by Addison Wiggin & Ian Mathias
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Another major Chinese milestone… our thoughts on the world’s new No. 2 economy
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Chris Mayer offers a new investment frontier: Columbia
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Data disappoints: Fed, Homebuilders start off another week of lousy index reports
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Failed bank scene goes from bad to worse: Media loses count while banks massage earnings
Our coffee doesn’t taste any different this morning. The sun still appeared on the horizon in the East. But today the world is different. Bean counters who care about these things say China has become the world’s second largest economy, effective: immediately.
If numbers from the Far East can be trusted, China produced $1.3 trillion of economic activity in the second quarter. Japan, the erstwhile #2 economy on the planet, produced a mere $1.2 trillion.
Moreover, at the current trajectory, China’s economy will be larger than the United States’ by roughly 2030. Yawn. Stretch.
Two nuggets from today’s report from the Japanese Cabinet Office glimmer in our suspicious eyes.
(1) The Chinese economy has grown 9,000% since Deng Xiaoping took over in 1978 and told his people “to be rich is glorious.” 9,000%!
With this statistic in mind, we’d like to note how many very smart people were making similar projections for Japan to eclipse the U.S. back in 1980. We won’t pretend to know exactly how much growth is “too much, too fast,” but 90-fold in 30 years seems like it might make the cut.
(2) At the same time, the latest Chinese per capita income numbers have the average citizen making just $3,600 a year. That puts this booming, economic monolith in the same class as Algeria and El Salvador. America’s $46,000 seems a lot more than 20 years of growth away.
Still, stranger things have happened.
We’ve looked at this chart before. But the trends still appear to hold. If China only grows to consume half as much oil as the U.S. — that is to say, if the average Chinese person becomes only half the consumer of the average American — the impact on oil prices will be enormous. And is it really that impossible to think that one day they’ll use more oil than us? What’s a barrel worth then, when 1.3 billion Chinese want SUVs and flat screens? $1,000?
All this echoes of a great report we published upon our return from our investment excursion to China in May. Chris Mayer identifies eight Chinese stocks, all of which can be purchased on American exchanges, tied into the growth story of our lifetime. Pick up a copy of the report here.
Of course, Mr. Mayer is not one to rest on his laurels. The next global “oil rush,” he suggests, could be in Columbia.
“Violence all around is coming down,” Mayer reports. “The number of kidnappings and terrorist attacks has dropped to lows not seen in a decade. Colombia now can get back to business. And that business is increasingly about oil and gas…
“It’s been a 50-year drought for major exploration, which makes Colombia one of the most attractive markets for resource exploration. ‘Colombia has the best combination of fiscal regime and underexplored territory in the world,’ according to Jack Scott, COO of Petrominerales.
“Now, he may be talking his book, like a barber telling you that you need a haircut, since Petrominerales is an oil company in Colombia. But he has a point. There is a lot to explore and do here…
“Geologists think that Colombia could produce 1.5 million barrels of oil a day, double the current rate, in just the next five years if exploration pans out as they think it will. We’ll find out soon, since the number of oilrigs drilling in the country has surged in recent years.
“Many more will come. Colombia’s oil-licensing agency is entertaining more than a billion dollars in offers from global oil companies for the rights to explore 96 blocks of territory. Already, Colombia’s biggest export is oil, and it is the third-largest producer in South America, after Venezuela and Brazil.”
[Editor’s note: Chris’ passport is working overtime this year… Dubai and India…China to Columbia… Canada last month… Brazil in a few weeks. Even the Russians asked him to comment on their wheat crisis… seen here on Russian TV on Friday. Might be worth a review of his expense budget, hmmn…]
In spite of our optimistic long-term forecasts, the price of oil was nearly decimated last week. The front-month contract fell from $82 a barrel to $75 this morning after a full week of lousy economic data and a falling stock market.
The Dow and S&P opened down about 0.6% this morning after dropping well over 3% last week. Since the Fed announced its new quantitative easing campaign last Tuesday, the Dow has fallen about 400 points.
Of interesting note: Small caps are having a tougher summer than their larger counterparts. The Russell 2000, the most popular American small-stock index, is down 18% from its 2010 high. The S&P is down 8%.
As a rule of thumb, smaller companies lead the market up or down… we’re taking note.
“The lackluster performance we're seeing in small-caps,” writes our Penny Sleuth analyst, Jonas Elmerraji, “is both a bad omen for larger stocks and a potentially good thing for penny stock investors.
“With small-cap stocks in oversold territory right now, we're starting to see some of the deeply discounted valuations we were able to get into back in 2008. That's something we've missed in 2009 and early 2010 as the massive ‘recovery’ rally outpaced the fundamentals that should have driven it.
“For large caps, the shellacking the Russell 2000 has already taken suggests that bigger firms could be following suit. Without the discounts small-caps are enjoying right now, blue chip investors will continue to hold onto their capital.”
Today’s data will offer no comfort to skittish stock traders. The N.Y. Fed’s manufacturing survey rose in August, they said today, but not as much as the Street was expecting. And the National Association of Homebuilder’s survey of builder confidence hit 13 — its lowest level since March 2009. (Hmmm… the exact month of the stock market bottom.)
But fear not — the government will surely “fix” this stubborn housing correction at tomorrow’s “housing summit.”
Heh.
The failed bank scene here in the U.S. is getting so ugly, the media is having trouble keeping track… a fact not lost on readers. We’ve received several requests to clarify an apparent anomaly in the facts being reported.
The FDIC officially lists 113 failed banks so far for 2010, after Palos Bank of Illinois failed this weekend. Yet several well-established sources say the headcount is 114 this year… or 110… or 108.
Regardless of the exact count, there’s been a healthy surge in bank failures this year. The better question might be: How deep in the red is the FDIC’s deposit insurance fund?
“Even though the banking system remains under considerable stress,” our strategic short specialist Dan Amoss notes, “banks are starting to issue brazen earnings reports.
“On the downside of the biggest credit cycle in history, many banks are slowing the pace at which they're provisioning for credit losses. Some are even releasing reserves into the income statement.
“These are the reserves that banks had been building up to absorb credit losses. In other words, bank executives are employing the ’mark-to-model’ accounting framework to justify reporting higher earnings by employing subjective (usually rosy) estimates about the future.
“If it turns out that we're not, in fact, past the peak of credit losses in the banking system, banks will have to once again rebuild loss reserves, and perhaps even write off the earnings they've been reporting in recent quarters.
“Bullish bank analysts are certain we've seen the worst of earnings performance in the banking system. These are the same analysts who didn't recognize the risks in 2006-07, which wound up wiping out most of the bubble-era earnings during the 2008 write-off tsunami.”
For a list of banks Dan is watching… and ways to play them up or down… be sure to subscribe to Strategic Short Report.
Amid all this madness, gold has been in steady uptrend since the end of July. The spot price rose as high as $1,227 this morning, up about $50 from the beginning of August.
“I paid into Social Security for 40 years,” a reader gripes, “and because I expect it to be there, some liberal left-wing, progressive will call me greedy and insist that I want an entitlement. I want nothing from the government, however. If they don't want me to have Social Security, pay me the money that I put in it for 40 years. That’s not entitlement; that’s what I earned, by working for a living.
“Yes, it has to stop at some point, and they better resolve this issue, yet be fair to those who have contributed money as well.
“If the government had any brains, the stimulus money would have stimulated had they given it to the American workers, who would have gone out and spent it, thus stimulating the economy. Then again, what do I know? I do not have a masters degree, just common sense.”
The 5: Yeah… because the scheme worked so well in 2008 when the government gave everyone earning less than $75,000 a year a check for $300?
“The government should come clean with Americans on Social Security,” opines another. “First, we all know that it can't last forever in its current form. Second, anybody under the age of 30 is in the belief that they will not have Social Security when they retire. And third, the fix is going to be raising the age of retirement benefits and less paid out.
“Why should the government continue to not face the facts?
“Instead, the government could help the country today by owning up to the facts and raising the retirement age for the under 30 and under 40 to some later age (the actuaries will figure it out). This would have huge impacts on the dollar and the perception of strength in American credit around the world.
“The same is true for local governments and their retirement programs (working for 20 or 30 years for a government agency should not give you a lifetime of income). Someone 20 years old working for a big city and earning $100,000 in the last 3 years of employment should not retire at 45 and garnish a retirement of $100,000 a year with inflation adjustments until they die at the ripe old age of 80. That is a recipe for bankruptcy.”
The 5: We’re noticing three common threads among our reader comments:
One: Most appear to be very angry but without a clear idea at whom.
Two: Most also seem to think “the government” is a single entity that can think, act and even solve problems on its own. As opposed to the tangled mess of competing special interests feasting on the public trough that it really is.
Three: “Everyone” supports a fix to the system so long as “the government” doesn’t touch theirs…
“Please take some time to investigate Medicare further,” a reader pleads. “Probably second only to the banksters, Medicare is one gigantic fraud from top to bottom. It is the second of the three main reasons the country is bankrupt — the others being the banks and the gargantuan military.
“American seniors, many of whom are drug addicts (legal, of course), run to the doctors and hospitals for every little thing and think that everyone has a right to spend untold hundreds of thousands of dollars to extend their useless lives an extra few months or years.”
The 5: Oy. What a mess.
Cheers,
Addison Wiggin
The 5 Min. Forecast
P.S. Regardless of your opinion of Social Security, Medicare or what easy fixes you may think are not being acted on, the board of Trustees themselves says the fund is paying out more this year than they’ll take in. That’s a financial crisis arriving six years ahead of schedule. Here our income specialist, Jim Nelson, presents ways you can legally collect money from the “other” government-backed retirement program.