December 2, 2013
- Dispatching Joe Biden to avert World War III
- Byron King on the profit possibilities from China’s “Air Defense Identification Zone”
- Taking the pulse of the world’s factories…
- One step closer to gold’s “Zero Hour”
- More input on the length of The 5… a reader’s partisan plea… a clever Bitcoin stunt… and more!
“China is going to eat our lunch,” declared Vice President Joe Biden last spring during the commencement speech at the University of Pennsylvania. To which he then added, “Their problems are immense, and they lack much of what we have.
“You cannot think different in a nation where you cannot breathe free. You cannot think different in a nation where you aren’t able to challenge orthodoxy, because change only comes from challenging orthodoxy.”
Many Chinese nationals were among the graduating seniors. One of them took offense… and took to Renren, China’s version of Facebook.
“Imagine,” he wrote in a post that went viral, “you study abroad — say, in England — and then you’ve worked very hard for four years, spent so much sweat and toil to get that degree and you wake up one morning in your academic regalia and suddenly there’s this old guy standing on the podium saying, ‘You guys suck.'”
Turns out “nation” can be interpreted in Mandarin to mean “race” or “ethnicity.” Oops.
We briefly document this event — one of 390,000 hits on Google for the search terms “Biden” and “gaffe” — by way of saying…
It falls to the vice president to go to China this week and try to avert World War III.
The trip — also including stops in Japan and South Korea — had been scheduled long ago. But now it will be dominated by a term we’re all going to have to get used to, an “Air Defense Identification Zone” or ADIZ.
Ten days ago, the Chinese government expanded its ADIZ off the coast of China — all the way beyond the “strategically irrelevant and economically marginal islands” we’ve been writing about for nearly a year now. China calls them the Diaoyu. Japan calls them the Senkakus. Both nations claim them. Japan has controlled them for nigh 120 years.
“China,” according to the BBC, “says aircraft operating within its ADIZ must follow certain rules such as filing flight plans or face ‘defensive emergency measures.’ U.S., Japanese and South Korean military aircraft have all defied these rules and Japanese commercial carriers have agreed to a government request not to comply. On Friday, China scrambled fighter jets to monitor U.S. and Japanese planes flying in the area.”
(Click map to enlarge)
Yeah, it’s serious stuff. And don’t forget the United States is obligated by treaty to come to Japan’s defense if events get out of control.
“The new Chinese ADIZ goes beyond diplomatic words,” says our Byron King. “It is a powerful, meaningful act of state. In essence, the ADIZ is a unilateral statement by China that ‘this is ours.'”
“China’s new ADIZ is one of the most politically destabilizing developments in East Asia since the Korean War of 1950-53,” Byron hastens to add.
“When you take it all in, China just converted a war of words with Japan into a full-blown, potential wartime scenario. The new Chinese ADIZ now clearly defines a battle space.
“Under traditional international law, Japan could view the Chinese ADIZ declaration as an act of war. At the very least, the Chinese ADIZ is a direct military challenge to Japan.
“When you distill these new ‘China rules’ to their essence, it’s obvious that China is setting the stage to militarize the Diaoyu/Senkaku dispute with Japan, and perhaps other disputes with other neighbors. It’s a clear threat of military action if Japan — or anyone else, for that matter — violates the new ADIZ.”
“Expect blowback from China’s unilateral ADIZ declaration,” Byron adds, “and expect that it’ll be more than the Chinese likely expected.
“I foresee increased defense budgets for aircraft, ships and systems intended for East Asia among Japan, South Korea and the U.S. I anticipate that Taiwan will use the ‘new mainland’ Chinese ADIZ as justification for more defense spending. Meanwhile, other nations in the Southeast Asia region will doubtless take the matter with complete seriousness. That includes the Philippines, Vietnam, Brunei, Singapore and others.”
That is, even if planned increases in Pentagon spending are trimmed further by the “sequester,” other nations will step into the breach and keep the big U.S. defense contractors humming. “Really,” Byron concludes, “thanks to China and its ADIZ announcement, money will flow like Niagara into Asian rearmament.”
[Ed. Note: It’s not only ships and planes — “big iron” — that stand to get huge new flows of money. The fastest-growing niche within the defense space is what Byron calls the “fifth domain of war” — beyond land, sea, air and space. The feds are about to unleash a $16.1 billion spending spree, and Byron has tapped his extensive contacts in government and industry to identify the seven players most likely to grab the lion’s share. For access to the “MI Wealth Secret,” look here.
Major U.S. stock indexes are starting the new week in much the same fashion as the previous week — oscillating near record highs, but with little direction.
As we write, the S&P and the Nasdaq are almost flat; the Dow and the Russell 200 have slipped a bit.
It being the first workday of the month, traders are chewing on November manufacturing numbers from around the world. With each of these numbers, 50 marks the dividing line between growing or shrinking factory activity…
- China: 51.4, same as October, according to the Chinese government. A separate measure from HSBC rang in at 50.8, better than the “expert consensus” was looking for
- Eurozone: Up from 51.3 to 51.6
- United States: Up from 56.4 to 57.3, the highest since April 2011, according to the ISM Manufacturing Survey. Within the index, new orders powered up to 63.6.
The moment the ISM number came out at 10:00 a.m. EST, gold took a tumble. At last check, the bid was $1,230.
Well, that’s just more gold the Chinese can scoop up at bargain prices.
China’s gold imports via Hong Kong totaled 129.9 metric tons in October. That’s the second-highest monthly total on record, and once again an impressive year-over-year increase…
Net imports via Hong Kong will likely top 1,200 metric tons in 2013, according to Lawrence Williams at Mineweb. And remember the Hong Kong figures are the only gold imports China discloses publicly. “China also imports gold through other routes,” he writes, “notably Shanghai — and that total import figures now look likely to be nearer 2,000 tonnes — some analysts put them even higher — rather than those shown by the Hong Kong figures alone.
“Thus, gold continues to move from West to East, seemingly at an accelerating rate with China being fed by the gold bleeding from the big gold ETFs as well as from global new mined production.
“When are investors in the West going to wake up to the fact that if China carries on buying at current rates — and there’s no sign of any slowdown — there soon won’t be any physical gold left to trade in the traditional markets — it will all be being swallowed up by China and the other Eastern consumers?”
Which only puts us closer to the “Zero Hour” scenario we’ve been exploring all year: “If anything points to a massive price squeeze ahead,” writes Mr. Williams, “this has to be it!”
“Making history,” reads the subject line of an email passed along by our fearless leader Addison Wiggin from old friend Mark Skousen.
For decades, Mr. Skousen has found fault with the government’s measurement of gross domestic product (GDP). Recall from previous episodes of The 5 that the formula is as simple as it is problematic…
Skousen says a better measure is what he calls “gross output.” “GO attempts to measure total sales from the production of raw materials through intermediate producers to final retail,” he writes at Forbes. “Based on my research, GO is a better indicator of the business cycle, and most consistent with economic growth theory.”
Starting next year, the Commerce Department will include a measure of GO in its regular reports on GDP. “I’m excited,” Mr. Skousen tells us — “this is a personal triumph nearly 25 years in the making.”
We like GO to the extent that it puts less weight on consumer spending: Anything to undercut the daft notion routinely parroted in the media that “consumer spending makes up 70% of the economy”… and if only consumers would spend more, the economy would grow faster!
On the other hand, GO still assumes the more government spending, the better — even if the government were to pay people to dig holes and pay them again to refill those holes. Nor can we shake the notion that GO, like GDP, is an abstraction that tells you precisely nothing about how to invest your money.
But hey, small victories…
“I lost my health insurance a few weeks ago,” a reader writes as we compile Obamacare tales of woe. “Well, sort of lost it.
“Had a great health plan, which was apparently not compliant with the new Obamacare rules. So the insurance company decided to cancel that plan. My employer had to figure out what to do about that. In the end, they switched carriers to another company and gave us choices of new,
‘compliant’ plans.
“With this new plan, my copay for office visits doubles, my deductible doubles, my out-of-pocket doubles and my annual cost is 2.46 times as much as this past year. And the new plan is with a company I had once before and hated for their incredible bureaucracy and lousy service.
“I can see clearly now how I am paying for the health care of others that did not previously have health insurance. Makes me want to scream.”
The 5: That’s only half the story. The other half ties in to the stories you see about 50-something couples paying for maternity coverage and the like.
We’ll dive into that some more later this week. In the meantime, some of Obamacare’s biggest provisions go into effect in only 30 more days. There’s still time to prepare… but the clock’s ticking.
“I’m a slow reader,” writes a reader weighing in on the length of our daily missives. “I’ve been a slow reader all my life.
“There’s no way I can finish The 5 in five minutes. It’s more like 15-20. But so what? It’s the best source of news as far as I’m concerned. Occasionally, I find something that’s not immediately crystal clear, but rarely. I read every issue of The 5. I don’t care how long it takes. It beats the fumes they spew out on TV any day. Thanks for providing this service.”
“The 5 is the ONLY newsletter worthy of my time,” adds another, profuse with praise. “I am retired, so have lots of it, but why bother when this so far exceeds everything else out there?
“You are so far above every other — well, since I have not read every other, it is far superior to the ones I HAVE read. Your willingness to print the crapola when other readers display their pettiness is so superior to the excuse-making made by other, lesser publications and all the evidence we need to confirm your excellence.
“Thanks for your broad-brush approach — there is so much going on it is comforting to know you — and we — are up to snuff.”
“Has it occurred to you,” a reader writes, “that I and many other people do not appreciate your playing on the anger and fears of people who dislike the president?
“It is not only Republicans who read your articles. This country is divided, and headlines like yours are not helping it. You can get your points across to your readers in a better way than you are doing. Please think about it. It is perfectly normal to be both an investor and an American and also be a Democrat. I would appreciate an answer.”
The 5: We’re not sure which headline you’re referring to, but any criticism you see is strictly nonpartisan. Maybe even “anti-partisan,” considering our attitude toward voting in the first place.
Or to put it another way, we can’t help it if the clown who occupies the White House at any given time belongs to one party or the other…
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. Did you hear about the guy who raised more than $23,000 by waving a sign on TV asking for Bitcoin?
Seriously. You could see him in the background Saturday morning during ESPN’s College GameDay broadcast from Auburn University.
Someone posted a screenshot on Reddit, and someone else blew up the QR code to identify the guy’s Bitcoin “wallet.” Soon the whole thing became a phenomenon making Reddit’s front page and the guy collected 109 donations totaling 22 Bitcoins.
With Bitcoin trading at $1,053 today, that’s $23,166. The man promises to donate most of the proceeds to a homeless shelter in Pensacola, Fla.
Still not sure what to make of the Bitcoin phenomenon? The Laissez Faire Club recently revised and updated its Bitcoin Bible — everything you ever wanted to know and the government doesn’t want you to know. Learn how to get your free copy by following this link.