themusingsoffritz: 4/29/07

China
Reading the following information one can conclude that most probably the commodity bull cycle will last for much longer than some people believe. Furthermore China most probably will take a more important role on the international platform over the coming years. Of course as it happened with other raising nations as well, China on the way up will have to face some downturns from time to time.
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The news that China’s economy grew by 11 percent in the first quarter, and that China is now a net importer of coal, coupled with the EIA projection that China will soon surpass the US as the world’s biggest emitter of carbon dioxide, raises the issue of just where China is going.

For the last 25 years, the Chinese have been undergoing an economic boom with little attention to efficiency or the environment. There are now 30 million cars in China and the number is growing by 20 percent a year. Power use in China, the world's biggest coal producer, is rising 13 percent annually, and a new power plant is opening every four days. The world oil markets are under constant pressure from Chinese demand.

A recent Chinese government report on global warming rejects binding caps on carbon emissions until the country is “modernized” around the middle of the century. While the Chinese realize they are creating an environmental disaster, the forces pressing for modernization are simply too strong to be overcome by appeals to reason. In short, China seems a nation out of control on the issue of growth vs. the environment.
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Equity Markets
Surprise, surprise (or maybe not that much) equity markets are making new highs. The Plunge Protection Team has been successful so far. The question now is if that will go on like that or not. If something is kept in an artificial way up, the correction that will come at some point will be much stronger. Sell in May and go away? I do not know if that old rule will be the rule to follow for 2007. However it might be a moment to sell part of the stock holdings, especially the ones with profit. I would still wait with new purchases until 3rd quarter 2007. Maybe the only investment I would go in at this point of time are the Canadian Income Trusts on Oil & Gas. These had to face a strong correction over the past 12 months. The correction was due on one side to the remarks of the minister of finance regarding change the tax system for the income trust, and on the other side due to the fact that the commodity investments went through a correction in general terms. A lot of these Oil & Gas Income Trust have a very high dividend yield and I believe that the actual prices are OK to go in if your target is medium term at least. Of course in a major downturn of equitiy markets a correction in these income trust might be possible as well. However as they had to face a major correction already I expect that they will do better than other investments if such a downturn will happen.

Debt
The situation with subprime debt has not improved at all. The actual trend is bailout. Bailout of the homeowners who will not be able to pay their mortgage anymore, or is it the bailout of the credit companies and banks that should have never accepted the mortgage at the first place? Anyway someone has to pay as bailouts are not for free. Who will pay? Possibly everybody through the indirect taxing system called “inflation”. If you want some more information about that topic, please read comments on:

http://globaleconomicanalysis.blogspot.com/2007/04/fatal-flaw-in-housing-bailout-plans.html

My favourite investments Gold and Silver
While the equity market is kept up, the Plunge Protection Team and their agents are working hard to keep the gold and silver price under control. So far they were quite successful in doing so. Gold is being kept below the USD 700 oz. price and Silver below USD 14. However gold and silver prices will go up. To me it seems as when someone intends to keep a balloon under water. Once you stop pressing down the balloon will go up and might even pop out of the water. The open interest is at record levels. Commercials have loaded shorts. Once prices go up they will have to cover their shorts. It would not surprise me to see for the rest of 2007 a similar up move as in the second half of 2005.

Commodities
Please see my comment re China. Re the situation with Oil & Gas I recommend to read the below article.
http://energybulletin.net/29162.html

Uranium
As a contrarian, I do not like that the investment U is more and more on the radar screen of more and more investors. Furthermore I do not like at all the plans of NYMEX to offer Uranium futures. So far the U308 price has gone up because physical stockpiles are low and demand is high. No “paper U308” did exist so far. Now the market manipulators will have in U futures a new tool to keep U prices under control the same way they do with gold and silver.

http://www.marketwatch.com/news/story/uraniums-set-make-waves-futures/story.aspx?guid=%7B04534340%2D989E%2D43ED%2DB93D%2D1CEC856F39BF%7D

Anyway in general terms I am still positive for U up to a price of USD 200. However we will have much more volatility in the market due to the new futures

Derivatives
Just recently the Bank of England and the Monetary Authority of Singapore gave their warnings that the risk of a financial crisis has increased. Why would they warn us? There must be something cooking.
By the way there is a market we do not even get information about.
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And now we come to something interesting. The world's credit system is no longer controlled by banks, and thus, no longer under the control of bank regulators. Instead, there is a huge pool of liquidity outside of the banking system. A news item last week spoke of giant "dark pools" of liquidity that "do not publish quotes on the open market." But how much bilge is sloshing around in these dark puddles? How do they work? Where does the money come from? We don’t know. But we know that pools of liquidity do not really make the world a richer place. They just increase the odds that you will step into something like Enron or New Century and sink.
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Inflation
You ever asked yourself why prices of almost all important goods and services, such as food, health care and so on is going up but according to official inflation numbers we do basically have almost NO inflation?

Here is the answer:

The chart is from John Williams, Shadow Government Statistics
http://www.shadowstats.com

I wanted to insert the chart real CPI vs official CPI. Unfortunately without success. sorry.
However you can see that chart plus other interesting charts on
http://www.trendsman.com/v1/members/archive/pdf/269852696_AmericanInflation2.pdf
(if the report is too long, have a look at pages 7, 11, 12 and especially 15 where you find the real CPI) all charts are very interesting.

John William is ex US comptroller and is using the same method they used in the early 80ies. At that time the hedonic calculation, law of substitution and other nice statistical gimmicks that make the CPI looking better, were not yet used. If CPI has been much higher that means that GDP has been negative for some years. So the strong US economy might not have been that strong at all.
If you like some more information about inflation see:

http://www.shadowstats.com/cgi-bin/sgs/article/id=343