London Irvine Report May 21, 2007

The Golden Age of Instability.

Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Charles Dickens

This week the world’s largest debtor holds a financial summit in Washington with the China, the world’s largest saver and its most important creditor. It is probably the most important economic event of the week. The strains and tensions will likely remain strident in private and muted in public, unlike last week’s ugly public name calling summit between the EU and the Russian Federation. The EU has yet to wake up to the new reality of the rising importance of Russia, and their almost total vulnerability in the short term to the supply of oil and gas from Russia. Whether one likes what’s happening to democracy in Russia or not, the EU is going to have to adjust to a strong Russia.

Back in Washington, a similar state of denial exists. Every single day, the US goes deeper into unrepayable debt, and the eventual end game for the dollar gets one day closer. Every single day, China gets financially stronger and closer to floating the yuan. At some point ahead, China and Russia are going to ask the world to trade with them in their own currencies and the end of dollar hegemony will be at hand. All the parties in the game are aware of how it ends, just not of when and what precisely will be the cause. For now the US has tag teamed with Japan, to keep the present system staggering on. The yen carry trade still underpins US Treasury and Agency bonds and brakes the dollar slide towards intrinsic value. For now the collateral damage is confined to the dodgy unloved euro. Club Med countries are being hammered towards exit from the euro.

The Fed for its part, talks tough on fighting inflation, but to keep the whole system from implosion, is now expanding the old now unpublished M3 at a rate slightly above 12%. By contrast, the still published M2 is expanding at a “mere” 6%. The M3 steroids are widely believed to be supplied by all the Fed repos. “Listen to what we say and try not to notice what we do.” A visual chart of the difference is available at the following link.

A forever depreciating fiat dollar cheats savers, and all the existing dollar holders. Debtors repay with devalued spending power. The feckless default and wealth is dissipated into nothing.

For now, neither China, Russia, the EU, Japan or America, have an interest in pulling the plug, though the EU has become the weakest link. France and Club Med are busy tooling up for the Battle of the ECB. Russia, now racking up FX reserves at $14 billion a week, is only too happy to have the tables finally turned on their old cold war adversary. China wants the status quo to continue until the Beijing Olympics are history and their internal economy has reached critical mass. Japan can’t end the carry trade without busting the government and banks. For now the golden age of increasing instability rolls on, although two great dangers are at hand.

In China a stock market bubble has gone ballistic, its bursting has the potential to undo the game, if to buy off social unrest China has to start liquidating reserves. In America, rising protectionism and the aftermath of the Greenspan real estate bubble, can also bring the Golden Age of Instability to an end. Stay long gold and silver, just in case.

Today we look at China. Looking to seize the high ground ahead of this week’s meetings, on Friday China widened the bands for the yuan to float.

Yuan hits record high against U.S. dollar
BEIJING, May 21 (Xinhua) — The central parity rate for yuan against U.S. dollar rose to new high on Monday, the first trading day when the daily floating band for the spot rate in the interbank foreign exchange market is expanded.

The central parity rate for the yuan, also known as Renminbi (RMB), reached 7.6652 to one U.S. dollars on Monday, gaining 152 basis points from Friday’s reference rate of 7.6804 to the hard currency.

The yuan has climbed 1,435 basis points from 7.8087 yuan to one U.S. dollar posted on the last business day of 2006.

On Friday, the People’s Bank of China announced to widen the floating band of yuan against U.S. dollar for daily spot trading on the interbank market from 0.3 percent to 0.5 percent as of May 21.

The new move will be conducive to growth of forex market, making the yuan more flexible, enhancing the strength against risks of enterprises and financial institutions and sharpening their competitive edge, said the central bank.

Seeking to head off a US move to protectionism, China’s begun to toss the US financial elite a bone or two. Will they reciprocate and move to head off the political move towards protectionism?

Beijing to buy Blackstone stake for $3bn
By Francesco Guerrera in New York
Published: May 20 2007 19:22 | Last updated: May 21 2007 04:26
The Chinese government is to use $3bn of its vast foreign exchange reserves to buy a 9.9 per cent stake in Blackstone, the US buy-out fund, in an unprecedented move that underlines Beijing’s desire to tap into the private equity boom.
The investment will coincide with Blackstone’s landmark $40bn stock market listing, expected in the next few months, and will allow the private equity group to nearly double its original target of raising $4bn.

Stephen Schwarzman, Blackstone’s chief executive, hailed the deal – the first time Beijing has invested its foreign reserve in a commercial transaction – as an “historic event that changes the paradigm in global capital flows”.

Under the terms of the deal, which is believed to have been agreed in just a few weeks, the Chinese government has taken the unusual step of giving up its voting rights associated with the stake in Blackstone.

The move appears aimed at defusing any US political opposition to the deal at a time of tension between Washington and Beijing over the renminbi.

The US Treasury pointed out that it had decided last week to allow the Chinese to invest more in foreign stocks and was working to create “opportunities for US financial services firms like this”.

The announcement comes just before Tuesday’s visit to the US by Wu Yi, China’s vice-premier, to discuss bilateral trade relations.

The investment – announced on Sunday – will come through a new Chinese agency charged with managing part of the country’s $1,200bn in foreign reserves.

In other China news, China seeks to open up contacts with the major stock exchanges of the world. Not a bad move as China starts it’s new policy of outward investing some of its $1.2 trillion in reserves.

China allows overseas stock exchanges to establish offices
BEIJING, May 20 (Xinhua) — China securities regulator Sunday unveiled management rules that give green lights to the establishment of representative offices of overseas stock exchanges in the country.

The rules will come into effect on July 1.

To be eligible, the stock exchanges should be in operation for more than 20 years and have fine financial records, according to the rules.

Meanwhile, their home country should have signed memorandum of understanding on supervision cooperation with the China Securities Regulatory Commission (CSRC).

The representative offices can only do non-operating activities including liaison, promotion and research, the rules stated.

Violators will face warning, confiscation of all illegal earnings, or even closure.

The offices are also required to report to the CSRC their large-scale promotion plans targeted at local businesses and can go ahead only if they get no rejection from the securities regulator 10 days after the reporting.

The rules also ordered the offices to submit written reports to the CSRC 10 days after they give severe penalties to the companies listed on their stock exchanges.

No less than half of the staff at the office should be Chinese, according to the rules.

The rules also apply to the stock exchanges in Hong Kong, Macao and Taiwan.

Domestically, China’s edging closer to achieving critical mass in its economy. Two years, five years or ten years? My monies on sooner rather than later.

Chinese railways carry record passengers, freight
BEIJING, May 19 (Xinhua) — Chinese railways have seen record numbers of passengers and record freight volume since the country hiked up rail speeds on April 18, said the Ministry of Railways on Saturday.

The country’s railways transported 115 million people in the past thirty days, up 4 percent on the same period of last year. Freight totaled 263 million tons, up 7 percent.

A new daily passenger record was created on May 1, the first day of the weeklong Labor Day holidays, when 5.48 million people climbed onto trains.

Ministry sources said more than 99 percent of the trains started and arrived on time and ticket prices remained stable.

“The journey time of the Z59/58 between Beijing and Fuzhou, for example, has been shortened by nearly 14 hours. But the ticket price remained unchanged,” said a ministry official.

All high-speed trains were fully booked, said the official.
He said more high-speed trains will be used to meet growing demand on coming holidays, adding that the ministry is now focusing on improving safety precautions.

The country will put more than 500 China-made high-speed trains into operation this year after boosting the speed limit for rail traffic for the sixth time, said the ministry in April.

The high-speed trains travel at speeds of up to 250 kilometers per hour.
Currently, express trains in China travel at an average of 115 kilometers per hour.

China to become 3rd biggest travel destination
BEIJING, May 20 — China is likely to replace the United States as the world’s third most popular tourism destination next year, a United Nations World Tourism Organization (UNWTO) official said.

At present, China ranks fourth, after France, Spain and the United States.

Last year, China accounted for 5.8 percent of the global tourism market, a growth of 0.3 percent compared with two years ago.

Twenty-nine percent of tourists who traveled to Asia and the Pacific last year also visited China.

Xu Jing, regional representative for Asia and the Pacific of UNWTO, said the market share percentages of China and the U.S. last year were very close.

“I am confident China will overtake the US next year,” he said at the 2007 China (Qingdao) International Olympics & Tourism Forum, which concluded on Friday.

UNWTO forecast last year that China would become the most popular destination by the year 2020. At the beginning of this year, it revised its forecast to 2015. Xu said the forecast was revised because of the rapid development of the country’s tourism industry.

The number of overseas travelers to China has increased from 10.5 million in 1996 to 49 million in 2006. The 2008 Summer Olympics in Beijing and the 2010 World Expo in Shanghai, will further boost China’s tourism market.

The Pacific and Asia Travel Association said inbound tourism to China will increase by 5 percent year-on-year between 2007 and 2009.

We close on China today, with China tying up yet another gas deal to secure its future supply. The end game for Eur-Asia’s energy assets is well underway. Iran gets forced into an SCO embrace.

Iran, China agree on North Pars gas field development
TEHRAN, May 19 (Xinhua) — Iran and China have finalized the negotiations and came up with an agreement on the development of the North Pars gas field in the Gulf, local daily Tehran Times reported on Saturday.

Iran’s Pars Oil and Gas Company’s (POGC) and China National Offshore Oil Corp (CNOOC) will ink the contract by August 31, 2007,the daily quoted POGC managing director Akbar Torkan as saying on Friday.

CNOOC has already signed a memorandum of understanding with National Iranian Oil Co. (NIOC) on upstream and downstream development of the gas field which has been defined in four phases, the daily reported.

According to the negotiations, the phases are to produce 20 million tons of liquefied natural gas (LNG) per year, Torkan said.

The North Pars gas field is located 85 km north of the giant South Pars gas field in the Gulf and has an estimated 80 trillion cubic feet of natural gas, according to the report.

In more bad news for the dollar, Kuwait has been forced off it’s currency peg to the dollar.

Kuwait abandons US dollar peg
By Simeon Kerr in Dubai
Published: May 20 2007 18:43
Kuwait yesterday removed its currency peg to the US dollar, throwing plans for Gulf currency union by 2010 into doubt and raising the prospect that other oil-producing states might abandon long-held dollar pegs.

Sheikh Salem Abdelaziz Al Sabah, governor of the Central Bank of Kuwait, told the official Kuwait news agency the decision had been made owing to the “detrimental effects of the pegging system to the national economy”.

Since late last year, Kuwaiti officials have hinted that the country would revert to a basket of currencies to prevent the sliding dollar increasing the cost of imports, which has stoked inflation to more than 4 per cent, double the historic average. This has encouraged speculators to plough billions of dollars into the dinar over the past few months, betting that the central bank would allow the dinar to appreciate.

Yesterday the dinar traded up 0.4 per cent as the central bank replaced the peg with a basket of undisclosed currencies. The central bank had allowed the currency to vary up to 3.5 per cent from the peg, but the dinar had been at the top end of the approved trading band for a year owing to the continuing weakness of the dollar and the strength of Kuwait’s oil-driven

The dollar is expected to make up about 75-80 per cent of the new basket, reducing the third largest Arab oil exporter’s exposure to the weakening dollar.

Kuwait dropped its currency basket in 2003, adopting a dollar peg as part of the Gulf Co-operation Council countries’ drive to create a unified economic block with a single currency by 2010. But doubts over the ability of the GCC economies to harmonise have arisen, with one member of the six-nation council, Oman, saying it would not meet the convergence criteria.

—- Mr Williams did not believe other GCC states would follow suit on revaluation quickly, as these countries have clung to dollar pegs since the early 1980s.

But other GCC states – Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Oman – are studying the move as an option to mitigate dollar weakness.

While we wait for developments in DC, the drought appears to have broken in the land of Oz. In what may be bad news for the coming Atlantic hurricane season, the La Nina condition in the Pacific has ended. Australia should return towards a normal rainfall pattern, South America should start to lose the excess rains. While an El Nino is unlikely to develop in time for the 2007 hurricane season, it is now far less likely to repeat last year’s ultra quiet season.

More rain forecast after week’s downpour
By Daniel Hoare for AM
Meteorologists say the past few days of welcome rain in much of south-east Australia are a sign conditions are returning to normal, after the drought conditions brought on by the El Nino weather pattern.

The weather bureau may be a long way from calling an end to the drought but it is predicting plenty more rain across Victoria in the coming months.

Over the last week, farmers and city dwellers have welcomed huge downpours, particularly in western Victoria and western New South Wales.

For the last few days, Melburnians have needed to consistently leave home armed with an umbrella, for the first time in years.

While Victoria’s heaviest falls have been recorded in the state’s north-east, Melbourne’s water catchments have been given a much-needed top-up of around 30 millimetres.

The downpour is providing residents with welcome relief – Melbourne received less rain last year than in any other year since records began and catchments are only holding 30 per cent of their capacity.

Bureau of Meteorology spokesman Phil King says the recent rain is a sign El Nino has gone and weather patterns could be returning to something more predictable.

—–Mr King says the latest rainfall patterns could be the first evidence that La Nina, the weather pattern that replaces El Nino, has arrived.

“The El Nino broke a while ago. The ocean temperatures in the Pacific are returning to a more normal pattern,” he said.

“We were expecting more normal autumn rainfalls and now we’re starting to get that. It’s confirmation that the atmosphere is returning to a more normal pattern.

“There are some weak signs of La Nina starting to form, which is a reverse of El Nino, but it’s too early to say that.

La Niña, El Niño, and Atlantic Hurricane Damages in the United States
Roger A. Pielke, Jr. and Christopher W. Landsea
Bull. Amer. Meteor. Soc., 80, 2027-2033.

—–During El Niño events, increased vertical shear is primarily due to increases in the climatological westerly winds in the upper troposphere (and reduced westerlies and shear during La Niña) (Gray 1984a; Shapiro 1987) .
The larger (smaller) vertical shear accompanying El Niño (La Niña) events contributes directly to decreased (increased) numbers of Atlantic tropical storms and hurricanes. A tropical storm has sustained (1 min) surface wind speeds of 18 to 32 m/s; a hurricane has wind speeds of 33 m/s; and an intense hurricane wind speeds of 50 m/s (i.e., Categories 3-5 of the familiar Saffir/Simpson Scale) (Simpson 1974). Goldenberg and Shapiro (1996) identified the area between 10 and 20 N from North Africa to Central America as having the largest sensitivity to changes in vertical shear. Tropical storms and hurricanes forming over the subtropical waters farther north do show a similar, though much weaker, modulation due to ENSO (Landsea et al.
19 99).

Gray (1984a) has also shown a three-to-one ratio in continental U.S. landfalling intense hurricanes, with 0.74 per year striking during non-El Niño years and only 0.25 per year during El Niño events. Recently, Bove et al. (1998) ana lyzed all continental U.S. landfalling hurricanes and intense hurricanes of this century by the concurrent phase of ENSO.

They found that the probability of at least two hurricanes striking the U.S. is 28% during El Niño years compared with 48% du ring neutral years and 66% during La Niña years. Likewise, the probabilities for at least one intense hurricane striking are 23%, 58% and 63% for El Niño, neutral and La Niña years, respectively.

Tropical Atmosphere Ocean project
Real-time data from moored ocean buoys for improved detection, understanding and prediction of El Niño and La Niña.

Due to attending a funeral tomorrow, the next LIR will be on Wednesday.

At the Comex silver depositories Friday there was no movement in or out.
Final figures were Registered 81.87 Moz, Eligible 50.14 Moz, Total 132.01 Moz.

The NYSE WIN system is now flat. The NASDAQ system is also 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.

This week’s featured link: First Metals Inc.

First Metals Inc. (FMA-T) is a newly formed public company, created to capitalize on favourable upward trends in metals prices.The First Metals management team brings a combination of mining expertise and entrepreneurial and professional experience designed to effectively and efficiently advance the development to production of two identified copper-zinc deposits.

The location of the Fabie Bay/ Magusi River Deposits and their advanced stage of development are key components in making the project successful.

My thanks to reader Terrence for suggesting taking a look.

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


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: