I think there is big hope in global economy and there is little hope in the US economy. I actually started to aggressively buy shares of Dry Ships (DRYS) near its recent lows, around about $4. Many ironic things happen for reasons. During the WW II, non-Christian China extended helps to the European Jews escaping from Hitler by letting them come to Shanghai without a visa, while Christian western nations kept their doors shut. Today, the communist China which Jim Rogers called "the best capitalist in the world", is coming to the rescue of the world's capitalism, by doing the right things. Today the man with a Muslin middle name could save America!
China's aggressive plan to boost spending and stimulate domestic demands will save and revitalize the global economy. Based on its huge population basis, China's per capital consumption of many basic things are still far below even global averages and hence have a lot of rooms for growth. With 1/5 of global population, China consumes 1/12 of the world's oil, owns 1/28th of the world's passenger cars, Read "China Eats the World" to get a better picture what Chinese demand means for the world. China's relentless economic growth amid global resources depletion is the fundamental basis for a long period of commodities bull, regardless any temporary set backs. As China turn its economy from one which is export oriented to one that's domestic consumption oriented, the demand on global commodities will be stronger, not weaker. There is a good reason that well over half of China's overseas investments are in the mining sectors.
But the Americans people will have to wake up and do right things to save the US economy. We either succeed, or we will be marginalized and become irrelevant as the rest of the world moves forward, leaving America behind. I voted for Obama as I hope he is humble enough to listen to humble people like me instead of special interests. He needs a lot of helps to get his job done. I am willing to do what I can to help him, but only if he listens. Obama is calling all Americans to contribute ideas. I know exactly how to save America from an economic collapse so I am hoping that my ideas can make it into his ears in some way.
My first help to Obama is helping him with his difficulty in picking a proper inauguration gift for his wife. Obviously Obama must have thought about a rhodium ring, but then backed off the idea. I think he was smart to have considered rhodium, and wise to give it up.
There is no better indicator of the health of global economy than the commodities sector. As I discussed, rhodium was the brightest star in the commodity boom, haven raised from $300 to $10000 per ounce. But rhodium was also hit hardest, having fallen to $700-ish recently. The rhodium price swing is just too much change even for Obama, and it surely will raise public eyebrows that you purchased the perceived most luxurious precious metal during hard times.
Obama should buy Michelle an Iridium Ring. Iridium, just like rhodium, is a PGM metal. The noble metal iridium is just as rare and precious as rhodium, but it is much humble than rhodium. Iridium price never experienced the glory and then the collapse of rhodium. Out of all noble metals, iridium is the noblest one: Its melting point is 500 degrees higher than platinum; It's the most corruption (corrosion) resistant metal in nature, and extremely hard. The character of iridium is so precious and unique it is a perfect expression of an eternal bond and commitment, a perfect fit for a gift to our next First Lady. Iridium is the second densest element in nature and the most dense one is Obamium (oops, Osmium). Some say the densest is Bushcronium, an element that like they say in Texas, is all neutron and no proton. Unlike rhodium's freefall from glory, iridium is a phoenix raised from ashes.
So President-elect Obama, be sure to buy a custom made iridium ring for the first lady as it is a perfect symbol in defining your presidency and your character, and a daily reminder to yourself that American people deserve an Obamium that's different from Bushcronium.
The root of America's economic problem is we create too little and spend too much. We live beyond our means, which is unsustainable. We created one debt bubble after another to pop up the system and continue reckless spending and accumulation of debt, only to make it worse. We must head directly to the problem of over-spending and under-producing. The budget must be balanced, but it can NOT be done by tax hike or spending cut. The solution must be found outside conventional thinking. We need some revolutional thinking to solve the problem.
- Stop throwing trillions of dollars at financial institutions. They are blackholes and anything thrown at them makes the blackholes grow bigger. Soon the blackholes will be big enough to swallow America in one swoop. Let them fail! What's good of banks if they are not lending money out? I can lend my money to my neighbor without a bank's help!
- Get rid of the Federal Reserve System; get rid of IRS; get rid of personal and business income tax. This gets rid of the need for people to file annual income tax return. If there is no income tax to pay, then there can not be any tax fraud or tax evasion.
- Tax consumptions, NOT incomes or profits. The government provides public services and protections so people can go about their lives. If you are consuming more goods and services, you are likely also using more government services so you need to pay more tax.
The third point is the most important point: Tax on consumptions, not on incomes or business profits. Is this unfair that billionaires like Warren Buffet who lives a modest life could end up paying little tax compare to his fortune? Not at all! If a billionaire spends his fortune on luxuries, he will surely pay the consumption tax for it. But if he re-invests his fortune to expand business and create more jobs and do all kind of good things to the economy, and at the end of day he donates the bulk of his fortune to charities that promote the well being of the society, why should he pay more tax beyond what he pays for his own personal consumption?
California's current budget woe is a good example why it's bad idea to tax on business and personal incomes. During bad economic times, when the government desperately needs to spend more money, the tax revenues dry up, as individuals lose jobs and businesses are not making profits, hence paying no tax. The government then has to tax the remaining profitable businesses even harder, driving them out of business as well, or driving them out of state. Likewise, on the national level, businesses are moving operations to overseas and bring away jobs with them. Rich people migrate to foreign countries and even denounce their US citizenship. Capitals are flowing out; cheap foreign goods are flowing in. The whole reason of the downfall of the country is the irrational tax and spending system.
President Obama's job No. 1 is to bring America's Most Famous Fugitive back home! Not the terrorist, but a true patriot and believer of free market capitalism, named Jim Rogers, he openly confessed to have sold almost all of his US assets and dollars, sold his house, sold all furniture: sofa, bed, tables and chairs, and moved to Singapore. He is a billionaire refugee as he sees no hope left for the country. Send Air Force One to bring him home! Offer him a good job and he might be helpful to salvage America. Likewise, use people like Peter Schiff and Karl Denninger. They have good ideas what's wrong and how to fix things.
Why Jim Rogers would call China the "Best Capitalist in the World" is quite striking. Thirty years ago China was a completely different world. In 1978, China was on the brink of catastrophic social, economic and political collapse, after ten years chaos of the Cultural Revolution destroyed the country's remaining economic infrastructures. To Americans today it may sounds like an ideal society: "bankruptcy" and "unemployment" were phrases never heard about as they simply did not exist in a socialist system. Are we going in the direction of socialism if we now bail out every one and no failure is allowed?
Deng Xiao-Ping changed China and the world forever. He visited America to learn how free market capitalism works and why is it successful. He adopted Dr. T.D. Lee's suggestion and started a series programs to send Chinese students to study in America, including the CUSPEA which I personally benefited from. More importantly, he started some experimental special economic zones to invite overseas investors to come and open businesses, promising full support of the government in all means possible, relaxed labor laws, prohibition of labor unions, and not a penny of the business profit shall be taxed. The only tax is a low, symbolic land usage tax. It was quite controversy at the time, because how could any communist allow a capitalist come and open a sweatshop to rip off local workers, and get off with the profits and not paying a penny? But it worked; capitals flowed in, first in trickle and eventually like flood. China's economy prospered. The rest is history.
Exactly thirty years later, President Obama needs to pay a return visit to China and learn how the Chinese succeeded in the economic reform and how America can benefit from it. Things can be turned around quickly; stop taxing any business profits, then capitals from all over the world will flood into America and open business here and create jobs at home. When Americans have good jobs and they don't need to pay income tax, they will have more money to spend and create more consumption tax for the government. Wouldn't it be wonderful?
In light of current economic crisis, I am hoping for the best and preparing for the worst. So my investment strategy reflects both possible outcomes. I am hoping that somehow my humble words can make its way to some one close to Obama, and somehow indeed he is persuaded to buy an iridium ring for the first lady, and some how the iridium metal will get him interested in the rest of the noble metal family, particularly palladium. Mr. Obama needs to know that America is blessed with a world unique palladium mine in Montana: Stillwater Mining (SWC), and that palladium enable cold fusion, a physics discovery which is being suppressed by the establishment science camps, but which could bring to the world virtually inexhaustible cheap new energy source. He needs to take cold fusion seriously, as it is the best solution to the looming global energy crisis and bring about long lasting global peace.
Short of a quick cold fusion break through, America needs to rely on its own natural resources. We have a tremendous amount of coal. But vehicles burn oil, not coal. There is a chemical process that turns coal into synthetic fuel; it needs cobalt, which is in the same family as rhodium and iridium! Iridium's little sister is rhodium; rhodium's little sister is cobalt. I hope any day Obama sees his iridium ring, he thinks about cobalt and how it can contribute to America's energy future. We need biofuel. But we first need lots of fertilizer to grow biofuel efficiently. We need platinum, palladium, rhodium in making chemical fertilizers. All these metals are critically important to a nation's survival and prosperity, both during peace time and during war times.
On the night that the auto bailout failed in the Congress, let's pray for America's tomorrow. Let's hope that Obama is truly a leader who can listen to the people and can bring about change in Washington as well as change in Wall Street. GM might only have days if not hours to live as market confidence in its survival has now been lost. Let's hope President Bush can do one last thing right before he goes home: Use executive power to bail out GM immediately. Meanwhile Obama should promise Bush that he will be pardoned if he exceeded his legal authority in directly bailing out GM, as it is in the national interest to protect millions of jobs. Stop the bipartisan finger pointing already. We have only one America and one future for our children.
Full Disclosure: The author is heavily invested in SWC and PAL, two palladium mining companies, in OMG, a cobalt chemical company, and in DRYS, a dry bulk shipping company. I have no GM position either way.
Circuit City (CC) bankrupted. General Motors (GM) could be next and Ford (F) is not much better. Mean while we are bailing out AIG (AIG) for the second time (or maybe the third time) in just a few months as it seems to be just another growing black hole. And who will bail out the Federal Reserve Bank or the US Government itself?
If you read my past articles, you know my favorite precious metals are palladium and platinum. PGM metals used in catalytic converters in vehicles account for half of global demand. Am I concerned about these two precious metal's future prospect?
I am not concerned at all, not only because PGM metals are precious metals and hence are safe haven investments just like gold and silver, not only because PGM metals have strong demand in emerging new applications especially in alternative energy sectors like fuel cell, hydrogen economy, bio-fuel, and coal-to-liquid, but even within the auto sector, the global demand continue to remain strong fundamentally.
Enron collapsed a few years ago. Did we stop using electricity at the time? No. Do you stop buying auto insurance if AIG goes out of business? No. More than ten years ago, the last American owned TV manufacturer went out of business or was acquired by a foreign entity. It did NOT stop Americans from watching too much TV today, either.
The downfall of the US auto industry is a completely separate story from global auto demand, just like a sunset of US based TV manufacturers did not mean a sunset of consumer demand of TVs and other electronics. It simply means that the US auto industry is no longer competitive in the market place against foreign auto makers like Toyota (TM) and Honda (HMC). Businesses go bankrupt even during good economic times, if they can not compete. But I truly feel sad about the current status of the auto industry and other manufacturing infrastructure of this nation.
From a fundamental point of view, the global auto demand is expanding even as the world enters a period of severe economic recession. IEA recently revised the projection of global oil demand in 2008 and 2009. The lowered projection is 86.5M barrels per day for 2008, which is still 0.5% higher than 2007, and the projection for 2009 is 87.2M barrels a day, yet higher than 2008. Higher oil consumption must mean higher vehicle demand.
Let's do some simple calculation. One barrel of oil produces roughly 19.5 gallons of gasoline and 9.2 gallons of diesel, totalling about 28 gallons of road vehicle fuel. If global oil demand is 86M barrels a day, that's 880 billion gallons of fuel consumed per year. An average vehicle drives 150,000 miles during its lifespan and consumes fuel at a rate of roughly 20 MPG, so lifetime consumption of fuel is 7500 gallons. So 880 billion gallons per year means the world is wearing off vehicles at a rate of 117 million per year. That is the expectation of global new vehicle demand in the next few years, versus current 70M auto sales per year.
China just announced a 4 trillion yuan ($586B) stimulus plan to transition her economy to one based on domestic consumption demand rather than on exportation. Chinese demand on commodities, goods and services will be insatiable even as her growth slows down, because China's population is just huge and the per capital consumption is still at a very low level comparing with global average, leaving plenty of room for growth.
October auto sales in China increased 8.37% over last year. For the first ten months, auto sales were 5.67 million, which is 6.8M annually. There are only 40M passenger cars in China. These numbers are incredibly low considering China's 1.3 billion population. Global average ownership of cars is roughly one car per 6 persons. China has one car per 33 persons. China today consumes 8M barrels of oil a day, still less than half of global average. Using the rough numbers above that correlates to 11 million vehicles wear off per year in China. So China needs 11M new vehicles a year just for replacements, not to mention new ownerships. I will not be surprised if auto sales in China double or triple in the next 5 years.
The global commodity bull cycle will continue if you understand the impact of China's demand growth. Global consumption of many raw materials can easily exceed available supply by a large margin, even if China's per capital consumption only reach where global averages are!
No wonder we see ever increasing Chinese influence in Africa. Africa is blessed with some of the world's richest mineral resources, especially South Africa, owning over 90% of the world's PGM metal reserves and virtually every spieces of mineral resources, missing just a few. China is also blessed with mineral riches. China is rich in more than half of all known mineral spieces, especially in rare earth metals and tungsten, antimony, indium, etc. But China doesn't have much base metal reserves. China has zero reserve in PGM metals and very little in cobalt, metals of critical strategic importance. What China doesn't have, Africa has plenty. And what about USA? We are the world's capital of helium. We have plenty of coal. That's about it. America desperately needs to develope good relationships with Africa and South America, if we want to be prosperious in the 21st century.
Upon his inauguration, President Obama needs to first pay visit to China, second to Africa, and third to Russia. America, now the world's top debt nation, needs to be bailed out by the world's emerging economic power houses. We can not afford to be a superpower any more as we are not self sufficient and can not survive on our own any more. We need a peaceful and co-operative world to help us. President Obama must prevent an Iranian War or World War Three from breaking out, during his term(s). Prosperity comes from peace, not from aggression.Now coming back to the US auto industry. Is there still hope in the Big Three, GM, Ford and Chrysler? I think the fundamental demand of autos from US consumers is still there. The current credit crunch means a consumer may not be able to get an auto loan. But it does NOT destroy the auto demand, merely postpones it. If I see a vehicle break down on the roadside, or a vehicle crashed on the highway, I am pretty sure that within less than 24 hours, a certain auto repair shop or a new car dealer will see a new customer come to their doors for business, regardless of how many credit cards the customer may have. The mobility needs can not be eliminated. The question is will the customer come to a Toyota (TM) dealer or a GM one.
There might still be some hope if GM can adapt itself to meet customer's demand, but I don't think it can do it alone. It needs a government bail out. I am against using tax payer money to bail out private enterprises. But it is in our vital national interest to bail out the US auto industry to preserve jobs and our manufacturing basis. The current GM shareholders must be wiped out. GM must go bankrupt, then the government must immediately come in to help the bankruptcy re-organization and give the auto maker a second life.
Full Disclosure: The Author is heavily invested in SWC and PAL, two palladium mining companies, as well as in OMG, a cobalt chemical company. The author does not have a position in GM or Ford, and does not intend to buy or short either.