July 9, 2011


For some time now I have been sounding the alarm about my concern that China is worse off than people think. Three things confirm this for me. First, you cannot believe the official numbers of the Chinese government. Second, it is a command economy that controls, regulates, and dictates everything concerned with the economy and money, and plans the economy over a five year period. That is just not possible. Ask the Russians about the five year plans they carried out for almost a century. Yet for some reason it is taken as "gospel" that China will continue to grow vigorously under this system. And third, we hear that the State has been building entire ghost towns. In other words the Chinese are erecting office complexes and apartment buildings to create construction jobs despite having no one to occupy them...


In a recent release there was this:


The New York Times ran a story this morning about rising local government debt in China. There have been a growing number of reports in the global financial press lately about China's seemingly non-stop building frenzy and the fact that there are thousands of large office and apartment buildings that are sitting vacant. Ditto the hundreds of high end name luxury goods-laden stores that no one can afford to shop in. China’s leaders have finally begun an enquiry into just how significant the size of local government debt burdens has become.

There is justifiable angst in China about whether some municipalities will be able to honor their debt obligations. As things stand right now, the country’s huge foreign exchange reserves imply that the China might be able to avoid a complete “meltdown” for some time to come, but this issue is just another in a growing series of “bubble signs” in the country, and is one that appears to be part of a growing structural problem. The topic of a “hard landing” by the former darling of the global economy is thus not only gaining traction but has some serious credence. As we noted in many previous instances, any such “runway accidents” could put a serious damper on the demand for “stuff” coming from that all-important economy. Greece is the Word, John Nadler

And if you have lingering doubts about the China bubble, click here to read a firsthand account of a visit to one of China's ghost cities.

Watch out for China! Any surprise slow down there will affect world growth. And any financial shock there will be felt around the world.


According to the CBO, US government spending fell 18 percent in May from the same month last year to $232.6 billion. The actual deficit fell 43 billion dollars from last month, as the government’s agreement on spending cuts start to take effect. The pay back of TARP has also increased revenues.


As I have mentioned more than once, our deficit and debt problems are not economic in  nature, they   are political. If the GDP grows only slightly at the same time government spending is   reduced, even if the reduction is puny, the deficit will be heading toward balance.


A 1% cut per year in government spending would result in a balanced budget in about ten years. Even though the nominal amount of the national debt will increase over that period of time, the percentage to GDP will shrink, thereby allowing the servicing of that debt to become easier yearly.


Once the point of balance occurs, a reduction in the national debt will begin. This could occur in the next decade. Some people like Rand Paul are arguing for a more radical reduction in spending, 500 billion a year, with the goal of seeing a reduction in debt closer to five years.


Whatever the compromise is, it is important that the direction be set in stone. We need a verifiable glide path toward balance. We also need a fix to entitlements and a complete revamping of our tax system so that we have a fair, simple tax, that provides incentives; not loopholes.


I smell a compromise along the following grounds. Democrats have laid out eliminating certain tax deductions from certain parties. I would submit an equal amount of deductions and subsidies (such as ethanol subsidies) to be eliminated. Both parties could declare victory, by cutting government spending, and “raising taxes.” The math works. And so does the semantics.



Japan’s government debt is projected to reach 219% of gross domestic product next year according to the Organization for Economic Cooperation and Development. A lack of policy options may cause debt to become “uncontrollable,” according to Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance Co. in Tokyo.


“There’s a risk that the government will chip away at fiscal discipline, leading to the uncontrollable expansion of public debt,” Kodama said. “I wouldn’t be surprised to see the Japanese bond market start pricing in a fiscal collapse at any time given how much the nation’s fiscal health has deteriorated.”

Just what the world economy needs, another nation in fiscal crisis.




The unemployment rate has stagnated at about 9%, but that doesn’t tell us what is really going on behind the scenes. Not all jobs are created equal. Say for example that we have a 9% unemployment rate, and lose 500,000 jobs in the public sector. Now add the same number of jobs in the private sector. The unemployment rate remains the same, but the nation is much better off. We have just transferred 500,000 jobs that are tax liabilities which produce relatively little, to 500,000 productive jobs, in profit making areas of the economy that cost you and I nothing.


This has been the case for the last 11 months as jobs have been falling in the public sector and rising in the private sector. We are going through a transition. Last month 39,000 jobs were lost by government while 59,000 were created by private enterprise. The headline is that we only added 18,000 jobs. True, but we are moving in the right direction.


Keep this in mind when you hear that austerity will only cut jobs and be a drag on the economy. It is bureaucratic jobs that are being cut. The bureaucrats being cut are higher paid, middle class, educated people. They have savings to live off, and a better than average chance of finding a new job in the private sector where they would actually produce something. Rather than this outcome being a drag on the economy it reduces government liabilities and stimulates productivity.


For example: if we went to a flat and simple tax, rather than the monstrosity of a system we have now, we would not need thousands of IRS agents. All these bureaucrats do is insure that we pay our taxes, so there is enough money available to pay other bureaucrats who also provide a service of dubious worth. Thousands of IRS agents finding productive jobs in the private sector would be the best thing that could happen to the economy as far as I’m concerned. This logic works across the board when it comes to a bloated and wasteful government.




In his recent news conference President Obama said, “If millionaires and billionaires get to keep their tax breaks, senior citizens and the poor will bare the brunt of the burden from additional cuts.” There he goes again. Let's look at exactly what Obama is saying. If you don't take away the money that some people earn, others that are receiving charity will be hurt. Charity is a “right” according to Obama. That is what is meant by an "entitlement.” 

Entitlements are moral claims to other people’s money. The government uses force to seize the property of those that earned their money fair and square. If the government is ever asked to cut back on the charity they provide, it is then claimed that not providing this charity, is taking money from others and is immoral! So, when you don’t take money from the rich it is called theft from the poor. This is "the right thing to do" according to this moral code, where the use of force to confiscate an individual’s property is not only moral, but to claim that the government has no right to do this, is immoral. Just wanted to clear that up so we all understand each other.


Obama then took a shot at the very business leaders his White House has tried to court. "The business community is always complaining about regulations," he said in response to one question. "Frankly, they want to be able to do whatever they think is going to maximize their profits.” Obama went on to say that business is never satisfied when it comes to rules and regulations, “they want to do what they want to do without interference”.


It is called freedom Mr. Obama! As long as businesses are not breaking the law, which means not using force, coercion, or fraud, to profit; as long as they are not hurting anyone, why shouldn’t they object to being told what to do by government? I should not have to explain to a man of color why being forced to do what someone else tells him to do is objectionable. In this country that used to be called “slavery.”




A recent Business Investor's Daily article provided very interesting statistics from a survey by the United Nation’s International Health Organization.

Percentage of men and women who survived a cancer five years after diagnosis:
U.S. 65%
England 46%
Canada 42%

Percentage of patients diagnosed with diabetes who received treatment within six months:
U.S. 93%
England 15%
Canada 43%

Percentage of seniors needing hip replacement who received it within six months:
U.S. 90%
England 15%
Canada 43%

Percentage referred to a medical specialist who see one within one month:
U.S. 77%
England 40%
Canada 43%

Number of MRI scanners (a prime diagnostic tool) per million people:
U.S. 71
England 14
Canada 18

Percentage of seniors (65+), with low income, who say they are in "excellent health":
U.S. 12%
England 2%
Canada 6%

The above stats show why people say America has the best health care in the world. The problem is not quality or even quantity—it is cost. The cost of our health care is expensive for two reasons.


First, we invent the life saving drugs, devices and procedures that prolong life. Extending life is expensive. When we die it is no longer so much from heart attacks, pneumonia, or plague, which occurs quickly (and relatively cheaply). More often, we now die from cancer, or diabetes, or Alzheimer’s, which are far more prolonged and expensive.


The second reason we have expensive healthcare is because we have restricted the free market from the industry of healthcare more and more over the years. Now when you turn 65, your insurance company cannot by law insure you. You become a ward of the state. If you could choose to continue coverage, or go to a catastrophic alternative at a lower price, the cost to government would be reduced, and competition would be increased. Allowing the healthcare industry to compete as an industry would result in lower prices to all.


Paul Ryan's bill would allow those under 55 to start making private coverage arrangements now. This would solve the imminent bankruptcy of the system which is scheduled to begin in nine years. If we continue to pursue only government “solutions,” we will see costs increase and care deteriorate. Soon we will see statistics like those of England and Canada shown above. The choice is ours.


Market Update:

The last couple of months have been, let us say, dramatic. I have sold out my previous portfolio, wiped the slate clean, and re-built a new portfolio. Cycles are getting closer and closer as the world of information increases and accelerates.


This week I did something I rarely do—I looked back. I checked my portfolio, and it is up close to 100% since the first of the year. I placed half of that into REIT's at about 12% to lock in the profits. The rest is now 100% invested in the stocks I think will do best going forward. It is a more conservative portfolio, but an upgraded one of higher quality and less risk. I do not need to swing for the fences to hit the proverbial home run. I just did that. It’s now more about keeping those gains and building on them.


Although I entitled my Mid Year Outlook, "A Year of L," I would like to reiterate that I thought the second half of the year, economically, would be better than the first. My projection for GDP for 2011 is 2.75. We had a 1.8% increase in the first quarter, and it looks like the second quarter will come in at about 1.9%. If we are to make 2.5 to 2.75% for the year, we need to do 3 to 4 % growth in the second half.


That may be what the market is seeing and why it has turned on a dime. It also explains why copper is near an all time high. Even though the market has fallen back on the unemployment figures, it is up dramatically over the last two weeks. And as I said, as the market goes, so go resource stocks. It is not doom and gloom that will take resource stocks higher; it is the prospect of greater world growth. I think we will accelerate toward my 2.75 L scenario in the coming months. If not, we could see a reversal of these gains.


But, we do not need higher gold, silver, or copper prices to make profits on resource stocks from this point. If we get them, fine. Resource companies can do very well given current prices. What we need is stability, and higher world growth. That will lead to higher stock prices in general. At present, commodity prices are sufficiently high for resource stocks to return hefty gains in the future, and will return huge profits to the luckiest and the best run exploration resource companies going forward.


I think the following stocks are positioned to move higher after what is more and more looking like the end of a correction. But in case I’m wrong, I have mental stop loss targets that will get me out with only small losses.




Cash and cash equivalents, CXS, MFA, & TWO

(Average yields are about 12%)


Verde Potash                                    Stop 5.50


CDE                                                 Stop 23.90


Aurizon                                            Stop 5.25


Copper Fox                                      None


Nevsun Resources                            Stop 5.50


US Silver Corp                                  None


Humana                                           Stop 77.50