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Mike Holt

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  • Epilogue to TREM '11 -- A Focus on Chinese Trade Restrictions and the WTO [View instapost]
    With the WTO now broken due to the inability to enforce restrictions on unfair trade practices that have become far more frequent and flagrant since China was admitted to the WTO in 2001 (ironically, with the expectation that allowing China into the WTO would cause them to become more responsible stakeholders in the global economy), attention has now turned to regional trade agreements instead.

    The Trans-Pacific Partnership that would promote free trade between the US and numerous Asian countries excluding China is one such agreement.

    Although incredibly important developments such as this get far less attention than the noise of daily fluctuations in market prices for this or that, and can be obscured by other geopolitical events and developments with less important long-term strategic significance, it is somewhat encouraging to see the US finally turning to the USTR to address the growing damage being inflicted upon the US economy and to the proper functioning of global markets as a result of the CCP's sponsorship of Red Capitalism in all its various forms, rather than relying on QE programs initiated by the Federal Reserve and other Central Banks around the world to serve as a panacea for any and all problems.

    However, now that the TPP has been developed to a stage where it can be introduced to Congress for approval, it now faces stiff opposition from special interest groups on both sides of the aisle. Some of their concerns are valid, or at least understandable, and there may be room for improvement in some of the proposed terms of the TPP, but what many fail to realize is that the outcomes with which they are most concerned would be exponentially worse if this trade agreement is not implemented. To hold out for perfection across a broad spectrum of issues as if global competition was non-existent is simply naive.

    Here is a link to the USTR website for more info on the Trans-Pacific Partnership.
    Apr 29, 2015. 02:41 PM | 1 Like Like |Link to Comment
  • '60 Minutes' Tackles Rare Earths [View article]
    For more info on the relevance of thorium to the development of rare earth resources outside of China, this article that appeared on oilprice .com today may be of interest.
    Mar 31, 2015. 02:07 PM | 1 Like Like |Link to Comment
  • '60 Minutes' Tackles Rare Earths [View article]
    Shaduc, the world's reliance upon China for rare earth minerals and high tech components derived from rare earths is a matter of fact rather than of opinion.

    So, yes the US is reliant upon China for these components that are critical to the high tech industries that play an important role in the growth of our increasingly knowledge-based economy.

    These components are also used in the self-guided missiles that you mentioned, and in many other advanced weapons systems as well.

    But, the US and China are locked into an odd relationship where they have become increasingly reliant upon each other and must cooperate to a certain extent in order to achieve their strategic objectives but seek to gain power relative to the other in the process.

    For example, it became obvious during the 2008 financial crisis that the economy doesn't function properly absent growth, and that economic growth is also critical to keeping debt to GDP ratios in check since austerity is so unpopular. So, the US, Europe, Japan and other developed countries faced with a dangerous cocktail of aging populations and already high debt levels have turned to China, directly or indirectly, to achieve this economic growth.

    But, China has been sustaining its growth over the past several years by incurring debt at an unprecedented rate in order to fund Fixed Asset Investment activities that by definition are non-recurring in nature.

    So, where will all this lead? Government leaders should have been able to anticipate decades ago the impact that the aging of the baby boomers would have on economic growth and government finances, but rather than taking the tough actions needed to address this they have instead labeled this as the third rail of politics and essentially agreed among themselves to ignore it. Now, when they're faced with the question of what should be done after decades of neglect, the simple answer is to turn to China and to massive monetary policy experiments on the part of central banks rather than tackling the fundamental problems for which there is no political courage to address.

    And, they attempt to downplay the significance of any conflicts with China that could derail economic growth, such as the fact that the Chinese government has been a major sponsor of cyber theft against the US, including confidential information for the F-35 fighter jet and many, many other offenses that would likely be intolerable if they took place in broad daylight rather than the shadowy world of cyberspace.

    Will China eventually evolve into a responsible global stakeholder as many hope, or will it seek to dominate strategically important industries using every means at the disposal of the Chinese Communist Party leaders possibly even with the objective of punishing the rest of the world for China's century of humiliation?

    These are tough questions to answer and are best left to geopolitical experts whose views are more likely to be expressed elsewhere, but I believe that China's decades in the making strategy of controlling rare earths and downstream industries that are critical building blocks for numerous high tech industries including the defense industry will play an increasingly important role.
    Mar 31, 2015. 02:02 PM | 3 Likes Like |Link to Comment
  • '60 Minutes' Tackles Rare Earths [View article]
    After China, the second largest consumer of rare earths is Japan. Being an island nation, they are not blessed with plentiful supplies of commercially viable rare earth deposits. But, the US, an important ally, does have plentiful supplies of rare earths that could be extracted. Given the strategic importance of rare earths due to their use in our most advanced weapons systems and for a wide range of applications across virtually all of our high tech industries that we rely upon for economic growth to keep debt to GDP ratios from spinning further out of control, it is therefore astounding to the Japanese that the US has discouraged, rather than encouraged, the development of domestic rare earth mining operations.

    One reason for this is our inefficient, patchwork quilt network of environmental regulatory bodies with overlapping jurisdictions imposing, inconsistent or even contradictory requirements that can result in a twelve year process just to get approval to begin a mining operation.

    Another, less well known reason is that rare earths, particularly the most critical heavy rare earths, are often accompanied by deposits of moderately radioactive thorium. And, since there is no market for thorium, it becomes a liability with extremely high storage costs, rather than an asset to potential miners, who then can't economically justify investing in a mining operation even if their investors were prepared to deal with the decade-long permit process described above.

    Fortunately, the Thorium Energy Alliance, a group of scientists and others familiar with a safer, cheaper form of nuclear energy technology that is sustained by thorium rather than enriched uranium has remained determined in their efforts to call attention to this technology that was developed at Oak Ridge National Laboratories in the 1950's and 60's, but then abandoned largely for political reasons.

    If the Thorium Energy Alliance can succeed in simply calling attention to the merits of the newer, safer, form of nuclear energy that they advocate, known as a Liquid Fluoride Thorium Reactor ["LFTR"], this would not only create a market for thorium that would potentially break down an important barrier to the development of domestic rare earth mines, it could also revolutionize the energy industry and bring about a number of other positive changes that could reshape the 21st century in ways previously only imagined, e.g., the economical production of hydrogen for use in recyclable, energy-dense liquid fuels, water desalinization, and an easing of global tensions regarding nuclear weapons production capabilities which would no longer be synergistic with claimed aspirations to develop nuclear energy programs.

    But, developing rare earth mines in the US is just the tip of the iceberg. The more critical issue facing the US and many other countries around the world is the lack of qualified people with the education, training, and experience to compete in downstream industries that process rare earths into the increasingly advanced components that are actually needed to fulfill high tech applications. Having a lump of dirt somewhere will not help Apple (AAPL) compete with Xiaomi, the privately held Chinese company that is the third largest global smartphone distributor to build smartphones with the tiny speakers, vivid displays, and high data storage capabilities that are just some of the features that are made possible by rare earth based components.

    At one time, the US possessed this talent, but today many of those with an expertise in this area are approaching retirement age, if they haven't already, so according to Karl Gschneidner, for example, there is a huge void in the US talent pool within this critical area that would already require 15-years of dedicated effort jus to catch up with the current stage of development of these industries within China. Understandably, this has Karl Gschneidner, who played an important role in the success of The Manhattan Project, greatly concerned--especially since most Americans don't even recognize the challenge with which we are faced.
    Mar 23, 2015. 02:28 PM | 9 Likes Like |Link to Comment
  • '60 Minutes' Tackles Rare Earths [View article]
    It was encouraging to see that not everyone has forgotten or become complacent about the risks associated with our reliance on China for over 90% of rare earths and a growing share of rare earths-based components manufactured in downstream industries.

    When attention was drawn to this risk in 2011, it led to keen investor interest in junior rare earth mining companies, causing their shares to soar. As prices for rare earths fell, the stock prices for those rare earth mining companies fell with them, causing investor interest to wane.

    But, since this serves to increase, rather than decrease, the risk that the CCP will be successful in achieving its objective of dominating strategically important industries through its control over access to rare earths based components critical to so many high tech applications, attention to this risk among investors [as well as government and military leaders, and the public at large] should be growing, not waning.

    Maybe this risk would be better appreciated if more attention was directed toward the manner in which the CCP has quietly gone about orchestrating its strategy to dominate industries reliant upon rare earths based components over a period of many decades.

    There are several Chinese universities and Chinese government funded research centers that sponsor PhD programs that focus on the unique properties of rare earths and their critical importance across a wide range of applications that will be critical to national defense as well as the high tech industries upon which
    knowledge based economies are increasingly reliant for their desperately needed economic growth.

    And, opportunities for the scores of PhD students graduating from these programs are virtually guaranteed through government subsidies for companies in these industries, whose success, in turn, is critical to the achievement of CCP efforts to dominant the strategically important industries that have been identified in their successive 5-year economic development plans for decades.

    And, don't forget that it was the two sons-in-law of Deng Xiaopeng, who is also known as the father of the rare earths industry in China, who were among the investors who acquired Magnequench, the Terre Haute, Indiana manufacturer of bonded neodymium magnets before its US operations were closed down and shifted to China shortly after its acquisition.

    There is much more to this story, but if investors educate themselves regarding developments in the rare earths space within this context, then they will appreciate how these developments will not only impact the shares of companies in which they are invested, but may also impact many key global macro factors that could influence what the 21st century holds in store for them and their families.
    Mar 23, 2015. 08:36 AM | 11 Likes Like |Link to Comment
  • Update: ETC-1002 Development Remains On Track [View article]
    Mark, I have read both of your articles, as well as the comments for both, and I feel much better informed as a result.

    Its up to each investor to do their own due diligence and to formulate their own opinions regarding the information presented, but your analysis, summarized in a clear and concise manner, together with the comments shared by some readers, has certainly helped me to put things into better perspective. Thanks for sharing your thoughts.
    Mar 20, 2015. 02:05 PM | 1 Like Like |Link to Comment
  • China's Debt Bomb Remains A Stealth Candidate For Top Gray Swan Of 2015 [View article]
    Yet, when the wheels were falling off the wagon in 2008 for the same obvious reasons, investors were asking the supposed experts all around them "why didn't you see this coming?"

    The answer of course was that most would rather fail conventionally than to succeed unconventionally. If you try hard enough, you can even convince yourself that not only is the Emperor wearing clothes, but he is wearing very find, splendid clothes.

    What's that you say? Oh, "this time is different?"

    And why, may I ask, do even the central bankers themselves, to whom some now attribute super human knowledge and skills, continually warn that their efforts to keep the economy afloat will ultimately fail absent fundamental economic reforms?

    When those who are being relied upon to support the argument that the economy no longer matters respond that the economy does indeed matter, and that ever increasing debt levels are not a panacea for the fundamental problems plaguing large swaths of the global economy, then I think its time to take concerns about large and growing debt levels in China and in many parts of the world much more seriously.

    Total debt in China has soared by $20 trillion since 2007, causing their debt to rise to 282% of their GDP in record time which should tell you something about the quality of this debt, yet because their unsustainable debt-fueled Fixed Asset Investment spending has temporarily served as an engine of global economic growth, now those able to conceal themselves after they were caught naked when the tide went out before this new, larger debt tsunami are trying to convince the observers onshore that its now safe for them to go skinny dipping, too. And those nearby speed boats their friends are tinkering with that have catchy names such as "Flash Trader" are actually life boats equipped with buckets large enough to bail out everyone this time.

    So, what to do? Avoid shark-infested waters, wear a life jacket, and get onboard a gunboat, or something similar such as the Aerospace and Defense ETF (ITA). Cyber-security stocks have done well, but that means their valuations are not nearly as attractive as they were a year ago. However, a 7% yield on midstream MLP's that don't take possession of the oil and natural gas that they get paid to transport still looks attractive relative to paltry yields on US Treasuries or sovereign debt of most developed countries.

    Stocks of companies in defensive industries such as Health Care have been popular for awhile, but their higher valuations have brought with them higher levels of risk, especially since there is no guarantee that the next grain of sand dropped on the mountain of debt piling up throughout the world won't be the one to cause an avalanche. That could create some buying opportunities, so keep some dry powder around that can be used to unearth those opportunities and serve as ballast in the meantime.
    Feb 20, 2015. 07:35 PM | 2 Likes Like |Link to Comment
  • China's Monumental Debt Trap - Why It Will Rock The Global Economy [View article]
    Rising debt levels in China should not be our only cause for concern. Debt levels in the US have been growing rapidly ever since the late 1970's, and debt levels have accumulated even more rapidly since 2007. And, judging by a recent CBO report, this was not a temporary phenomenon that will be followed by an orderly deleveraging process that will serve to bring debt levels down to manageable levels.

    "Consequently, the $13.4 trillion in debt held by the public projected for 2015, which would be akin to 74 percent of the overall economy, is projected to swell to $21.6 trillion by 2025, when it would total 79 percent of the economy. As recently as 2007, before the Great Recession, it was equal to about 35 percent of the economy."

    “Federal debt remains greater relative to the (overall economy) than at any time since just after World War II,” the CBO report says.
    Feb 20, 2015. 02:19 PM | 1 Like Like |Link to Comment
  • China's Debt Bomb Remains A Stealth Candidate For Top Gray Swan Of 2015 [View article]
    Citizens of the PRC save 30% of their income, which represents about 35% of China's GDP. So, their savings translates into about 10% of GDP.

    Meanwhile, debt accumulated by governments at all levels, and by state-owned corporations has grown to 282% of GDP, with $20 Trillion of that debt incurred since 2007.

    So, while I admire the savings discipline of the hundreds of millions of PRC citizens who now have modest incomes to compensate them for their not so modest efforts, they have just been immersed deeply into debt. And, unlike the very rich who can simply pack up and go along with all the wealth they have created for themselves, most of the PRC citizens with an average per capita GDP of $7,500 per year will be left stuck holding the tab--which is even larger when you tally up the costs to recover from the severe environmental damage that they have also been saddled with.

    I take no comfort in this. In fact, I find it very sad and unfair--if not tragic.

    Nor do I believe that the debt levels that are rapidly accumulating in China make the debt levels that are rapidly accumulating in the rest of the world any less worrisome. To state otherwise is like the pot calling the kettle black. When their are no better alternatives, it can allow every country engaged in these debt- as- a- substitute for fundamental reform charades to keep on playing for longer than many thought possible, but when they start driving off their respective fiscal cliffs leaving fewer participants left to buy the debt issued by the remaining players, there will be no "winners."
    Feb 17, 2015. 07:10 PM | 4 Likes Like |Link to Comment
  • China's Monumental Debt Trap - Why It Will Rock The Global Economy [View article]
    My understanding is that the PBoC has an offsetting RMB denominated liability that must be repaid if they were to liquidate Fx Reserves.

    Nonetheless, it will be interesting to see whether the PBoC will be willing to put those Fx Reserves to work to support the Fx value of the RMB:

    Contrary to all of the headlines about past efforts to keep their currency artificially low, their objective over the past several years has been to strengthen the Fx Value of the RMB in the hope that it would gain wider acceptance as a reserve currency.

    But, slowing growth coupled with accelerating debt levels may require a return to their previous currency devaluation strategies--or induce others to devalue their currency for them.
    Feb 17, 2015. 05:49 PM | 1 Like Like |Link to Comment
  • China's Monumental Debt Trap - Why It Will Rock The Global Economy [View article]
    DavidLMO, there was a time when Monetarists and Keynesians were at odds with each other. Somewhere along the way, the Monetarist views of Milton Friedman and the Chicago School have essentially transformed themselves to reflect Keynesian thinking and objectives implemented through market interventions initiated by central banks rather than elected government officials.

    How did it come to be that the Federal Reserve became a policy making body in the first place, i.e., essentially a fourth branch of government--absent the checks and balances that theoretically apply to the other three--that has been given the not so insignificant power to create money? This question can be answered by revisiting the 1918 Amendment to the Federal Reserve Act, but for now just think about this.

    And, think about this as well. During the 1970's, tax shelters of many types proliferated due to a plethora of tax breaks, i.e, fiscal policy actions that Keynesians still relied upon to intervene in the markets as they saw fit. Many of these tax shelters generated no economic returns absent the artificiality of the tax savings they offered to investors. When the 1986 Tax Act was passed, greatly simplifying our tax code, these tax shelters imploded overnight.

    Now, the Federal Reserve, in concert with FNMA and FHLMC, are attempting to inflate home prices--and prices for other assets as well--by attempting to keep interest rates artificially low. Granted, there are other reasons why interest rates have fallen to such low levels--including similar actions being taken by other central banks around the world--but why would anyone think that the prices for these assets wouldn't plunge when the artificiality of low interest rates is removed, just as asset prices for tax shelters plunged when the artificiality of tax savings from tax loop holes was removed?

    History may not repeat itself, but it does rhyme. Yet, we've become so accustomed to cheering for the Monetarists who once advocated free market principles that we haven't noticed that the Keynesians and the Monetarists are now all wearing the same uniform and standing on the same side of the field. It's all good fun provided that nobody dares to let any air out of the ball. The "D" word would have everyone scrambling for the exits.
    Feb 17, 2015. 02:14 PM | Likes Like |Link to Comment
  • China's Monumental Debt Trap - Why It Will Rock The Global Economy [View article]
    WMARKW, one of my greatest concerns about the sustainability of US debt levels is that most don't even realize that it is far greater than the sum of past budget deficits.

    We often refer to US government debt as Total Debt, i.e., $13 Trillion of public debt outstanding plus the $5 Trillion of intra-government IOU's that have been issued to account for the fact that social security / Medicare contributions received in excess of payouts have been spent for other purposes, so it is widely believed that Total Debt of $18 trillion accounts for everything.

    Although $18 trillion, representing about 100% of our annual GDP, is an awfully large amount, it does not account for the unfunded liabilities for government and military pensions, and unfunded social security and Medicare obligations that are disclosed only in the footnotes of the federal government's financial statements. The present value of these unfunded liabilities is estimated to equal about $75 trillion!

    People will quibble whether it's an additional $50 trillion or an additional $200 trillion, but regardless it should be clear that when baby boomers begin to retire, the US government will have to issue large amounts of additional debt to the public in order to raise the funds needed to pay for these obligations.

    Given that global debt has already risen by $57 trillion over the past several years to $200 trillion, representing 285% of global GDP, and many other governments around the world may also be seeking to issue more debt to sustain the debt-fueled spending that keeps their economies growing, can we be assured that the US will be successful in issuing this debt even if it requires paying much higher interest rates? Initially this may not be a problem barring some other "unforeseen circumstances" such as wars or natural disasters, but if higher interest rates are required, causing debt carrying costs to increase as a percentage of GDP--especially if higher interest rates cause GDP to slow, wouldn't that create a "real and rational reason" for potential investors to ask whether they will be repaid?

    A rise in interest rates as other countries around the world also seek to issue more debt could cause US debt levels to compound at much higher rates, causing debt carrying costs as a percentage of GDP to rapidly become a much more significant burden. Who are the savers, and why would they invest in US sovereign debt versus sovereign debt of other countries, or in a multitude of other alternatives for that matter? Is this concern effectively addressed if other countries go down this same path so that the "we suck, but they suck worse" syndrome can be further perpetuated? Or, does this just magnify the problem, and increase the risk of global financial crises? During the throes of the 2008 financial crisis, as I watched a disorderly deleveraging process wreak havoc on markets for assets of all kinds, it was of little consolation to me to think that the Euro might splinter at any moment.

    One might argue that investors will always prefer US Treasuries, just as they did in 2008 in part because it is the largest, most liquid debt market in the world, but against the backdrop of already rapidly growing debt levels, and the potential for a further surge in debt to finance military campaigns brought on by growing geopolitical instability throughout the world, will that always be the case? Is it prudent to continue pushing the envelope as far as possible, as we have for the past 30 years, and then just hope that when government liabilities explode potential investors won't question whether they will be repaid?

    If you posed this question to citizens of many other countries who have suffered from financial crises brought on by excessive debt levels, they would wonder why anyone would even find it necessary to ask this question. So why do Americans assume that, when we begin to issue debt at a more rapid pace, all those we expect to rely upon to buy those bonds will have no real and rational reason to question whether they will ever be repaid?

    Why are so many other countries also going down this same path when the need for deleveraging and fundamental structural reforms has become so glaringly obvious--but politically unappealing? Will we all be saved when North Korea announces that its "independent central bank" is about to embark on a QE program to solve all of the problems facing its economy?
    Feb 16, 2015. 12:20 PM | 3 Likes Like |Link to Comment
  • China's Monumental Debt Trap - Why It Will Rock The Global Economy [View article]
    According to this Bloomberg article, The BIS [Bank for International Settlements], based in Basel, Switzerland, said in a report in January that China accounts for the biggest share of international borrowings in dollars, amounting to $1.1 trillion.

    That is why the article leads with these statements:

    "China, like much of the world, is beefing up monetary stimulus to boost its economy. Yet, unlike its peers, it probably won’t let its currency depreciate to help.

    Sustained weakness in the yuan would make it more expensive to repay the $1.1 trillion of debt the Bank for International Settlements estimates is owed by Chinese companies. As a result, China has to offset interest-rate cuts and other easing measures with steps to curb the yuan’s 3 percent slide from its peak about a year ago."

    “It’s a dilemma,” Claudia Calich, a money manager in London at M&G Ltd., which oversees about $1 billion of emerging-market assets, said Friday by phone. “They can’t afford to let the yuan depreciate quickly because of the concerns about dollar debt. The authorities will perhaps slowly guide the yuan lower, but not in one go. It’s quite a delicate balance.”

    "The quandary has made the yuan one of only two major currencies that forecasters surveyed by Bloomberg expect to strengthen versus the dollar this year, the other being Mexico’s peso. Any gains would risk blunting China’s stimulus and hurt an economy that’s already slowing by making exports less competitive just after they suffered a surprise drop."
    Feb 16, 2015. 11:03 AM | 1 Like Like |Link to Comment
  • FireEye: Pay Attention To These Negative Trends Before Buying [View article]
    Michael Edwards, pay attention to market caps rather than stock prices.

    AAPL has a market cap of $700 billion.
    FB has a market cap of $212 billion.
    GILD has a market cap of $153 billion.

    FEYE has a market cap of $6.2 billion [versus ~$10 billion for Palo Alto Networks].
    Feb 15, 2015. 11:14 PM | 3 Likes Like |Link to Comment
  • Epilogue To TREM '11 -- Cyberspace, The Friend Or Foe Of Technology And Western Civilization? [View instapost]
    An interesting question to ask is whether Tim Cook would change his itune if the Chinese mobile phone maker Xiaomi gains further ground in its efforts to take market share away from Apple by doing more than just cloning its products.

    Until investors see a direct and immediate relationship between their portfolios and the future of the principles of individual liberty and justice that once defined what it means to be an American, concerns about someone else's grandchildren will likely seem irrelevant to most.
    Feb 15, 2015. 03:14 PM | Likes Like |Link to Comment