The KISS Letter

The cat is out of the bag. The markets ignored the European crisis despite the panic mongering by all the brilliant analysts in the western media. And guess what? The markets and the money were correct again. Even more impressive is the behaviour of the US economy and equity markets. Barely six months ago, most of the experts were trumpeting the failure of the quantitive easing programs QE1, QE2 and QE3 (albeit under a different guise). Once again, the markets have made a mockery of the doomsayers. The Dow has clambered all the way back to 13000 from the low of 6500. Unemployment, at least the political indicator, is closing in on the predicted 8%. While the Republicans flounder, comically tearing each other to pieces on national TV, Obama looks more like an easy winner in November. One may be forgiven for thinking that if this is too good to be true, then maybe it is.

The all-time high of the Dow before the collapse and at the peak of the real estate bubble was about 14200. Today it is 10% below that level.

The Euro is stable and the USD is resuming its devaluation against the currency basket. What is different today from four years ago? The real estate market is in the doldrums. Unemployment is still high and GDP is still low. The difference, readers, is the fact that US debt has jumped by 50% during this period from $9.8T to $15T and as a percentage of GDP from 70% to 100%. Put simply, the markets are being supported by mountain of debt and liquidity that makes all the previous bubbles look inconsequential. And to remove all doubt,  a KISS rule of thumb states that ALL bubbles must come to an end. The only questions are when and how. Before or after November? The plan is for inflation (as opposed to deflation) to gain traction. At these low interest rates, funds will flow to real assets as a hedge. Seems to be working....so far.

The price of oil is up to $108 a barrel. The theory espoused by some of the media and politicians blaming Iran, is a load of claptrap. ALL the commodities are up more or less about the same as the world economy slowly recovers and demand increases. Take a look at a graph of oil (blue) superimposed on the Dow

Says it all, doesn't it? As for the price of gas in the States rising above $4. The explanation is simple. First, there is an oversupply of oil and gas sources in the US. A warm summer guaranteed that. However, Asia and Europe had a particularly cold winter increasing demand. The law of supply and demand. American companies are exporting excess capacity and more, creating a supply shortage in the US. Nothing to do with Iran, folks!

SHORT and SWEET

1. DOW - looks to be making a double top (negative), supported by the liquidity bubble. Huge resistance in the 13000-14000 area. Volumes are low, so for now sideways is an easy bet. However, any real bad news (not CNN type nonsense), could cause a sharp downturn. KISS rule of thumb - the market does what it is supposed to, but not when.

2.CHINA - The Shanghai index is indicating a possible recovery in the making. A break above 2520 would be a buy indication. FXI is an ETF traded in the US.

3. GOLD and SILVER - Both looking very strong and clearly sensing possible inflation ahead. Inflation is usually a negative indicator, but with these budget deficits, liquidity and guaranteed low interest rates, we could see a rush of cash to perceived value.

4.Equity markets are nervous, so anyone wishing to invest might want to look at specific direct investments in areas of personal expertise.

Thats it for February. Happy hunting and looking forward to Spring.

The first rule of survival is clear: Nothing is more dangerous than yesterday's success - Alvin Toffler

KISS News

1.The nonpartisan Congressional Budget Office released its latest budget and economic forecasts this morning. I stopped rereading after the first three points. 


1) Growth will slow to just 1.1% in 2013 because of tax increases, spending cuts, and other factors. CBO projects 2012 GDP to increase just 2%.


2) Unemployment rate will stay above 7% until 2015. It will increase to 8.9% at end of this year and hit 9.2% at the end of 2013.


3) Deficit will be $1.1 trillion in 2012, the fourth consecutive year above $1 trillion.


Are you kidding me? This is Japan all over again...Worse!


1. Unemployment in Spain has risen to its highest level for almost 15 years. It is now at 21.5%, which confirms that Spain has the highest jobless rate among industrialised countries. Europe's unemployment is averaging above 10%. While the real unemployment rate in the US is around 15% with a background of spiralling debt, the moment of truth for the industrialized countries is getting closer. None of this augers well for our children.
    
2.Corn, soybeans, rice and wheat are the most important food staples consumed in the world. The majority of countries do not produce more than what their populations can consume. Output from exporting countries is an important geopolitical issue. Increased demand for global food supplies can cause localized shortages and price spikes. Food shortages and price increases, in turn, can lead to political turmoil and social unrest in countries whose populations depend on these imports for survival. Expect shortages to continue while cute expressions like "arab spring" are just that. A cute expression for a nightmare economic scenario.


3.Last week, despite the strong dollar, silver surged and closed above its 50-day MA. It may be that the action of strong silver will rub off on gold, taking gold above 1700. Below is a 3 year chart for silver. Looking bullish, but a break above $35.70 would confirm this. The ratio between gold and silver is 50 (one ounce of gold buys 50 ounces of silver). Historically it would be about 15. On this basis silver is cheap.

4.Rare Earth Elements have a range of sophisticated uses from missile systems, precision-guided weapons (laser guided smart bombs), night vision and radar systems to hybrid cars, batteries, cellphones and wind turbines. I read that sentence over and over to understand the implications of shortages of these metals. They have unique magnetic  (GM has moved its whole magnets division to China), optical and other properties crucial for miniaturization, lasers and energy efficiency. China controls about 90-95% of world supply....and we thought that oil was a vital commodity!


5.The Germans are proposing that Greece, a sovereign country, transfer its right to national self-determination to an overseer. The Germans argue that given the failure of the Greek state, and by extension the Greek public, creditors have the power and moral right to suspend the principle of national self-determination. Given that this argument is being made in Europe, this is a profoundly radical concept. About 40 percent of German gross domestic product comes from exports, much of them to the European Union. The Greeks are well aware of this, so don't expect them to sit back and take the bullying. They still haven't forgotten the Nazi occupation in the forties.


6.WSJ: A unit of China National Petroleum Corp. agreed to buy a big slice of a shale-gas play in Canada from Royal Dutch Shell PLC, bolstering Beijing's footprint in North America's energy patch, as two other Chinese companies sealed energy deals in the U.S. and Europe. Next week, Prime Minister Stephen Harper travels to China, where he has promised to promote Canada's energy potential to Chinese officials and executives. Mr. Harper's government has also said it is eager to export its growing oil-sands production to China, after the U.S. recently rejected a proposed pipeline from Canada to Texas. Currently, Canada sends almost all of its oil exports to the U.S. KISS: Bad move Mr. Obama. This is a perfect example of how a top down government  functions.  


7.Richard Russell: If you listen carefully, you can hear the heart-beat of the market. It's a slow, heavy beat, as if the market is waiting for something. That something is going to be BIG. Bigger than what anyone is expecting. 2012 is fated to be a monster year. Keep your eyes on the dollar and gold, and the newspaper headlines!


Too many people miss the silver lining because they're expecting gold - Maurice Setter

The Rare Earth Revolution

It looks like the shortage of Rare Earth Minerals is coming home to roost. This is a group of 17 metals that are essential to many facets of Hi Tech manufacturing. China controls 90-95% of these minerals. A Chinese premier in the eighties once said "The Middle East has oil, China has Rare Earths". He was right.

In 2009 we wrote the following:


The more I read about this group of seventeen metals, the more it dawns on me that whoever controls the supply of these metals, controls the world. Literally! China controls at least 90% of the source of REM (Rare Earth Metals).  The more we learn the more obvious it is that we are just scratching the surface as regards the strategic importance of these metals. CHINA has triumphed in a 15-year quest to become the "ultimate monopolist" in the supply of rare earth metals - a dominance that industry experts say could give Beijing control over the future of consumer electronics and green technology.


1.According to the New York Times, "The Mideast had oil, but China has Rare Earth Elements. As OPEC did with oil...China is about to tighten its hammerlock on the market for some of the world's most valuable metals." From hybrid car batteries to wind turbine motors to missile guidance systems... From iPhones to solar panels to flat screen TVs…Metals such as cerium, promethium, europium, and many of the remaining 17 rare earth elements are essential to all modern electronic devices that use rechargeable batteries, electric motors, photo optics, solar cells and strong magnets


Toyota’s hot selling hybrid car, the Prius, uses more than half-a-dozen rare earth metals.

2.REM further have a range of sophisticated uses from missile systems, precision-guided weapons, night vision and radar systems to hybrid cars, batteries, cellphones and wind turbines. I read that sentence over and over to understand the implications of shortages of these metals. They have unique magnetic  (GM has moved its whole magnets division to China), optical and other properties crucial for miniaturization, lasers and energy efficiency.  Imagine a cellphone the size of a shoe. Or a laptop weighing 10 kilograms. That’s what we would be carrying around today, if not for the rare earth metals.  Their unique properties that have enabled the miniaturization of  electronic components including capacitors, lasers and powerful magnets.


3.Catherine Ngai - National Geographic news: “Smart bombs” that use neodymium-iron-boron magnets to control the direction when dropped from an aircraft, lasers that employ neodymium, yttrium-aluminum-garnet used to determine the range of enemy targets at distances over 22 miles, and neodymium-iron-boron permanent magnets used for sound system components used in psychological warfare are among the many, according to a 2004 USGS paper.  These are just a few examples. Wow! Who Knew?


4.Forget about green technologies, for the moment. Bottom line is that these metals are essential for the manufacture of sophisticated weapons systems. It will take the US and the rest of the world at least five to seven years (some estimate as much as fifteen years)  to catch up on production and mining, using today as a benchmark. Who knows how much will be needed in the coming years. So if the Pentagon and Department of Energy are outwardly calm, trust me when I say that inwardly, anxiety verging on panic is the name of the game. And no amounts of Lorazapan (an anxiety medication) will be of help.


NOW FAST FORWARD TO THE PRESENT:


1.On 6th Jan, 2012 we mentioned that Rare Earths were close to the bottom of the cycle.  REMX the rare earth ETF stood at $15.51. Today it traded at $17.70. A rise of 14% in less than a month. At the time we reported "The creation of a US Rare Earth strategic reserve is more likely to get the go-ahead after China's largest exporter halted production, two congressional sources told dealReporter. Such a move would create another source of demand for the metals, likely aiding a rebirth of the US Rare Earth industry, said two company executives and a company spokesperson." REE a US miner did even better. It doubled in price within a 5 week period. Obviously somebody knew something was in the wind.
Below is a two year graph of REE

GOODBYE OIL AND HELLO RARE EARTHS


This is an extremely volatile market. Before any investment is made, please consult your broker as regards YOUR risk


A big part of financial freedom is having your heart and mind free from worry about the what-ifs of life - Suze Orman

Nothing Glitters Like Gold

Take a look at a ten year chart for gold. It almost speaks for itself.

There is no rush like a gold rush. The dye is cast. Three thousand years of history is shouting from the rooftops and making its way into our living rooms. The rush is on. Does it really matter that we have all these primitive thoughts? After all what is it that the barbarians knew that we don't? Every system in history was based on the gold standard, and when most empires removed the gold content from their coins and replaced them with lesser metals, they proceeded headlong into mediocrity.

How did all of this get started? Once upon a time some fellow came up with this idea which he designated as a bank. He was prepared to take in all types of  gold and silver, lock it away in a safe place and issue a certificate stating that he was willing to exchange that certificate for gold at any time or place. That, ladies and gentleman, was your first currency note with a gold standard.

As time went by, we invented the telephone, TV, motor vehicles and computers. The brilliance of mankind knew no boundaries. The powers that be landed a man on the moon. Imagine that?Confidence was brimming, and gathered further strength with the collapse of communism. So then along came another fellow by name Nixon and convinced us (who needed convincing?) that as long as we had the almighty American Dollar, who needs a gold standard. After all, a nation's economic power is measured by the strength of its currency, and the dollar had swept all before it. Basically, the power to create money had been removed from the limitations of a gold standard and placed in the hands of Congress and The Federal Reserve. Like placing a cat in charge of the cream. Simple but true.

It has often been said that there is a thin line between self esteem and arrogance. Somewhere along the way that line was crossed. So self esteem changed to arrogance and then greed was added to the mixture. Central banks had no need of this non-yielding asset and sold their gold, in hindsight, at ridiculous prices and replaced it with goverment debt. Everybody was coming to the party. Euphoria drowned out the solitary voices of warning. Who were these people trying to interrupt our party? Humanity has developed past this primitive ideology. Quiet! Great minds with great theories are at work here. Do not interfere. Everybody has a home, a car and a dog to prove it. Sweet talking politicians joined in the celebrations.

Fast forward to today. Central Banks have ceased gold sales and are now buying gold at a much higher price. The developing economies are now part and parcel of the same family. None of them are buying the American dream. There is a manouvering for power and new candidates are raising hands. Diversification is the name of the game. Gold is on the rise, and the once mighty US Dollar is in decline. We now ask ourselves what we have done to future generations, while the idiots in Washington hang onto power by the skin of their teeth. The chickens are coming home to roost.

Uneasiness takes hold as the markets dictate a new order, and show us that we are human, after all. History is repeating itself whilst we observe in high definition or even in 3D. Nothing glitters like gold. This was correct for centuries, and it is correct today. Despite claims to the contrary, gold remains the only "Honest Currency". Some folks legitimately ask the question "what is so special about gold?" The answer is simple. It represents the shortcomings of humanity.

Any intelligent fool can make things bigger and more complex... It takes a touch of genius - and a lot of courage to move in the opposite direction - Albert Einstein

Iran - Economy on the Brink

In Israel in the early eighties, inflation reached 1000% p.a. The black market rate for USD went crazy and people were withdrawing Israeli lira from the banks in boxes (I kid you not) and running to the arab market and exchanging the devaluating currency for USD. I happened to witness all this while working for an Israeli bank in Jerusalem. The USD were placed under floorboards, bed mattresses and in private safes at home but mainly at the bank. At the end of the day the banks collapsed, were nationalized by the government and the stock market was closed. It took years for the Israeli economy to recover, but that was then and this is now.

So much has been written about Iran's nuclear potential and the sanctions imposed, we will hurdle over the preamble and begin in the present. In order for a country to survive today's economic climate, a viable currency is required. The Iranian currency, the Rial has been devalued by 50% in the last month. Black market rates have rocketed to well above the official rate as the Iranian Government reacts and raises interest rates from 14% p.a. to 21%p.a. This in an attempt to support the currency. Official figures for inflation are probably incorrect. Prices of all imported goods will eventually have to rise by 50%. Sanctions, in conjunction with a covert war, appear to be having a strong psychological effect on the citizens of Iran, increasing economic insecurity and sending them scuttling to the black market to save what they can.

Even though Europe and the US has declared an embargo on Iranian oil, this only accounts for 30% of Iran's exports. Such is the market, that they will clearly find a buyer(s) for their oil. This is not the key problem. 95% of International business is conducted in USD and Euro, and are subject to Central Bank rules. To simplify this, If I transfer USD100 from my account at CIBC to an account anywhere in the world, that amount, by law is transferred through a correspondent bank in the home country of that currency. In this case, through a bank in the USA, where the US Central Bank can either permit or block the transfer. So Canadian dollars all go through Canada and Euro through the European Central Bank apparatus. As a result, Iran cannot participate in any international transaction using USD, British pounds or Euro. So the key problem is not the sale of oil, but how they will be remunerated for it.

Their easiest solution would be to trade oil for food or machinery etc. Or possibly try to do trades in Japanese Yen or Swiss Francs. Whether they like it or not, the US controls the International Monetary System, so banks doing business with Iran may find themselves blacklisted. Whichever way one spins it, the sanctions are beginning to bite. Its not over by a long way, but it would be fair to characterize the situation as a possible beginning of the end. Ahmadinejad is teetering and we are more than curious which way he will vacillate.

An appeaser is one who feeds a crocodile—hoping it will eat him last - Churchill W.

KISS News

1.Fitch Ratings Tuesday said Italy is the euro-zone member that poses the greatest threat to the future of the currency bloc, as the lack of a region-wide plan to prevent the sovereign-debt crisis from spreading has been coupled with the country's large debt burden and high borrowing costs. David Riley, head of global sovereign ratings at Fitch, speaking at a conference in London. "Italy is the front line of this crisis," Mr. Riley said, adding the country's elevated government bond yields have "marked a profound intensification of the crisis." Italy's 10-year government bond was yielding 7.13% Tuesday.


COMMENT: For every $100 produced in Italy, $120 of credit is required. This credit is now compounding at 7% p.a.


2.Turkey Gas and Oil:  Petar Shkrbina told SETimes. "Erdogan knows that Europe needs Turkey and not the other way around. The main networks of gas and oil pipelines will go through Turkey." Analysts are unanimous that the pan-European corridor No. 10, which will connect the Balkan countries with the rest of Europe, will command the economic attention of Turkey. The corridor's left wing will secure a transportation connection between Turkey and the Balkans, and Turkey and the EU. 


3.Russia’s total capital outflows in 2011 were $84bn as political uncertainty in the fourth quarter caused volumes to rise sharply. Most of the total was recorded in the fourth quarter, following the news at the end of September that Vladimir Putin, the prime minister, would be returning as president in this year’s elections. Following that announcement, $37.8 bn in assets were transferred abroad.


COMMENT: This is not an instant crisis. Russia has a consistent source of foreign currency from oil and raw material exports. It is, however, an indicator of an unstable political situation in that country.


4.James Dines has been around a long time. He was the "Original Gold Bug", the "Original Rare Earth Bug" and is a guru on technical analysis of markets. .  He also wrote a book about "Mass Psychology" where he discusses the "Mass mind". He compares the new geopolitical markets to the Mass Mind and coined the word "murmurations". With this word he creates an analogy to a flock of birds flying in unison, or a school of fish all darting in perfect formation. Its amazing how these formations, sometimes miles across, manage a perfect parallel movement. These murmurations are leaderless and remind Dines of todays markets.


5.These leaderless murmurations also have a political analogy. Think Islamic Spring, Occupy Wall Street and The Tea Party. These movements appeared out of nowhere and presently have merged into the landscape.


6.It has been almost non-stop political turbulence for Egypt since the revolution which ousted Hosni Mubarak as president last year. Tourism receipts have declined from $12.5bn in 2010 to $8.8bn last year. The majority of tourists are from Russia, Britain and Germany. It looks like Egypt's loss is Dubai's gain as tourism to that country is increasing.


COMMENT: What's surprising is that they have any tourism at all. Prices have fallen, so follow the money....


7.The United Arab Emirates has become the latest country with which China has signed a currency swap agreement, worth 35bn yuan ($5.5bn), aimed at promoting bilateral trade and that could boost the renminbi’s role in the Middle East. Bilateral trade surged nearly 40 per cent last year to $32bn with Chinese exports to the UAE amounting to $24bn. Since 2008, China has made currency swap agreements, amongst others, with Pakistan, Japan, Indonesia, Thailand and Turkey. In all 14 countries and counting. The idea behind these swaps is to provide “seed money” for China’s trade partners so that trade can be conducted in an alternative currency – read: renminbi – instead of the US dollar. 


COMMENT: Think "murmurations", think of Iran's problem with payments for oil in USD. Make the connection.


MARKETS: The Dow seems to be waiting for a real test. Volume is in the low to average range. This market is making me nervous. GOLD seems to have stabilized and is looking for a reason to rise. The USD is strong at the top of its range, more because of a weak Euro than a strong Dollar. DR COPPER is steady, as is OIL. All this steadiness is an invitation to a murmuration.


The problem with socialism is that you eventually run out of other people’s money -  Margaret Thatcher

KISS news

1.Russia was formally, and finally, admitted into the World Trade Organisation on Friday, 18 years after negotiations began. Russia was the world’s last major economy, and the only Bric, remaining outside of the organization.


2.NY Times: "Just to replace all the jobs lost in the recession and keep up with the population growth, the economy would have to add 275,000 jobs a month for the next five years." 


3.K-Opinion: Both Indian and Chinese stock markets have hit new 3 year lows (a fall of about 40%). The Dow is holding at the 12000 mark, down only from 14200 in 2008. Could it be that the US is retaking the lead as the world's economic engine? As the emerging markets slow, it will be fascinating to see how the US markets react. Follow the money.


4. A side effect of the Asia-European slowdown is the weakness in commodity prices, except of course, oil, which is reacting to geopolitical factors.


5.FT: "It’s another milestone – an emerging economy overtakes a developed one in terms of GDP. Earlier this year it was China overtaking Japan. This time, Brazil has moved ahead of the UK as the 6th biggest economy in the world. The question is: who’s next? And does it matter?" So who is next? Well, Russia and India are set to move up from 9th and 10th respectively, with Italy at 8th in their sights. The CEBR predicts that by 2020, the four Brics will be the 2nd (China), 4th (Russia), 5th (India) and 6th (Brazil) largest economies, with only the US (1st) and Japan (3rd) ahead. Does it matter? Nope. Just another forecast.


6.The creation of a US Rare Earth strategic reserve is more likely to get the go-ahead after China's largest exporter halted production, two congressional sources told dealReporter. Such a move would create another source of demand for the metals, likely aiding a rebirth of the US Rare Earth industry, said two company executives and a company spokesperson. KISS: Rare Earth mining companies appear to be at the lower end of their cycle.


7.China has again outshone the U.S. as the top venue for initial public offerings despite steep share price falls on the mainland and Hong Kong stock markets, highlighting the shift in global financial activity from west to east Companies raised $73 billion from IPOs in Shanghai, Shenzhen and Hong Kong this year, according to Dealogic — almost double the amount of money raised on the New York Stock Exchange and Nasdaq combined. KISS: The interesting thing about these figures is that the Shanghai Stock Market had one of its worst years ever. Possibly because of an oversupply of equity via these IPO's. Simple supply and demand. 


8.FT: US generals measure the war in Afghanistan by numbers, seeking to distil a messy conflict into neat graphs of troop levels, roadside bombings and suicide attacks. To gauge hopes for the country’s future, they might consider a new indicator: sales of Red Bull.
On the one hand, surging imports of the straw-coloured energy drink – now a staple at wedding parties thrown by the Kabul elite – are emblematic of Afghanistan’s galloping economy. They also signal danger: the booming business of war has fed a rise in consumption without fostering enough of the private investment needed to underpin more durable growth. KISS: This paints a bizarre picture of the Afghanistan situation. Elitist wedding parties, suicide bombers and Red bull.


KISS Market Summary: The DOW is still at the top of its trading range. Actually about 200 points above, however volume still on the low side. Most breakouts are accompanied by higher volumes. So in spite of better employment figures, the market is still hesitating. Possibly slow GDP and rising debt is putting a damper on the party. On the positive side, the markets are not showing any signs of panic with regards to the slowdown in Europe and Asia. GOLD and OIL would be a lot more volatile if the money suspected that the chest-beating out of Iran was serious. DR COPPER is stable at $3.40. So folks, as we move into 2012, its business as usual.


You cannot help the brotherhood of man by encouraging class hatred - Abraham Lincoln