China Lowers the Boom

by Addison Wiggin

  • China’s lowers the boom: why you should care

  • The dirty secret behind the “rare earths” ban… and how to invest successfully in the sector before it’s too late…

  • Yesterday’s market trends reverse — dollar down, everything else up… another GUDD day in the markets…

  • 47 billion clouds over Bank of America, but FDIC chief’s gotta wear shades…

  • Cancer-fighting “smart bombs”… the reader debate that won’t die… and more fun with presentations!

“It makes logical sense: Whenever you have a shortage of raw materials in the world, it historically has led to war.” So said investment biker and Vancouver veteran Jim Rogers during a recent address to the Mises Institute in Alabama.

A couple of generations ago, Japan attacked Pearl Harbor within months of a U.S. oil embargo. Monday, China embargoed exports of rare earth elements to the United States.

Rare earths, in case you need a refresher, are a class of 17 elements used in everything from mobile phones, to hybrid car batteries, to flat-screen TVs, to guided missile systems, to wind turbines.

If it involves cutting-edge modern technology, chances are it requires rare earths.

So what’s the rub? Right now, China controls 93-97% of the world supply, depending on the source you choose to cite at your next cocktail party.

Still, the Chinese decision to stop exports to the U.S. marks one of the strangest export bans in recent history.

When Russia banned grain exports in August, Prime Minister Vladimir Putin made the announcement himself and outed his fear that Russians would starve. But when China banned the export of rare earths to the United States, a New York Times reporter had to suss it out through “three rare earth industry officials, all of whom insisted on anonymity for fear of business retaliation by Chinese authorities.”

There’s no indication how long the embargo may last, and a fourth industry official says it appears a stray shipment or two is still being allowed to go through.

It puts officials in Washington in an odd position: “We’ve seen the news report,” says a spokeswoman for the Office of the U.S. Trade Representative, “and are seeking more information.”

On this front, they’re bereft of their usual posturing and indignant outrage. As if they just didn’t see this one coming… hmmmn….

When China cut off rare earth exports to Japan last month, the motive was pretty obvious: Japan captured a Chinese fishing boat in waters claimed by both countries. But what gives with the stealth embargo to the U.S.?

Of course, there’s headline-grabbing tension between policy wonks in Washington and party apparatchiks in Beijing over the value of the renminbi… which has, in turn, played host to a series minor trade disputes: The U.S. government has imposed duties on Chinese tires. Chinese officials have imposed duties on U.S. chicken. Yada, yada. Bureaucrats squabbling: what else do they fill their time with?

As we were looking under the hood, we found a motive with a little more oomph behind it.

Last Friday, the Office of the U.S. Trade Representative announced it was launching an investigation into Chinese subsidies of green energy. The United Steelworkers have been raising a ruckus about this so, of course, given the election cycle, there’s more than one beltway resident willing to go to bat for them.

The union claims the Chinese have adopted “policies that protect and unfairly support its domestic producers of wind and solar energy products, advanced batteries and energy-efficient vehicles… as China seeks to become the dominant global supplier of these products.”

What goes into wind turbines? Rare earths. What goes into advanced batteries and energy-efficient vehicles? Rare earths.

Suddenly, it all starts to make sense. Then again, the U.S. investigation may have simply handed Beijing a pretext for doing something it planned all along.

“China does have 97% of rare earths,” Jim Rogers explains, “and China’s booming. So China’s cutting back on the exports of rare earths, which I guess anybody would do if they were booming and they could see there was limited supply.”

“Since 2006,” explains The Economist, “China has behaved in a way that resembles OPEC, the oil-producers’ cartel, cutting exports by 5-10% a year. In July the export quota was cut by 40%. Prices have soared.” And they’ve soared at the very time demand is soaring, too: “Demand is forecast to increase by around two-thirds over the next five years.”

“If you could figure out a viable way to invest in rare earths,” Jim Rogers concludes, “you will probably make a fortune.”

So who are the winners and losers from all this? Reuters is out this morning with a handy list. The losers include the manufacturers who rely on rare earths. In the U. S., those are primarily makers of catalytic converters, along with the metal-alloying and ceramic-making sectors.

The winners are the miners of rare earths… and they do exist outside China’s closed system. In fact, 65% of world reserves lie outside China. They just haven’t been developed yet. The United States, Canada and Australia all have deposits that tiny mining firms are scrambling to bring into production.

But the most intriguing and explosive possibility of all — the most “viable way” to invest — lies elsewhere. It’s a combined rare earths-uranium play that falls clearly into Chris Mayer’s definition of a “special situation” — that is, the kind of thing that flies way underneath Wall Street’s radar. There’s an amazing story behind it, too… which Chris is eager to tell you about.

The global sell-off of everything except dollars that dominated the news yesterday is receding into memory today like a spontaneously tawdry happy hour. The dollar index is down more than half a percent to 77.8. Gold is recovering from its severe thrashing, however slowly — sitting smartly right now at $1,340.

Stocks, too, are up — the Dow recovering roughly one-third of yesterday’s losses. Those losses were already piling up for a host of reasons we spelled out in real time in yesterday’s issue… and then at 1:49 p.m. EDT, they went into hyperdrive.

At that exact moment, we learned who the “institutional investors” are who want redress from Bank of America for fobbing crappy mortgages on them. They’re heavyweights — Pimco, Blackrock and the New York Fed.

We also know how much they want in redress — $47 billion. That’s on top of existing “put-back” claims of $13 billion, which BoA says it will contest vigorously. We’d expect no less when BoA’s “loss reserves” total a scant $4.4 billion.

BoA shares are down 5% this week… and it’s only Wednesday.

Unlucky for BoA, but going forward the Federal Deposit Insurance Corp. says it expects fewer bank losses from here on. In fact, FDIC chief Sheila Bair says the outlook is so rosy she’s not going through with a plan to require banks to kick more into the FDIC fund used to “insure” your deposits.

By our over-the-shoulder accounting, the fund was $20.7 billion in the red as of June 30. But whatever; we take everything we hear from official channels as gospel. If nothing else, the announcement will help the banks goose their earnings statements three months hence.

The Great Recession may have officially ended more than a year ago, but banks are acting as if it’s still on, judging by their purchases of U.S. Treasuries. If anything, the trend is accelerating…

It’s still much safer to borrow from the Fed at next to nothing and pile into a 10-Year Treasury note at 2.5% than it is to lend to you — assuming you even wanted to borrow.

“Imagine the market,” asks Ray Blanco, who has joined Patrick Cox on the tech beat, “for a drug that’s 10,000 times more effective than today’s radiation or chemotherapy treatments for cancer… and many times safer for the patient, too.”

That’s the idea behind a cancer drug that amounts to the “smart bomb” of cancer — killing the cancerous cells, but leaving the healthy ones alone.

“What scientists do,” Ray explains, “is attach cancer-killing drugs to bio-engineered antibodies. The combo floats through your bloodstream and latches on to cancer cells… where it gets sucked inside, releasing its poison payload. And the cancer cell gets blown apart.

“The company that created this ‘smart bomb’ technology just tested it with a breast cancer drug. A third of the women using it saw their tumors shrink and half saw their tumors stop growing.”

This entirely new way to fight cancer is one of six breakthroughs Patrick Cox describes in a presentation we released a week ago today. 320,000 people have learned how these breakthroughs will build whole new fortunes over the next decade. If you’re not among them, but would like to be, here’s your chance.

“I looked at my last Social Security statement,” writes a reader, one of many determined to carry on beating the Social Security horse well after the vultures have picked its carcass clean. ”It says that between me and my employer, we have paid in a total of $277,934. I don’t know where that guy who paid in $79,000 and will receive $19,000 a year got his information.

“The $27,612 a year I can get from them if I start now, or the $37,632 I can get if I wait another four years, adding an additional $15,000 each year to that total, for a total of at least $60,000 more contributions, [which] by the way, doesn’t include the time value of the money I have paid in over the last 50 years. It will take me over 10 years simply to collect my original investment, without considering the forgone income I could have accumulated from that money.

“I ran the numbers some years ago, and discovered that had I simply put that kind of money into a savings account paying 5%, I’d have almost $2 million in cash. As far as I can see, you may have been better off putting the FICA taxes into a mattress, because at least your heirs would have that capital if you happen to keel over.

“The unpaid funds from Social Security are forfeit the day you die.”

“This discussion is dishonest from your readers on both sides,” another writes, offering another helpful perspective. “Yours was the honest appraisal — Ponzi scheme — but some of your readers seem to take that as a joke. This is hardly a laughing matter.

“Social security payments are a tax. The government even says so. Anyone involved in accounting or having a business must know that it is referred to as a payroll tax.

“Your money is taken from you without consent — taxed — and given to someone else as a bribe — welfare. It doesn’t matter whether you have been paying for two years or 200 years, whether your life was easy or tough. If you receive a Social Security check, you are a welfare recipient.

“You know, I’d love to get my money back, too. Not just my Social Security payroll tax money, but my income tax money, my cap gains tax money, my motor vehicle tax money, my property tax money. But you know what? It is not going to happen.

“I could add a huge dishonor to myself by being party to the theft of the next generation and accept welfare, but I won’t and neither should you. I read that when Isabel Patterson died, she had a stack of Social Security checks sitting uncashed in her desk drawer. She took a principled stand.

“Until we all take a principled stand, nothing is going to change for the better.”

The 5: At the risk of beating another horse to death, here’s one way to take a principled stand: The “Other” Government-Backed Retirement Program.

“For those who unfairly lump Social Security in with Bernie Madoff,” writes our final contributor, “in all fairness, you should point out the difference. No one was ever legally required to pay money to Madoff.”


Addison Wiggin

The 5 Min. Forecast

P.S.: “I got 20 min. into Chris Mayer’s special small mining stock report,” a reader writes, “and had to get off to take an important call before he gave me the link to join. I want to join, but don’t have the time to listen to it in its entirety again.

“Can someone provide me the link please?”

The 5: Oy. These presentations are a pain in the tuckus. Here, this will take you directly to the order form. Thank you for your interest.


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