London Irvine Report May 7, 2007

China’s Century – Cooking a small fish.

“China is a big country, inhabited by many Chinese.”
Charles de Gaulle

With the French and UK elections well covered in the mainstream media, today we focus on China, because international developments suggest that China is heading for economic leadership far faster than most of us in the west realize. But first this, stay long gold and silver, Bloomberg suggests this morning that the dollar has much further to fall.

“There’s a depreciation bias in the dollar” say’s Harvard’s Professor Rogoff.

I agree, but not entirely for the same reason’s. In the world’s largest fiat currency, deficits, money supply, and risk management are all out of control with no sign of any political will in America or the west to confront the problem. With the world’s longest, most expensive presidential election campaign just starting off in America, that’s unlikely to change until that campaign’s ended and a new president takes over in Washington. By then, the rest of the world will likely have adapted to the increasing use of multi reserve currencies, and the dollar will never regain its once dominant core position.

Weak Dollar? Currency, at 10-Year Low, May Fall More
By Bo Nielsen
May 7 (Bloomberg) — Anyone who says the dollar is weak after it fetched a record-low $1.3681 against the euro and the fewest pence against the pound in 25 years is expressing a euphemism.

The currency may decline at least another 10 percent by the end of 2008, say Jay Bryson, an economist at Wachovia Corp., and Kenneth Rogoff, the former chief economist at the International Monetary Fund. The dollar has only fallen 3.4 percent in the past two years to a 10-year low, according to a Federal Reserve index that weighs trade with 38 countries including China, Mexico, Canada and countries in Europe. It tumbled 30 percent in the three years ended 1988.

“Dollar weakness will be broad-based and could last for years,” said Bryson, a global economist at Charlotte, North Carolina-based Wachovia who previously analyzed currencies at the Federal Reserve.

Investors are dumping dollars, lured by higher returns elsewhere. The U.S. will grow more slowly than Europe for the first time since 2001 and Japan for the first time in 16 years, the IMF forecasts. The difference in yield between 10-year German bonds and Treasuries has shrunk to the smallest since 2004.

—– The U.S. will expand 2.2 percent this year, compared with 2.3 percent in the euro region and Japan, according to the IMF. The U.S. grew 3.3 percent in 2006. Growth slowed to an annualized 1.3 percent last quarter, the slowest in four years. The global economy is growing at its fastest in a quarter century.

“We are in a situation where Europe and Japan are going to outperform for a couple of years,” said Rogoff, an economics professor at Harvard University in Cambridge, Massachusetts.
“There’s a depreciation bias in the dollar.”

Central banks and investors are helping spur the dollar’s drop. U.S. investors bought 43 percent more foreign stocks and bonds last year than in 2005, Treasury Department data show.

—– Central banks are paring holdings of U.S. assets. The dollar accounted for 64.7 percent of global currency reserves in the fourth quarter, down from 65.8 percent in the prior three months, IMF data show. The euro’s share was 25.8 percent, the highest since the currency’s 1999 debut. It will rise to 40 percent by 2010, Frankfurt-based Deutsche Bank AG, Germany’s biggest bank, forecasts.

Adding to the dollar’s problem’s, latest US polls put the President’s approval rating at a President Carter like 28% low. A lamest of lame duck readings.

The Elephant in the Room
George W. Bush has the lowest presidential approval rating in a generation, and the leading Dems beat every major ’08 Republican. Coincidence?
By Marcus Mabry
Updated: 10:31 a.m. ET May 5, 2007
May 5, 2007 – It’s hard to say which is worse news for Republicans: that George W. Bush now has the worst approval rating of an American president in a generation, or that he seems to be dragging every ’08 Republican presidential candidate down with him. But According to the new NEWSWEEK Poll, the public’s approval of Bush has sunk to 28 percent, an all-time low for this president in our poll, and a point lower than Gallup recorded for his father at Bush Sr.’s nadir. The last president to be this unpopular was
Jimmy Carter who also scored a 28 percent approval in 1979.

For those who have forgotten life under the well meaning, but challenged President Carter, stagflation competed with international crises to get space on the front pages of newspapers. Internationally, G-7 leaders start to put distance between themselves and lame duck presidents, recognising that they have limited ability to shape US policy to get international treaties ratified, and from a need not to offend any of the candidates likely to succeed them. In non G-7 countries, any number of contentious issues are now likely to become a pretext for baiting the G-1. I fully expect Russia and China and others to press their perceived advantage now, to the full.

“Running a large country is like cooking a small fish.”
DaoDeJing by Lao Zi

Now back to the rise of China, where as General de Gaulle astutely observed, it’s a large country inhabited by many Chinese. Some even know how to cook. These days, as seen from far away London, nowadays it’s more likely to be more books than fishes. Below, some of the recent developments of short term and long term significance. Up first, the short term. China is still
trying to slow parts of its economy. Below that, why even “success” probably means just lowering the rate of growth from 11% to 9%.

PBOC governor hints at reserve increases
BEIJING, May 7 — People’s Bank of China Governor Zhou Xiaochuan said there’s room to raise commercial banks’ reserve requirements further after seven increases in 11 months failed to slow lending and inflation.

“There surely is still room” to raise the reserve requirements, Zhou said in an interview on a flight from Beijing to Frankfurt on Saturday.

Zhou, on his way to a meeting at the Bank for International Settlements in Basel, Switzerland, also said an acceleration in inflation to the fastest pace in two years is “normal” and “not very unexpected,” Bloomberg News reported. China’s central government is trying to prevent excess cash from a record trade surplus from stoking inflation, fueling wasteful investment and
creating more bad loans.

Economic growth accelerated to 11.1 percent in the first quarter from 10.4 percent in the previous three months, driven by a trade surplus that almost doubled to 46.4 billion U.S. dollars.

The PBOC has raised interest rates three times since April last year and sold bills to soak up liquidity in the banking system and stem price increases.

China’s GDP grows annual average of 9.67% from 1978 to 2006
BEIJING, May 6 (Xinhua) — China’s gross domestic product (GDP) grew an annual average of 9.67 percent from 1978 to 2006, said Ma Kai, the minister of the National Development and Reform Commission.

“The annual growth rate was much higher than that of the world economy, which was about 3.3 percent on average in the same period”, said Ma.

“During the period, China has beefed up its comprehensive national strength and elevated its international status”, said Ma, adding that “the country has become the world’s fourth largest economy and third largest trader”.

“The per capita disposable income of urban residents rose from 343 yuan (44 U.S. dollars) in 1978 to 11,759 yuan in 2006, while the per capita net income of farmers grew from 134 yuan to 3,587 yuan”, Ma said.

“Meanwhile, China’s budgetary revenues rose from 113.23 billion yuan to 3.93 trillion yuan”.

“As it opens wider to the outside world, China has received more foreign direct investment than any other developing country for 14 straight years and by the end of 2006 there were 590,000 foreign-invested firms in China”, said Ma.

Some slowing may be already factored in from the lowering of the export rebate on steel products on April 15. Q1 shipments were likely higher than normal to beat the date. Below, Xinhua reports second half exports are likely to dip.

China’s steel export to slow down in second half
BEIJING, May 5 (Xinhua) — China’s export of steel would not maintain the high growth rate recorded in the first quarter, and would slow down in the second half of the year, owing to the shrinking demand internationally and reduced export rebates, according to a business insider.

Statistics with the China Iron and Steel Association show the country exported 14.13 million tons of steel in the first quarter, an increase of 33.26 percent from the same period last year. The export throughout the year would reach 57.3 million tons if estimated on the average daily export reported in the first quarter.

However, Luo Bingsheng, vice chairman of the association, said the estimation for the whole year was not well grounded, predicting that the high growth rate was unlikely to continue into the second half.

—-The International Iron and Steel Institute said the demand for steel in 2007 was 2.6 percent lower than last year.

The export rebate cut for steel products, which came into effect on April 15, may dampen the enthusiasm of steel exporters, Luo said.

He predicted that China’s export of steel products may level with that in 2006 or even drop slightly in 2007.

Below, another longer term development likely to help open up a whole swathe of southern China to faster extended development.

India begins reconstruction of highway link with China abandoned 60 years ago
The Associated Press
Published: May 6, 2007
GAUHATI, India: India has deployed hundreds of workers and engineers to rebuild the last portion of a highway to neighboring China that was abandoned six decades ago, authorities said Sunday.

The Stilwell Road linking India and China, which also traverses stretches of Myanmar, was closed after India gained independence from British rule in 1947. Frosty relations with China in the following decades impeded the reopening of the route.

In recent years, relations between the two countries have rapidly warmed, with both sides looking to boost economic and political exchanges.

A mountain road through the Nathu La pass in the Himalayan state of Sikkim, linking India with the Tibet Autonomous Region, was reopened last year, but the Stilwell Road is seen as financially more viable for traders in India and China.

“Widening of the road on the Indian side has picked up speed and provisions are being made to make it a four-lane highway,” said Pradyut Bordoloi, commerce and industry minister in the northeastern state of Assam.

—-The 1,736-kilometer (1,078-mile) -long Stilwell Road begins in Ledo, a small town in Assam, and rolls westward through Myitkyina in Myanmar to Kunming in China’s Yunnan Province.

—The Indian portion of the Stilwell Road is just 61 kilometers (38 miles) long, while the Chinese stretch measures about 632 kilometers (393 miles). More than 1,000 kilometers (600 miles) lie in Myanmar, which is getting financial help from Beijing to rebuild that stretch. Beijing has already completed work on its portion.

Reconstruction of the Stilwell Road has generated much excitement in eastern Assam, where people expect to benefit from trade along the route.

Goods from India will take just two days to reach China on the road. Currently, sea cargo between India and China must pass south of Singapore and through the Malacca Strait.

Last July we updated on the Nathu La pass reopening linking Sikkim and Tibet in the high Himalayas, and getting a major upgrade on both sides, with the Chinese planning to extend the railway on their side to almost the edge of the border. The reopened Stilwell Road will stimulate far more development than the Nathu La which can only be used during the summer.

In addition to the two new commercial routes into China from India, under development or in planning in southeast Asia are the Mekong water carriageway project to provide a new commercial route into southern China, the new north-south Vietnam interior highway with an extension into southern China, the Myanmar China pipeline project to pump oil to south China by passing the Strait of Malacca choke point. The Chinese provinces of Yunnan and Sichuan are both on track for expedited commercial development.

Projecting forwards a decade, more and more of China’s vast population will be integrated into the western global capitalist economy. I think we underestimate how fast the process of change will develop. China’s century seems to be at hand.

We close with a repeat of a warning in oil. A new reality in global oil trading has virtually arrived. We in the west still seem to under appreciate the size of our energy problem ahead.

The new Seven Sisters: oil and gas giants dwarf western rivals
By Carola Hoyos
Published: March 11 2007 21:23
—–As oil prices have trebled over the past four years, a new group of oil and gas companies has risen to prominence. They have consolidated their power as aggressive resource holders and seekers and pushed the world’s biggest listed energy groups, which emerged out of the original seven sisters – ExxonMobil and Chevron of the US and Europe’s BP and Royal Dutch Shell – on to the sidelines and into an existential crisis.

The “new seven sisters”, or the most influential energy companies from countries outside the Organisation for Economic Co-operation and Development, have been identified by the Financial Times in consultation with numerous industry executives. They are Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras and Petronas of Malaysia.

Overwhelmingly state-owned, they control almost one-third of the world’s oil and gas production and more than one-third of its total oil and gas reserves. In contrast, the old seven sisters – which shrank to four in the industry consolidation of the 1990s – produce about 10 per cent of the world’s oil and gas and hold just 3 per cent of reserves. Even so, their integrated status – which means they sell not only oil and gas, but also gasoline, diesel and petrochemicals – push their revenues notably higher than those of the newcomers.

Robin West, chairman of PFC Energy, an industry consultancy, says: “The reason the original seven sisters were so important was that they were the rule makers; they controlled the industry and the markets. Now, these new seven sisters are the rule makers and the international oil companies are the rule takers.”

The International Energy Agency, the developed world’s sectoral watchdog, calculates that 90 per cent of new supplies will come from developing countries in the next 40 years. That marks a big shift from the past 30 years, when 40 per cent of new production came from industrialised nations, most of it controlled by listed western energy groups, noted a report published last week by Rice University’s James A. Baker III Institute of Public Policy.

The biggest contributor will be Saudi Aramco, the world’s largest and most sophisticated national oil company and thus number one on the FT list. After the surge in crude prices since 2002, Saudi Aramco launched its most ambitious expansion programme in a generation. It aims to boost production capacity from 11m barrels a day – or 13 per cent of today’s global consumption – to 12.5m b/d and then 15m b/d.

——In 1975 Gulf, one of the original seven sisters and now part of Chevron and BP, shifted all its movable investment dollars out of the developing world and back to North America and the North Sea. This time international oil companies are finding no new fields to escape to. In fact, they have discovered nowhere capable of pumping more than 1m b/d since 2000, when Kazakhstan’s Kashagan field became the biggest find in 30 years.

Meanwhile, national oil companies are banding together to help to develop each other’s reserves, leaving growth in the oil and gas industry – and the resources for world economic development – in the hands of the new seven sisters and the governments that control them. The consequences of this could hardly be more profound. Fatih Birol, chief economist at the IEA, estimates that the world is falling 20 per cent short of making the $20,000bn investment needed to ensure adequate energy supplies for the next 25 years

Governments’ unwillingness to allow their national oil companies to reinvest their recent windfall profits back into the industry lies at the root of many of the worries about future supplies. Instead, those governments use the money for social ventures or it is wasted

President Hugo Chávez, of Venezuela, spends two-thirds of PDVSA’s budget on his populist social programmes, with almost $7bn being funnelled in that direction by 2005, compared with the $77m spent in 1997 by the previous government, the Rice Univeristy report found. Meanwhile, in Russia too little of Gazprom’s earnings goes towards upgrading Russia’s antiquated, leaking pipeline system, 30 per cent of which needs replacing, the IEA warns. In Iran, NIOC is still a gas importer despite controlling South Pars,
the world’s biggest gas field. It is hindered from boosting its oil production or fixing its refineries because of the burden of financing subsidies that keep petrol prices at just 10 US cents a litre.

But the poster child of what happens when a government restricts foreign investment while using its national oil company as a bottomless piggybank is Mexico. Pemex’s decline has excluded it from the FT list of the developing world’s most influential energy companies.

The most pessimistic forecasters say the rapid ageing of Mexico’s giant Cantarell field will turn America’s third largest oil supplier into a net importer within a decade.

At the Comex silver depositories there was no change on Friday. Final figures were Registered 80.68 Moz, Eligible 50.66 Moz, Total 131.34 Moz.

The NYSE WIN system is short. NASDAQ system is flat. Since playing a black box system in the current geo-pol/economic climate, isn’t the wisest thing to do, we will adjust long positions to carry an offsetting deep-out-of-the-money matching option position to provide an automatic fail safe stop in the event another 1987 like event occurs before the PPT can step in.

More details on the WIN system are available at link below.

The monthly Coppock Indicators finished April:
DJIA: 156 up. NASDAQ: 91 up. SP500: 131 up.
The NASDAQ turned down in February and has now turned back up. The DJIA is now moving higher again from sideways. The S&P continues to move higher. Technically, the PPT and their helpers have managed to turn the indicators bullish.

This week’s featured link: Frontier Pacific Mining Corporation. TSX.V: FRP

Frontier Pacific Mining Corporation (TSX.V – ‘FRP’) is a mineral exploration and development company based in Vancouver B.C. The Company is focused on gold and uranium projects in Europe and the Americas.

A Personal Disclosure.
Over the last few months, many of the stocks we’ve linked to have made some interesting moves. Possibly because of the LIR link, more likely because of the underlying companies and good management. Going forwards, I expect the commodities demand cycle to last another couple of decades. I expect the pace of interest in natural resource stocks to quicken. I also expect many
junior resource stocks will become takeover or consolidation targets. I expect NAFTA based resource stocks to be especially prominent.

Where I hold a position prior to a company being featured as a link, this will be disclosed. Where I will be investing during the week of linking, this too will be disclosed.

In no event should my investing or not investing substitute for doing your own due diligence, if you are considering an investment in the stock.

My circumstances and resources are probably very different to other potential investors. All stocks linked in LIR, I consider to merit the link, whether or not I invest in the company. As before, neither LIR, Global Profiles nor myself get paid for featuring a link. Lastly, because I invest in a stock it does not necessarily turn it into a sure thing winner. Happily though, neither will my investing turn it into an automatic loser.

Below is the list of natural resource stocks I hold an interest in. In no particular order, they are:
Birch Mountain Resources Ltd. BMD.
Canadian Royalties Inc CZZ.
MacMillan Gold MMG.
Quaterra Resources Inc QTA.
MBMI Resources Inc MBR.
Candax Energy Inc CAX.
Derek Oil & Gas Corp DRK.
Consolidated Spire Ventures CZS.
Cornerstone Capital Resources Inc
Pacific Asia China Energy Inc.

If you have a junior resource company you think has merit and don’t mind sharing it with others, feel free to send it along. If space permits and they have no objections, we’ll try to put up a link.

Junior resource companies are not suitable for everyone, but for those who are interested in that sector, we aim to provide companies of merit. As the new century unfolds and natural resource demand soars, I think, that there will be big money to be made from prudent investment in the sector. As always, it’s important to do one’s own due diligence if thinking about making an investment. No one has more at risk in an investment than you do yourself.

If you like this report, feel free to share it with others. It is not copyrighted but open sourced. If you have comments, witty remarks, or information to share, please send them along as well. If permission is granted, we may use them in this report.

Sometimes the daily LIR gets “bounced” out of the receiver’s server. When this happens it sometimes bounces you out of the LIR database as well. If you suddenly stop receiving the daily update but didn’t actually want a break from my daily insanity, just email me at the link below to get back onto the daily list.

Graeme Irvine

Global Profiles LLC


One Response to “London Irvine Report May 7, 2007”

  1. David Wozney Says:

    A “Federal Reserve Note” is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold.

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