May 27, 2014
- From shipping cranes to oil rigs… and a hot war on the high seas?
- Byron King on the “quick, bare-bones fight” China’s preparing for
- The property baron who just warned of a “Titanic” sell-off
- Clear sailing for large caps… but small caps will have the last word
- After the coup, Neil George scouts out opportunity in Thailand
- The biggest lawsuit ever… tracking all those federal firearms… how sex and drugs can boost GDP, continued… and more!
We begin this episode of The 5 picking up where we left off a week ago today.
Then, we noted the arrival of three massive shipping cranes aboard a specially designed freighter at Port Newark in New Jersey. Built in China, these newer, bigger cranes can quickly unload larger ships that will pass through an expanded Panama Canal starting next year.
Here’s a quick refresher of what they look like…
“Then there’s this structure,” says our military affairs expert Byron King — “another symbol of China’s industrial expansion… also built in China and floated to site on specially designed systems.
“And,” he adds, “protected by the Chinese Navy.
“By moving this drilling rig on-site in South China Sea,” says Byron, “China now has created major territorial issues with three major Asian nations — Japan, the Philippines and Vietnam.”
This morning brings word a Vietnamese fishing boat sank after it collided with a Chinese vessel near the rig. Each country’s government is blaming the other. “Whatever the truth,” the BBC reports, “the sinking is likely to further escalate tensions between the two countries, given that for the past few weeks they have engaged in skirmishes at sea.”
Let’s quickly revisit a map of the region. As you see, five nations have overlapping territorial claims… but the drilling rig makes China and Vietnam the most immediate source of trouble. China’s claims are marked by the U-shaped light blue line…
“Large-scale deep-water rigs are our mobile national territory and a strategic weapon,” declared the chairman of Cnooc — a Chinese state-owned oil company — two years ago.
Byron suggests China is itching for a brief and decisive war at sea with Vietnam. The two fought a brief and indecisive war on land in 1979. And unlike Japan and the Philippines, Vietnam is not protected by the U.S. military umbrella.
“China could endure a quick, bare-bones fight,” he says — “as long as it leads to a decisive ‘win’ of some sort with which to justify, at home and abroad, its major military buildup of recent years (financed by foreign exports…. like those cranes).”
Nothing like a short, sharp war to distract the populace from an economic crisis.
At least that’s the thought that comes to mind upon seeing one of China’s property tycoons caught in a candid moment.
Pan Shiyi is the founder of Soho China Ltd. “I think China’s property market is like the Titanic,” he was quoted as saying during a panel discussion on Friday, “and it will soon hit an iceberg in front of it.”
For further effect, he added, “After hitting the iceberg, the risks will not only be in the real estate sector. The bigger risk will be in the financial sector.”
Pan also offered that he was selling considerable holdings, anticipating a 20-30% drop in housing prices.
He thought he was answering the question off the record: “I didn’t expect there are countless reporters hiding [in the audience],” he said.
But there were, and the rest is history. Heh…
“Apparently,” quips David Stockman at his lively Contra Corner site, “the millions of Chinese sheeple who have piled into the luxury apartments sold by Soho China Ltd and its legions of imitators were not supposed to know about the upcoming end of the Titanic’s voyage just yet.”
Meanwhile, China has fired the latest shot in the cyberwars — days after the U.S. Justice Department indicted five officers in China’s People’s Liberation Army on hacking charges.
A Chinese government agency issued a report saying Chinese leaders are a main target for U.S. spies. “The United States’ spying operations,” says the report, “have gone far beyond the legal rationale of ‘anti-terrorism’ and have exposed its ugly face of pursuing self-interest in complete disregard of moral integrity.”
As if to underscore the point, the Chinese government is urging domestic banks to get rid of computer servers made by IBM and replace them with Chinese-made ones.
Easier said than done: “There aren’t any locally made hardware around that can handle the massive amount of data in the banking industry,” said an anonymous IT executive at one of China’s big four banks.
“The essence of the U.S.-China spat over cyberespionage reveals hypocrisy on the American side and misdirection on the Chinese side,” says an Op-Ed in the South China Morning Post. “Neither government is truly serving the welfare of its own people with their respective claims…
“One government thinks it should be able to spy on anyone, including its own citizens, because it is keeping the world safe. The other government thinks it should be able to steal anything because it has been a victim.”
We don’t expect a truce anytime soon… so we expect investment dollars to continue flooding into the sector. For access to the niche players most likely to capture the lion’s share, give this a good look.
Major U.S. stock indexes are in the green this morning. The S&P 500 is inching further into record territory as we write, at 1,911.
And with that, Jonas Elmerraji of our trading desk is finally ready to break out the champagne. Even the close above 1,900 on Friday wasn’t enough to convince him stocks were breaking out of his “snooze zone.”
But now, “We’re finally seeing a more meaningful breakout out of the range that the S&P 500 has been stuck in for the last three months.
“That doesn’t mean stocks are going straight up from here, but it should mean a return to the kind of directional trading that treated investors so well in 2014. As long as the uptrend in the S&P holds up, we’re still in a ‘buy the dips’ market.”
But can it hold? Watch the small caps, says Greg Guenthner.
“This week will give us some very important clues that could determine where this crazy market is headed this summer,” he says. “If the Russell 2000 can build on last week’s bounce, we could see it break out of its three-month downtrend and help buoy the market. But if last week’s showing turns out to be nothing more than a dead-cat bounce, another test of recent lows could materialize very, very soon.”
As we write, small caps are leading the way this morning, the Russell up 1.3%, at 1,141. The Dow can’t eke out even a half-percent gain…
“I see this ‘crisis’ in Thailand as a potential opportunity to buy,” says our income specialist Neil George, eyeing yet another trouble spot on the globe.
Secretary of State John Kerry fulminated before the cameras after the military coup there last week, but that was for public consumption: “The main game in Asia is China,” a State Department planner tells the Washington-insider website the Swoop. “We don’t want to pick quarrels with otherwise friendly nations in Southeast Asia.”
Coups in Thailand are nothing new, Neil reminds us: “Thailand’s military has felt the need to step in and replace the government 19 times since the nation drew up its constitution in 1932.” So while curfews are in effect and media outlets are shut down, “we’re also seeing a lot of stories about Thais just going about their lives.
“Thailand has a broadening economy — a rising middle class and investment inflows supporting further infrastructure development, as well as manufacturing supplying further exports. Plus, over the last 10 years — even including a few coups — Thailand’s SET 50 Index is up over 309%, for an average annual return of over 15%.
“I’ve found plenty of investment opportunities in the country, particularly as the politics ebb and flow every few years. What makes the country particularly inviting is that many of my favorite companies in this market favor investors with nice dividends.”
Neil is eyeing two names that trade on U.S. markets — one with a double-digit yield — as potential additions to the Lifetime Income Report portfolio.
Everything costs more in New York — including the amount demanded in lawsuits, evidently.
Anton Purisima is suing the Au Bon Pain bakery cafe chain — along with the city of New York, Hoboken University, LaGuardia Airport, the Metropolitan Transportation Authority and a buncha others. He claims, among other things, he was bitten by a dog on a city bus and that he’s regularly overcharged for coffee at the airport.
Purisima is seeking $2 undecillion. That’s a two followed by 36 zeroes. The Lowering the Bar blog reckons this amount eclipses the previous record for money sought in a lawsuit — a 2010 suit against Bank of America for $1.784 septillion (only 24 zeroes after a septillion).
The What If? blog helpfully points out the value of all goods and services produced by humanity since evolution began won’t come even close to making Purisima whole. “Even if Au Bon Pain conquers the planet and puts everyone to work for them from now until the stars die, they wouldn’t make a dent in the bill.”
Purisima is no stranger to a courtroom, evidently: Time informs us he’s previously sued everyone from Wells Fargo to the People’s Republic of China.
A quick 5 follow-up: The Justice Department is undertaking a study of how many federal agencies now have armed law-enforcement divisions.
We bring up the matter after the email from a reader last week pointing out the Agriculture Department’s purchase order for submachine guns and ammo — the better to subdue organic farmers, or something like that.
“The Justice Department’s Bureau of Justice Statistics (BJS) will undertake this year’s report,” reports The Hill — the first survey performed since 2008. “It is not clear when the data will be finalized, though the final release could take until early 2015.”
The 2008 study found 73 government agencies employed some 120,000 armed agents — 80% of them with either the Justice Department or Homeland Security.
One agency that has given up its armed division since then — the Library of Congress.
Progress…
“I recently read,” a reader writes, “that the cost of regulation in the U.S. is $1.8 trillion annually.
“When the cost of regulation exceeds the revenues that the government takes in, estimated at $1.4 trillion, how can anyone expect our country to move forward with growth? You don’t need a high IQ to figure this out.”
The 5: The figure is indeed $1.86 trillion, as calculated by the Competitive Enterprise Institute — more than the size of the Canadian or Australian economies.
However, those costs do not yet exceed the amount of federal revenue — $2.77 trillion in 2014.
Those regulatory costs work out to $14,974 per household — more than any other household expense except shelter.
“To the reader who wrote about government regulations killing manufacturing jobs in the U.S.,” a reader writes: “It was NAFTA that killed those jobs, and opening up to China and its two dollar a day labor there. You cannot compete against that, no matter how low taxes are and eliminating all government regs.
“It must be awful warm and cozy with his head up Ayn Rand’s a**.”
The 5: How did NAFTA send jobs to China? Mexico maybe…
“Sounds like the U.S. could boost GDP real easily by legalizing prostitution and disclosing the CIA’s drug running operations,” a reader writes after we noted Italy’s move last week to add illegal drugs and prostitution to its GDP figures.
“Legalize the drugs and you get even more glorious numbers. It would certainly get the pols out of a lot of personal publicity problems. If only there were more goods production than services in all of that… sigh…”
The 5: Well you do bring up an interesting spin on Agora Inc. founder Bill Bonner’s gripe with GDP: If two guys mow their own lawn, he points out, it adds nothing to GDP, but if they mow each other’s lawn and pay each other $30, the economy miraculously grows by $60.
So if a prostitute…
Naw, we won’t go there today.
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “The toxic corporate culture that led up to the crisis and TARP has not sufficiently changed.”
So said a report last fall by the inspector general for TARP — the “Troubled Asset Relief Program,” aka the best known of the 2008 bank bailouts.
Well, it’s good to see somebody in the government acknowledge the problems that led up to 2008 haven’t been fixed yet.
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