The Embargo

by Addison Wiggin

  • Japan, Vietnam, Germany, Switzerland: A roundup of rare earth news in
    the wake of China’s U.S. embargo
  • Fast-food and cereal companies agree… Time to raise prices
  • Chris Mayer issues the cry Paul Revere can’t: “Inflation is coming”
  • Why quiet markets are holding their breath today
  • Reader mail: Business owner sees recovery, Canadian sees market
    failure, and a complaint about… the Madoff auction?!

  It’s been another dizzying 24 hours in the scintillating world
of rare earths.

To recap: A week ago today, the U.S. complained about “green energy”
subsidies given to Chinese companies, undercutting the U.S.’
competitive advantage in that industry. Wednesday, China retaliated by
embargoing exports of rare earth minerals to the United States.

China denies the whole thing… repeating the official line that
reports of another 30% cut in worldwide exports of rare earths next
year are “false.” Germany says they’ve been inadvertently smeared by
the Chinese campaign. The Japanese, having already been cut off, are
making plans elsewhere.

If you haven’t had the chance to keep up with it all, we don’t blame
you. We’ve condensed the essential news into a fact-packed 1 minute
and 35 seconds in this Speed Brief…

  Overnight, we saw these new developments:

  • The World Trade Organization (WTO) says it needs another six months
    to rule on a rare earths complaint lodged against China. As China
    clamped down on exports last year, the United States, Mexico and the
    European Union launched a dispute. No word why the WTO says it needs
    more time, but both sides agreed to the extension
  • Glencore — the Swiss mining and natural resources firm founded by
    the Clinton-pardoned financier Marc Rich — is joining forces with a
    privately held U.S. company to reopen a shuttered rare earth mine about
    75 miles southeast of St. Louis. We’ll be watching this one…
  • Japan is about to sew up a deal to start mining for rare earths in
    Vietnam. And not a moment too soon: Yesterday, Japan’s government
    estimated they have at most a six-month stockpile. Before China imposed
    a rare earths embargo on Japan last month, Japan bought 60% of Chinese
    rare earth exports.

Rare earths miners are a tiny sector. They aren’t usually the subject
of paparazzi or lead material in The 5 Min. Forecast. To say the market
action this week has been volatile would be like saying Congress is
dysfunctional; that is, you’d be stating the obvious.

One company far away from the hullabaloo is about to get the “official”
green light to develop a potential $1.3 trillion deposit in the ground.

The story has been 42 years in the making — replete with Cold War
political machinations and present-day capital cronyism — our managing
editor, Mr. Chris Mayer, uncovers all the intrigue in this
presentation… right here.

  If the United States needs Chinese rare earths, China needs
American soybeans.
Through Wednesday of this week, China bought U.S.
soybeans for six consecutive trading days… enough to push bean prices
to their highest levels since summer 2009.

China needs beans for cooking oil and livestock feed. During the week
ending Oct. 14, China snapped up 72% of U.S. soybean exports.

[Ed note: If you’ve got a penchant for the quick adrenal trade, you’ll
want to know Alan Knuckman’s Resource Traders laid on a soy meal play
this week. They’re also still holding out for maximum gains on a
silver play that’s currently up 204%. Volatility makes for interesting
times in the “Millionaire’s Market” — check it out here.

  And… McDonald’s customers, you’ve just been put on notice: In
the tug-of-war between rising meat and wheat prices on the one hand…
and you, the cash-strapped customer, on the other… rising commodity
prices are winning out.

Again.

Two years ago, in the midst of a financial panic and mass layoffs,
Mickey D’s decided to remove a slice of cheese from its dollar-menu
double cheeseburger and rename it the “McDouble.” If you still wanted
that second slice, it’d set you back $1.19.

The company’s CEO let drop during a conference call yesterday prices
are about to go up again. Exactly what’s going up this time around, and
by how much, has yet to be revealed.

  Likewise, you’d better stock up on your Cheerios, Chex and
Wheaties before Nov. 15.
General Mills is raising prices by what a
spokeswoman innocently described as “low single-digit percentages.” On
Jan. 3, 2011, slightly bigger price increases kick in for Pillsbury and
Betty Crocker baking mixes.

“While General Mills may be the first of the large food companies to
really press higher on pricing,” says Stifel Nicolaus analyst
Christopher Growe, “we believe many others may follow.

“[The price hikes are] just a matter of time, given what is coming down
the pike in the way of inflation.”

  If you have any doubts about significantly higher food prices on
the way, this chart should put them to rest…

The jagged line shooting up 50% since June of this year is the UBS
Bloomberg Constant Maturity Commodity Index for farm products. The
smooth, gently accelerating line is the food component of the consumer
price index. The latter is lagging the former — a situation that can’t
last. And won’t.

  “If Paul Revere were around,” muses Chris Mayer this morning,
“he’d be riding through the streets of lower Manhattan yelling,
‘Inflation is coming! Inflation is coming!’

“In many ways, it’s already here, just not yet widely recognized.

“Deflationists argue that the dollar will buy more tomorrow than it
does today. Although that definition would pain the old economists,
today’s deflationists still hold sway in the bond market, where
investors happily accept puny yields.”

Still, companies are facing rising costs from everywhere. Today’s Wall
Street Journal
cites these examples: corn up 44% from a year ago, milk
up 6.5%, hot rolled coil steel is up 4%, copper is up 29% and oil is up
14% from a year ago.

“The Journal’s article had no discernible effect on bondholders,”
writes Chris, “Or I should I write ‘bag holders’? For it is they who’ll
be left holding the bag when inflation kicks in.”

The bond market opened bored and laconic. Yields inched up just a
touch. The 10-year note pays a whopping 2.506%.

  Elsewhere in the markets, it’s quiet. The Dow and the S&P opened
flat.
Gold is drifting not far from where it was yesterday, at $1,325.
The dollar index isn’t moving much either; as of this writing, it’s at
77.3.

There are no data coming out today, so traders are biding their time,
waiting for any shoes to drop at a meeting of G-20 finance ministers in
South Korea. If this one’s anything like the meeting of the
International Monetary Fund (IMF) in Washington a couple of weeks ago,
there will be little news of note.

But that won’t stop Treasury Secretary Tim Geithner from trying to make
some anyway…

  Geithner is proposing that G-20 members agree to limit their
trade surpluses and deficits to 4% of GDP.
Virtually every other member
of the G-20 thinks this is a terrible idea.

Japan’s finance minister calls it “unrealistic.” Germany’s economy
minister rejects it as “command economy” thinking. “Totally
condescending,” I, our inimitable David Gonigam, agreed, “yet without a
trace of self-awareness.”

In the BRIC bloc, Russia and India are also in opposition. Brazil’s
finance minister isn’t even attending — he stayed home to implement
new capital controls aimed at keeping the real from appreciating more
than it already has this year.

China is keeping its silence, and no doubt that’s who Geithner has in
mind with this harebrained scheme. China’s trade surplus in the first
half of 2010 amounted to 4.9% of GDP.

  “We own and operate an industrial construction company in North
Texas,” writes a reader
with his take on the perennial question, “How’s
business?”

“During the last recession, our industry went into the recession early
and emerged early. The same thing seems to be happening now. For 10
weeks now, we have been busier than the last 30 months combined.

“We service manufacturing companies. Maybe they have a stockpile of
money and are spending it on new conveyors, and new production lines,
and gearing up for the future. Half of our work is now maintenance of
existing industrial machinery and half is installing new lines and new
equipment.

“In addition to a dozen of our regular customers, we are getting calls
from many potential (and secured) new customers. And it’s not just us.
The subcontractors we use are really busy with work from other
industrial contractors. Work is coming from everywhere.

“I don’t know if this recovery is regional, but after 10 weeks straight
and broad-based from all kinds of manufacturers, I believe it is real!
Hallelujah!”

The 5: Nothing like boots on the ground like these. So how about it? Is
our friend from Texas in the throes of a regional recovery? Or is it
widespread?

  “Tut-tut,” a confused Canadian reader admonishes us in reaction
to the rare earth news this week.
“Where is the mighty ‘invisible
hand’? Isn’t it supposed to foresee these events and prepare for them,
perhaps by setting up mining ventures in our corporate-run nations?

“I believe government has a role and should be filling it better.
Perhaps there could be a happy mix of corporate ventures that do not
control liberty and equality and government ventures to plan for the
necessities of successful nations and their people.

“Enjoy reading your stuff, even though there is much I disagree with.”

The 5: Hmmn. China is using more of what it produces… prices are
going up… and rare earth mines that couldn’t generate a profit at
lower prices are coming into production at higher prices.

The price mechanism is doing exactly what it should… and it’ll hand a
select group of smart people a small fortune. You can start yours here.
Or you can lobby your local representatives to ensure government fills
its role better. Frankly, it’s up to you.

  “The investors with Bernie Madoff should not be getting one
dime,” writes a reader
outraged at the U.S. Marshals’ auction of
Madoff’s slippers and other effects — the proceeds going to his
investors.

“They ALL knew that if it’s too good to be true, then it is too good to
be true. They wanted the higher yields he promised, and should have
known the risks involved. Now that government waste will be (hopefully)
slowed, the proceeds of the sale should go to pay off the U.S. debt.”

The 5: Well, let’s do some math. A previous auction of Madoff’s
belongings brought in $1 million. If this next one does roughly the
same, that’d be good for 0.0017% of the debt that Uncle Sam ran up last
Friday.

Another reader reminded us on the blog site this morning that Madoff
once admitted he got the idea for his Ponzi scheme by studying how the
Social Security Fund operates.

Have a good weekend,

Addison Wiggin
The 5 Min. Forecast

P.S.: “Nothing, nothing at this moment. Nothing,” says Shigeo Nakamura,
president of Advanced Material Japan Corp. — describing the rare earth
shipments he’s not getting from China.

The Chinese can play coy over whether they’re embargoing rare earths to
Japan and the United States, but the businesses that need them know the
score. The scramble is on to find new sources and reopen old ones in
Australia, the United States and Canada…

Vietnam…even in one of the most “remote corners” of the earth…
where one very large and lucrative deposit could deliver quadruple-
digit gains for early investors. It’s a “Special Situation” in the
classic sense of the word and right up Chris Mayer’s alley. Get the full story here.

rspertzel

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