China & Peru Now Point To Recession?

Recently China has been in the news re their huge debts, new QEs, real estate overbuilding and other signs that they may be on the verge of recession.  Chin has also stopped importing the massive amounts of copper and iron ore that they had been importing for years.

Australia has started shutting down some iron ore mines.  Zero Hedge recently reported that iron ore prices have sunk to a very low $80 per tonne.

Peru has for the first time arrived at the edge (or worse) of recession.  The below chart comes from the INEI (Peru's economic statistics agency):

I found this at Otto Rock's interesting blog on Latin America and mining (especially Peru), here is the link to the article with the chart:

http://www.incakolanews.blogspot.com/2014/09/peru-gdp-july-2014-116.html

Note how close to zero Peru's growth has been in the past four months or so.  Otto comments that this news is being "spun" as good news, but..., if you account for the fact that governments often lie, then you might infer that Peru may have entered recession.  Otto's blog (incakolanews.blogspot.com) is quite irreverent, but is really more interest to people in mining or involved with Peru.

If Peru HAS entered recession, that would be the first time since the mild one in 2008-2009 (mild for Peru).

Another indicator that Peru may be slowing down is the recent performance of our own bearing business there.

QT_Year_Totals

Year	Expr1001
2007	$543,000
2008	$610,000
2009	$597,000
2010	$620,000
2011	$607,000
2012	$759,000
2013	$874,000
2014	$736,000

(figures rounded)

Some of the above lower 2014 sales figures (6% lower) we can explain away by noting that some of our best selling pieces have not been available, but Peru's slowing economy is a factor.  Many of our customers are telling us that business is slower.

Lower commodity prices (which hint at lower Chinese demand) also affect Peru as a major exporter of copper and other metals.  Gold production is likely to decline this year as well, as Peru's production at their huge Yanacocha mine is going down faster than production from mines gearing up.  Lower export volumes at lower prices, this is known in economics as "deterioration terms of trade", which is not good for an export economy.

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In addition to the well known facts of China's risks (eg, credit bubble, "ghost" cities, bad demographics), there are some new tidbits of information:

-- Zero Hedge and others have been reporting a new giant QE in China...

-- A recent surveys of Chinese billionaires shows some 40% are considering leaving...

-- A LOT of Chinese money has arrived (and still coming) buying US real estate...

-- Alibaba has just IPO'd...  The largest IPO ever.  A typical sign of a top...

The Alibaba IPO may be significant in that it is typical of OUR country slowing as well as any Chinese themselves cashing out by buying US real estate.

Mish (Michael Shedlock) often comments on important financial issues out of China, often he cites respected Chinese observer Michael Pettis:

http://globaleconomicanalysis.blogspot.com/

Pettis has his own blog, mostly on China (where he teaches and writes):

http://blog.mpettis.com/

The Telegraph out of the UK has coverage of China that is usually better than that of the US media, although only a percentage is financial news:

http://www.telegraph.co.uk/news/worldnews/asia/china/

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And it is not just Peru and China.  Brazil entered recession recently (probably due at least in part to lower commodity exports).  Europe and Japan are teetering...:

Spain and France are both in Mish's latest (France apparently now is recession).

Abe's "Abenomics" (deficit spending witgh help of the Bank of Japan's new QE).

The above remarks include nothing about the arguably recessionary conditions in the USA (if we ever recovered from 2008/2009).

A Thought Experiment On The Value Of Gold

My "Trail Guide" FOFOA wrote a new piece just Wednesday.  In it he describes how hard it is to convince those we know to buy some gold.  Even when many of those know that our system has gone horribly off the rails.  He is not trying to convince others, he is mostly just reporting as well as charting what he feels will be the end-game, at least regarding gold.

fofoa.blogspot.com

In the comments section below his article, there was a remarkable comment by one of his readers "Hill C", I lightly edit the quotation:

"Do you believe that China would exchange its current $2 trillion reserves for all of America's gold currently valued at $419 billion?  The answer is almost universally "Yes or probably"."

In other words, lots of people that "Hill C" knows believe that China would happily trade its $2 trillion dollar horde for $419 billion in gold, taking a US$ LOSS of over $1.5 TRILLION to take the gold.

Furthering Hill C's idea, do you think that the US government would allow China to do that?  To let the Chinese take our $419 billion in gold in exchange for settling the $2 trillion in debt?  The answer is: NO WAY.


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The below graph is a tool that I am now going to be using to monitor stress in the physical gold markets. That is, how available gold (that would be the metal, not gold futures or other types of "paper gold") really is at the market price.

Buying REAL GOLD always costs more that the quoted "spot" price (found at kitco.com or 24hgold.com or even right here at my blog).  This higher price exists because there is a "premium" (spot plus a "premium", the premium covers other costs like transport, opportunity cost of capital, etc.) over the spot ("paper") price of gold.

The graph below shows the price of gold (Y Axis) vs. the premium over the price of gold (X Axis) in order to be able to buy a 1 oz Gold Eagle (coin), America's most popular retail way to buy gold.  The graph's data points are from Dec 30, 2011 - Jan 13, 2012, so it is very short term.  The original data comes from the eBay/24hgold.com joint venture widget.

Click on the image for a better view.

To help interpret the graph, please look at the five points above "0.10".  That 0.10 means that on each of those times I took the data that a Gold Eagle had a 10% percent price premium (on eBay) vs. the quoted price of gold in the markets.  Note that the premium has varied quite a bit in just a bit over two weeks, from 7% to 19%.  Please also note that there is NO time information, the linear trend you can see shows that as the recent price of gold has been lower, the premium tends to be higher.

FOFOA believes that what is going to happen sooner or later is that the "paper gold" price will not reflect the real value of gold (because of the approximately 100 times the paper claims on each physical ounce, that is LOTS of derivatives claiming the same ounce).  "Paper gold" will eventually become worth less (worthless), and for a short time there will be NO GOLD available because owners of gold will NOT sell...  Until the price of gold goes much higher...

The graph (and the Widget, found at 24hgold.com, at their home page at the bottom), will help me follow how scarce physical gold is vs. the paper price.  This is the ONLY way I know of at present to follow this dynamic.

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Let's go back to the Thought Experiment above (would China exchange its $2 trillion of Treasury debt for just $419 billion worth of gold).  That kind of implies that gold is/should be worth over $7600 / oz right now (($2 trillion / $419 billion) * $1600).

Let's think some more.  If the USA were to pay off our debt by exchanging gold for it, the price of gold would have to be $75,000 per ounce...

Review of Barron's, Dated 14 November

As I entered 7-11 yesterday, I again wondered what Barron’s would offer up this weekend.  When I saw the 100 Yuan note (China’s currency) that was the illustration for the Cover Story, I just went and bought the edition without even looking more.

“Enter the Yuan” (by Kopin Tan) makes the case that China’s yuan (renmimbi) will become a reserve currency by the end of the decade.  I quote the author:

“In recent years, China has stepped up an ambitious plan to increase the circulation of the yuan outside the mainland and persuade trading partners to use it to invoice or settle transactions.”

China’s currency is not a reserve currency now because it is tightly controlled and not freely convertible.

Companies like McDonalds and Caterpillar have issued debt in yuan.  Countries like Brazil and Russia already have deal worked out with China to use each other’s currencies.  One nice thing about having a reserve currency is that Chinese importers and exporters would then not have to run foreign exchange risk.  This resonated with me as our company in Peru a few years ago worked with a Japanese exporter who wanted to be paid in Japanese Yen (or more accurately, we would place our order and then when it was ready we would wire over enough dollars to cover the amount in yen).

There are pressures within China to open up the yuan as well as pressures to not do so.  But, it looks like China will indeed push slowly to turn their currency into a reserve one, as that will help with their long term goals of increasing its middle class and consumption as well as give the country more buying power (and so help slow down inflation).  The ones resisting this are the exporters, who would then find the higher level of the yuan to be an unwelcome cost push.

People who follow China might want to read this article.

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Alan Abelson returns this weekend with a term I had never heard of: “Cognitive Fog”.  The latest victim of cognitive fog is none other than Texas Governor Rick Perry who had his brain freeze there in the latest Republican debate.  Cognitive fog seems to have visited Jon Corzine as well, who apparently cannot remember what happened to the $600 million in MF Global’s customer money.

Abelson then goes on to write about Europe.  It’s bad what’s going on there, to sum it up.  He writes of his conversation with David Rosenberg (a name familiar to Zero Hedge readers).  The biggest take-way: France is the next domino…

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I have noticed something about Barron’s (hey, I am not the sharpest knife in the drawer. OK?), in that they provide a story on two or three companies each edition.  Most of them are bullish articles.

Sandra Ward writes on hi-tech glass maker Corning (ticker GLW) in her article “A Glass Act on the Cheap”.

Vito J. Racanelli writes “It’s Time to Ring Up Vodafone”, making a bullish case on Vodafone (VOD) vs. other wireless carriers.

Miriam Gottfried writes up “Darden Offers Investors a Tasty Treat”, mentioning that Darden (DRI) is renovating the company and offers a 3.6% dividend yield.

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“D.C. Current” column writer Jim McTague writes about a tax too toxic even for Obama!  The Europeans (Merkel and Sarkozy among them) want to levy a financial transactions tax, to raise money and discourage wanton speculation.

There are many reasons why such a tax would not work.  One of them is that it would have to applied everywhere, or else traders would seek out the Zurichs and Dubais of the world to avoid it.  Well known Harvard economist Kenneth Rogoff (co-author of the excellent book This Time Is Different) says it would be a bad idea as well.

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Thomas Donlan disappointed me with his Editorial Commentary re the supercommittee.  Just let the cuts happen, or let it burn…

He writes a piece (better) on the bond vigilantes knocking on the gates of Rome.  Yes, Italy has caught the contagion from Greece.

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Now from the Market Section:

“Asian Trader” writer this week writes positively about HTC, the Taiwanese cell phone maker is now number three (behind only Apple and Samsung) in the cell phone sphere.  I know for a fact that HTC has worked with Google on the Android operating systems for cellphones.  I even have a friend who dumped his Apple iPhone for and Android phone, he likes Android better.

I always look at “Commodities Corner”, this week Shane Romig writes a piece on beef, mainly about Argentine beef.  Argentina’s totally incompetent government for a few years gas been hurting beef production (limiting exports, price controls, etc.) to pacify urban beef consumers in the cities.  That seems to be changing, maybe Argentina will be back as a major player in the beef market worldwide.  They used to be the No. 4 beef exporter, currently they barely make it into the top 10.

My money comments (Market Laboratory – Indicators):

Total Fed holdings: down a tiny bit

Monetary Base: down a tiny bit

M1 Money Supply: up a tiny bit

M2 Money Supply: up a very tiny bit

The Peruvian Sol: up the tiniest bit vs. the US$

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Finally, there is a small Special Section on ETFs.  I just glanced through it, there are plenty of ETFs out there that I already know about, so I chose not to use my time plowing through the Special Section on the ETFs.

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Verdict on the weekend’s Barron’s: you make the call!