Gold and food
Yesterday, Porter asked what the U.S. has that China could want in exchange for China's huge supply of Treasury debt.
John Burbank, of the San Francisco-based asset manager Passport Capital, has offered two answers to that question. I spoke to John a few weeks ago, and I've seen him give presentations at the Value Investing Congress in both New York and Pasadena, California.
John's two answers: food and gold.
The U.S. could easily produce enough food to feed the entire world. We have the most efficient, productive farmers on Earth. And China, of course, has a burgeoning middle class, which means it's creating a huge new demand to put better food on the table. Just this morning, China's Bright Foods Group said it is buying Australian-based CSR Ltd's sugar and renewable energy business for 1.4 billion Australian dollars.
As for gold, last I heard, the Federal Reserve's official gold holdings were a little more than 261 million ounces. That's worth about $300 billion at current market prices. I think China is holding just shy of $1 trillion in Treasury debt.
I've been hearing about coal shortages in China for about a year now. They sometimes shut down their down coal-fired power generators because they don't have enough fuel to keep them running.
I'm not saying the U.S. will sell China enough food and gold to fix its massive debt problem. (I don't believe the folks in Washington really want to fix anything.) And I still find myself squarely in the "look out below!!!" camp when it comes to the U.S. dollar.
My point is, I know we have things of value we can sell China. For investors, it's worth thinking about what's going to be in higher demand as China grows and grows...
Perhaps China won't succumb to the bubble everyone (except Jim Rogers) has been crowing about lately. The Chinese central bank unexpectedly raised Chinese bank reserve requirements from 15.5% of capital to 16% of capital. That's the minimum requirement... and it's nearly double the requirement for a well-capitalized bank by U.S. standards.
I hate central banks. Central planning is as bad for banking as it is for everything else. But if U.S. banks had raised reserve requirements to 16% back in 2001, I doubt we'd be in as big a mess as we're in today. Chinese central bankers know the country's banks lent out $1.3 trillion in the first nine months of 2009. They don't want that huge amount of loans to spark a property and stock market bubble, the popping of which would be bad for the Chinese economy.
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Back home here in the People's Republic of Spendthrifts, consumers aren't borrowing... banks aren't lending... the Fed is holding interest rates near 0%...
Don't you wonder what would happen if the government were completely uninvolved in the debt market? Would there be more lending? Would inter-bank interest rates be 0%?
To get an idea of the answers to these questions, just take a look at one of the unregulated corners of the lending world: hedge funds that lend to distressed financial institutions. To the best of their ability, they've jumped in where the banks fear to tread. Throughout the financial crisis, funds devoted solely to lending nearly tripled in size, from $5.5 billion in December 2006 to $15.6 billion as of February 2009.
Seventy-four-year-old hedge-fund operator Michael Tennenbaum is one of the industry's top performers, with his fund up 58.5% in the first nine months of 2009. He manages seven funds with more than $5.1 billion in assets.
Says Tennenbaum, "We make aggressive loans no one else will make."
He lent Oregon-based Integra Telecom $69 million and turned it into an equity stake worth more than $100 million today. He lent both Northwest and Delta airlines money, making his investors nervous. But even though both companies went bankrupt, he still made double-digit returns because the airplanes, which retained their value even in bankruptcy, secured the loans.
As of December 2009, Tennenbaum's funds have made loans to 140 companies. Investors seem as eager to lend as Tennenbaum himself. He started a brand new $454 million fund in December, one that will finance bankrupt companies.
As we've reported over the last couple of months, our Resource Report editor, Matt Badiali, is on top of a giant oil and gas story. He found a company on the verge of a massive breakout. Here's what he told his readers on December 20:
I think Ultra Petroleum (UPL) is a good analogy for [this company]. Its share price exploded on news that the company found a new gas trend in the Green River Basin of Wyoming. UPL's share price rose nearly straight up from $3 to $20 between July 2002 to July 2004.
That's a 560% gain in two years... but it didn't stop there. Its share price topped out at $100 in June 2008. If you'd bought UPL at $20 (when the market cap was $3 billion), you still made 400%.
Since Matt wrote that, shares of his reccommended company are already up 10%. But as we've explained before, we think this stock is the best way to make 1,000% gains in 2010.
The company announced a major deal just last month. That deal is just the first of several drivers that will propel this stock higher throughout 2010.
The company plans to complete and test its current well, then begin drilling the next one sometime in March. That's why Matt recently raised his buy-up-to price by nearly 20%.
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New highs: Fairholme Fund (FAIRX), iShares Hong Kong ETF (EWH), Central Europe & Russia Fund (CEE), Powershares Dynamic Biotech Fund (PBE), Valhi (VHI), Burlington Northern Santa Fe (BNI), Amerigas Partners (APU), Kinder Morgan Energy Partners (KMP), Altria (MO), Intel (INTC), United Parcel Service (UPS), Korea Electric Power (KEP), POSCO (PKX), Sequoia Fund (SEQUX), Sprott Resources (SCP.TO), Prospect Capital (PSEC), Northgate Minerals (NXG), Dana Holding (DAN), Carpenter Technology (CRS), Enzon Pharmaceuticals (ENZN), Northern Dynasty (NAK), Silver Wheaton (SLW), Eldorado Gold (EGO).
In the mailbag... readers raising questions about guns, calendars... and our citations. Send your e-mails to feedback@stansberryresearch.com.
"You reference the AAII survey in your recent Extreme Value, also I believe in one of the daily letters. This is not a survey of newsletter writers – I believe that's the Investors Intelligence poll (weekly in Barron's) The AAII weekly survey is a voluntary survey of members of the AAII. Your point, however, is correct. Sentiment among retail investors – the AAII membership – is bullish currently and that is a contrary indicator." – Paid-up subscriber Nick McCully
Ferris comment: You're right, and thank you for the correction. What an awful gaffe. I've been quoting both surveys recently, and certainly should have known better. I like the AAII survey better than the Investors Intelligence Survey because it's larger and likely a more representative sample of how individuals view the market.
"Reference the thought that China is hiding massive quantities of cars in the countryside. Boeing did that with its aircraft in the late '60s when the airline industry was in a crunch. The completed aircraft would be flown to Moses Lake, WA to Grant County Airport, which was formerly Larson AFB. Larson AFB had been home to a large number of B-52 bombers. The Boeing aircraft would be placed inside the large hangars that had been used for B-52 maintenance work, remove the engines, and then drive the engines back to Seattle. To the general public that drove by the final assembly areas each day, it appeared Boeing was selling aircraft since new airline livery aircraft were appearing each week to take the place of another aircraft. When the airlines began making money, Boeing trucked the engines back to Moses Lake, installed them, then delivered to the airline." – Paid-up subscriber Steve Matthews
"Is it true that George Soros is behind the move to make gun ownership illegal everywhere he can? Ask Australia how it worked for them. Crime rose 35% the first year. I have heard he is the money behind IANSA. Please reply if you know." – Paid-up subscriber Stephen R Stanfield
Ferris comment: I haven't heard about Soros' involvement, but I have heard about the Blair Holt Firearms Licensing bill, H.R. 45. This will require a federal license to sell or own a gun. As I read the 13-page bill (surprisingly short and to the point), it looks like it would send gun owners to jail for two years if they fail to let the attorney general know they moved.
Naturally, there's a total media blackout. No one is reporting on the bill. When there's evidence an armed society is preferable to an unarmed one, the media executes a full blackout. Since the Heller case, in which the U.S. Supreme Court struck down Washington D.C.'s gun ban, murders have dropped 45% in the city and neighboring Prince George's County... but the talking heads on network TV aren't saying a word about it. If the murder rate ticked up 0.01%, Katie Couric would be falling all over herself to interview the parent of some dead teenager in D.C.
"Mr. Ferris, I love your work and have followed you since before you joined S&A, but (and I'm sure you could see this 'but' coming) I find rants on such arcane topics to be quite insufferable, especially when the ranter apparently thinks everyone else is wrong (or are idiots). And which topic might I be referring to? Why, of course, your last few paragraphs on how to measure a decade!
"First, I think we all agree that a decade is defined as a ten year period. And it doesn't really matter which ten year period you select, it is still a decade. People who claim that the 21st century began in January 2000 are incorrect, but we do not typically measure our decades in the same fashion as our centuries. The 'first decade of the century' would be properly be defined as 2001-2010, but that is a mouthful to say, and we typically use the second digit left of the decimal point to define our decades (ie the '80s, the '70s, etc). Perhaps you would be inclined to argue that the '80s began in 1981 and did not include 1980. But that defies common convention. The simple truth of the matter is that we can define our decades in whatever fashion is most convenient, and one man spitting into the cultural wind is likely to end up with a moist face." – Paid-up subscriber Michael Overton
Ferris comment: It feels good down there in the herd, doesn't it? Safe... warm... If you get far enough into the middle, you're surrounded on all sides by nothing but bull. And we all know what a wonderful feeling that is. As for me, Austrian School economist Walter Williams and I will continue to sleep well, content in the knowledge that, when we count things, we start with one.
Regards,
Dan Ferris
Medford, Oregon
January 12, 2010