by Addison Wiggin & Ian Mathias
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The Great Wall, automatic weapons and you…
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Canadians come calling in Beijing… why China’s a more attractive customer than Uncle Sam
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Another big U.S. sell-off… The “unexpected” numbers behind it
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Readers scold us on naked short selling, silver market manipulation… we attempt to clear the air
Before the market opened in New York this morning, we’d visited the largest (empty) mall in Asia, fired automatic weapons at a Chinese military research facility near the Great Wall and, by chance, met the chief of a small village 40 minutes west of Beijing.
We may have hindered this gentleman’s chances of getting re-elected “chief” of his village this morning.
But we’re not here just to amuse ourselves. Really.
We’ve been talking to private equity guys, financial writers, hedge fund managers, publishers, professors and academics, retailers, trade stall doyens, restaurateurs, real estate developers, rental agents, CFAs, CFOs, locals, expats … trying to answer two questions: Is the Chinese economy in a bubble? Should we invest here ourselves?
(Psst, short answer: We still don’t know.)
We’ll be gathering our thoughts over the next few days and sending them your way, by word and by video… or otherwise. Carrier pigeon, perhaps.
Two big China stories are taking shape as we write in the wee hours of this particular Friday morning in Beijing. Both of them say a lot about China, the United States and their positions of wealth and influence in the world.
For example, we’re not the only ones scoping out business opportunities in China this week. The premiers of Canada’s three westernmost provinces are here, too.
“We literally have what these [Asian] countries need” says the curiously named Saskatchewan premier Brad Wall, “and in biblically proportioned reserves.”
Wall’s peers from Alberta and British Columbia are here, too. Alberta, of course, is home to the tar sands… an oil reserve that’s as massive as it is difficult to produce. If oil doesn’t fetch $70-90 a barrel, the oil sands aren’t very economical.
No matter to the Chinese, who’ve struck two tar sands deals this quarter…
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The state-owned oil producer Sinopec paid $4.65 billion to buy a 9% stake in Canada’s biggest tar sands project from ConocoPhillips
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The sovereign wealth fund China Investment Corp. paid $801 million to buy 45% of a venture to produce tar sands oil.
Canada’s more than happy to open up the tar sands to China rather than the country next door. That’s partly because producing oil in the region is very carbon intensive, so the Obama administration frowns on it. But it’s also “common economic sense” for the Canadians, says Jeff Rubin, former chief economist with CIBC World Markets.
“China’s oil consumption has grown from just over 2 million barrels per day in the early 1980s to an estimated 9 million barrels per day this year,” Rubin says. “And at the rate that its vehicle market is growing, the country could double its oil consumption over the next decade or so.
“By comparison… this year there were four million fewer vehicles on the road in America than there were the year before.”
It’s not just oil in play, either. The region is also flush with uranium and potash, a key ingredient in fertilizer. Chris Mayer, who’s with us in China this week, has already identified players in those sectors that can’t help but rake in money from China’s demand. Watch for his special report next week.
After the Canadians depart, the American delegation arrives. These guys are sure to impress. Secretary of State Clinton and Treasury Secretary Geithner both head to Beijing. Their agenda couldn’t be more different from the Canadians. It includes…
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Tougher sanctions against Iran for its nuclear program
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Rising tensions on the Korean Peninsula, with the South accusing the North of torpedoing a warship and killing 46 sailors
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The dollar-renminbi exchange rate.
Just for the sake of comparison: The Canucks are here to make business deals. The Yanks are here to, what, push their weight around?
By nature, we’re skeptical that politics can trump business. Clearly, we’re in the minority in our homeland.
Oh, and there’s the issue of “indigenous innovation” — a new policy-wonk term describing Chinese industrial policies that are “damaging to U.S. business”.
“We have no problem with China promoting innovation,” says David Loevinger, a China hand at Treasury. “We do it. Lots of countries do it. But we want to make sure that they do it in a way that doesn’t close off markets for U.S. goods and services.”
U.S. stock markets tumbled yesterday, and then tumbled again this morning. The first hit came right after the open, as traders reacted to the news that first-time jobless claims rose last week. This was one of those “unexpected” increases, the first in five weeks, and the biggest in three months.
Then came the Index of Leading Economic Indicators from the Conference Board. This too delivered an “unexpected” number, and the chart pretty much says it all.
The index has turned down for the first time since it began racing upward in March 2009. Of course, that was the same month stocks began their epic bear market rally.
The reaction has been predictable. After the first hour of trading, the Dow was down a good 300 points. And the S&P has entered into correction territory — a 10% drop from the April 23 high.
Gold is likewise pulling back. It sits around $1,184 as we write. For the moment, traders are taking their profits on gold to raise cash and cover their losses elsewhere. That’s pushed the dollar index to about 86.6, territory unseen in over a year.
The euro is bouncing all around, but still looking sickly, currently sitting at $1.234.
Ironically, the euro’s woes have helped the Chinese with U.S. pressure to let the renminbi float. The Chinese currency has risen 17% against the euro this year. A revaluation against the dollar now would only make matters worse for exporters here… in an economy addicted to exports.
“If I had to take a bet,” said Marc Faber, our Vancouver favorite, “I’d say that the renminbi will not go up this year.”
“Did Germany ban short selling or naked short selling?” a perplexed reader writes. “I think there's a big difference. While I'm all for short selling provided the stock can be borrowed, I strongly disagree with naked short selling. With naked shorting, anything can be brought down (read "manipulated") as long as the person or party has enough money.”
“Excuuuse me,” adds another, channeling Steve Martin, “but just why do you think naked shorting of anything is legal or moral? How is it other than fraud perpetrated upon the buyer, who thinks she owns something that does not actually exist?
And counterfeiting upon the issuer, who could otherwise sell more?”
The 5: We weren’t arguing morality. We’re just curious. They’ve banned naked shorts. But why does the ban apply only to 10 big banks, European sovereign bonds, and sovereign credit default swaps? And why was it applied with less than 24 hours notice?
Ad hoc governance before the fall…?
“I’m afraid you are mistaken,” a reader writes, “on the matter of the CFTC and the silver short positions. The investigative division of the CFTC has had an ongoing investigation of this matter for more than a year. It simply has not brought it to conclusion.
“The recent CFTC hearing on precious metals position sizes brought forth compelling evidence of market manipulation through position concentration primarily held by JPM. In fact, the evidence was sufficiently compelling that the Department of Justice is now formally investigating JP Morgan for possible criminal trading activity.
“This isn't the blogosphere anymore, this is reality.”
“It might not be an ‘investigation’,” another reader clarifies, “but public prodding caused the CFTC to hold a hearing on the metals on March 25, with the public comment period open until April 26.
“If you follow the whole matter, you'll find a whistle-blower in London told the CFTC in advance how JP Morgan Chase would manipulate the silver market on a given day, and it did. CFTC is hard-pressed to ignore or not explain not doing something at this point.
“Your reader is right — if CFTC causes JPM to unwind its huge short position over a short period, the whole market will come unglued.”
The 5: That would not be good. But it’s good to know.
Regards from Beijing,
Addison Wiggin
The 5 Min. Forecast
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