What Casey Research Staff Are Buying This Summer

By Jeff Clark, Senior Precious Metals Analyst

I ran across a business show last week that advertised that its guests would give out stock picks. That piqued my curiosity, so I watched to see what they would recommend. For disclosure purposes, a chart was shown that listed if the speaker, his family, his fund, or his clients owned the stock. By the end of the show, I was flabbergasted—not one speaker owned any stock they recommended!

Anyone can go on television and tell investors company X is a great investment, but how much should you trust them if they don’t follow their own recommendations? The counterargument is that the speaker could be biased if they recommend stocks they already own because then they’re just “talking their book.” True enough.

But consider a more personal situation: If you got specific investment advice from a professional you hired and found out he never bought what he told you to buy, how seriously would you take his advice?
What if a newsletter service recommended you buy gold and gold stocks, but their editors didn’t follow their own advice? And what if the market retreated and they encouraged you to average down—but they didn’t?
In the June BIG GOLD, I told subscribers to put the final touches on their precious metals portfolio over the summer, to take advantage of low prices. Do I take my own advice? What about the rest of our staff? And what about those at Casey Research who write non gold publications?

I decided to poll our editors to see if they follow the advice in BIG GOLD and International Speculator and what they plan to buy this summer in the precious metals arena. Here’s what they told me…
Doug Casey, Chairman: Most everything is overpriced, thanks to the Fed’s unprecedented money printing. That includes stocks and property, and bonds are in a bubble. So I continue to buy the metals consistently, and do private placements in deserving companies. The metals and mining stocks are about the only value out there.

Olivier Garret, CEO: I am definitely not reducing my exposure to precious metals [PMs] and stocks. I will add to my positions in PMs at Hard Assets Alliance. Our funds, of which I am a large shareholder, continue to deploy capital in the best-of-breed resource companies.

David Galland, Managing Director: Over the last year, I have been taking full advantage of the softness in the precious metals sector by concentrating my purchases only on the best of the best precious metals stocks, deciding on a price I am thrilled to pay and then waiting for the price to come to me. I have also been very selective in participating in private placements. If a private placement doesn’t come with a very favorably priced warrant with an expiration date at least three years out, giving the company time to take its business to the next level, then I’m simply not interested. That’s the beauty of periods of consolidation—you can afford to be selective.

I also like to build large positions in companies which I know have the right stuff, including a significant and feasible project as well as the money and the management needed to get the job done. When those companies pull back—as they invariably do in markets such as these—I have no reservations about buying more. Pretium Resources falls into that category. My personal upside target is over $15, so buying at these levels is a no-brainer for me. That said, I’m not greedy, so when I get a solid double-digit return on a stock, I’m happy to take a profit.

I guess when it comes down to it, now that I live most of the year in my version of paradise—La Estancia de Cafayate—and dedicate much of every day to fully enjoying the place, I try to keep things simple. Primarily, by setting aside a couple of hours each month to review my portfolio in order to make sure I still understand why I own all the investments I own and to rebalance any positions that have grown outside of my comfort zone, or pulled back, allowing me to continue to build a position. In the case of precious metals-related investments, I am very comfortable with them totaling about 25% of my overall portfolio.

Dan Steinhart, Managing Editor, The Casey Report: I have all the physical metal I want for now, and I averaged down on a couple junior miners in the last few months. For this summer, I’m looking hard at mid- and large-tier dividend payers. I want more exposure to gold because I’m confident it’s going to the moon, but I have no idea how long it will take to get there. Collecting dividends helps offset the opportunity cost while I wait. I already own a good amount of Goldcorp, so Yamana is my next target… I’m watching its chart for signs that the price has stabilized, and once I see that, I’m ready to buy.

Marin Katusa, Chief Energy Investment Strategist: I am looking to build positions in certain stocks but don’t want to advertise which ones.

Bud Conrad, Chief Economist: Gold is my largest personal position. As I wrote in the April issue of The Casey Report, the world’s financial system is approaching an important rebalancing. New political alignments will undermine the dollar’s special privileges and in turn will elevate gold’s importance.

The petrodollar arrangement will not last forever, and cracks are beginning to form that suggest it may decline faster than most expect. Since the 1970s, Saudi Arabia and OPEC have only accepted dollars for oil. The new $400 billion agreement between Russia and China does not use dollars, and this is a major geopolitical shift that could eventually undermine the reserve status of the dollar. The price of gold could rise into the thousands of dollars very quickly if the petrodollar system fails.

In the meantime, investors should understand that current price weakness comes from short term, big, institutional influence rather than from economic fundamentals. There are big forces that are able to move markets—interest rates, commodities, and stocks. The key movers are the central banks and their closely related big banks. Some international banks are being indicted for illegal activities in LIBOR, foreign exchange, and most recently London bullion fixings. Employees are being fired, some are leaving, and firms are closing some of their trading desks. We even have suspicions about some bankers’ deaths.

The Fed’s massive and not completely revealed actions have been used along with the truly massive derivatives and futures markets as developed and traded by the big banks to distort the traditional economic forces so that big deficits can be managed by keeping rates low. Prices can thus be managed in the short term, and the media continues to support the government’s policies. That high-frequency trading is tolerated as described in Michael Lewis’ book Flash Boys is only the tip of the iceberg of all that is going on.
In the long term, I agree with Doug Casey: we still face the greatest financial collapse ever when the current machinations hit their limits and the deception becomes widely understood.

Dennis Miller, Senior Editor, Miller’s Money Forever: I have a full allocation to precious metals, but I have a growing concern that Obamacare, by design, will ration care for seniors. Pity the poor senior that goes to Panama for treatment because he can’t get it in the US, or the wait is too long, or it’s too expensive—only to realize currency controls have been instituted and he can’t get money out of the country! As a result, I have been using some of the strategies in our Going Global 2014 report to assure that this won’t happen to me or my wife. And gold is part of that strategy.

Nick Giambruno, Senior Editor, International Man: This summer I plan to continue with steady purchases through MetalStream^® for gold bullion held in Singapore. I’m also keeping a higher than normal cash reserve for stink bids on juniors. I already have adequate exposure to silver and large producers.

Shannara Johnson, Chief Editor: I buy silver every week through SilverSaver, a metals accumulation program that allows you to save as little as $25 per week. When I get extra money, such as bonuses, I often use a lump sum to buy a larger amount of silver on dips. As Doug Casey says, only metal that you can hold in your hand is really yours, so whenever my SilverSaver account reaches a certain level, I have some of the bullion delivered.

The reason I’m buying silver instead of gold is that it’s more affordable, and also because of the “divisible” part of Aristotle’s criteria for money. If there ever comes a crisis so devastating that paper dollars become worthless and precious metals are used for trade and barter, I imagine that silver bullion coins will be easier to, say, buy food with than gold coins or bars.

I’m very wary of the cancer that is eating away at the heart of America—call it crony capitalism or neo-feudalism—and everything the government and Wall Street do seems to be designed to separate the little guy from his money. I believe precious metals are manipulated, the markets are manipulated, and we saw in Cyprus that nothing is sacred anymore, not even our own bank accounts. I don’t plan to sell my silver unless I have to—it’s a safety net in case things go from bad to worse.

Doug Hornig, Senior Editor: I think quality numismatic coins are the best buy right now, which I’ve focused on, because they’re down 50% or more from their highs, which is a lot more than gold itself. If collectibles rebound as they always have, I’ll do very well. But if not, I still have the value of the underlying asset, gold, which provides a powerful amount of downside protection, and that’s not to be sneezed at.
I don’t buy gold as a speculation; just as an heirloom (hopefully, provided I don’t need it myself) for my kids. So I couldn’t care less about the gyrations of the gold price. Anyone who wants to play those ups and downs is welcome to, and it could be very profitable to do it. It’s just not for me. I’m strictly buy and hold.

Ed Steer, Editor, Gold & Silver Daily: I’m full up on stocks, as I’m still “all-in,” with virtually all of them junior silver producers from BIG GOLD. Right now I’m buying silver—physical metal in hand—as it won’t be at this price forever.

Chris Wood, Senior Analyst, Casey Extraordinary Technology: I just used the bulk of the cash I had budgeted for investing this summer to buy several of the Casey Extraordinary Technology stocks we recently recommended. So I probably won’t do much in the way of precious metals investing this summer, but I definitely plan on it this fall: buying physical gold and silver bullion coins, and setting up an account with the Hard Assets Alliance.

The short term technical picture for gold doesn’t look great, coupled with the dollar strengthening over the past month and yen declining, which is generally bearish for gold. But I honestly don’t care about that at all. The long-term fundamental picture has only improved, save for the small bit of tapering that the Fed has initiated in its bond buying program. Central banks around the world continue to create currency units at a record pace.

And the mid-term outlook for gold looks good too. Even though the dollar has strengthened over the past few weeks, the beginning of the end of the petrodollar system (shown most recently by the China/Russia gas deal) and China’s desire to essentially create a new UN without the US and EU but with Russia and Iran, has to be bullish for gold.

Kevin Brekke, Managing Editor, World Money Analyst: The post-2008/09 financial crisis run-up in gold had everyone from die-hard gold bugs to momentum jockeys riding the price wave. It seemed the trend would never end. Then came the countervailing realities of monetary, currency, and economic interventions, deflationary forces, and—gasp!—profit taking.

The ensuing price volatility in the precious metals sector had the myopic, trade for today crowd scamper to the next hot trade. Yet, the consequences of misguided policies remain unknown, and the excesses that were deployed to resolve them have simply been repressed. The underlying fundamentals are unchanged, and I will not sell my gold and render myself unarmed against the eventual fallout from a delayed day of reckoning.

Louis James, Chief Metals & Mining Investment Strategist: Our household is tight on cash this summer, as we just poured much of our liquidity into buying our new home in Puerto Rico. Still, my wife and I have been going over our budget and plan to buy some stocks, maybe more bullion as well. Which ones will depend on what looks best when we pull the trigger, but adding to our position in BOZ is a high priority, and we’re thinking about SWC, too, as we’ve yet to add exposure to platinum/palladium, and our diversification into that sector in the newsletters seems to be working out even faster than expected.

If the market correction continues and we see the capitulation this summer that was close but never really fully developed last December, I will do all I can to scrounge up more cash to deploy, because I think it will be both life-changing and a once in a lifetime event.

What About Me?

I have been buying tubes of silver Eagles and Maple Leafs every time silver dips to $19.50 or below. I plan to buy the discounted bullion offered in the June BIG GOLD, as well as the new Canadian Howling Wolf. I have full exposure to equities in the precious metals space—but then Louis or Marin will recommend a compelling speculation and off I go turning over couch cushions.

What I have found very rewarding is that by just sticking to a regular accumulation plan, my stash has steadily grown. Given the crises I see ahead, I want to be sure my household can withstand the fallout, which could be ugly if Doug Casey, Bud Conrad, James Rickards, and Jim Rogers are right. The financial crisis in 2008 was a wake up call, and I realized then I probably didn’t have sufficient monetary protection. I feel differently today, thanks to my regular buying habits.

Since I’m in the public eye, I don’t keep any bullion at home—except for a dummy stash. I use several of the services recommended in our Bullion Buyers Guide, that you don’t have to be a high-net-worth investor to use.

Conclusion

What you see above started out as a survey but ended up becoming a great set of precious-metals-related investment advice. I hope you find it helpful.

If you’re interested in precious metals investments, but don’t know where to start, read our free special report, the 2014 Gold Investor’s Guide. It tells you how and when to buy gold and silver bullion… what to watch out for when investing in gold stocks… and much more. Click Here to Get it Now.

The article What Casey Research Staff Are Buying This Summer was originally published at Casey Research

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Can Central Planners Revive China’s Economic Miracle?

By John Mauldin

For years, when asked whether I thought China would experience a hard landing, I would simply answer, “I don't understand China. Making a prediction would be pretending that I did, so I can’t.” The problem is that today China is the most significant macroeconomic wildcard in the global economy. To understand both the risks and the potentials for the future you have to reach some understanding of what is happening in China today. Last week we started a two part series on what my young associate Worth Wray and I feel is the significant systemic risk that China poses to global growth.

The first thing in my inbox this morning here in Tuscany was a note from a friend about the growing scandal in Quingdao. For a long time many of us have known that there has been “double counting” in the commodities trade sector in China, where local “entrepreneurs” create multiple warehouse receipts on which to borrow money cheaply, and then invest in what are essentially subprime securities that pay higher rates. Everyone “knows” that the government is not going to let anyone lose money on investments, so what could possibly go wrong? It turns out that Chinese warehouse officials are now emigrating in significant numbers to parts unknown around the world, armed with only their passports and whatever money they made through producing such bogus receipts.

My sources suggest that the size of the problem is approaching $1.3 billion (far greater than the number being bandied about in public reports). Since one of the guiding principles operative in any scandal is that there is never just one cockroach, I expect the ultimate losses to be far larger. And it appears that the People’s Bank of China is finally going to let people lose money on these fraudulent schemes. Good for them. But to suggest there is no risk in cleaning up corruption and fraud misses the point of our own subprime crisis. In a world where global economic trade and international banks are so intricately linked, trying to determine the actual risk to the system is difficult. And as I will note in my “final thoughts” section, corruption is a very real issue.

We are going to try gamely to finish with China today, having left at least three or four letters worth of copy on the editing floor. There is just so much information and misinformation to cover. I’m going to turn it over to Worth and then follow up with a few final thoughts of my own. (Please note that this letter will print exceptionally long as there are a number of charts and other graphics.) Now let’s do a deep dive into part two.

Can Central Planners Revive China’s Economic Miracle?

By Worth Wray
In my Thoughts from the Frontline debut this past March (“China’s Minsky Moment?”), I highlighted the massive bubble in Chinese private-sector debt and explored the near-term prospects for either (1) a reform-induced slowdown or (2) a crisis-induced recession. Unfortunately, it was not an easy or straightforward analysis, considering the glaring inconsistencies between “official” state compiled data and more concrete measures of all real economic activity, which is why I suggested that China is simultaneously the most important and most misunderstood economic force in the world today.

With the stakes now higher than ever, I returned to Asia’s “miracle” last week (“Looking at the Middle Kingdom with Fresh Eyes”) and probed deeper into the shadows (including China’s shadow banks) with the help of my new friend Leland Miller and a few illuminating excerpts from his Q1 2014 China Beige Book (the largest and most comprehensive survey series ever conducted on a closed or semi-closed economy).
Pulling back the Bamboo Curtain, Leland’s data revealed aspects of the Chinese economy that John and I could have only guessed at before, giving us a rare opportunity to explore regional contrasts in Chinese economic activity, to survey the modest (but still insufficient) rebalancing among sectors, and to identify a series of pressure points within the credit markets that suggest last summer’s interbank volatility may return in 2014.

Unfortunately, Leland’s key insights confirmed our fears that China’s consumption-repressing, debt-fueled, investment-led growth model is slowing down and starting to sputter… but not collapsing (at least not yet). 

What happens next – with huge implications for global markets – depends largely on the economic wisdom and political resolve of China’s central planners, who must find a way to gradually deleverage overextended regional governments and investment-intensive sectors while also rebalancing the national economy toward a consumption driven growth model.

Finessing the challenges will require not just one but a series of miracles.

Like Every Other Investment-Driven Growth “Miracle” 

After 34 years of booming economic growth averaging over 9% per year (the longest sustained period of rapid economic growth in human history), China’s credit-fueled, investment-driven growth model is exhausted and increasingly unstable. As you can see in the chart below, the Middle Kingdom’s credit boom is well past the point of diminishing marginal returns; and no one can deny that the misallocation is widespread, with capacity utilization now below 60%. (I should also note that Societe Generale’s Wei Yao has consistently published some of the best research on China in recent quarters; personally, I won’t be surprised to see her vault to rock-star status as the People’s Republic decelerates.)


Source: Wei Yao & Claire Huang, “SG Guide to China Reform.” Societe Generale Research, May 14, 2014.

Moreover, state perpetuated distortions in the cost and availability of financing are (1) funneling huge amounts of capital toward increasingly unproductive, state directed investments, and (2) pushing household and private business borrowers into the shadows, where the burden of substantially higher interest rates drags on household consumption.


Source: Wei Yao & Claire Huang, “SG Guide to China Reform.” Societe Generale Research, May 14, 2014.

It doesn’t require much imagination to connect the dots. Structural distortions in Chinese financial markets are a major cause of debt fueled overinvestment; and without sweeping structural reforms (along with a major crackdown on corruption at all levels of government), captive capital will continue to flow toward unproductive investments, capacity utilization will continue to fall, and China’s investment boom will continue its march toward a mega Minsky moment.

This kind of structural distortion is a classic symptom of an overextended investment boom and a warning sign that rebalancing – whether it’s induced by voluntary reforms or an involuntary debt crisis – will not be easy. The critical adjustments – gradual deleveraging and structural rebalancing – will require a greater slowdown in economic growth and a sharper fall in still-bubbly asset prices than China’s policymakers are letting on.

“This is not an easy task,” The Daily Telegraph’s Ambrose Evans Pritchard says, in a truly brilliant article published this week, “not least because land sales and taxes make up 39% of state revenue in China, and the property sector employs 20% of workers one way or another. It is clearly a bubble of epic proportions and already losing air. Mao Daqing from Vanke – China’s top developer – says total land value in Beijing has been bid up to such extremes that is on paper worth 61.6pc of America’s GDP. The figure was 63.3pc for Tokyo at the peak of the bubble in 1990.” Yikes.

As Peking University professor Michael Pettis explains in his 2013 book, Avoiding the Fall: China’s Economic Restructuring, “Every country that has followed a consumption-repressing, investment-driven growth model like China’s has ended with an unsustainable debt burden caused by wasted debt-financed investment. This has always led to either a debt crisis or a lost decade of very low growth.”
China’s “miracle” is no different from any other investment-driven growth binge where high levels of leverage (directly or indirectly paid for by the household sector), combined with high levels of fixed investment, eventually result in excessive and unsustainable debt loads. Pettis elaborates:

While these policies can generate tremendous growth early on, they also lead inexorably to deep imbalances. As demonstrated by the history of every investment-driven growth miracle, including that of Brazil, high levels of state-directed subsidized investment run an increasing risk of being misallocated, and the longer this goes on the more wealth is likely to be destroyed even as the economy posts high GDP growth rates. Eventually the imbalances this misallocation created have to be resolved and the wealth destruction has to be recognized. What’s more, with such heavy distortions imposed and maintained by the central government, there is no easy way for the economy to adjust on its own…. [Furthermore], Beijing [will] not be able to raise the consumption share of GDP without abandoning the investment-driven growth model altogether.

In other words, the world’s second largest economy is approaching its debt limit and the end of the line for investment led growth… but China’s financial system is structurally designed to prevent capital from flowing freely toward more productive uses. One way or another, the world’s largest contributor to global economic growth must slow down – either because Beijing has the foresight, resolve, and political capital to pursue aggressive economic and financial market reforms or because party elites fail to address the country’s structural imbalances and policy-induced distortions before the credit bubble pops. “Debt,” Pettis explains, “as we will learn over the next few years in China, has always been the Achilles’ heel of the investment-driven growth model…”

Which Way to Sustainable Growth?

Among the various reforms set forth in last November’s Communist Party Third Plenum, ranging from financial liberalization to a crackdown on corruption and pollution, the most challenging is the gradual deleveraging of the Chinese economy while simultaneously rebalancing the national economy toward a more sustainable, consumption-driven growth model.

To continue reading this article from Thoughts from the Frontline – a free weekly publication by John Mauldin, renowned financial expert, best-selling author, and Chairman of Mauldin Economics – Please Click Here.

The article Thoughts from the Frontline: Can Central Planners Revive China’s Economic Miracle? was originally published at Mauldin Economics

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Good Reason for Doom and Gloom

By Doug French, Contributing Editor

Predicting the future, like getting old, ain’t for sissies. Questioning the bull market is even more treacherous.
Howard Gold, writing for MarketWatch, makes fun of seers who made what he calls “the four worst predictions to gain traction over the past few years.”

Gold says the last six years have been a disaster for those who stayed out of the stock market. He claims there’s a bull market in doom and gloom, referring to a column by his colleague Chuck Jaffe, who points out, “The fortune-tellers … know that the more outrageous the prediction, the more attention they get. They can highlight any forecasts they get right, knowing that their misfires are forgotten quickly. Thus, calamity and catastrophe sells. Right now, it’s a bull market for bearish forecasts.”

If such a bull market in doom were really happening, the market wouldn’t be hitting all-time highs. Besides, no one ever went broke being out of the market.

But more importantly, there is a very good reason people respond to gloomy forecasts. Behavioral economics pioneer and 2002 Nobel Prize winner Daniel Kahneman explains in his bestseller Thinking, Fast and Slow that when people compare losses and gains, they weigh losses more heavily. There’s an evolutionary reason for this: “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce,” Kahneman explains.

Most people, when given the opportunity to win $150 or lose $100 on a coin flip, decline the bet because the fear of losing $100 is more intense than the hope of gaining $150. Kahneman writes that the typical loss aversion ratio seen in most experiments is 1.5 to 2.5. Professional stock traders have much higher tolerance for risk, but most people investing their retirement accounts are not pros and have little fortitude for losses.

The average Joe can’t just sit tight while his retirement account drops 40%. He’s not wired that way. His retirement savings represent safety, and a market crash is the modern equivalent of a flood, a bear, or a warring tribe. When stocks start falling, survival mode kicks in. He or she sells and runs for cover.
So when someone makes a compelling case that stocks might crash, the average person rightly listens. Otherwise they don’t get any sleep.

Gloomy Forecasts

Economist and financial newsletter writer Harry Dent predicted the DJIA would crash to 3,000 and told investors to bail out between early 2012 and late 2013. Some people likely took him up on it. In July 2010, Robert Prechter of Elliott Wave fame predicted the DJIA would fall to well below 1,000 over the ensuing five or six years.

“I’m saying: ‘Winter is coming. Buy a coat,’” Prechter told the New York Times. “Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.”

While Prechter sees massive deflation on the horizon, Marc Faber, editor of the Gloom, Boom & Doom Report, says Zimbabwe-style hyperinflation is on the way. Gold calls this “the single worst prediction of the past five years.” Gold calls Faber wacky for telling Bloomberg in 2009:

I am 100% sure that the U.S. will go into hyperinflation. Not tomorrow, but the problem with the government debt growing so much is that when the time will come and the Fed should increase interest rates, they’ll be very reluctant to do so and so inflation will start to accelerate.

Peter Schiff’s call for $5,000/oz gold also has Mr. Gold laughing. Schiff sees the Fed printing more to stimulate the economy, which will send the yellow metal soaring.

“Back in the real world,” sneers Gold, “new Fed Chairwoman Janet Yellen is actually winding down the Fed’s extra bond buying (quantitative easing, or QE), and she’s on pace to finish by fall.”

Europe’s economic problems had establishment news outlets like The Economist saying in November 2011, the euro “could break up within weeks.” President Obama’s former chief economist, Austan Goolsbee, said “there probably isn’t” any way to hold the eurozone together.

And the ultimate establishment voice, Alan Greenspan, told CNBC the divergent cultures using one currency “simply can’t continue to work.”

So it’s not just wackadoodles wearing tinfoil hats missing the mark, as Mr. Gold implies. He writes, “But too many people have lost precious time and a chance to make real money by listening to these fear mongers. They’re probably kicking themselves now, or should be.”

However, nearly all of the gloomy prognostications Gold makes fun of are in response to the actions of central bankers, who have been at least as wrong as anyone else in their predictions.

Big financial-services companies should be kicking themselves for paying Greenspan $100,000 a speech these days. The Maestro reportedly hauled in an $8.5 million advance for his book, The Age of Turbulence. That’s a lot to pay for someone who whiffed on the housing bubble. In 2002, Greenspan said, “Even if a bubble were to develop in a local market, it would not necessarily have implications for the nation as a whole.”

Ben Bernanke, who used to make $200,000 a year, now makes “that in just a few hours speaking to bankers, hedge fund billionaires and leaders of industry,” the New York Times reports. “This year alone, he is poised to make millions of dollars from speaking engagements.”

He hasn’t exactly been an accurate predictor either. In 2005, Ben Bernanke was asked if the housing market was overheated. “Well, I guess I don’t buy your premise,” he replied. “It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis.”

Even former Treasury Secretary and ex-New York Fed President Tim Geithner is getting in on the action, receiving $100,000 to $200,000 per talk. Plus he likely received a large advance for his book Stress Test.
Geithner admits he didn’t see the financial crisis coming. In his review of Geithner’s book, Flash Boys author Michael Lewis writes, “The story Geithner goes on to tell blames everyone and no one. The crisis he describes might just as well have been an act of God.”

They Warn for a Reason

Mr. Gold believes that economic catastrophes have natural causes. “Bad things happen in life,” he writes. “Hurricanes and tornadoes destroy communities. Nuclear war and climate change are big long-term dangers. And there will be bear markets and deep recessions in the years ahead.”

Inflation to any degree is not an act of God. Neither are currency nor stock market crashes. Central bankers create these calamities and then ride off into the sunset, earning six-figure speaking fees and multimillion-dollar book deals. The positive reinforcement they receive ensures they’ll repeat the same mistakes over and over again.

Thus, warnings must be issued constantly. Bad things are going to happen to the finances of individuals who aren’t prepared.

It’s not a matter of if, but when. Better scared than sorry.

(Editor’s Note: How quickly a crisis can creep up on you is demonstrated in our Casey Research documentary, Meltdown America. If you haven’t watched it yet, you should. Click here to watch this free video.)

The article Good Reason for Doom and Gloom was originally published at Casey Research

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Weekly Futures Recap With Mike Seery for Week Ending June 6th

We've asked Michael Seery of to give our readers a weekly recap of the futures market. Mike has been a Senior Analyst for close to 15 years and has extensive knowledge of all of the commodity and option markets.......

Crude oil futures traded in a very tight range this week going out this Friday at 102.70 finishing slightly higher as the volatility is extremely low at the current time as I’m sitting on the sidelines in this market as I do think prices are headed higher but the trend is very weak and I must find another market that is trending stronger. If you look at the chart over the last 6 months longer term it’s still in a bullish trend with the possibility of retesting last Augusts high during the Syrian crisis around 110/112 a barrel as economies around the world are improving and this is supporting the crude oil market with the S&P 500 at all time highs once again today as the United States added 217,000 new jobs which are all supporting crude oil prices so I’d be looking at buying on dips rather than selling on rallies.

If you’re looking to get into this market one recommendation would be if your bullish crude oil prices & think that prices bottomed in yesterday’s trade I would buy today at 102.70 while placing my stop below yesterday’s low which is also the 10 day low at 101.70 risking $1,000 per contract and if you’re looking to get short this market my recommendation would be to sell today’s price while placing my stop above the 10 day high which is 104.20 risking around $1,500 per contract as the chart structure is excellent because of low volatility.
TREND: HIGHER
CHART STRUCTURE: EXCELLENT

Gold futures in the August contract traded in a very tight and narrow trading range this week going out last Friday at 1,246 and settling this Friday at 1,251 up about $5 for the week, however I’m still recommending a short position when prices broke below 1,267 placing your stop loss above the 10 day high which currently stands at 1,290 risking around $40 or $4,000 per contract from today’s price levels. Gold futures are trading below their 20 and 100 day moving average telling you that trend is lower as major support is at 1,240 and if that level is broken I would think you have to retest 1,200 as the same old story continues with the S&P 500 hitting all-time highs once again as money is coming out of the gold sector into equities and I think that trend is going to continue especially with low interest rates staying around for quite some time. At the current time there are no geopolitical events that one must rush into the gold market with the stock market continuing its trend higher it’s difficult for gold to rally at this time so I do see lower prices ahead but make sure you do place your stop loss at the 2 week high in case the trend does change as an investor or trader you always must have an exit strategy.
TREND: LOWER
CHART STRUCTURE: IMPROVING

The S&P 500 continues its bullish momentum trading up another 8 points at 1947 and I continue to harp on the fact that this market is going higher due to several bullish fundamental reasons including stock buybacks, increasing dividends, a Federal government that want higher equity prices while maintaining extremely low interest rates so this is the perfect storm to the upside in the S&P 500 continuing its bullish trend to the upside. S&P 500 futures contract is trading far above its 20 & 100 day moving average with outstanding chart structure I’ve been recommending buying this market for quite some time and I still believe that prices will move higher as this Monday morning as Apple Computer will split 7 to 1 and I think that will bring even more buying pushing this market higher once again as I think 2000 is in the cards in the S&P in the next couple of months and I do believe that the NASDAQ 100 will hit all-time highs breaking above 5000 this year so continue to play this to the upside and if you’re lucky enough to get any type of dip take advantage while placing your stop below the 10 day low of 1880.
TREND: HIGHER
CHART STRUCTURE: EXCELLENT

Coffee futures in the September contract are up 300 points this Friday afternoon in New York currently trading at 174.60 still trading below its 20 and 100 day moving average with relatively low volatility with major support right at the 170 level which is been hit on 6 different occasions and bounces off every single time as traders are awaiting estimates on the Brazilian crop currently being harvested and that will certainly send high volatility back into this market. Coffee prices settled last Friday at 180 finishing down around 500 points for the week continuing its short-term down trend and I’ve been sitting on the sidelines waiting for a buying opportunity around the 165 level as I do think prices to the downside are limited as I still have many contacts in Brazil telling me that they think 43 million bags is on the high estimate but only time will tell so keep a close eye on this market as the sleeping giant will wake once again in my opinion.
TREND: LOWER
CHART STRUCTURE: IMPROVING

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Are You Ready for Negative Interest Rate and Pay the Bank to Hold Your Money?

The six members of the European Central Bank (ECB) Executive Board and the 16 governors of the euro area central banks vote on where to set the rate. We watch interest rate changes closely as short term interest rates are the primary factor in currency valuation.
 

A higher than expected rate is positive for the EUR, while a lower than expected rate is negative for the EUR. Today (Thursday June 5th) we expected a rate cut. The cut was not as much as analysts expected which is bullish for the short term, but the rate is still declining and nearing zero, or even worse, negative territory.





A negative interest rate may sound crazy or impossible, but it's already happening in Denmark. Europe is already in a deflationary state and central banks are doing everything they can to bring about inflation by cutting rates and devaluing the euro. This will cause a ripple through multiple asset classes and will drastically alter the outcome of individuals worldwide. Just imagine if you had to pay a bank to hold your money and you do not earn any interest but rather pay interest.

People who have been saving their entire lives will get hit the hardest. Retired folks will stop earning money and start paying for all the money they hold held at banks. Individuals will go more into debt because money will be extremely cheap to borrow. Price of assets like equities, real estate, discretionary goods will rise because the cheap money everyone is borrowing will be used to buy more stuff. While all this happens everyone takes on more dept. It is a brutal spiral leading to increase debt levels, inflation and eventually bankruptcy.

If the euro dollar starts to decline at a quicker pace the U.S. dollar will likely rally. A strong dollar could affect the commodities market including gold, silver and the European stock markets. Todays rate cut led to a pop in the euro, but that is likely to be short lived. I hope this sheds some light on the markets and helps in your trading.

Chris Vermeulen

P.S. In the next few days members and myself will be looking to enter some trades based round this analysis. See Premium Trading Video & Newsletter

Sincerely,
Chris Vermeulen


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Mining and the Environment — Facts vs. Fear

By Laurynas Vegys, Research Analyst

“I would NEVER invest in a mining company—they destroy land, pollute our water and air, and wreck the habitat of plants and animals.”


These were the points made to me by a woman at a social gathering after I told her what I do for living. She prided herself on her moral high ground and looked upon me with obvious disdain. It was clear that as a mining researcher, I was partly responsible for destroying the environment.

I knew a reasonable discussion with her wouldn’t be possible, so I opted out of trying. (As Winston Churchill said, “A fanatic is one who can’t change his mind and won’t change the subject.”) She left the party convinced her position was indisputably correct. But was she?

Not at all.

In fact, with few exceptions, today’s mining operations are designed, developed, operated, and ultimately closed in an environmentally sound manner. On top of that, considerable effort goes into the continued improvement of environmental standards.

My environmentalist acquaintance, of course, would loudly disagree with those statements. Many people may feel uncomfortable investing in an industry that’s so closely scrutinized and vehemently criticized by the public and mainstream media—whether there’s good reason for that criticism or not. This actually is to the benefit of those who dare to think for themselves.

So let’s examine what mining REALLY does to the environment. As Doug Casey always says, we should start by defining our terms…

How Do You Define “Environment”?

In modern mining, the term “environment” is broader than just air, water, land, and plant and animal life. It also encompasses the social, economic, and cultural environment and, ultimately, the health and safety conditions of anyone involved with or affected by a given mining activity.

Armed with this more comprehensive view of the industry’s impact on the environment, we can evaluate the effects of mining and its benefits in a more holistic fashion.

Impact on the Economy

According to a study commissioned by the World Gold Council, to take an example from mining of our favorite metal, the gold mines in the world’s top 15 producing countries generated about US$78.4 billion of direct Gross Value Added (GVA) in 2012. (GVA measures the contribution to the economy of each individual producer, industry, or sector in a country.) That sum is roughly the annual GDP of Ecuador or Azerbaijan, or 30% of the estimated GDP of Shanghai, China. Here’s a look at the GVA for each of these countries.

Keep in mind that this doesn’t include the indirect effects of gold mining that come from spending in the supply chain and by employees on goods and services. If this impact were reflected in the numbers, the overall economic contribution of gold mining would be significantly larger. Also, it’s evident that gold mining’s imprint on national economies varies considerably. For countries like Papua New Guinea, Ghana, Tanzania, and Uzbekistan, gold mining is one of the principal sources of prosperity.

Another measure of economic contribution is the jobs created and supported by businesses. The chart below shows the share of jobs created of each major gold-producing country.

The four countries with the highest numbers of gold mining employees are South Africa (145,000), Russia (138,000), China (98,200), and Australia (32,300). The industry also employs 18,600 in Indonesia, 17,100 in Tanzania, and 16,100 in Papua New Guinea. (As an aside, it’s quite telling that South Africa employs more gold miners than China, but China produces more gold than South Africa.)

Note that these employment figures don’t include jobs in the artisanal and small-scale production mining fields, or any type of indirect employment attributable to gold mining—so they understate the actual figures
For many countries, gold mining accounts for a significant share of exports. As an example, gold merchandise comprised 36% of Tanzanian and 26% of Ghana’s and Papua New Guinea’s exports in 2012.

Below, you see a more comprehensive picture of gold exports by 15 major gold-producing countries.

Other, often overlooked ways in which the mining industry supports the economy include:

• Foreign Direct Investment (FDI). The three mining giants—Canada, the United States, and Australia—have been dominating this category for a number of years, both as the primary destinations for investment and as the main investor countries.

• Government revenue. All mining businesses, regardless of jurisdiction, have to pay certain levies on their revenue and earnings, including license fees, resource rents, withholding and sales taxes, export duties, corporate income taxes, and various royalties. Taken all together, these payments make up a large portion of overall mining costs. For example, estimates suggest that the total of mining royalty payments in 2012 across the top gold-producing countries worked out to the tune of US$4.1 billion. This, of course, doesn’t account for other types of tax normally applied to the mining industry.

• Gold products. Gold as a symbol of prosperity and the ultimate “wealth insurance” is very important to many nations around the globe—especially in Asia and Africa. Gold jewelry is given as a dowry to brides and as gifts at major holidays. In India, the government’s ban on gold purchases by the public led to so much smuggling that the incoming prime minister is considering removing it. Chinese, Vietnamese, and peoples of India and Africa may all be divided across linguistic lines, but they all share the view of gold being a symbol of prosperity and ultimate insurance against life’s uncertainties.

It’s also important to note that jobs with modern mining companies are usually the most desirable options for poverty stricken people in the remote areas where many mines are built. These jobs not only pay more than anything else in such regions, they provide training and health benefits simply not available anywhere else.
Mining provides work with dignity and a chance at a better future for hundreds of thousands of struggling families all around the world.

Let’s now have a look at the most debated and contentious side to mining.

Impact on the (Physical) Environment

In previous millennia, humans labored with little concern for the environment. Resources seemed infinite, and the land vast and adaptable to our needs. An older acquaintance of ours who grew up in 1930s Pittsburgh remembers the constant coal soot hanging in the air: “Every day, it got dark around noon time.” Victorian London was famous for its noxious, smoky, sulfurous fog, year round.

Initially, the mining industry followed the same trend. Early mine operations had little, if any, regard for the environment, and were usually abandoned with no thought given to cleaning up the mess once an ore body was depleted.

In the second half of the 20^th century, however, the situation turned around, as the mining industry realized the need to better understand and mitigate its impact on the environment.

The force of law, it must be admitted, had a lot to do with this change, but today, what is sometimes called “social permitting” frequently has an even more powerful regulatory effect than government mandates. Today’s executives understand that good environmental stewardship is good business—and many have strong personal environmental ethics.

That said, mining is an extractive industry, and it’s always going to have an impact. Here’s a quick look at some of the biggest environmental scares associated with gold mining and how they are confronted today.

Mercury

Symbol: Hg

Occurrence in the earth’s crust: Rare

Toxicity: High

Mercury, also known as quicksilver, has been used to process gold and silver since the Roman era. Mercury doesn’t break down in the environment and is highly toxic for both humans and animals. Today, the use of mercury is largely limited to artisanal and illegal mining. Industrial mining companies have switched to more efficient and less environmentally damaging techniques (e.g., cyanide leaching).

Developing countries with a heavy illegal mining presence, on the other hand, have seen mercury pollution increase. The United Nations Industrial Development Organization (UNIDO) estimates that 1,000 tons of mercury are annually released into the air, soil, and water as a result of illegal mining activity.

To help combat the problem, the mining industry, through the members of the International Council on Mining & Metals (ICMM), has partnered with governments of those nations to transfer low- or no-mercury processing technologies to the artisanal mining sector.

Sodium Cyanide

Mining compound employed: NaCN

Occurrence in nature: Common

Toxicity: High

This is one of the widely used chemicals in the industry that can make people’s emotions run high. Historically considered a deadly poison, cyanide has been implicated in events such as the Holocaust, Middle Eastern wars, and the Jonestown suicides. Given such associations, it’s no wonder that the public perceives it with alarm, without even adding mining to the equation.

It is important, however, to understand that cyanide:

• is a naturally occurring chemical;
• is not toxic in all forms or all concentrations;
• has a wide range of industrial uses and is safely manufactured, stored, and transported every day;
• is biodegradable and doesn’t build up in fish populations;
• is not cumulative in humans and is metabolized at low exposure levels;
• should not be confused with Acid Rock Drainage (ARD; see below); and
• is not a heavy metal.

Cyanide is one of only a few chemical reagents that dissolves gold in water and has been used to leach gold from various ores for over a hundred years. This technique—known as cyanidation—is considered a much safer alternative to extraction with liquid mercury, which was previously the main method used. Cyanidation has been the dominant gold extraction technology since the 1970s; in Canada, more than 90% of gold mined is processed with cyanide.

Despite its many advantages for industrial uses, cyanide remains acutely toxic to humans and obviously is a concern on the environmental front. There are two primary environmental risks from gold cyanidation:

• Cyanide might leach into the soil and ground water at toxic concentrations.
• A catastrophic spill could contaminate the ecosystem with toxic levels of cyanide.

In response to these concerns, gold mining companies around the world have developed precautionary systems to prevent the escape of cyanide into the environment—for example, special leach pads lined with a plastic membrane to prevent the cyanide from invading the soil. The cyanide is subsequently captured and recycled.

Further, to minimize the environmental impact of any cyanide that is not recycled, mine facilities treat cyanide waste through several processes that allow it to degrade naturally through sunlight, hydrolysis, and oxidation.

Acid Rock Drainage (ARD)

Target chemical: Sulfuric acid

ARD occurrence in nature: Common

Toxicity: Varies

Contrary to popular belief, ARD is the natural oxidation of sulfide minerals such as pyrite when these are exposed to air and water. The result of this oxidation is an increase in the acidity of the water, sometimes to dangerous levels. The problem intensifies when the acid comes into contact with high levels of metals and thereby dissolves them, which adds to the water contamination.

Once again, ARD is a natural process that can happen whenever such rocks are exposed on the surface of the earth, even when no mining was involved at all. Possible sources of ARD at a mine site can include waste-rock piles, tailings storage facilities, and mine openings. However, since many mineral deposits contain little or no pyrite, ARD is a potential issue only at mines with specific rock types.

Part of a mining company’s environmental assessment is to conduct technical studies to evaluate the ARD potential of the rocks that may be disturbed. Once ARD has developed, the company may employ measures to prevent its spread or reduce the migration of ARD waters and perhaps even treat the water to reduce acidity and remove dissolved metals.

In some places where exposed sulfide minerals are already causing ARD, a clean, modern mine that treats all outflowing water can actually improve water quality.

Arsenic

Symbol: As

Occurrence in the earth’s crust: Moderate

Toxicity: High

Similar to mercury, arsenic is a naturally occurring element that is commonly found as an impurity in metal ores. In fact, arsenic is the 33rd most abundant element in the earth’s crust and is present in rocks and soil, in natural waters, and in small amounts in all living things. For comparison, silver (Ag) is 47th and gold (Au) 79th (see the periodic table of elements). Arsenic is toxic in large doses.

The largest contribution of arsenic from the mining industry comes from atmospheric emissions from copper smelting. It can also, however, leach out of some metal ores through ARD and, when present, needs to be removed as an impurity to produce a saleable product.

Several pollution-control technologies have been successful at capturing and removing arsenic from smelting stacks and mine tailings. As a result, between 1993 and 2009, the release of arsenic from mining activities in Canada fell by 79%. Similar figures have been reported in other countries.

Mythbusters

Now, here’s our quick stab at dispelling the three most widespread myths environmentalists commonly bring up in their rants against the mining industry.

Myth 1: Mining Uses Excessive Amounts of Land

Reality: Less than 1% of the total land area in any given jurisdiction is allotted for mining operations (normally far less than that). Even a modest forestry project affects far more trees than the largest open-pit mine. Mining activities must also meet stringent environmental standards before a company can even get a permit to operate.

The assessment process applied to mining operations is very detailed and based on a long string of policies and regulations (e.g., the National Environmental Policy Act in the US). Environmentalists may claim that the mining industry is rife with greedy land barons, but there’s more than enough evidence to the contrary.

Myth 2: Mining Is Always Detrimental to the Water Supply

Reality: Quite the opposite, actually. Before mine operations start, a mining company must submit a project proposal that includes detailed water utility studies (which are then evaluated by scientists and government agencies). Many companies even install water supply systems in local communities that lack easy access to this basic resource. It’s also common for the rocks to be mined to be naturally acid-generating—a problem the mine cleans up, by its very nature.

Some die hard zealots blame the mining industry for consuming huge amounts of water, but in fact it normally only uses +1% of the total water supplied to a given community, and 80% of that water is recycled continuously.

Myth 3: Mining Is Invasive to the Natural Environment

Reality: Yes, mining activity in certain countries has led to negative outcomes for certain plants and animals—not to mention the rocks themselves, which are blasted and hauled away. However, the industry has progressed a long way in the last few decades and, apart from rare accidents, the worst is behind us now.

The key determinant here is compliance. All mining activity must comply with strict environmental guidelines, leading up to and during operations and also following mine closure. After mining activity ends, the company is required to rehabilitate the land. In some cases, the land is remediated into forests, parks, or farmland—and left in better condition than before.

It’s worth reiterating that in some cases—where there’s naturally occurring ARD or where hundreds of years of irresponsible mining have led to environmental disasters—a modern mine is a solution to the problem that pays for itself.

Can You Be Pro-Mining and an Environmentalist? Absolutely.

Gold mining (and mining in general) is extractive and will always leave some mark on our planet. Over time, however, the risks have been mitigated by modern mining technologies. This is an ongoing process; even mining asteroids instead of planet Earth is now the subject of serious consideration among today’s most visionary entrepreneurs.

Meanwhile, the (vastly diminished) risks associated with mining are far outweighed by the economic contribution and positive effects on local communities and the greater society. This net positive contribution is here to stay—unless our civilization opts for collective suicide by sending us all back to the Stone Age.

Right now, gold and gold stocks are so undervalued that you can build a sizable portfolio at a fraction of what you would have had to spend just a few years ago. To discover the best ways to invest in gold, read Casey Research’s 2014 Gold Investor’s Guide—Get it for Free Here.

The article Mining & Environment—Facts vs. Fear was originally published at Casey Research

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Looking at the Middle Kingdom with Fresh Eyes

By John Mauldin

I am writing this introductory note from London during a layover on my way to Rome, and I’ll append a personal ending tonight after I finally make my way back from dinner to the hotel.

One of the few consensus ideas that I took away from the Strategic Investment Conference is that China has the potential to become a real problem. It seemed to me that almost everyone who addressed the topic was either seriously alarmed at the extent of China’s troubles or merely very worried. Perhaps it was the particular group of speakers we had, but no one was sanguine. If you recall, a few weeks back I introduced my young colleague and protégé Worth Wray to you; and his inaugural Thoughts from the Frontline focused on China, a topic on which he is well versed, having lived and studied there. Our conversations often center on China and emerging markets (and we tend to talk and write to each other a lot). While I’m on the road, Worth is once again visiting China in this week’s letter, summing up our research and contributing his own unique style and passion. I think regular TFTF readers are going to enjoy Worth’s occasional missives and will want to see more of them over time. Now, let’s turn it over to my able young Cajun friend.

Editors’ note: With John up to his eyeballs in prosecco and peaches there on the patio in Trequanda this morning and with Worth just getting the sleep out of his eyes in Houston, we are hereby making an executive decision to split this 22 page beast masterpiece right up its middle and bring you the second half next week … which will give both these guys some well earned rest!  – Charley & Lisa Sweet

Looking at the Middle Kingdom with Fresh Eyes

By Worth Wray (Houston, TX)

In my Thoughts from the Frontline debut this past March (“China’s Minsky Moment?”), I highlighted the massive bubble in Chinese private sector debt and explored the near term prospects for either (1) a reform induced slowdown or (2) a crisis induced recession. Unfortunately, it was not an easy or straightforward analysis, considering the glaring inconsistencies between “official” state compiled data and more concrete measures of real economic activity.

More Questions Than Answers

Although John and I spend hours every week searching for the truth in a murky stream of official and unofficial reports, we always reach the same conclusion about the People’s Republic: There is really no way to know what is happening in China today, much less what will happen tomorrow, based on widely available data. The primary data is flawed at best and manipulated at worst. Sometimes the most revealing insights lie in the disagreement between the official and unofficial reports… suggesting that official data is useful only to the extent that we think about it as state-sanctioned propaganda. In other words, it tells us what Chinese policymakers want the world to believe.

This shortfall in credible and actionable data from one of the global economy’s largest and most interconnected members leaves us with more questions than answers – especially in the presence of a massive Chinese credit bubble, with clear signs of overinvestment and unsustainably high debt-service ratios. These are troubling signs for all investors, in every asset class, everywhere in the world today… and everyone should be paying close attention.

(I should note that John has access to a massive amount of research from a very wide variety of both traditional and nontraditional sources… and I say that after having extraordinary access myself as the portfolio strategist for an $18B Texas money manager. I am seeing and reading things every day that I could only imagine before, and the information flow is addictive. John’s sources give us a big, if sometimes overwhelming, head start on thinking through all the implications for investing around the constant collisions of macroeconomic forces. While we legally and ethically cannot share some of the best research we see, we can share a lot of the core ideas and do our best to give you a head start, too. That’s what this letter is about.)

Read the Tea Leaves Carefully & Expect Miscues

Most China economists – who do the best they can to read the economic tea leaves by focusing on a handful of economic indicators ranging from gross domestic product (GDP), purchasing managers’ indices (PMI), consumer/producer inflation (CPI/PPI), total social finance, and industrial production – end up expressing a rather bipolar view on Chinese economic activity, with wild swings in their outlooks from quarter to quarter.

On this front, I was particularly impressed by an explosive letter (viewable by Over My Shoulder subscribers only) from our friends at Political Alpha, which remains one of the elite political intelligence/analysis firms on the Street. While China watchers tend to trade reactively around official and unofficial manufacturing PMI releases as monthly proxies for the broader economy, very few investors realize that “not only is manufacturing no longer the bellwether of the [Chinese] economy, more often than not it now performs counter cyclically.”

Although China is the world’s largest producer of value added manufactured goods, it has not been an export led economy for a very long time. As I detailed in last month’s letter, China’s growth has largely relied on extraordinarily high levels of fixed investment, supported by even higher levels of domestic savings and an unsustainable rise in private sector credit.


Source: Wayne M. Morrison, China’s Economic Rise: History, Trends, Challenges, & Implications for the United States. Congressional Research Service, February 3, 2014

Even so, industry experts often fall into the trap of extrapolating flash manufacturing readings into forecasts for the broader economy.

Our friends at Political Alpha describe one such situation where HSBC’s China team (which puts out the unofficial monthly PMI each month in partnership with MarkIt) “was forced to backpedal from its September 23^rd announcement that the flash PMI data was ‘further evidence [of] China’s ongoing growth rebound’ to a much more somber conclusion just seven days later: ‘There are still a lot of structural headwinds ahead. This is as good as it gets for the time being…. [D]on’t expect too sharp an acceleration from here."

Feel free to compare the clips yourself:

• HSBC release on 9/23: http://www.cnbc.com/id/101053388

• HSBC release on 9/29: http://www.cnbc.com/id/101071631

On a side note, I don’t mean to disparage the China research team at HSBC or question their competency by reprinting the comments above. I’m sure they get up each morning (just like I do) with a genuine intent to understand changing economic conditions as best they can and to help their clients protect and grow their savings. If anything, this example is a broader indictment of investors’ widespread reliance on a handful of flawed or misunderstood data points in the absence of credible Chinese economic data.

I don’t mean to be cute or coy on this issue. The lack of transparency of the Chinese economy is not just a problem for individual and institutional investors who make the choice every day to put their money at risk; it also carries enormous policy implications for central bankers and elected politicians in a highly unstable global system where total debt-to-GDP has risen across the world’s major economies by nearly 35% since 2008… and continues to rise.


Source: Hoisington Investment Management Company, May 2014

As you can see in the table above (which Dr. Lacy Hunt was kind enough to share with us at this year’s Strategic Investment Conference), China has seen its total debt to income ratio jump by more than 100% (another full turn of GDP) in the last five years… more debt growth than any other major economy on the planet, including Japan.

Pulling Back the Bamboo Curtain 

Fortunately, my last letter on China’s debt build up sparked a flurry of introductions and fresh conversations with investors, economists, and policymakers from around the world – in places like London, Spain, South Africa, Singapore, Dubai, Australia, Hong Kong, and Finland. Of course, John has also eagerly introduced me to many of his close friends (who happen to be serious A-list economists and money managers)… so needless to say, it has been an incredibly fun and enlightening couple of months.

But John introduced me to one man, in particular, who was able to pull back the curtain on the Chinese economy in a way I had not imagined… and it feels like I am looking at the Middle Kingdom with fresh eyes.
Meet Leland Miller, President of China Beige Book International. Along with Dr. Craig Charney, who oversees the firm’s vast research efforts, Leland spearheads the effort to supply the world’s elite institutions (from central banks and heads of state to multinationals, mega banks, and hedge funds) with a comprehensive look into China’s economy, by applying the same survey methodology employed by each of the regional U.S. Federal Reserve Banks in preparing their submissions for the national Beige Book. 

Aside from the fact that Leland is an Oxford-educated China historian, a brilliant economist, and a genuinely nice guy, what first caught my attention was his remarkable track record of contrarian calls since the inaugural issue of the China Beige Book in Q1 2012… from the initial slowdown; to unexpected bounces in economic activity; and even the June 2013 cash crunch where interbank interest rates spiked dramatically in a matter of weeks, signaling that a wave of defaults was on the way. (I should note that John has sat on China Beige Book International’s advisory board and has worked closely with Leland for most of the firm’s history.)
Before we proceed, here is a short but important description of the history and methodology behind the China Beige Book. Although survey data has its limits in any economy, this is as good as it gets for a semi-closed economy like China’s.

Beginning in early 2010, our team set out to craft a Chinese analogue of the US Federal Reserve’s Beige Book. Over the next twelve months, we conducted a study of the Beige Book and the methods used to prepare it, including contact with officials at each of the regional Federal Reserve Banks involved in its preparation. We then worked to develop a method that would be similar, but more comprehensive and systematic, in its approach to the world’s second largest economy – a Beige Book “with Chinese characteristics.”

Our approach triangulates three methods, repeated every quarter: a quantitative survey of over 2,000 leading firms from key sectors across the country; qualitative one-on-one in-depth discussions with C-Suite executives in the same industries across every region; and a separate, targeted banker survey of loan officers and branch managers, designed to home in on the complexities of both the official and shadow economies. With the data from this approach, we are able to compare regions and industries within a quarter, as well as track changes over time, both in near and real time.

The result of these efforts is the largest and most comprehensive survey series ever conducted on a closed or semi-closed economy…

I cannot share the report in its entirety or reveal too much of its contents, but Leland did give me permission to share part of the regional overviews and research highlights from the Q1 2014 report. If you are able and willing to pay the six figure annual subscription fee, Leland’s work will blow your mind and dramatically change your perspective. For the rest of us, the following excerpt can at least point us in the right direction… and I am discovering that Leland’s media interviews and tweets (@ChinaBeigeBook) are quite telling, as well. (You can also follow John and me on Twitter at @JohnFMauldin and @WorthWray, respectively.)

China Beige Book, Regional Overview (Excerpts from the Q1 2014 report)

China Beige Book regions [listed below]

Region 1: Shanghai, Jiangsu, Zhejiang

Growth slowed – retail & real estate gains weakening sharply – despite stability in manufacturing and pickups in services, transport, and agriculture. Borrowing was stable with rates down at banks and up at non-bank lenders. Hiring slowed, as did margin growth. On quarter weakness was modest, but the on-year drop was worrisome.

Region 2: Guangdong, Fujian

Despite the national slowdown, Guangdong’s pickup continued, driven by manufacturing and transport. Growth was steady in retail, off in services and property. Wage growth remained high but costs inflation eased, boosting margins. Borrowing ticked up, with bank rates steady and shadow rates up. The export power-house found an encouraging second wind.

Region 3: Beijing, Tianjin, Shandong, Hebei

The capital region saw Q1’s worst results, due to trouble in services and manufacturing. Property and mining were stable, retail slightly better. Margin growth suffered. Borrowing was stable and moved to banks, on the country’s lowest interest rates. Beijing is leading the national economic slowdown.

Region 4: Heilongjiang, Jilin, Liaoning

The Northeast slowed as mining contracted and manufacturing, property, and farming growth eased. Services was stable and retail saw a pick-up. Hiring and wages strengthened, while pricing weakened, pressuring margins. Borrowing ticked up, rates easing. Rebalancing does not look easy in this old industrial region.

Region 5: Hubei, Henan, Chongqing, Sichuan, Anhui, Jiangxi

Growth slowed sharply, slipping in retail, services, property, farming, and mining, with only manufacturing stable. Hiring was steady but input costs grew faster, narrowing margin gains. Borrowing slid again, with lower interest rates in both formal and shadow finance – not an encouraging trend.

Region 6: Shaanxi, Shanxi, Inner Mongolia, Ningxia

Growth took a hit, gains slowing in this crucial mining sector. Manufacturing, real estate and, especially, retail weakened. Services and transport were the bright spots. Hiring and margin growth both eased. Borrowing was flat as rates went up. The North remains dependent on struggling mining.

Region 7: Guizhou, Guangxi, Yunnan, Hainan, Hunan

Again out of sync with the rest of China, the Southwest sped up. Manufacturing, transport, and mining improved, but retail, services, and real estate saw growth slow. Hiring and input costs picked up, but so did pricing and margins. Borrowing ticked up, as shadow lenders’ rates moved back above banks’ rates.

Region 8: Xinjiang, Tibet, Gansu, Qinghai

The West again boasted China’s best overall growth, though manufacturing, retail, and services slowed. Only property picked up, with mining and transport stable. Hiring and input cost growth were steady, but pricing and margin growth eased. Borrowing remained China’s least frequent as rates jumped.

China Beige Book, Research Highlights (Excerpts from the Q1 2014 report)

Manufacturing is fine, yet the economy is not

The pace of Chinese economic expansion has painfully slowed. Revenue, sales, profit, and wage growth are all weaker than a year ago. The slowdown is particularly steep in the North [region 6] and Northeast [region 4] and also pronounced in Beijing [region 3] and Central China (region 5).

By sector, stable first-quarter growth in manufacturing confirms our long-standing thesis that it is no longer the economy’s bellwether...

A bounce-back later this year is possible

The worst performer according to CBB figures, both on-quarter and on-year, is real estate and construction. While property companies are getting crushed, the sector is also notoriously unstable for both structural and political reasons. It would be no surprise if real estate were to rally before the end of the year.

More immediate reason for optimism: Growth in new domestic orders was solid (save in the Northeast), and domestic orders and export orders were both stronger in powerhouse Guangdong. The results do not indicate a boom later in 2014, but they do suggest that linear forecasts of continued deterioration are overly simplistic.

Financial segmentation is profound

The ongoing debates about monetary policy assume that anticipated loosening or tightening applies across the spectrum of borrowers. CBB data say otherwise, and in multiple ways. First, while the number of firms reporting that they borrowed stabilized in Q1, it did so at a very low level. Shoving more liquidity at the credit market will have limited effects until participation expands. This includes RRR cuts – though of course these may occur for political reasons.

Second, shadow finance may be revving up for a comeback. CBB numbers show a recovery in the sales of wealth management products (WMPs), likely due to competition from online banking. This is cash leaving the traditional banking sector and, while non-bank lending did not pick up in the first quarter, the groundwork is being laid for it to do so.

Online banking may be encouraging riskier behavior

Online lenders are typically viewed as a force for liberalization, as well as a potentially healthier alternative to unregulated shadow finance. Yet our data show their proliferation would impart significant costs as well…

What appears to be happening is the higher returns available in online banking are forcing banks to move more transactions off-balance sheet, in order to avoid the interest rate cap. While this may accommodate policy goals in the short term, an uptick in off-balance sheet funding portends more shadow bank lending down the line.

Interest rate spread between banks & shadow banks highest in a year

Bank loan rates and bond yields eased slightly this quarter, but the cost of capital increased again for those borrowing from non-bank lenders. While the shifts were not dramatic, the spread between bank and non-bank loan rates nationwide is now the largest since Q1 2013. This highlights the still more challenging road for those firms, principally domestic private entities that are pushed outside formal lending channels.

Growth Is Slowing But Not Collapsing (So Far…) 

After reading through the latest report, consulting with friends who are also familiar with the research, and bombarding Leland with a never-ending stream of questions for the last month, John and I still cannot claim to have enough information to make a directional call on the world’s most powerful (and least understood) macro force… but we know more about the inner workings of China’s economy than we did when we wrote to you a couple of months ago.

Great data often has that effect – it’s like shining a light into the shadows (including China’s shadow banks). We can see the nuanced regional contrast in economic activity, the modest (but still insufficient) rebalancing between sectors, and pressure points in the credit markets that suggest last summer’s interbank volatility may return in 2014.

We also see a far more mixed picture of economic activity than a lot of the widely followed headline data suggests. The overall pace of Chinese economic growth is clearly slowing but not collapsing. The credit transmission mechanism is obviously broken, as you can see in the chart below (with government and government-sponsored borrowers in zombie industries consuming the majority of the country’s credit… in turn forcing households to borrow through shadow banks at massive risk premiums); but so far, the credit bubble is not imploding.

On that note, China Beige Book International is the only independent research firm in the world that tracks the non-bank (shadow) lending rates not just nationally, or by region, but for every sector in every region over time. Leland and his team have essentially solved the most difficult China puzzle of all: what is true cost of capital in the Chinese economy, and who is able to actually access it?


Source: Wei Yao, “China: A whiff of debt deflation.” Societe Generale Research, May 9, 2014

Of course – and Leland was emphatic on this point – China’s greatest challenge will lie in deleveraging the economy while also rebalancing toward a consumption-driven growth model for the first time in modern history. That cannot happen as long as households remain repressed by unequal access to credit markets or intentionally suppressed exchange rates, which essentially represent a transfer of household wealth from workers to state-favored firms. But reforming the system will require a greater slowdown than China’s policymakers are letting on. And, Leland warns, Beijing runs the risk of blowing its credibility and instigating capital flight if the divergence between official forecasts and China’s actual economic experience grows too large.

To be continued next week 

Trequanda, Nantucket, New York, and Maine

It is very early Saturday morning here in Rome (still late Friday night in the US) as I finish this letter, or at least my part of it. Worth is still up and reworking this piece (I really can’t keep up with him); then the editors, Charley and Lisa Sweet, will do their final runs; and then a whole team will make sure you get your letter. A far cry from the early days when your humble analyst did everything. And the mistakes I made showed up in print far more often. I am grateful to have a whole group of dedicated people working to keep the machine humming.

In a few hours I will meet George Gilder at the train station. I will buy a few local phones (I already have local sim cards for the iPads from the airport yesterday), find some cash, and have lunch before we hop the train to Chiusi with my daughter Melissa and some friends and then meet Tiffani and Lively, who are already there with the cars. We’ll drive to Sinalunga to shop for groceries and other stuff for the week before going the last short leg to Trequanda.

Other guests will come and go over the next few weeks, using the villa as a base to explore the Tuscan region; but I will probably stay “home,” reading and thinking and working out, doing some preliminary writing on my next book, and trying to take the speed of life down a gear or two. Vacation for me is being in the same place for an extended period. And getting to talk with Gilder in the evenings about our books is such a treat. He is one of the finest philosophical/sociological/economic/technological minds in the world (in my opinion), and having him to talk with in the evening will help me lay the proper intellectual framework for my book, though I have to work on not distracting him too much.

Last night I had dinner arranged here in Rome with my friend Steve Cucchiaro, his daughter (who was celebrating her birthday), and his son. My group was running late, even though our driver from the airport was driving like we were in a Formula One race. That is typical, but it was not long before we realized he was also drunk and half mad, talking and gesturing to himself the entire time. Obviously, we survived. When we got to our hotel, I was busy getting people to get ready ASAP so we would not be too late. I asked the concierge for directions, and he gave them to me but then said, “Signor Mauldin, you cannot wear that to the Imago restaurant. It is a very nice place.” I pointed out that I had not brought a tie, and he offered me one. So I went to the room and called Steve to tell him we would be a little late. He said jackets were required but no ties.

It turned out he had booked one of the finest places in Rome and got the corner window table overlooking the Spanish Steps and St. Peter’s, with a spectacular sunset/nighttime view. Another special night for the memory book.

It is time to hit the send button, as trains will not wait. I will report from Tuscany next week, by which time Worth and I should have China all figured out – not! But we’ll keep after it. Also, I hope to summarize the speech I did in San Diego. Until then have a great week!

Your thinking I need to get to China analyst,

John Mauldin, 

The article Thoughts from the Frontline: Looking at the Middle Kingdom with Fresh Eyes was originally published at Mauldin Economics

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EIA: Mexico's Energy Ministry Projects Rapid Near Term Growth of Natural Gas Imports from U.S.

 A combination of higher natural gas demand from Mexico's industrial and electric power sectors and increased U.S. natural gas production has resulted in a doubling of U.S. pipeline exports of natural gas to Mexico between 2009 and 2013. Mexico's national energy ministry, SENER, projects that U.S. pipeline exports to Mexico will reach 3.8 billion cubic feet per day (Bcf/d) in 2018. This would be more than double U.S. pipeline exports to Mexico in 2013, which averaged 1.8 Bcf/d. This projected growth is driven mainly by higher demand from Mexico's electric power sector in both the north and interior of the country.



Nearly three quarters of the projected growth in Mexico's natural gas consumption between 2012 and 2027 is projected to occur in the electric power sector (see graph). This growth is largely driven by private and independently operated power plants, whose natural gas consumption is expected to rise at a 7.9% average annual rate, from 1.6 Bcf/d in 2012 to 4.9 Bcf/d in 2027. By contrast, natural gas consumption from plants operated by national energy company CFE grows at just 0.4% per year, from 1.1 Bcf/d in 2012 to 1.2 Bcf/d in 2027. The growth comes largely from new combined cycle plants, which benefit from greater operational efficiencies and lower emission levels compared to other generation sources. Growth sharply accelerates over the near term but continues through 2027, when power sector consumption reaches 58% of total gas consumption, compared to 47% in 2012.

Mexico's projected growth in natural gas consumption occurs in each of its five market regions: Northeast, Northwest, Interior-West, Interior, and South-Southeast. According to SENER, demand growth is particularly strong in the northern and interior regions of the country.



All natural gas pipeline imports from the United States into Mexico enter the country's Northeast and Northwest regions. Some of these imports enter the country as logistical imports on pipelines owned by private entities, as well as by Pemex's natural gas subsidiary PGPB. The term logistical imports refers to imports that arrive in areas with no other form of access to natural gas. The largest growth in projected pipeline imports takes place from nonlogistical imports on PGPB owned pipelines in the Northeast. An increasing portion of this gas flows through the Northeast south to the interior regions, but much of it also serves increased consumption from the Northeast's industrial and electric generation facilities. Higher natural gas pipeline imports from the United States into the Northeast region meet both higher demand from consumers there and the increased pipeline flows from the Northeast to regions further south.

About three quarters of Mexico's natural gas production comes from associated gas that is produced at Pemex's offshore oil platforms in the South-Southeast region. Natural gas production in the South-Southeast is expected to grow by only 0.4% per year through 2019. Pemex consumes increasing amounts of this production in the near term for its exploration, production, and refining activities. With stagnant growth in the production of associated gas in the South-Southeast and limited capacity for future growth in LNG imports, pipeline imports from the United States become the primary means for Mexico to satisfy national demand growth.

SENER has previously made projections that assumed more robust investment in the development of new gas fields, and a more aggressive and diverse range of well productivity rates. SENER's high natural gas production growth projections included the undertaking of an initiative to enhance recovery rates in the South-Southeast of both gas and oil extracted from offshore fields in the Yucatan Peninsula, as well as development in the Northeast of the Sabinas Basin's La Casita shale gas play and Mexico's portion of the Eagle Ford shale play.

However, there are significant factors that could inhibit the development of shale gas and other basins in Mexico, including the geologic complexity and discontinuity of its shale gas areas, the availability of required technology and water resources, security concerns, and a focus on development of crude oil resources. Even if additional development did occur, Mexico's northern regions would likely still see high growth in pipeline imports from the United States, particularly in areas that lack pipeline connectivity to other parts of the country.

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Encore Presentation....."The Insiders Guide to Growing a Small Trading Account into a Big Account"

Thanks for all the positive feedback on John Carters webinar “The Insider’s Guide to Growing a Small Trading Account into a Big Account”. Many of you have requested an encore presentation. So we are happy to say that we’ll be hosting a "live" encore webinar on this Tuesday June 3rd

You can attend at either 1:00 pm or 8:00 pm New York time. Both webinars will be live encore presentations.

Just Click Here to Register

One of the reasons we are doing this is that it turns out that a lot of traders were shut out of last week’s webinar because we were over capacity. We apologize to all that were and hope you get a seat for this week. Make sure you log on 10 minutes early to claim your seat.

So join us for a live encore presentation on Tuesday.

Click Here to Choose the 1 p.m. Webinar

Click Here to Choose the 8 p.m. Webinar

See you on Tuesday!
Ray @ The Crude Oil Trader


Get ready for this weeks webinar by watching John's video primer "The Big Trade"