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Mike Holt

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  • What Every Investor Must Know About China [View article]
    The NYT article similarly places too much emphasis on what economic growth within China has been recently--based in part upon speculation about how to interpret levels of electric power production--rather than the outlook for future global economic growth and financial market conditions 12 to 18 months in the future based upon an analysis of factors far more meaningful than electric power production.
    Aug 26, 2015. 02:19 PM | 1 Like Like |Link to Comment
  • What Every Investor Must Know About China [View article]
    As Warren Buffet once said, the market is a barometer [of the future] not a thermometer [of the present]. Unfortunately, the Chinese stock "market" is neither. It is so opaque and controlled, it signals very little about the fuure. It merely reveals that the CCP has failed to control it in their attempt to orchestrate a rising stock market that would lull equity investments that heavily indebted corporations could use to pay down their debt.

    The greatest risk associated with the CCP's failure is a loss of confidence in their ability to control the Chinese economy, although the probability of the CCP losing its legitimacy at this point is very low. But, looking into the future, as investors should, there are many challenges to China's economic growth and these challenges are of legitimate concern to investors across the world. Given all the levers available to the CCP to conceal their debt problems, financial contagion risk (a lighning fast form of risk) directly from China is low, but trade contagion risk (which spreads much more slowly) has already manifested itself over at least the past two years as evidenced more visibly by falling commodity prices.

    Trade contagion weakens the economies of other countries and can also weaken their banking systems. The markets and economies of these other countries are much more transparent so it should be easier for investors to view conditions there for signals of what's in store 12 to 18 months ahead--or sooner if those countries have taken on high levels of debt (especially debt denominated in a foreign currency, such as the Swiss Franc or the US dollar both of which have generally strengthened relative to other currencies, which makes it more expensive to borrowers to repay their debt as revenues from slower economic growth simultaneously fall).

    As for China, the best way to understand the challenges facing their continued economic growth would be to read John Mauldin and Worth Wray's recent book, "A Great Leap Forward" which is actually a compilation of insights shared by over a dozen experts regarding "China's Cooling Credit Boom, Technological Transformation, High Stakes Rebalancing, Geopolitical Rise, & Reserve Currency Dream."

    I would also remind investors of a long forgotten book by W. W. Rostow who coined the term "Emerging Markets." That book is "The Stages of Economic Growth" and it will provide investors with a better conceptual understanding of one of the challenges facing the CCP in their quest for continued economic growth while still maintaining their power and legitimacy as they attempt to progress from Stage 3 growth to Growth Stages 4 and 5 which involve a greater role for consumers and a dimished role for centralized, command and control type planning.
    Aug 26, 2015. 08:14 AM | 2 Likes Like |Link to Comment
  • Tesla: A New Generation Of Competing Plug-In Luxury Hybrids Will Shrink The Niche Of The Model S [View article]
    PeterJA, your delusion is soon to result in your dilution. Tesla must now issue new shares in order to come up with a measly $500 million despite Tesla's $30 billion market cap because most of that "value" represents an increase in the price of shares after they were issued. It lines the pockets of the Tesla-naires who sold their shares to others, perhaps you, rather than residing in cash accounts on Tesla's balance sheet where it could then be used to fund the current production of an affordable Model X if that was anything more than just a concept that is still "somewhere around the next corner."
    Aug 23, 2015. 09:48 PM | Likes Like |Link to Comment
  • Do Markets Determine The Value Of The RMB? [View article]
    Michael, thank you for yet another article that allows us to view developments related to China through the lens of your conceptual framework, and with great clarity thanks to the polish added by your keen insights.

    The resulting patterns that emerge may not quite serve as a crystal ball, but they do have predictive value because putting these developments into context allows us to engage in more meaningful scenario analyses and to more fully appreciate and understand the implications of each.

    In particular, I appreciate your focus upon the "why" of the PBOC's partial deregulation of their currency regime on the heels of a falling stock market, a decline in exports, and other signs of slowing economic growth on one hand, and on the other hand the pending deadline for an IMF decision whether to include the Renminbi in the basket of currencies comprising their Special Drawing Rights. In your words:

    "There are three different reasons that might explain the PBOC's move Tuesday:
    - Improve trade
    - Qualify for SDR
    - Monetary Freedom"

    As John Mauldin and Worth Wray point out in their recent book "A Great Leap Forward?" which features chapters written by experts such as yourself on the topics of "Making sense of China's cooling credit boom, technological transformation, high stakes rebalancing, geopolitical rise, & reserve currency dream" one of the most important questions we can ask about China's future centers around its currency. In their words:

    "Will the renminbi strengthen as the world embraces it as a global trade and reserve currency?

    Or will the People's Bank of China intentionally devalue the currency in an effort to breathe life into its uncompetitive export sector, raise the value of its $3.5 trillion Fx war chest, and potentially lighten the load of its massive RMB-denominated debt load?

    Or will the renminbi collapse like the Thai bhat in 1997 as foreign capital flees in a disorderly debt crisis that Beijing cannot contain?"

    As you have pointed out elsewhere including in your two recent books "The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy" and its sequel "Avoiding the Fall: China's Economic Restructuring" it doesn't seem possible for the CCP to orchestrate a rebalancing of their economy away from an unsustainable reliance on debt-fueled Fixed Asset Investment spending toward increased domestic consumer spending without experiencing at best, a "Long Landing" scenario accompanied by heightened risks (economic and otherwise) associated with a combination of growing debt and a slowing economy that could threaten the CCP's legitimacy. Within this context, its easy to speculate that the PBOC's decision was motivated primarily to facilitate a deleveraging of China's debt burden with implications for the health and growth of the global economy whether or not they are successful.

    But, despite the fact that China's balance sheet (that is laden with debt and NPL's likely to be many times greater than the 1.5% "official figures" suggest) would already appear to be unsustainable if it wasn't for the willingness of creditors to place their faith in the implicit backing of the CCP that has failed in most aspects of managing the Chinese economy other than spending (or reporting) exactly the amounts announced at the beginning of each year (whether or not such spending had economic merit), there is also the possibility that the CCP may instead seek to take on much higher levels of debt in order to pursue Xi Jinping's "vision" of a new Chinese empire by financing continued Fixed Asset Investment spending for:

    a so called "New Silk Road" consisting of overland trade routes intended primarily for exports to Europe (unlike the United States, China lacks a west coast--unless it can essentially colonize Myanmar (Burma)--so Chinese exporters are much more limited in their ability to take advantage of drastically lower costs for transportation by water); and

    a so called String of Pearls development of ports that would allow China to access critically lacking resources from Africa and the Middle East, and even a canal on a scale even greater than the Panama Canal that would traverse Thailand (to the detriment of Singapore) in order to avoid the need for passage through the Strait of Malacca.

    This grandiose external Fixed Asset Investment spending plan would require the funding of an Asian Infrastructure Investment Bank [AIIB] through an initial contribution of $50 billion, but would be expected to somehow enable the AIIB to attract capital of $4 trillion in order to rival the World Bank. Although reforming their own domestic financial system that the CCP relies upon to control the Chinese economy would be the more logical next step, earlier this year the PBOC announced an accelerated timetable for internationalizing the renminbi which would require the Chinese currency to become more "usable" in international transactions [not necessarily more freely "tradable"]. So, it is also possible that the PBOC's decision to partially deregulate its currency regime was intended to gain the IMF's approval to include the RMB among the basket of currencies underlying their Special Drawing Rights. Although the IMF soon after announced that the RMB would not be included in the SPR basket this year, the PBOC may have hoped that it would if the PBOC took this last ditch effort that could also achieve the other two potential objectives that you have identified in your article.

    So, while the motives for the PBOC's actions are not entirely clear, the significance of the answer to the question as to "why" this action was taken at this time should be more clear since it has incredibly important implications for the growth and health of the global economy. I look forward to your further writings that may shed additional light on this topic.
    Aug 23, 2015. 02:44 PM | 1 Like Like |Link to Comment
  • Chinese stock plunge leads Asia lower [View news story]
    China's GDP grew from $3 trillion in 2007 to over $9 trillion today on the back of a surge in debt-fueled Fixed Asset Investment spending that now accounts for almost half their GDP.

    As Michael Pettis points out, the size of this unsustainable Fixed Asset Investment spending which, by definition, is largely non-recurring in nature, has dwarfed domestic consumer spending, which has been diluted to about 25% of GDP.

    Since Fixed Asset Investment spending, equal to twice the amount of domestic consumer spending, has been growing at 18% per year, in order to achieve the supposed 7% total GDP growth reported by Chinese government officials, it would be necessary for Chinese consumers to increase their spending at an even higher rate if progress is made in the urgently needed cutbacks in wasteful Fixed Asset Investment spending that has resulted in a mountain of bad debt.

    In sum, the CCP must decide between continued economic growth requiring even higher debt levels to finance foolish capital misallocations, or rebalancing their economy to get it back onto a sustainable footing, which will require either a sharp or a long and sustained decline in economic activity.

    When the new leaders of the CCP were vying for control, they pledged to rebalance the Chinese economy and rein in the out-of-control debt and Fixed Asset Investment spending, and they even began to take steps in that direction. But, more recently, after witnessing the extent to which the Chinese economy has slowed as a result--as evidenced by plunging prices for commodities--the CCP has taken a complete "about face" and has instructed local government officials to do whatever it takes to restore economic activity levels even if it involves a repeat of the same foolish behavior that resulted in empty cities, bridges to nowhere, and production capacity in certain targeted industries two to three times higher than total global demand.

    Many familiar with the practices that the CCP has employed in the past to conceal the bad debt that has been incurred to create the façade of limitless economic growth expect the CCP to instruct Asset Management Companies ["AMC's"] to buy up bad debt from banks and state-owned-corporations in exchange for Notes Receivable from the AMC's which could then be carried at face value provided that interest payments were made on a timely basis--even though they were financed by liquidations of assets at pennies on the dollars so that the principal balance for these Notes could never be repaid. Indeed, the CCP has ordered every Province in the PRC to create additional AMC's to supplement the four large AMC's that the CCP has relied upon to implement this Extend and Pretend smoke and mirrors strategy that has worked so well for them in the past.

    But, rather than take the risk that investors may now see through this ploy after witnessing all the phony activities that led to the 2008 GFC, the CCP seems to have put that strategy on hold for now, and rely instead on encouraging the Chinese people to buy stocks "because it would be patriotic to do so" when in fact it was intended to entice foreign investors into buying "A" shares in Chinese companies that they were now being "allowed" to buy. If these foreign investors could be fooled into thinking that CCP leaders were infallible, or that they had an unlimited number of levers to pull in order to sustain economic growth and/or support stock prices even if they continued to make the obvious errors that have finally captured the world's attention lately, the capital invested by these foreigners could be used to repay all the crap loans that have been issued since 2007, leaving foreign investors holding the bag, which creates less risk of domestic social unrest that could weaken the CCP's hold on power.

    So, the real significance of the 30% decline in the Shenzen stock market since its June peak is the impact that it will have on the false narratives described above that the CCP hopes to rely upon to entice foreign capital so that it can deal with its massive debt problem. Previously, some investors may have believed that the CCP had many levers at its disposal that could relied upon to protect them from incurring investment losses, but the CCP has been pulling many levers lately, and the result has still been a 30% market decline, and a revelation that the CCP has less control over the markets than they had hoped.
    Jul 8, 2015. 06:30 PM | 2 Likes Like |Link to Comment
  • Chinese stock plunge leads Asia lower [View news story]
    In a recent interview, Carson Block, the founder of Muddy Waters Research explained that his firm has uncovered Chinese companies that are merely empty shells, but yet have market caps in the billions.

    These were obvious candidates for short selling, but the challenge to investors is that the managers of these companies often arrange to have trading in their shares halted as soon as they realize that they have been uncovered.

    And, more importantly, under Chinese stock exchange rules, trading in the shares of these companies can be halted indefinitely. This makes it very expensive for short sellers to maintain their positions. In other words, the managers of these Chinese companies are offering foreign investors [who lack guanxi] the following proposition:

    Heads they win, tails you lose.

    So, staying away from this market may be the best alternative, but don't turn your attention away. China's grand strategy for dealing with its overwhelming debt burden is to attract foreign capital so that debt for equity swaps can be implemented on a grand scale. Otherwise, the massive amounts of debt that have been accumulated in an extremely short record of time could cripple their economy, and a curtain will be figuratively pulled back to reveal that the Chinese Communist Party leaders are not infallible after all.

    Absent debt-equity swaps funded by capital inflows from unsuspecting foreigners who had bought into the myth that the CCP has done anything more than simply misallocate capital at precisely defined levels with the help of some creative accounting [and in the process failed at just about everything else ranging from the environment to corruption and human rights abuses], the combination of an abrupt halt in Chinese economic growth and a crushing debt burden could pose great risks for social unrest in the PRC, which is of great concern to the CCP insofar as it could jeopardize their hold on power and privilege.

    But, since China's debt fueled Fixed Asset Investment spending accompanied by a $50 trillion INCREASE [rather than a promised DECREASE] in global debt since the 2008 financial crisis [from $150 trillion to $200 trillion] has been a primary engine of global economic growth over the past several years, if bad debts can't be shed onto foreign investors, the resulting plunge in China's economy could also be damaging to the rest of the world in a variety of ways.
    Jul 8, 2015. 01:47 PM | 3 Likes Like |Link to Comment
  • Never Mind Greece, Look At China [View article]
    I found these remarks in a WSJ article yesterday to help put things into perspective:

    "Instead of lending to companies, banks have been channeling funds to brokerages, which then use them to finance investors' stock purchases, a more lucrative practice for the banks than corporate lending.

    Debt incurred by so-called margin financing...has risen almost fivefold over the past year in China to about 2 trillion yuan ($323 billion) in early June, though the amount dropped somewhat in the past week.

    The jump in margin financing had led to growing fears of a stock-market collapse in China, which could wipe out the savings of millions of small-time investors and ignite social instability.

    A market collapse would also squash Beijing's efforts to restructure crippling debt levels and steer the economy toward more sustainable growth.

    To stave off a widespread meltdown, the PBOC, with approval by the State Council, announced a quarter-point interest rate cut on Saturday, coupled with the loosening of some banks' reserve requirements--a rare combo move not seen since 2008, at the height of the global financial crisis.

    But some analysts saw the PBOC's easing action Saturday as giving in to investor demand, pointing to risks of a vicious cycle, in which Chinese investors and the central bank become dangerously beholden to each other.

    According to Zhong Zhengsheng, director of economicresearch at Hua Chuang Securities, a state-owned brokerage, "China's monetary policy risks 'getting kidnapped' by the stock market.

    And, Haibin Zhu, China economist at JP Morgan Chase adds "Using monetary easing to support the stock market is highly debatable."


    To address these concerns, it was announced today that the Chinese state pension fund may be permitted to invest up to $93 billion in the Chinese stock market. I think they failed to understand that propping up a stock market bubble was what was actually of concern to investors, bankers, and economists--not which entity the CCP used to do so.

    Besides, why put the pension plans of Chinese citizens at risk when there is now an opportunity to shed bad loans onto naïve foreign investors who have recently been "allowed" to invest in Chinese A-Shares? Maybe this announcement was just intended to convince those investors to keep piling into these shares despite their still lofty levels.
    Jun 30, 2015. 03:31 PM | 3 Likes Like |Link to Comment
  • China Takes Advantage Of A Preoccupied World [View article]
    Andrew, I think I get your drift now. China holds monopsony power (a market form in which only one buyer interfaces with would be sellers of a particular product).

    This is a term hadn't heard before until I listened to a presentation by Dambisa Moyo, a Zambian-born international economist who has written a few books including "Winner Take All: China's Race for Resources and What It Means for the World."

    I didn't agree with all of her conclusions, but you're right, if more attention is not paid to this, it will become even more difficult to deal with. We've tended to rely on creative new monetary policy actions on the part of the Federal Reserve as a panacea to any and all of our problems even though many would be better addressed through other means.

    Fortunately, the Trans-Pacific Partnership is gaining some traction, the pivot to Asia hasn't been completely derailed by growing unrest in the Middle East (although there is the potential for that to happen), and Ash Carter, the US Secretary of Defense, seems to understand the true nature of things and is not afraid to express his views.
    Jun 2, 2015. 05:36 PM | 1 Like Like |Link to Comment
  • China Takes Advantage Of A Preoccupied World [View article]
    Although financial contagion risks emanating from China are a concern for some, so far trade contagion risks have been the greater problem.

    Ironically, China's debt-fueled spending on excess capacity makes their heavily subsidized Red Capitalist economic model seem more attractive to some relative to more market-oriented economies because their greater capacity for increased debt coupled with more extend and pretend levers to be pulled means they can subsidize Chinese companies in the strategically important industries they have targeted for longer than their foreign competitors can survive within the free-market, competitive constraints of a rational economic model that requires products and services to be sold at prices higher than at least their internal costs through value-creating activities rather than direct and indirect subsidies.

    In other words, it's their debt, but it's our problem.

    This is obviously not sustainable, but if you adopt their long-term view of who cares about someone else's grandchildren, it's a hard model to beat.
    Jun 2, 2015. 03:33 PM | 1 Like Like |Link to Comment
  • China Takes Advantage Of A Preoccupied World [View article]
    There is some truth in your observations regarding the long-term strategic planning orientation adopted by China's central planners, but if you look under the hood as closely as you encourage others to do, you will discover that many undertakings that didn't appear to make economic sense really didn't.

    Looking at the most visible, asset side of the balance sheet, this activity that showcases some very impressive engineering talent and organizational skills is quite remarkable.

    But, less visible, is the debt side of the balance sheet that has allowed China to grow its GDP from $3 trillion in 2007 to over $9 trillion today, of which about half represents Fixed Asset Investment spending fueled by debt that spun out of control. Many of the projects undertaken have resulted in unprofitable surplus capacity in a number of industries, and white elephant projects that don't generate enough revenue to cover even the interest on the debt incurred to finance them. The not so new anymore leadership of the CCP had been struggling to rein in this debt-fueled activity, and to regain control over the banking system that they rely upon as the main conduit for their broader control over the country, but this has proven to be even more difficult than they feared.

    As Michael Pettis points out, Fixed Asset Investment spending equal to almost half of China's GDP has been growing at rates over 18% per year, and this disproportionate spending has caused domestic consumer demand to be diluted to a mere 25% of GDP. So, just to keep China's GDP from shrinking, domestic consumer demand must grow at rates much greater than 18% since domestic consumer demand represents only half the base of Fixed Asset Investment spending that must now shrink in order to avoid a massive debt crisis.

    Given the propensity of the Chinese people to save a high percentage of their income for a variety of reasons, and other factors such as the uneven development of the country (e.g., the inland areas are still extremely poor and undeveloped relative to the export-oriented coastal areas), this targeted transition to a more balanced economy in order to achieve sustainable growth has fallen far short of expectations, as many expected.

    So, after a high-ranking CCP official recently completed his tour of three provinces and saw the extent to which the economy was slowing, the CCP has reversed course and ordered local government officials to borrow and spend again--or else. Although debt levels have already grown to equal 245% of China's GDP, apparently China's four major Asset Management Companies ("AMC's") plus the new AMC's that each province was ordered to establish will have the capacity to replace all the bad loans on the books of banks and state-controlled corporations with Notes Receivable from the AMC's so the poor quality of these loans can be concealed for many more years.

    And, the CCP Propaganda Machine has also encouraged the Chinese people to "invest" in the stock market because it would be "patriotic" when in fact this is just intended to create an asset bubble in stock prices to offset the impact of falling real estate prices. The Chinese stock market is already up over 100% in 2015, and efforts to short stocks of companies that are clearly overvalued have been thwarted by actions such as corporate managers requesting a halt in the trading of their shares--with no limit on how long these trading restrictions can remain in place. And, many potential short sellers fear that this stock market bubble will be perpetuated if China's stock markets are included in the MSCI International Index since a percentage of all funds directed into that index will automatically be directed into Chinese stocks regardless of their questionable fundamentals shielded by opaque accounting practices and hard to unravel circular loan guarantees, etc. So, this stock market bubble may not burst anytime soon. In fact, just as it became passé to consider the fundamentals of US dot. com companies during the late 1990's US stock market bubble, rising stock prices may serve instead as a magnet for foreign investors for some time to come.

    And, to the extent that this creates an opportunity to dump losses from bad debts onto unsuspecting foreign equity investors anxious to take advantage of the "opportunity" to invest directly in mainland-listed shares even though they lack Guangxi, the resulting diversification of the exposure to these bad debts may further reduce the risk of financial contagion emanating from China, just as many had hoped would be the case with respect to US Mortgage Backed Securities in the years leading up to the 2008 GFC. Hopefully, this time will be different.
    Jun 2, 2015. 02:33 PM | 1 Like Like |Link to Comment
  • Q1 GDP revised down to -0.7% [View news story]
    Government statisticians are very good at identifying all the supposedly transitory factors that caused economic slowdowns, but are painfully ignorant of the more obvious long-term fundamental conditions behind this, chief among them being Debt and Demographics.

    The aging of a disproportionately large segment of the population that used to spend like crazy (thanks, in part, to the housing bubble that let them tap the equity they once thought they had in their homes as if it was an ATM) has contributed to a decline in consumer spending as these baby boomers finally realize that they must save for retirement. (This decline is obscured by a rise in government payouts for programs such as social security which are categorized in the Consumer Spending bucket of GDP rather than as Government Spending based on the notion that whatever the Government pays, the recipients will spend.)

    As for debt, after a disorderly deleveraging process caused a near financial system meltdown during the 2008 Global Financial Crisis, the powers that be promised that the risk of similar episodes in the future would be minimized through an orderly deleveraging process that they would orchestrate over a period of a decade or more. The fact that it would take this long to reduce debt levels to manageable levels revealed the magnitude of the problem, and left many wondering if bouts of disorderly deleveraging episodes could, in fact, be avoided given that excess debt was that large. With Central Bankers playing an even greater role in our supposedly free market economy, we were assured that this deleveraging process would occur in a gradual, orderly fashion.

    The result? Since 2008, global debt has GROWN, rather than shrunk. And, it has grown by a lot--by $50 Trillion, from $150 Trillion back then to $200 Trillion today. Compare this to a $70 Trillion global GDP and you get a Debt/GDP ratio of 285%--on a global basis. There was a time when Debt/GDP ratios approaching 80% were considered dangerously high, and led to financial crises followed by "lost decades" in places like Argentina--indeed, for South America as a whole.

    But, now this debt is considered a panacea, even though it serves only to temporarily extend a condition of "stable disequilibrium" in which declines in consumer spending are offset by increases in debt-fueled capital spending to produce even more surplus productive capacity--most notably in China. Such is the beauty of artificially low interest rates that also allow governments to temporarily keep their debt carrying costs relatively unchanged over the past two decades even though their debt levels have soared--just like consumers once did when they were able to rack up debt on their credit cards at the initial 0% teaser rates that got hundreds of millions of Americans addicted to debt.

    And, even the transitory factors to which government statisticians attribute the first quarter 2015 contraction in GDP may not be as transitory as they insist. How cold weather in the Northeast can cause the entire US economy (and the economies of many other countries) to slow when interest rates are at unbelievably low levels and gasoline prices were chopped in half is hard to fathom, but if it has had such a pronounced effect, shouldn't we have a better understanding of these weather conditions before we dismiss them as transitory?

    I'll bet few people have even heard of Bardarbunga, the largest of Iceland's 30 volcano systems, although you'd never know it given that it lies several miles beneath a huge glacier. But, we should since Bardarbunga spewed sulphur into the atmosphere for over six months during 2014--the biggest continuous volcanic eruption in several centuries--and these high concentrations of dense sulphur are what caused the shift in the polar vortex that is to blame for the unusually cold weather in the Northeast this winter.

    And, in 2013, there were 34 active volcanoes, the highest number ever experienced in a single year, which can also affect our weather for decades if the ash they emit reaches the Stratosphere where it will remain for prolonged time periods rather than just settling back down to earth. So far, reports attempting to explain this increase in volcanic activity and its linkage to colder weather and the altered El Nino conditions in the Pacific that have led to droughts in California have gone largely unnoticed.

    And, other than climatologists, little attention has been given to the fact that a huge crack is forming in the glacier above the Bardarbunga volcano in Iceland suggesting that this incredibly large volcano (its caldera is a whopping 10 kilometers in diameter) is about to erupt much more violently than before. If so, we might experience much longer and colder winters in Europe, Canada, and the Northeast US than the "Snowmageddons" experienced over the past two years.

    Its not clear what real impact this may have on our economy, but, at least it would give policy makers the opportunity to blame future episodes of deflation / deleveraging on something other than the macro development trends of Debt and Demographics (the so called "Third Rail" of politics) that they have largely ignored over the past 30+ years.
    May 30, 2015. 10:20 AM | 2 Likes Like |Link to Comment
  • 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