Picking a Fight with China

by Addison Wiggin

• Sound and fury signifying, er, nothing… and the real news stemming from this weekend's IMF/World Bank summit

• How China has been “manipulating” its currency far longer than most people think

• China’s next big move… and the simplest way to profit

• Miami property bubble reinflating? Will bargain hunters get more than they bargained for?

• Overtime Briefings prompt reader inquiry… your most burning question, answered!

Well, that was a whole lot of nothing. Bigwigs from the International Monetary Fund met over the weekend in Washington to “tackle global imbalances,” as the BBC put it.

Alas, the imbalances broke every tackle and sprinted to the end zone unencumbered.

“In my view, it’s too early to make a decision regarding currency exchange rates,” Russian finance minister Alexei Kudrin said last Thursday, telegraphing the outcome. He implied the BRIC countries — Brazil, Russia, India, and China — were united on that score.

“Will anything really be accomplished?” roving analyst Richard Lee wrote to us the same day. “Not likely."

Further, "the lack of anything substantial surfacing from these meetings is likely to propel the major and emerging market currencies against the U.S. dollar higher in the near future.”

The likely trend if the status quo remains: Dollar down… gold, precious metals, commodities, energy up!

The remaining outlier in this equation: the people's currency.

China's reticence this weekend to cave to his will prompted still more ham-fisting by Treasury Secretary Tim Geithner:

Geithner called for emerging economies to adopt “a more flexible, market-oriented currency policy.” He didn’t name China, but he didn’t have to.

Low interest rates in the "developed" world, Zhou Xiaochuan, governor of China’s central bank, responded tersely, have created “stark challenges for emerging market countries.”

In short, hot money is fleeing low interest rates in the U.S. and Western Europe for China, India, South Korea, etc., where the returns are much higher. The knock-on effect is forcing their currencies up against the dollar and the euro, hurting exports and creating property bubbles.

What's a Dartmouth- and Johns Hopkins-trained banker to do?

“In my opinion, the renminbi became undervalued late 2003,” says Pieter Bottelier, writes an adjunct professor of China studies at Johns Hopkins, "when China’s trade surplus — especially its bilateral trade surplus with the United States — began a steep incline.

“The initial burst of China’s trade surplus," Bottelier continues, paraphrasing more or less the hypothesis we put forward in The Demise of the Dollar, "came on the heels of the sharp monetary expansion in the United States… triggered by the switch to budget deficits in the early George W. Bush years. The Greenspan Fed’s interest rate cuts after the Nasdaq collapse and Sept. 11 also played a role.

“China was the only major exporter that could and did respond quickly to the sharp increase in global demand driven by the massive credit expansion in the United States. In other words, China’s surplus exploded not because of anything China did with its exchange rate — it did nothing — but because of an explosion in external demand led by credit expansion in the United States.”

Surprise, surprise. Washington and Beijing are at a stalemate.

“The willingness of the countries to work together," IMF chief Dominique Strauss-Kahn fretted this morning, "which was very strong at the climax of the [financial] crisis is not as strong today."

Meanwhile, the specter of a trade war looms.

When the Senate convenes for its lame duck session after the election, it will begin debating a bill that has already passed the frozen stare of Nancy Pelosi in the House: stiffer tariffs on Chinese goods.

“Even if the remnimbi does appreciate," writes Dee Woo, an econ teacher at Beijing Huijia Private School, in a remarkable piece published last week in The Wall Street Journal, "it's unlikely to reduce the U.S. trade deficit or create American jobs…

“Regardless of the yuan's value, the U.S. trade deficit won't be significantly reduced unless the U.S. boosts its chronically low savings rate and defuses the disincentive — caused by the dollar's status as the global currency — for manufacturing. When other nations want imports, they must produce goods to send abroad. All the U.S. needs to do is print more greenbacks: Buy dollar-denominated commodities and goods with dollars and debt, and service the dollar-denominated debt with dollars and more debt."

Ah, in the immortal words of Mel Brooks: "It's good to be the king."

In July of this year (the most recent figures available), Beijing held $846.7 billion worth of Treasury paper. In July 2009, the figure was $939.9 billion. That’s a 10% reduction in China’s Treasury holdings in just 12 months.

What is Beijing doing with the proceeds? What it’s been doing all along… acquiring real wealth in the form of energy, raw materials and precious metals.

Just yesterday, the state-owned Chinese energy company Cnooc agreed to buy a one-third stake in a Texas shale gas project from Chesapeake Energy for $1.1 billion. Cnooc will put up another $1.1 billion to finance the drilling costs. “Unconventional” oil and gas were the one remaining energy sector the Chinese had yet to pursue seriously. No more.

On Oct. 1, another state-owned energy firm, Sinopec, spent $7.1 billion for a 40% stake in the Brazilian unit of the Spanish oil company Repsol. The Chinese are getting a foothold in the offshore Brazil story Byron King’s been writing, excitedly, about.

On the commodities front, China’s corn crop is looking good this year — but not so good as to avoid a second straight year of net imports. Don’t expect this trend to reverse: The U.S. Grains Council, back from its annual visit to China, forecasts that China will quintuple its corn imports over the next five years.

As of 2003, Beijing kept 600 tons of gold in reserve. In April 2009, Beijing announced it had built that reserve to 1,054 tons — a 76% increase.

And there’s no reason to believe that buying has stopped. China is one of the reasons gold is holding strong above $1,300… why corn prices hit a two-year high today… and why oil is steady above $80, despite lower demand in the West.

We don’t expect this trend to let up. And we want you to profit from the trend. That’s why for the next three days only, you can grab membership to Alan Knuckman’s Resource Trader Alert at half price.

Alan has delivered nine winners in a row, for an average gain of over 119%. And every one of those trades was closed in the last three months. But you can’t lollygag on this — the offer closes at midnight on Wednesday.

“I don't sell stocks just because the price goes down,” wrote Chris Mayer this morning. His readers have, apparently, given him some grief for recommending China’s Harbin Electric, a manufacturer of industrial motors. Shares fell after Chris recommended the stock in April.

The share price has since rebounded, but the real story is more compelling. This morning, the CEO joined up with a private equity outfit to offer a buyout.

Harbin is the third buyout gain in the Chris' portfolio this year alone. “It's not a great price,” Chris comments on the modest 8% gain in six months, “but I'll take it.”

Following our trip to China in May, Mr. Mayer also closed out two other China plays for 32% in five months and 49% in just one month. To learn more about Mayer's Special Situations stocks, click here.

Stocks were flat on thin trading this morning. Don’t look for much to happen on a federal holiday. Gold is drifting down to $1,344.

Amid the wreckage of the south Florida housing bust, we find sings of… a reinflating bubble?

The Viceroy condos in Miami (in the same building complex as the hotel of the same name) has sold 262 of 372 available units since January. Ninety percent of the sales are to foreigners… who pay cash.

Seems Argentines, Canadians, Colombians, French, Israelis, Italians, Norwegians and Venezuelans are swooping down on Miami’s luxury market and scooping up bargains. Prices are 52% off the 2007 peak, averaging $319 a square foot.

Brokers say they’re seeing similar booms in Washington, New York, Los Angeles, San Francisco… and Las Vegas. “The idea,” says a recent Associated Press story, “is to rent out the properties and then sell them once the economy turns around.

Heh. The first part of that proposition is probably sound. But we suspect these units will stay rentals a lot longer than the owners are counting on.

“Usually, 'this time is different' comes from a fool talking,” writes a reader about having physical gold in your personal possession and the confiscation of 1933. “Not this time! The result will be very, very different this time if the predators-that-be attempt to steal all the gold held by individuals.

"This time, a huge minority, if not a majority, will 'just say no.' More accurately, they'll say and do nothing, or if pressed, say 'I traded my gold [for something untraceable and unverifiable].' Their gold will remain safely hidden in the desert/forest.

"Besides, what is the worst case of holding physical gold? Answer: They steal it and give you the current value in fiat currency… which costs them ZERO to do, so they will. Then you take your fiat currency and immediately buy some other real, physical good.

"However, to avoid holding physical gold (or silver), you have missed gains of 400% in the past 10 years and untold gains in the years to come. The worst that can happen by holding physical gold is… you make a nice profit and then switch into some other real, physical good: a no-brainer."

Another reader has a two-part take on the matter:

“A: How would the government know one has any gold as long as you buy it for under $10,000 at a time? Then there is no report of any kind.

“B: If the government knocks on my door, I will say that my gold was stolen years ago. It was buried in my backyard and someone found it. How could they prove it was a lie? And if there is a clear sign that a confiscation is eminent, I will walk to a nearest police station and make a report of my gold being stolen last night."

The 5: Umn, other than filing a false police report, I suppose you all have thought this through.

Good luck,

Addison Wiggin

The 5 Min. Forecast

P.S.: “I await with bated breath," a reader writes of our Overtime Briefings from Patrick Cox (see today’s edition below). “I will be sure to look for that email at 10:00” Wednesday.

“What time zone at 10:00 a.m. on Wed. Oct. 13?” writes another. “Each message has just said 10:00 a.m. Is it 10:00 a.m. no matter where we live??”

“I'm on the West Coast,” a third inquires. “That would be 7 a.m. my time. Is that right?”

The 5: There were more emails where this came from. The answer is 10 a.m. Eastern Daylight Time. So yes, adjust for your time zone. Alaskan readers will have to be fairly early risers. Grab a cup of coffee… make yourself a bagel.

As promised, here's today’s Overtime Briefing from Patrick Cox…

Less than 48 hours to go! The countdown to your future of profits is in full swing!

At 10:00 a.m. Eastern this Wednesday, Oct. 13 — you’ll get an email from me.

Inside this email, you’ll get all the benefits of over two years of my research. Over two years of trips and phone calls. Over two years of conferences and interviews.

You see, even though my Breakthrough Technology Alert readers have impressive gains from the companies that will change our world in the years ahead…

I knew there were opportunities out there to profit from larger, more liquid stocks — stocks in industries that are changing our world today.

So I spent two years researching the best of the best. Now I’m just about ready to release all my ideas to you…

From breakthroughs like graphene and carbon nanotubes to “sense” and “antisense” technology used in disease research — the future is amazing.

The future’s also profitable RIGHT NOW.

But the story runs deeper…to energy solutions, like the “smart grid” company I wrote to you about on Saturday. And the amazing tech firms making computers faster, smarter and more reliable.

Come Wednesday at 10:00 a.m. Eastern — you’ll get all the details on all my latest research.

Taken as a whole, this is the biggest story I’ve ever worked on. And I don’t mean to brag, but I was consulting in Silicon Valley before it was a buzzword for big ideas.

So I’ve been around the block. I don’t do idle predictions or entertain rumors. I find an idea — I research it — I get the scoop — and I deliver the scoop to you.

This Wednesday at 10:00 a.m. Eastern — be sure to check your email. You’ll get a chance to put all my latest ideas to the test.

For example — did you know one man’s pond scum is another man’s potential energy solution? That’s right. Exxon recently gave Dr. Craig Venter’s startup $300 million to work on algae fuels. Good move?

Venter is the man who broke wide open the human genome in 2000. He’s also behind the news releases you may have seen in recent months about the formation of “synthetic life”. That lab-created “life” could very well be the fuel of the future. There’s more…

Dr. Venter makes an appearance in Addison’s new documentary film. Details about the film, on risk and entrepreneurship, will be coming to you in the weeks ahead.

Here’s my point: Sludge. Algae. Pond scum. Or a bundle of wires and a silicon chip.

Or a tiny cell in your body that works for you, not against you.

The future is here. It’s profitable and breathtaking. On Wednesday at 10:00 a.m. Eastern time, the future is open to you.

Tomorrow, I’ll show you exactly why your world changes on Wednesday. You can’t afford to miss this…

Sincerely,

Patrick Cox

Breakthrough Technology Alert