China’s $220 Oil Catalyst

by Addison Wiggin

  • How China could set oil rising to record highs, starting this Sunday

  • China executes next step in incremental dollar-dumping plan

  • What’s this? Rising mortgage rates? How to play the latest housing news

  • “Like a futuristic police state”… Vancouver housing bubble’s ridiculous heights

  • Little-known nuggets in the health care bill: The 5 helps readers sort fact from fiction

  China is on the verge of signing a metaphorical death warrant for the Western economies. Maybe its own, too.

On Sunday, the Chinese railways minister is due to visit Iran to sign a $2 billion-dollar deal. China will build a 360-mile rail line stretching from Tehran westward to the Iraq border.

But that could be just the beginning, reports the London Telegraph: “Eventually, the Iranian government said, the route could link Iran with Iraq and even Syria as part of a Middle-Eastern corridor.”

It would also amount to an unprecedented expansion of Iranian power and influence in its corner of the world. A first step toward restoring Persian imperial glory. “Don't forget, Iran used to be Persia,” reminds Byron King.

“At one point Persia was the biggest and most powerful empire in history. Iraq, Syria, Turkey, Egypt — even Israel — the Persians controlled them all. Along with all of Afghanistan and Pakistan and most of the oil-rich coast of the Caspian.”

  China’s ambitions for this rail line probably aren’t limited to a 360-mile stretch west of Tehran. "It makes sense that if you build railways in Iran, you then get deals to stretch the lines [eastward] into central Asia," says Nicklas Swanstrom, executive director of the Central Asia-Caucasus Institute at Johns Hopkins University.

Ultimately, they’d stretch all the way to China — a modern recreation of the ancient Silk Road. Good for China… but also good for Iran. Suddenly, all those landlocked “stan” countries in Central Asia would have access to Iran’s port at Chabahar. Yet another expansion of Iranian influence.

Transport ministers from several nations meet next month to firm up a deal for a 1,225-mile route.

  If only China knew what it was getting into. By reawakening Iran’s imperial ambitions, it’s setting up an inevitable clash between the two dominant sects within Islam.

Iranians are Shia Muslims. And a lot of their fellow Shia live in countries where Sunni Muslims are the majority… or where Sunnis are a minority, but they hold all the power.

It’s an old struggle, almost as old as Islam itself. “But it's only now,” Byron King continues, “that this pressure has found its ultimate release — with Iran driving a new Shia uprising smack dab in the middle of the most dangerous place on Earth — the oil-soaked Middle East.”

Think about this: The family that rules Saudi Arabia is Sunni. But the people who live atop the richest Saudi oil fields are Shia. A tinderbox, for sure.

Byron lays out a compelling scenario in which these simmering tensions reach a full boil… driving oil prices well beyond the 2008 record of $147 a barrel. (We sit this morning at $75.58.)

That’s what we mean by China signing the Western economies’ death warrant. You can learn exactly how this would come about — and how to prepare your portfolio accordingly — in a presentation Byron recently updated. It’s looking more and more prescient every day. You can watch it here.

  China also just took another step on the road to diversifying out of the dollar — firming up plans with Russia to start trading each other’s currencies. After all, when you’re the world’s second-biggest energy consumer (China), and the world’s biggest energy producer (Russia), trading in dollars just gets in the way.

Russia’s Micex stock exchange has already announced its plans (with the blessing of the central bank), and traders are telling Bloomberg the Chinese are quietly making arrangements on their end.

Thus China will add the ruble to its stable of currencies traded already traded on its interbank market: the dollar, Hong Kong dollar, Japanese yen, euro and the Malaysian ringgit.

Russian and Chinese leaders telegraphed this move more than a year ago at the annual meeting of the Shanghai Cooperation Organization. "There can be no successful global currency system if the financial instruments that are used are denominated in only one currency," Russian President Dmitry Medvedev said.

The core members of the SCO are China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan.

(Hmm… There are those “stan” nations again…)

  It’s not just the Chinese and the Russians fleeing the dollar. Yesterday, Uncle Sam auctioned off $13 billion of 30-year bonds. Demand was only fair to middling, which pushed the yield up nine basis points, to 3.82%. In sympathy, yields on the benchmark 10-year note rose eight basis points, to 2.73%.

  As a consequence, we’ll likely see two straight weeks of higher mortgage rates. Yesterday came word from Freddie Mac of the first rise in more than three months. A 30-year fixed averaged 4.35% over the last week, up three basis points from the previous week’s record low.

Here’s a slam-dunk forecast: Mortgage rates will go up substantially. When, of course, is another matter. But when they do, look out. “Let's imagine that Ben Bernanke succeeds,” muses Bill Bonner. “Let's imagine that he nudges consumer price inflation upward. What happens to mortgage rates? Well, they go up too. Then, what happens to the housing market?

“Ooh la la… Housing would be a dead guy walking. There are millions of people who are not buying already — even with the lowest rates since the Eisenhower era. Imagine all those who will not be buying at higher rates!”

  And as long as the economy stays sluggish, record-low mortgage rates just don’t matter. "Home sales went down when mortgage rates went down,” says Guy Cecala, publisher of the trade publication Inside Mortgage Finance. “These aren't normal times." That is, buyers will show up — maybe — when they’re confident about keeping their jobs again.

So how do you play a slumping housing market that’s already down-and-out? Clearly, you don’t want to just “go short housing.” You want to pick your targets carefully, as Dan Amoss does. One of his “housing bear” picks is already up more than 38% in just a few weeks.

The same target picking in the woeful trucking sector generated gains this year of 90% and 92%. You can learn more about Dan’s strategy and how to make it work in your portfolio by going here. For a limited time, membership to Strategic Short Report is available at a handsome discount.

  Canada’s torrid housing market appears to be finally taking a breather. Housing starts fell 3% last month, marking four straight months of decline. And home prices fell during July for the first time in more than a year.

  Canada’s most publicized patch of new housing construction has almost no takers… putting taxpayers on the hook for potentially $1 billion.

Fully two-thirds of the high-end condos that housed Olympic athletes last winter in Vancouver remain on the market. “I hope the market kicks in and they get sold,” the mayor says with characteristic Canadian understatement.

“It’s weird,” said Heather Eddy, one of the few who’s moved in. “It’s almost living in a futuristic police state. All you see is police cars driving around and people on bicycles.”

If you see even that much…

But is this any surprise? Earlier this year, Canada’s Frontier Centre for Public Policy ranked Vancouver dead last dead last among 272 metro areas worldwide when it comes to affordable housing. The typical home costs more than nine times the typical annual income.

  Stocks are up modestly this morning, the S&P putting a little more distance between itself and the 1,100 mark. Gold is more or less treading water at $1,247.

  What do you get when you join up North Korean dictator Kim Jong Il, News Corp. chief Rupert Murdoch, and “The Dude” from the cult movie The Big Lebowski?

Yeah, we’re not sure ourselves after seeing the news that North Korean software developers are behind a mobile phone video game, “Big Lebowski Bowling,” released under News Corp.’s Fox Mobile label.

The deal is perfectly legal, according to Bloomberg; only weapons transactions with North Korea are off-limits under international sanctions.

Still, “Any sort of transaction that gives cash to the North Korean government works against U.S. policy,” according to James Lewis, a senior fellow at the Center for Strategic and International Studies in Washington. “The coding skills people would acquire in outsourcing activities could easily strengthen cyberwar cyber-espionage capabilities. Mobile devices are the new frontier of hacking.”

Shhh… Don’t tell Fox Nation. Someone in the audience might take a golf club to Rupert’s limo.

  “I have the solution to the 1099 form fiasco,” a reader writes, “and I use the word 'fiasco' because that's what it will be. Let's have all the politicians get a properly filled-out 1099 form from every one of their political campaign contributors. Then they would see the folly of their plan, and we could see exactly who the hell is giving these guys money anyway.”

The 5: Several of you wrote in with a suggestion to this effect. All we have to say is good luck with that.

  “A couple days ago in The 5,” another writes, “there was a statement to the effect that as of next year, we will not be able to use HSA or flex money to purchase over-the-counter medications.

“Can you elaborate? What is the source of this information?”

The 5: Straight from the IRS website:

“Section 9003 of the Affordable Care Act established a new uniform standard for medical expenses. Effective Jan. 1, 2011, distributions from health FSAs and HRAs will be allowed to reimburse the cost of over-the-counter medicines or drugs only if they are purchased with a prescription. This new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted, even if purchased without a prescription.”

We predict the usual year-end stocking up of contact solution and whatnot will turn into a frenzy this year. Might even be some bare shelves here and there.

  “I received an email informing me — which I hope it is in error,” writes our last reader — “of another stealth tax that ‘they’ included in the health bill. That is a new 3.8% transaction tax on all real estate sales. Sell your home for $300,000, pay Uncle $11,400 off the top. Please tell me it isn't so.”

The 5: We don’t want to get into the business of chasing down every nutty rumor that turns up in readers’ inboxes, but since we’re in a good mood today…

The email you received is bogus. Yes, there’s a new 3.8% tax on the net investment income of couples earning more than $250,000 a year ($200,000 for singles). But it does not apply to the first $500,000 of profits from the sale of a personal residence ($250,000 for singles). So this little gem is directed at “the rich,” whoever they may be.

Of course, you shouldn’t take our 30-second answer as gospel. Consult your tax guru before you make any business decisions.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S.: Twenty days left before Social Security takes a major hit to its balance sheet. Learn what happens at the end of the month and how you can secure an alternative source of retirement income here.


Recent Alerts

Here Comes the AI Cartel

Maybe you saw the news earlier this week: An outfit called the Center for AI Safety issued a 22-word statement — as dire as it is terse. Read More

A Deal in D.C., a Wipeout on Wall Street

Debt ceiling deal, U.S. Treasury auctions, Wall Street liquidity, Fed policy reversal, BlackRock recession call, gross domestic income, GDI, Maryland license plate snafu Read More

Climate, Carbon… and Control

“The climate change agenda is not about climate change,” says Jim Rickards. “It’s about total political and economic control of the population.” Read More

White House’s New Witch Hunt

Go figure: The stock market is at nine-month highs, but the Biden administration is amping up its jihad against short sellers Read More

The Biden Bleed

Presidents have meddled with the SPR for political purposes. But Biden is really leveling up. Read More

Natural Gas Gets Blacklisted

The EPA — with Team Biden’s blessing — proposes an overhaul of U.S. power plants by 2042. Read More

Green Smokescreen

Ray Blanco is on the lookout for presumed do-gooders… blowing “Green Smoke” up our collective rear ends. Read More

“No Blood for Chips!”

Fair warning: This edition of The 5 might be the most controversial issue we’ve ever published. Read More

The Dollar’s Death March

Nine years after The 5 started writing about “de-dollarization,” you can’t get away from headlines about it now. Read More

The “F” Word

No sooner did G7 leaders sit down yesterday than they declared they’re doubling down on sanctions targeting Russia. Read More