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