Waiting for the Giant Squid

Addison Wiggin – July 7, 2011

  • “Biggest rare earth discovery ever!” Second thoughts about the hype, and how to invest accordingly
  • Dead-broke city asks a less-broke state to voluntarily pay property taxes on capitol building
  • Broken promises: A stealth cut in Social Security benefits proposed… why even that unsavory act is a drop in the bucket…
  • Copper thieves turn to a more cumbersome target…
  • Reader muses about bin Laden’s ROI… we discover it’s gone up since his death… Doug Casey chimes in on The Idea of America…

   At first blush, yesterday’s announcement sounds like one of the most lucrative mineral discoveries in years… and among “rare earth” minerals, the largest ever.

“Just one square kilometer (0.4 square mile) of deposits will be able to provide one-fifth of the current global annual consumption,” says the University of Tokyo’s Yasuhiro Kato, a member of the team that made the discovery.

If they can get to it, the cache would be large enough to break China’s stranglehold on 97% of the rare essentials for everything from iPhones to Tomahawk missiles.

   One problem: The find lies underwater — up to 20,000 feet below the Pacific Ocean’s surface. The scientists identified two locations in international waters — one near Hawaii, the other near Tahiti.

“Sea mud can be brought up to ships and we can extract rare earths right there using simple acid leaching,” explains professor Kato, sounding undeterred by the complexity of the undertaking. “Using diluted acid, the process is fast, and within a few hours, we can extract 80-90% of rare earths from the mud.”

The professor can perhaps be forgiven for his enthusiasm: Japan is the world’s biggest consumer of rare earths. With the Chinese government raising prices and slashing export quotas, Japan’s manufacturers have been over a fish barrel.

   “I’ll wait for the giant squid and the prehistoric monsters,” says the CEO of a Canadian-listed rare earths firm, speaking anonymously to Reuters, “that will come out of the bottom of the sea first before we see any rare earths.”

Cranky, yes. But also talking his book.

Considering the history of extracting mineral and energy wealth from underwater, any squid sightings are liable to be far out in the future…

  • Brazil’s offshore Tupi oil discovery involves drilling through a more shallow depth of water — 7,000 feet — plus 10,000 feet of sand and rocks, and another 6,600 feet of salt. Drilling this field is an unprecedented undertaking: Discovered in 2006, production began in 2010. Reaching peak production of 200,000 barrels a day could take another 10-15 years
  • Canada’s Nautilus Minerals has spent years trying to develop an underwater gold-copper project off the coast of Papua New Guinea. Shares of the company can be had today for about $2.60 each — the same price they went for in early 2008
  • Diamond miners have met with some success off the coast of Namibia, in southwest Africa.

“This underwater thing may or may not play out,” comments our own Byron King, who, as you know, has been on both the deep-water drilling and rare earth beat. “We’re just looking at the warm-ups. Haven’t seen the first real pitch. Lots of innings ahead.

“Even if true, it’ll take many years to turn underwater rare earths into a commercial business. It’s been 40 years or so since people discovered manganese nodules on the seafloor, and there’s no commercial mining.

“Producers are so desperate to find a way out from under the Chinese monopoly that they’ll latch onto almost any alternative idea.”

In other words, underwater rare earths are not a game-changer… certainly not in the immediate future. At least the Japanese gentleman is excited.

Alas, the race goes on — the race to be first into production outside China. Byron’s premium-level readers have already collected handsome profits from the big rare earth names: For instance, he got them out of Molycorp with a 178% gain before the stock took a tumble.

Byron still sees a dark horse in this race… and it’s still below his buy-up-to price. All is revealed in one of three special reports you can access right now with a new membership in Energy & Scarcity Investor. And from now through next Monday only, you can secure that membership at a significant discount from the regular fee.

   Stocks in the U.S. market are adding to yesterday’s gains. In fact, at 1,350, the S&P 500 has once again surpassed the mid-February high of 1,344.

It appears traders are cheering one of two jobs reports out today. Private employers added 157,000 jobs last month, according to the payroll processor ADP.

Still, the Bureau of Labor Statistics (BLS) reports 418,000 first-time unemployment claims last week. That’s 13 weeks in a row with a figure over 400,000.

For now, the Street is discounting the BLS report. Tomorrow comes their answer to the ADP monthly jobs report. A handful of economists surveyed by Bloomberg have low expectations. The mean foresee 110,000 new jobs and a flat unemployment rate at 9.1%.

   “It’s not a warm and fuzzy way to start a career,” says Ryan Davidson — a recent college graduate who might have a job were it not for the fact that state government in Minnesota has been in partial shutdown since last Friday.

Davidson is a teacher. She needs a license. But under the shutdown, no new licenses are being issued. “If the license isn’t processed in time, I cannot teach.”

And so it goes. State parks remain closed. Road construction projects are on hold.

Meanwhile, Minnesota’s fiscal hole keeps widening as the governor and lawmakers can’t agree on a budget. That’s because the lottery is also closed — cutting off $1.25 million daily. And laid-off state workers will collect about the same amount of money in unemployment benefits.

You have to wonder about the wisdom of shutting down the state’s revenue streams as well as cost centers. If you’re facing a fiscal crisis, wouldn’t you still want the lottery money to come in the door? Or the teacher’s licensing fee?

   Our favorite fiscal basket case, Harrisburg, Pa., has given up beseeching the almighty and is now hitting up the city’s nonprofits for money. Nonprofits are exempt from property tax, but the city is now asking them to cough up an amount equal to what they would pay if they weren’t exempt.

Would that include the churches who organized the prayer vigil, one might be tempted to ask? Or the federal government, for the courthouse complex. Or the state of Pennsylvania, for the capitol.

A harbinger for its architectural inspiration 116 miles to the south

On the list of indebted states we tapped last week, Pennsylvania ranks No. 25. Every citizen owes $938 on behalf of the state… including those still prone to spitting up their milk.

Wonder where your state stands in the parade of mismanaged funds? Take a look here.

   On the national level, President Obama announced yesterday he’s ready to put Social Security on the chopping block if his political foes will agree to start raising taxes.

Rather, he’s open to changing the standard by which cost-of-living adjustments (COLA) are calculated.

You might call it a “stealth default.”

The Greenspan Commission first recommended monkeying with the consumer price index (CPI) in 1983 so inflation would appear to be less severe than it is and the SS Trust Fund would not have to pay increases according to recipients’ needs, but rather a formula calculated in the backroom of some marble and glass structure on K Street.

This time around, policy wonks want to up the ante. The COLAs they propose should be calculated by a measure called “chained CPI.” The reason? To reflect a favorite among academic economists: the “substitution effect” — that is, when steak prices go up, you buy more hamburger, and thus the price you pay for beef remains stable. It’s only your standard of living that goes down.

If you’ve had money taken out of your pay for years to fund Social Security payments for others, you might conclude the “chained CPI” is nothing but a broken promise. We couldn’t fault you for feeling that way.

   Let’s get out the napkin. Between the Social Security changes, spending cuts and tax increases on the table, The Washington Post says the savings proposed will total $4 trillion over the next 10 years.

That’s an average of $400 billion a year. This year’s deficit is $1.65 trillion. Hmmn…

Like standing at the edge of a cliff in Canyonlands, at night, with the moon behind the clouds, we’re sensing a vast emptiness. Wait, that’s a $1.2 trillion yaw in the annual budget — even if these politically unsafe proposals get passed without the grubby hands of political staffers all over them.

   Thank the Lord, our creditors have problems enough of their own to contend with. Even so, the Chinese, the Japanese and the Middle Eastern oil sheikdoms are most assuredly watching developments in Washington very carefully. At some point, they’re likely to conclude they won’t get paid in full… or as with “chained CPI,” what they get paid back with will amount to a “stealth default.”

Whatever.

You should plan to be ready whenever, whatever happens. We’ve prepared five special reports to kick-start your action plan.

   Gold is taking a rest after two days of big gains. At last check, the spot price was $1,529. Silver, however, is adding to its gains and now sits at $36.37.

   With copper prices holding firm well above $4 a pound, copper thieves are moving beyond the usual manhole covers and construction sites.

In one Chicago neighborhood, it’s forcing homeowners to resort to this…

The things people do to stay cool…

“I’ve been going door-to-door,” one woman tells WBBM-TV, “letting my neighbors know our air conditioner got stolen. At first, they’re like, ‘You all have central air, what do you mean your air conditioner got stolen?’”

Thieves are now targeting central air conditioning units for their copper and aluminum coil. Police say it’s an issue all over Chicago.

Right before the holiday weekend, thieves climbed onto the roof of an animal shelter, stealing two AC units and the attached copper pipes.

Employees had to scramble for fans to keep 100 cats and dogs cool.

Hmnnn… seems like a lot of effort: HVAC repair folks say the coil inside a single home central air unit is worth perhaps $25.

   “Reading the seemingly endless stories about how various governments (local, state and federal) are strapped for cash (OK, the feds will just print whatever they need), and seeing how much is spent on our three or four different war fronts (Afghanistan, Iraq, Libya, home), I can’t help but feel that bin Laden, though dead, has won his war.

“The most powerful economic force in the world is going bankrupt. As far as investing goes, I wonder if the terrorists didn’t ‘short’ the U.S. — it’s gotta be one hell of a return on investment!”

The 5: The day after bin Laden was killed, we noted the Sept. 11 attacks cost about $500,000 to carry out. Research indicates the costs of the Iraq and Afghanistan wars at $1.26 trillion — yielding a 2,514,000:1 return.

Last week, Brown University took those direct costs and added a host of others, including interest payments on the money used to finance the wars and future health care for veterans. The total tops $4 trillion — or a return of 8,000,000:1.

According to the Congressional Budget Office, the cost of fighting World War II, adjusted for inflation, came to $4.1 trillion.

   “Just wanted to say thank you. I read your 5 Min. Forecast and it always brings a smile and a chuckle, the kind of smile that’s worth a million dollars.”

The 5: Thank you for reading. Without you, we wouldn’t be able to do this.

Cheers,

Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S. “The Declaration of Independence has become a piece of subversive and seditious literature,” muses our friend Doug Casey on the recent holiday, “and those who take it seriously… should be careful.”

We suggest they also give a look at The Idea of America. This newly revised and expanded collection of essays — assembled by our founder Bill Bonner and Independent Institute fellow Pierre Lemieux — includes everything from Rose Wilder Lane’s “Give Me Liberty” to Jefferson’s full text of the Declaration. Get your copy right here.

“Whenever any Form of Government becomes destructive of these ends,” says the Declaration, “it is the Right of the People to alter or to abolish it.”

“I think it’s worth pointing out,” Doug continues, “that this language basically guaranteed the right of the Southern states to withdraw from the union. The Declaration had become a dead letter long before today.”

“Most of what the colonists complained the king was doing is now being done — and to a vastly greater degree — by the U.S. government.”

Doug can always be counted on to say something provocative… especially during the Agora Financial Investment Symposium in Vancouver. We still remember the year he lit a cigarette in the strictly no-smoking venue and encouraged attendees from the podium to join him. Doug doesn’t smoke.

If you can’t be with us in person, you can always get the audio recordings. Every speech in the main hall is included… plus a handy written summary of every investment recommendation from the small-group “breakout” sessions. Discount pricing for this package is still available

rspertzel

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