The World According to China

by Addison Wiggin & Ian Mathias

  • Cryptic China assures U.S…. “nuclear option” not on issue, for now

  • Just the same: Chinese gov urges citizens to buy gold

  • Since it worked so well in the past: Desperate USPS to raise stamp price

  • Plus, Byron King on preparing for an era of higher taxes


  Imagine a happily married old couple. They work well together, though maybe the lady of the house has been “the better half” lately… doing a larger burden of the work, paying more bills, keeping the house together and so on. But nevertheless, things are good, it seems. Times are a little tough, but there’s no imminent reason to suspect the relationship won’t last.

Then one morning over breakfast, the “better half” says, “Honey, I want you to know I’m not planning on divorcing you and taking our money with me.”

What’s it feel like to be that guy? If you’re an American, today you might know.

 It is “completely unnecessary” to worry about China exercising its “nuclear option” of dumping U.S. Treasuries, the manager of China’s FX reserves announced today out of the blue. His comments were simply posted on a government site… best we can tell, completely unsolicited.

“We are closely watching and tracking all kinds of changes” he soothed, and any “adjustments to our investments… shouldn’t be politicized.” China’s massive debt holding is not a “threat” to the U.S.

That’s it. No big announcement… no mega-sale of U.S. assets. Just a quick reminder that there’s nothing to be worried about, and as a brief aside: “China has been calling for the U.S. to genuinely take measures to protect investors’ interests and confidence as a responsible big nation.”

Have a nice day!

  Meanwhile, the Chinese government is urging its citizens to buy gold. Check out this Globe & Mail report:

“Industrial Commercial Bank of China recently signed an agreement with the World Gold Council to help promote domestic demand for gold through new investment products.

“The country is also turning to television advertising to encourage its growing middle class to buy gold as an investment. State-owned China Central Television has run spots urging citizens to buy gold, as well as silver, a major shift from only a few years ago when the country imposed strict controls on precious metals purchases for its citizens.”

Retail investment there rose 57% in the first quarter of 2010, year over year, says the World Gold Council. Still, the Chinese account for less than 11% of global demand.

  “I heard it (and saw it) while I was in China,” Chris Mayer reports. “The Chinese are buying gold. The gold market I visited was packed with people. And news reports noted the pickup in gold sales as well. The Chinese government also encourages its citizens to own gold.

“It's fascinating, really. Can you imagine the U.S. government encouraging people to own gold? In any event, the gold price has a firm foundation to build on as China's gold buying continues.”

That’s good news for the gold miners in Chris’ Special Situations portfolio. For a special report on the rest of his favorite Chinese investment themes — freshly wrought from a trip to the Far East — look here. We’ve put together a special report on the matter at an extremely attractive price point. 

 While you’re at it, get ready to chalk up another “world’s biggest” for China: The world’s biggest IPO.

The Agricultural Bank of China — the country’s largest state-owned bank — went public this morning. Investors bought some 25 billion shares; thus, the ABC is supposedly on track to raise a record $22 billion — a global all-time high. The official word will come out Friday, but it sounds like the record is in the bag.

Now all four of the major state-owned Chinese banks are traded publicly… such an incredible leap for a country that didn’t even have a stock exchange open 20 years ago.

We doubt the irony of ABC in particular is lost on the average Chinese farmer. The bank was started in earnest in the mid-’50s, a gift from Chairman Mao to the rural Chinese population… just before he starved 30 million of them to death. Today, by one measure at least, it’s the most popular company in the world.

  Also worth noting, China already had the prize for world’s biggest IPO. The Industrial & Commercial Bank of China went public in 2006 for $21.9 billion. Before them, it was Japanese telecom NTT Mobile, which floated for $18 billion in 1998. The best the U.S. has mustered is Visa’s $17 billion IPO in 2008.

  Back in I.O.U.S.A., a desperate U.S. Postal Service just set the wheels in motion to hike stamp prices again. Heh, since it’s kept them out of so much trouble in the past.

But already forecasting a $7 billion loss for 2011, the USPS claims to have no choice (other than going out of business, like any other company would do). So the new plan is for 46-cent stamps starting in January. The move will supposedly bring in an extra $2.5 billion next year… and push the USPS one step closer to irrelevance.

  “Just so you know, your taxes are going up next year,” Byron King forecasts. “Yes, the Bush era tax cuts are due to expire at the end of 2010. Among other taxes, the federal estate tax — aka the ‘death tax’ — is coming back in 2011. In a perverse way, it creates an incentive to check out in 2010, but I'm not encouraging anyone along those lines. Move at your own pace.

“The Obama tax increases are kicking in as well. Just with the recently enacted ‘health care reform’ legislation, you'll see higher taxes on everything from passive income (dividends and interest — if any bank still pays you interest) to tanning salons, with much in between. Then there's that alleged ‘financial regulation’ bill that nobody has read. What's in it? We'll find out, I'm sure, to our eventual regret.

“What's the immediate impact of this? The stock market is selling down as people take their money off the table. Do your deals this year. Don't take the chance of getting taxed out the kazoo next year.

“Plus, instead of reinvesting funds in new stock ideas, people are buying gold and silver. As in, ‘Why bother taking risks? Let Atlas shrug.’"

  Indeed, despite a big opening yesterday, U.S. stock indexes ultimately finished the day with just a small gain. As we noted yesterday, the only real force behind the morning rally was pure selling fatigue from last week.

Just the same, gold hit the brakes on its plunge right around the time stocks lost grip of their rally. The spot price stabilized around $1,195.

“In general,” Byron continues, “my view is that if you think you'll need certain amounts of cash in the next two years or so, for daily living, for school tuitions, for nursing home costs, etc., then you need to sell shares and build your war chest. Don't count on any stock to hold up under the pressures that are coming.

“If you sell anything now, one thing that's certain is that you'll pay a lower capital gains tax this year than next. Right away, you're eliminating market risk — of which there's a lot — and saving taxes.”

  One likely winner of the American budget crunch: The pot smoker.

Last night, the city of Long Beach, Calif., voted to pursue taxes on the 35 medical marijuana dispensaries within city limits. They are following the lead of just about every city and county in California, where pot is quasi-legal. After all, the whole state is so hopelessly out of cash they’re willing to tax just about anything that moves… even if that something is a societal faux pas.

Of course, a state may not tax that which is not legal, which brings us back to the point: Once I.O.U.S.A. wakes up to the incredible potential tax revenues marijuana sales might bring in (and jobs, both in the public and private sectors), we’ll be awfully surprised if pot stays illegal for the rest of the decade. Fourteen states have already passed laws that make some form of possession legal… more will surely follow.

But will it work? Hard to say. According to the Stutman Group, the U.S. brings in $8 billion a year in alcohol-related tax revenue, but spends as much as $72 billion dealing with the related accidents, diseases and social repercussions.

  Quick follow-up to yesterday’s commercial real estate issue: Vacancies at U.S. shopping malls hit a near-record 10.9% in the second quarter, says Reis Inc. research published today. That’s up 0.1 percentage point from the first quarter and nearly a full 1% point from last year.

Last quarter’s vacancy rate has been topped only once in 30 years of data: 11.1% in 1990.

  “I found your most recent 5 Min. Forecast interesting due to its focus on commercial real estate,” a reader writes. “I'm a financial analyst for a private commercial real estate firm, and we've been watching our tenants slowly die and file bankruptcy. So far this year, it's been roughly one tenant per week. Most recently, the bankruptcies have been hitting our medical office portfolio. Tenants like general practitioners and chiropractors who have been in business for years all of a sudden can't make rent.

“The worst of it is that no one knows what's going on with the banks. They're sitting on assets, artificially inflating the price of all assets. If banks were to foreclosure upon and sell all the assets that are permitted under their loan covenants, we'd see a crash in the commercial real estate market. Here's to hoping ‘extend and pretend’ ends soon so we can accurately value real assets.

  “While it might be true that residential real estate sales numbers are very low,” another reader writes, “banks still manage to keep prices high, at least for now.

“I live in Phoenix, Ariz., and been renting throughout the housing bubble in large part thanks to your objective analysis and early warnings of the impending collapse. Prices have come down enough that with 20% down, I can spend same amount on a conventional mortgage as I am spending on monthly rent. Yes, I do know there are other costs associated with ‘homeownership.’ To my dismay, during the last month, I was outbid twice when making offers on 1,200-square-foot townhouses in a nice area of town, one time by a speculator (I mean ‘investor’). If banks can still play potential buyers one against each other, and if speculators are still active, the bubble is not over yet. I'll wait for at least another year.

“By the way, these units were all built at the height of the bubble (2005-2006) and sold for almost $200 per square foot on option ARMs. It seems since they already are back on the market as short sales or foreclosures. They are now being sold for less than $120 per square foot — still a little bit pricey. Better price next year… or the year after.”

Good luck,

Ian Mathias

The 5 Min. Forecast

P.S. If you’re a Reserve member, we’ve got quite an opportunity for you: Hopefully by now you’ve heard about Chill 2.0 — our second investment retreat to Rancho Santana. Aug. 11-15, we’re taking down another group of Reserve members and investors to our Nicaraguan beachfront hideaway. If you’re interested, it’s a great chance to check out this potential investment — and enjoy a sweet mini-vacation — at an extremely low cost. Details here… only a few spots remain.


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