The eurozone is hanging together for the moment and despite continued weak economic data from the U.S., the markets are moving higher. It is the kind of environment where if nothing horrible happens it's a relief and the market moves up; it's the market's inherent bullish bias that is causing this.
Our team was expecting this period of stabilization following the summer sell off, however the euro debt crisis derailed that theory, but not this week. We will need a few weeks of this stabilized environment (watch the VIX closely as it is dropping once again) before we see speculation start to come back to the juniors. There were a few times last week when every index but the Venture and Russell went up, clearly documenting the markets' zero tolerance for risk. With that stated, it has always been our theory to never let a major market sell-off pass you by. For every great collapse comes great opportunity. Fundamentally sound juniors are trading at very cheap levels. Although they aren't "2008 cheap," they are cheap enough and starting to form bottoms.
Gold took it on the chin last week among rising confidence Greece will not be the first nation booted from the EU. The ECB standing together and financial support from China gave financial markets a chance to stabilize. Gold had its biggest weekly drop since early May.
Gold will move back and forth as markets decide whether to be bullish or bearish, but its overall trend is up - and we don't see that changing anytime soon. With a continual threat of inflation and the underlying threat of default across many nations globally, gold is viewed as a safe haven. For now, gold has momentarily left the fear trade and will either return to the fear trade shortly or soon move higher on the inflation trade. It continues to build support at key levels and will ultimately move much higher.
Safe For Now
Europe is facing its sovereign debt issues now. If it was smart it would have cut its losses with Greece and let them default. This country couldn't balance a check book to save its own life. The market was beginning to price in a Greece default anyway, in our opinion.
The end of the United States being the world's great economy, as we've continued to preach, is still a ways off. The world reserve currency will not go up in smoke anytime soon. That being said, it will continue to lose its value until it is deemed worthless, after hyperinflation takes over.
China is Rising Quickly
Two weeks ago, on September 6th, our team published Volume # 234, titled, "Two Biggest Economies Moving in Different Directions." The volume highlighted China's emerging middle class and its potential motives to dethrone America and its world reserve currency.
We explained that China was remaining accommodative by continuing to lend money to the United States through the purchase of U.S. Treasuries. Beneath this accommodative behavior is China's realization that the U.S. is drunk on debt and if it continues on its over-spending path, it will soon drive itself off a cliff - through either default or hyperinflation. The only major flaw to this plan was that China would lose its largest customer. However, if China's middle class keeps expanding the way it has, it could become self-reliant and a U.S. default could be a reality within a couple years.
On Monday, September 12th, it was announced that China's trade surplus narrowed in August. Imports jumped for the month which can only be the result of surging domestic demand for products. China's trade surplus totaled just $17.8 billion in August, dropping from $31.5 billion in July. This is a significant decrease and our team believes a trend is taking hold. If China's domestic demand expands steadily with its middle class, America needs to be very concerned.
China has been making noise in the global financial markets for years. It is now positioning itself to be remembered as the great savior of Europe. We are thankful for China's involvement in the short-term, but don't be fooled by the motives of this long-term thinking, hybrid-communist country.
China's involvement in lending a "helping hand" to EU nations has two obvious motives behind it. The first and most obvious is that it will allow China to continue dumping U.S. dollars. Although exchanging them for euros isn't much better, it is a means of diversifying. The second is to increase its influence, respect and ultimate power in the EU zone - a region it has had trouble garnering respect from.
China envisions a day in the not too distant future where it is the home of the world reserve currency. If it is holding a ton of euros it will have significant influence over these countries that have long been closely tied to the IMF and World Bank.
What you must remember is that the EU still has an arms embargo on China, imposed after the Tiananmen Square massacre in 1989. The Chinese are desperate to gain some respect in Europe.
What other reason would China swoop in to help out Italy or Hungary?
China has bought huge amounts of debt in the past 12 months and stimulated both of these countries' economies. This is a tactical move and one that is moving China that much closer to its goal of being the undisputed economic powerhouse of this planet. According to Stamford, Connecticut,-based Faros Trading, in a report they issued in June, China wants access to purchase more sensitive European assets such as technology companies. We are not a political newsletter, nor do we pretend to be, but isn't it amazing how quickly everyone forgets about a communist agenda if they can make a quick buck or be bailed out?
Desperate times call for desperate measures and with the EU on the brink, China is seizing the moment.
Antonino Laspina, chief trade commissioner and coordinator in China with the Italian Institute for Foreign Trade stated that, "Italy's excellent design expertise, brands, innovation and technology are exactly what Chinese companies lack when they look to go from quantity to quality."
He also commented that, "Italy's strategic position as an important sea gateway to Europe can help Chinese companies' further tap the European market after they take hold in Italy."
Premier Wen Jiabao said in June that China can offer "a helping hand" to Europe by buying a limited volume of sovereign bonds. What a "limited volume" means is anyone's guess. Notice the choice of words by the Premier. He wants it to be known that China is amicable and willing to save members of the EU.
China has also pledged to buy Hungarian government bonds. It agreed to extend a 1 billion euro loan for the financing of development projects in Hungary as it was one of the countries that needed an IMF-led bailout in 2008.
China is doing everything to attract business and spur GDP growth. It is also luring U.K. banks to relocate to Hong Kong.
Bloomberg has recently reported that Hong Kong would "absolutely" welcome London-based banks HSBC Holdings Plc (HSBC) and Standard Chartered Plc (SCBFF.PK) if they decided to move headquarters to the former British territory, according to Chief Executive Donald Tsang.
Tsang, who is in London to promote Hong Kong as a financial center to British business leaders, said that it was ultimately a decision for the banks and he didn't "want to encourage a move that would impair relations" with trading partners including London and New York.
Donald Tsang went on to comment that, "Whatever the measures, you have to look at the viability and we are no longer in the 1930s." Banks' decisions about where to set up their headquarters "can be influenced by tax and regulation, but I do believe in the wisdom of the U.K. government in this regard."
Accounting firm KPMG estimated that with a top tax rate of 50%, London-based bankers making more than 1 million pounds ($1.58 million) will pay about three times more in tax and social security than colleagues in Hong Kong.
In a speech at the Think Asia Think Hong Kong conference in London, Tsang said, "If you ask businesses why they choose Hong Kong over other places, our surveys show that almost all of them place taxes at the top of the list - or perhaps I should say a lack of taxes."
We can't argue with that.
China continues to drive growth in its own country and abroad while western nations struggle to get their houses in order. We will be closely watching for developments within China's middle class. It is our belief that the rise of China's middle-class will ultimately bring the nation to the point of being the world's largest economy. If the U.S. approaches default in 2014-2015, China's middle class may be substantial enough for it to lead a charge that ultimately sees the USD removed as the world reserve currency.
The Chinese have a saying that goes "dig the well before you are thirsty."
As they continue to lend a helping hand to debt-laden nations, they are building loyalties abroad that will help them gain political clout when they need it most.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
