The China Bubble, Incredible U.S. Mortgage Stats, The Powerful Dollar Rally and More!

by Addison Wiggin & Ian Mathias

  • China: Boom or bubble? The evidence we’re gathering to prepare for our visit

  • How Chinese law could soon prop up Chinese stocks

  • Five months into the dollar rally, a powerful reason why it’s nowhere near over

  • 96.5% — the number that demonstrates Uncle Sam IS the mortgage market

  • Reader contemplates gold confiscation and whether to flee overseas


  We open this morning with a few questions: Is the Chinese economy in the throes of an epic bubble and, therefore, on the verge of collapse?

Better yet, does it even matter?

  These are not academic questions. We’re getting on a plane to Beijing tomorrow morning to scope out a potential business partnership there. Bill Bonner will be coming too, along with Chris Mayer and Joel Bowman.

But it’s also an important question if you’re an investor, says Chris, “because China is the world’s second largest economy, and it hits above its weight as far as commodities go. It is the most important buyer to watch when it comes to everything from oil to iron ore. So if China tanks, so do the prices of many commodities.

“Even beyond that, China is the growth engine for a host of U.S. companies.”

We’re, of course, reserving judgment until we see what’s on the table. Nor are we likely to take sides in a debate that has Marc Faber on one side (bearish) and Jim Rogers (longtime bull) on the other. But wend our own path… and bring you along for the ride.

  “I do think,” Mr. Mayer continues, “the time frame has a big part to do with how you view the world. China will certainly have nasty recessions and busts. But over the long term, this market is growing. You only have to look at the results of the companies involved to see how far it has already come.

“And that doesn’t mean that everything in China will do well. We have to be careful not to paint with too broad a brush. Just as in the U.S., there will be pockets of opportunity. In China, for example, I don’t think I’d want to be involved in the frothy property market of the big cities. I wouldn’t want to invest in its opaque and undercapitalized banks.

“On the other hand, I would invest in ideas that link to the agricultural scene. There is clear demand and growth and constraints — in water and arable land — that one can deal with in only so many ways. I would invest in uranium, which ties back, in part, to China’s aggressive nuclear build-out.”

Before we set off tomorrow for a firsthand look, let’s examine a few data points and anecdotes for some clues.

  Inflation is currently roaring in China:

  • Consumer prices rose 2.8% year over year in April — their fastest pace in 18 months

  • Producer prices rose a staggering 6.8%

  • Housing prices rose 12.8% — their highest since records began five years ago.

The housing numbers are even more astounding when you consider Beijing’s attempt to slam the brakes midmonth.

Among the measures taken: A demand for higher down payments, and a ban on lending for the purchase of third homes (!)

Sure enough, it put a lid on home sales month over month…

But it did absolutely nothing to put a lid on prices.

Something’s got to give. Either interest rates have to rise, the yuan allowed to float or both. But when that happens is anyone’s guess.

  So what does an upwardly mobile Chinese citizen do with his money when inflation is raging and housing prices lead the way?

Bloomberg News shares the story this week of Pan Weitang, a 27-year-old accountant in Shanghai with $59,000 in savings. (Yes, you read that right. And that’s not atypical.) Chinese law pretty much limits her to three options on where to put her money:

  • A bank account in which interest can’t keep up with inflation

  • Property which is increasingly beyond reach

  • Domestic stocks.

You get one guess about which she’s doing now. And she’s definitely not alone. So even though the Chinese market in Shanghai entered an official bear market earlier this week — it’s down 20% from last November — a new flood of middle-class savers are “buying the dip.”

“It becomes a question of who’s the least ugly girl at the fair,” Victoria Mio told Bloomberg. Mio is a Hong Kong-based senior fund manager at Robeco Group. Robeco is forecasting a second-half rebound. JPMorgan Chase expects Chinese stocks to rally more than 40% this year.

Our friend and potential partner in Beijing is eagerly awaiting pending legislation that will allow mainland Chinese to invest overseas. But for now, it looks like the official line is to keep those savings at home.


  The Chinese just announced a $23 billion deal to build three oil refineries in Nigeria. Nigeria is a major oil exporter, but its refining capacity is a shambles.

“The Nigerian government,” reports the BBC, “has said that foreign companies must invest in developing Nigeria's infrastructure and economy first, before they can benefit from its oil and gas exports.”

So here’s the latest example of China striking strategic deals with other developing countries: Chinese capital and know-how in exchange for scarce resources. Don’t be surprised to read soon about China securing a fixed amount of barrels of oil each day from Nigeria — not unlike the deals it’s already struck with Venezuela and Brazil.

This is one of the great untold stories of China’s great resource grab: Slowly but surely, less and less oil is being traded on the spot market. Instead, we see more of these bilateral deals.

Of course, there’s also the small point that Nigeria is America’s No. 5 oil supplier… Venezuela No. 4. It’s not enough that we’re “surrendering our destiny,” as Bill Clinton put it at the 2010 Fiscal Summit, referring to our dependency on foreign purchases of U.S. Treasuries, but the U.S. is also rapidly losing market share for natural resources.

Ho-hum. We know it has become a cliché to talk about how world power is passing from West to East, from the United States to China. So we’re looking forward to getting some fresh hands-on perspective.

We’ll bring you occasional updates next week while Ian holds down the fort in Baltimore. Then look for a full China-themed issue of Apogee Advisory in June. You still have time to beta test the first three issues here.

  Wall Street opened down big this morning, the major indexes down as much as 1.5%. Traders are still jittery about the euro, what with former Fed chief Paul Volcker making pronouncements like, “You have the great problem of a potential disintegration of the euro.”

  The euro has sunk below $1.25 for the first time in 18 months.

  The dollar index is within spitting distance of 86, thus fulfilling one of our team’s boldest predictions.

In mid-December, our income investing specialist Jim Nelson stepped out of his comfort zone to make a macro call: The dollar would take off in 2010. He said so to readers of Lifetime Income Report on Dec. 13, 2009, and we shared this forecast with you on Dec. 21, 2009.

Here’s what’s happened since.

“We’d love to take credit for predicting this dollar rally,” Jim says humbly. “But we haven’t even hit upon our original reason for it to rally.”

So far, it’s been all about the euro, but “we expected, and still do, that the dollar will rally because of a panic over falling stocks. The easiest place to turn in a straight-down bear market is cash… the dollar considered one of the safest choices in times of panic. Over the past few weeks, that’s exactly what we saw.

“We’re still sticking to our reasons for a fall in stocks. We’re in the middle of the second wave of adjustable-rate mortgage resets:

The chart should look familiar to 5 readers. “Just move the ‘You are here’ line over a bit,” Jim says. “The information is still the same.”

Combine that with the looming troubles in commercial real estate. And “this will ultimately turn to pessimism in the stock market, people pulling out of their stocks, and another market panic. And it’ll all end up in the dollar, and, of course, gold, which has already passed its all-time high in the most recent panic.

”Be prepared to see plenty of more instability in the stock market. Of course, even our stocks will be somewhat affected. But as you know, we are after long-term income, not short-term price volatility.”

You could be in a worse place during a panic than solid dividend-paying stocks. Jim has a whole bunch of them here.

  As if on cue, these April foreclosure stats flowed in moments after our discussion with Mr. Nelson:

  • Bank repossessions totaled 92,432 — an all-time record, and a staggering year-on-year increase of 45%

  • Foreclosure filings, however, totaled 333,837 — a drop of 2%.

“Right now, it appears that the banks are focusing on processing the loans already in foreclosure, and slowing down the initiation of new foreclosure proceedings as a way of managing inventory levels,” says Rick Sharga of RealtyTrac, whose firm crunched the numbers.

In other words, there’s a boatload of inventory that still needs to clear. 

  A few other markers of continued troubles in the housing market for you:

First, Zillow reports 23% of homeowners with mortgages were underwater during the first quarter. Nearly one-third of homes sold in March sold for less than the sellers paid


In the first quarter, 96.5% of all new mortgages written were backed by either Fannie Mae, Freddie Mac or the Federal Housing Administration. A trend that’s been in place since the top of the housing bubble in 2006 has reached its logical conclusion.

The mortgage market in the U.S. has been effectively nationalized.

  Strange doings in the gold market this morning. For a while, the spot price surpassed Wednesday’s record of nearly $1,250. But shortly before 10 a.m. EDT, it plunged — relatively speaking — to about $1,233.

Silver is also down from its recent highs, and rests at $19.38.

Whatever the reasons, the move is short-term noise. And we’re still getting anecdotal reports from Europe of huge demand for bullion. “Our Zurich and Geneva sales desks,” UBS gold analyst Ed Tully says, “remain exceptionally busy with this heightened retail demand for coins and small bars.”

At least one online bullion retailer in Germany has suspended sales.

By the way, belated congratulations are in order for members of Resource Trader Alert, who had the chance to grab 84% gains this week on Alan Knuckman’s silver call spread recommendation. In the last 15 days, Alan’s closed out three positions for an average 79% gain.

Membership in Resource Trader Alert is still available at a substantial discount… but only through this coming Monday. “The panic and volatility last week,” says Alan, “should be a reassurance that when all heck breaks loose, as it does from time to time, commodities are a great place to weather the storm.” Here’s where you can take shelter.

  “Gold is the only money that’s safe from the world’s clueless governments,” we wrote yesterday, which prompted a reader to respond, “Really? Who pens laws and runs the police again? Surely, 1932 cannot happen again, can it?

“What worries me is that the only way out is the airport. Even if every other country would embrace the same tyrannical laws (again, remember the 1930s), typically, third-world countries fail to reach draconian levels of tyranny (remember segregation in America), which makes them interesting destinations.”

The 5: Ah, the old fight-or-flight instinct kicks in again. Do you resist, or do you make your escape to someplace more hospitable. You’ll see from this link we’ve been getting that question a lot lately.

So much so we’ve made it the central theme of the Agora Financial Investment Symposium this year: The Assault on Enterprise: How to Invest in an Age of Rising Taxes, Wall Street Crooks and Government Boondoggles. Among the people weighing in on that question: Marc Faber, Bill Bonner, Doug Casey, Peter Schiff, John Mauldin, Rick Rule, Barry Ritholtz, David Walker and others.

Something unique happens at this event every year. When you get this many independent thinkers in a room and throw in the unique perspective of the attendees themselves, you get a rare combustible atmosphere. It’s worth attending. We’re confident you’ll come away with answers you can act on. You’ll see in the enclosed invitation, many attendees from last year did so in spades.

We’re already 70% sold out, so it’ll pay to move on this quickly.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S. Before we go… have you seen our brand-new video 7 Emergency Stocks to Own Right Now?

If not, with this episode of The 5, you can grab it for just $1. Best, along with your video, you’ll also get a month’s access to the Agora Financial Equity Reserve — every stock-picking service from the analysts you read in these pages. Plus, a few premium small-cap services like Mayer’s Special Situations and Breakthrough Technology Alert.

We’ve never extended an offer like this before, and may never again. It’s a test. So… it’s probably best take advantage of it right now. Then we’ll see how it goes.

P.P.S. Among a host of business meetings in Beijing, including introductions to one of the co-founders of the Shanghai exchange, we’re also slated to visit a military institute where we’ve been invited to test-fire some Chinese-made automatic weapons. Heh.

We’re told horses await us for a canter along the Great Wall, too.

Whatever comes of these events, we’re sure the week will be entertaining… and enlightening. Stay tuned.


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