The $3.8 Trillion Great Escape

November 15, 2012

  • The man who wanted to pay $3 million for a house in cash… and the lesson it says about capital preservation no matter your net worth
  • Four years until China’s gold stash overtakes America’s? An eye-popping chart
  • The government’s war on cheese… and science’s potentially lucrative milk breakthrough
  • Portraits of the Beltway class… the old “separating politics from investing” debate renewed… Friedman’s last word on the subject… and more!

  “Shall we go inside and look around?” said the real estate agent outside a home in Vancouver listed for $3 million.

The prospect — a man from China — wasn’t interested in looking around. He was ready to buy… after merely glancing at the exterior. We mean really ready to buy. In his car were two suitcases… stuffed with Canadian currency.

“I explained how, here in Canada, we don’t do large cash transactions like that,” the agent later told our Byron King. “There are banking and tax requirements. We need to go through lawyers and record all the transactions properly.”

Remarkably, the buyer was not dissuaded and the deal was done a few weeks later.

That’s a micro story, illustrating a macro trend — and spotlighting an opportunity you can’t afford to overlook.

  You think you don’t trust the government or the monetary system? You have nothing on the Chinese.

“There’s massive capital flight out of China,” Byron says. “According to a report by the Washington, D.C.-based Global Financial Integrity (GFI) group, almost $3.8 trillion (yes, trillion!) illegally exited the Chinese economy between 2000 and the end of 2011.

“About $602 billion left China in just 2011, so the trend is accelerating,” he adds. “Indeed, if about $50 billion per month ($602 billion divided by 12 months) left China in 2011, it’s no wonder that, for the past year, we’ve seen market-moving reports that China’s economy is slowing down. Perhaps China’s economy isn’t so much ‘slowing down,’ in many respects, as it’s decapitalizing due to illicit outflows.

“According to GFI, some of the proceeds are outright ill-gotten lucre from bribes to officials, or raw government corruption. Other capital that flees China may be money that was earned initially through legitimate business means. However, these funds then moved out of China in defiance of law, regulation and other capital controls, usually hand in hand with evasion of applicable taxes.”

It comes back to the adage about “capital goes where it’s treated best.” In China, capital is treated at least as shabbily as it is in the United States. “National economic policy keeps interest rates similarly low on savings accounts,” Byron explains. “It’s an overt, albeit indirect, government subsidy to banks. The banks, in turn, make dicey loans, on favorable terms, to favored, often state-controlled entities.”

Sound familiar?

  Fortunately, there’s a wealth-preserving step you can take along with the Chinese that doesn’t involve suitcases of cash or anything remotely illegal. “The Chinese buy gold — lots of it,” says Byron.

“Over the past decade, the Chinese have sought wealth preservation, if not investment returns, in China’s stock market, as well as in Chinese property markets.”

But gold is in a category by itself… as the following chart shows. It was prepared by Nick Laird of the Australian-based gold site ShareLynx. “At the current rate, China will exceed U.S. gold holdings within 4 years,” he writes in an email shared by Ed Steer at Casey Research.

Mr. Laird put this chart together with all the available data… which is incomplete. Note the “net imports via Hong Kong,” the figure we pass along most every month.

“The imports via Hong Kong are only a proxy for China’s overseas buying,” Addison wrote last January, “which the People’s Republic does not disclose.”

That is, the bars on this chart in reality might be even higher.

  Meanwhile, the People’s Bank of China — one of the forces driving ordinary Chinese into gold — wants more of the stuff for itself.

Bloomberg has picked up on an article in the China Securities Journal — the kind that doesn’t get published without an official blessing. It was written by Gao Wei, a functionary in the Ministry of Foreign Affairs.

The official word: China’s gold reserve is “too small.” China needs more for economic security, to promote the renminbi as a reserve currency and to hedge against risks to its foreign reserves.

You think that might be an oblique reference to China’s $1.2 trillion in U.S. Treasuries? Nawww….

It comes back to what our Dan Amoss said in this space last week: “Gold is the perfect hedge for the slowly eroding value of China’s U.S. Treasury portfolio. After the U.S. elections revealed a country likely heading more toward a European economic model, the shift into gold should accelerate.”

100  Gold got beat up a little this morning, but it’s holding the line on $1,700. At last check the spot price is $1,713.

After dropping like a stone yesterday for no obvious reason, the major U.S. stock indexes are holding steady this morning – despite a raft of rotten economic numbers. Go figure…

  • First-time unemployment claims: Up huge last week to 439,000, the highest reading in 18 months. The Bureau of Labor Statistics attributes the rise to Hurricane Sandy – which rings true, seeing as the last time the number bumped this big was after Katrina in 2005. But the “expert consensus” would have sniffed that out, and it didn’t: Economists polled by Bloomberg figured on 376,000.
  • Consumer prices: Up 0.1% last month, and 2.2% year-over-year by the BLS’ skewed reckoning. The “core” rate excluding food and energy is up 2.0% over the last 12 months – right in line with the Fed’s stated target
  • New York State factory activity: The Fed’s Empire State Manufacturing Survey is negative for a fourth straight month. The jobs component of the survey dropped to its lowest since – ouch –  2009
  •  Pennsylvania/New Jersey factory activity: After poking its head into positive territory last month, the Philly Fed survey is back in the dumps. Here too Sandy is in the mix, so we’ll have to wait till next month to discern a bigger trend.

Walmart beat on earnings, but missed on revenue… and issued a glum holiday outlook: “Current macroeconomic conditions continue to pressure our customers.”

Oh, and the eurozone is officially back in recession. Happy holidays!

  War on cheese?

“We were losing money hand over fist,” Greg Anema, a California dairy farmer told The Wall Street Journal this week.

In September, we reported that farmers are being forced to feed their cattle ‘throw-away’ candy due to a one-two punch of historic drought and economic slowdown.

It doesn’t end there… Californian dairy farmers are taking a third beating because of cheese making regulations.

That’s right… cheese laws.

While all other states have seen an upward push in milk prices, in California, the WSJ writes, “Farmers say gains from higher prices have been muted by the state’s formula governing the price that cheese makers pay for their milk — a quirk in state rules that some farmers say has forced them out of business.”

“State law requires California to keep the milk-for-cheese price in ‘a reasonable and sound relationship’ with the federal price. California dairy farmers say that for the past two years, they have been receiving $2 less per hundred pounds of milk for cheese than farmers in other states.”

Thus have about 100 dairy farmers shut their doors this year. Another 1,600 of them struggle to keep their heads above water…

  Meanwhile, on the opposite end of the country, scientists at Cornell University are using milk a tad more effectively: to breed “supermice”…

Readers with impeccable memories might remember our early July mention of a lesser-known ingredient in milk that’s stimulating lots of interest.

“Some scientists believe that this substance is a naturally occurring vitamin,” Patrick Cox said then, “capable of acting like a natural, but effective weight-loss drug with steroidlike abilities to increase muscle mass and strength.”

Early tests with this drug on rats at Cornell revealed stunning results: They didn’t become obese, their muscle performance increased, their energy expenditure improved and there was no sign of developmental diabetes. All without side effects.

  “I recently saw the new Bourne movie, The Bourne Legacy,” Patrick writes — making an unlikely link between the Cornell study and the investment angle.

“In the movie, the technology that creates agents with extraordinary abilities is revealed to be a substance that increases mitochondrial energy efficiency by just a few percentage points.

“In fact, we believe this drug will increase mitochondrial production of ATP, our bodies’ only usable energy, by quite a lot more than a few percentage points.

“I doubt that this drug will turn us into superheroes,” he concedes, “but it could help prevent or repair the mitochondrial damage associated with aging as well as improve our body mass profiles with more muscle and less fat.

“If clinical tests show that this drug, naturally found in milk, provides even part of those benefits,” Patrick concludes, “sales could be huge.”

Patrick is on the case of no less than three natural substances that science is harnessing to extend human life spans, improve the quality of life… and make early investors quite wealthy. Check out his latest research here.

  And now, a perk of government “service” that hadn’t previously occurred to us — being immortalized in oils.

“Multiple agencies have quietly commissioned artists to paint official portraits of Cabinet secretaries and other top appointees,” reports The Washington Times. After combing through scads of records, the paper concludes the government has forked over at least $180,000 for this purpose since last year.

The Environmental Protection Agency appears especially fond of these portraits. Current administrator Lisa Jackson’s portrait cost $40,000. Her Bush-era predecessor Stephen Johnson’s cost $30,000.

Recently, the Department of Housing and Urban Development spent $19,500 for a portrait of former HUD secretary Steve Preston — appointed to fill the final seven months of Bush’s term. It will hang on the 10th floor of HUD headquarters — in a work area, out of public view.

Steve Preston: Barely more famous than you are, but he has an oil portrait and you don’t.“These are done for future generations to see how we live now, and it’s really a tribute as well as part of a person’s legacy,” says Ann Fader, gamely defending the practice. She’s president of an outfit called Portrait Consultants, “which represents portrait artists,” as the Times puts it.

“It’s a tremendous privilege,” she adds, “to paint a portrait of somebody as accomplished as these people.”

At least as tremendous as your privilege of paying for it, to be sure…

  “The two comments from your readers who try to justify higher taxes on the rich are hard for me to understand,” reads the first of several emails rising to The 5’s defense.

“I’m not rich by any standard. I own a one-man machine shop that purchased a $150,000 milling machine last year to try to get ahead in this economy. I have taken no wages this year to keep the income in the business to be able to pay the loans off if anything more goes wrong with the economy.

“The grand total of the combined net worth of every single one of America’s billionaires is roughly $1.3 trillion. It does, indeed, sound like a ‘ton of cash’ until one considers that the 2011 deficit alone is $1.6 trillion. So if the government were to simply confiscate the entire net worth of all of America’s billionaires, we’d still be $300 billion short of making up just last year’s deficit.

“The way things are now, it doesn’t matter how much money anyone pays in to the federal system, they will spend far more than they take in and we will all be poorer for it. The only solution is to get the government out of our lives as much as possible and to cut spending dramatically.

“‘Leave politics out of it.’ Good one. Name one thing in life that doesn’t have politics in it.”

 “OK, maybe I’m missing something,” says another. “I see all these ‘readers’ complaining about being ‘customers.’ Doesn’t customer imply that one has purchased something?

“Last I checked, The 5 is still free. In the actual paid subscriptions, the whining class could easily avoid the tongue-in-cheek political and social commentary that most of us have come to enjoy in your entertaining and informative missive (and boost their portfolio returns, I might add).

“To them, I say put up or shut up.

“Oh, and by the way… the day The 5 starts drinking the Kool-Aid and ‘getting with the program,’ as opposed to sticking a finger in the eye of the politicos — as they deserve — I WILL cancel my subscriptions with the presumption that alien pods have claimed the bodies of the writers I have come to respect and whose company I have enjoyed for many years now.”

  “HOW OUTRAGEOUS!” adds another, tongue firmly in cheek. “You should beg our forgiveness for not being able to please all of us.

“Talking about and forecasting the economy without including government policies, pro or con, is like talking about the ocean without mentioning the currents. Like it or not, government policies affect the economy. Omission of policy discussion disguises the cause and effect. It is irrational to deny policy impacts on the economy.

“We need to be aware of the policies and regulations and their implications so we can plan our response, besides celebrating the opportunity to pay more taxes to a wasteful government. Denying the truth may make them feel better, but it doesn’t make for better planning. Mr. Wiggin, you have to realize how offended these clients are. I’m sure they never implied President Bush’s policies ever affected the economy.

“Keep up the good work. If I wanted sterile advice, I’ll get a Ouija board or a Magic 8-Ball.”

The 5: “It is widely believed,” wrote Milton Friedman 50 years ago in Capitalism and Freedom, “that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem; and that any kind of political arrangements can be combined with any kind of economic arrangements.”

Not so, he asserted throughout the volume: “There is an intimate connection between economics and politics… [A] society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.”

Blame the confusion on John D. Rockefeller. In 1891, he founded the University of Chicago — Friedman’s perch, as irony would have it — and from the outset, Chicago set the pace for the rest of academia, ruthlessly cleaving politics from economics. The hoary old term “political economy” was swept into the dustbin of history — “deemed unscientific and inappropriate in social sciences,” as described in the journal Critical Sociology in 2007.

Now you know…


Dave Gonigam
The 5 Min. Forecast

P.S. While the market slides, Options Hotline readers watch the gains pile up: 91% in less than a month on stumbling small caps… and 63% in a little over two weeks on a lumbering industrial giant.

Editor Steve Sarnoff’s next recommendation is due this Sunday. As you’ll see here, you could easily make money on your very first trade.


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