, smarm and emotion. Two young Republicans were trying to impress with their knowledge of the deficit madness of the current administration; their enthusiasm was met with snarky comments from a gentleman on the side of the class wearing sunglasses, open fingered gloves and a leather vest; a third in the middle just wondered why we all can’t get along.

A fun time was had by all. Especially the two Goths in the back row taking the time out for a nap. And the femme fatale in the front whose assets she clearly valued higher than all else in the class.

Hey, at least we created a smooth diversion from the lesson on taxes paid on annuity disbursements that we walked in on.

P.P.S. “As long as you’re listening to customers now (after a 4-year process),” writes our last critic today, apparently master of the colon: “how about considering the following idea, too:


“How about creating a Reserve membership for the services that are IN the full-blown Reserve, but NOT in the new Equity Reserve.

“For example: you could call it the ‘Trading’ Reserve and include Bulletin Board Elite, Strategic Short Report, Resource Trader Alert, Master FX Options, etc.


“Also: what if a person is a member of the Equity Reserve (or the Trading Reserve, should you ever create one) and later that person wants to upgrade to the full-blown Reserve. There’s no mention of how that would be handled in your ad. Surely you have to accommodate that somehow. Why not mention how, up front?


“Anyway: while I’d consider (and likely join, assuming appropriate pricing) a Trading Reserve, if offered, I’m not interested in the Equity Reserve at this time.


“Thanks for asking, though.”

The 5: Since we are inclined to listen to customers now, what would you think if we created a “Trading Reserve”? Send your reply, critique, remark, comment, suggestion, lip, smack-down or praise to: customerservice@agorafinancial.com

We’ll work on the “clear upgrade language” in the meantime.


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