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The Next "Peak" Trade...


China has the next move

Tuesday, January 26th, 2010 - By Ian Cooper

The market remains a mystery these days, shrouded in fear of Ben Bernanke's confirmation and fear that our recovery isn't as strong as first thought. But we remain long with all open positions, especially our long-term rare earth trades, as reports say global supplies of rare earth could be wiped out by 2012.

China holds 97% of the world's rare earth supply, and China is preparing to stop exporting these elements to the rest of the world by 2012... And if that happens, we'll be crippled by the coming collapse of available rare earth metals. In fact, according to reports, "manufacturing of everything from computers and electronics to farm machinery will grind to a halt. Electronics will disappear from the shelves and prices for manufactured goods that depend on these rare elements will skyrocket."

According to The Independent, by 2012 China could cease all exports of rare earth elements, reserving them for its own economic expansion. The paper also quotes Jack Lifton, a rare earth expert, who says, "A real crunch is coming. In America, Britain and elsewhere we have not yet woken up to the fact that there is an urgent need to secure the supply of rare earths from sources outside China."

And believe it or not, many haven't even heard of the problem.

But they have to wake up or we'll be screwed.

Think about this. Without these rare earth elements, we'd have no iPhones, car stereos, and no electric motors. This is real, folks.

The other problem is that demand is outpacing supply. Over the last decade, demand has risen from 40,000 tons to more than 120,000 tons. And get this - in order to build more green technologies, for example, the world will need 20,000 tons of rare earth by 2014, according to The Independent.

This, as China threatens to drop exports to nothing by 2012 - which could be met with the disappearance of wind turbines, the Toyota Prius, the iPhones and iPods.

But there's a very easy way to profit from this story, which you can read about here.

Here's more from The Independent:

Concern as China clamps down on rare earth exports
By Cahal Milmo

Britain and other Western countries risk running out of supplies of certain highly sought-after rare metals that are vital to a host of green technologies, amid growing evidence that China, which has a monopoly on global production, is set to choke off exports of valuable compounds.

Failure to secure alternative long-term sources of rare earth elements (REEs) would affect the manufacturing and development of low-carbon technology, which relies on the unique properties of the 17 metals to mass-produce eco-friendly innovations such as wind turbines and low-energy lightbulbs.

China, whose mines account for 97 per cent of global supplies, is trying to ensure that all raw REE materials are processed within its borders. During the past seven years it has reduced by 40 per cent the amount of rare earths available for export.

Industry sources have told The Independent that China could halt shipments of at least two metals as early as next year, and that by 2012 it is likely to be producing only enough REE ore to satisfy its own booming domestic demand, creating a potential crisis as Western countries rush to find alternative supplies, and companies open new mines in locations from South Africa to Greenland to satisfy international demand.

Amid claims that Beijing is using its rare earths monopoly as a tool of foreign policy, the British Department of Business, Industry and Skills said it was "monitoring" the supply of REEs to ensure China was observing international trade rules.

Jack Lifton, an independent consultant and a world expert on REEs, said: "A real crunch is coming. In America, Britain and elsewhere we have not yet woken up to the fact that there is an urgent need to secure the supply of rare earths from sources outside China. China has gone from exporting 75 per cent of the raw ore it produces to shipping just 25 per cent, and it does not consider itself to be under any obligation to ensure supplies of rare earths to anyone but itself. There has been an effort in the West to set up new mines but these are five to 10 years away from significant production."

After decades in which they were considered little more than geological oddities, rare earths have recently become a boom industry after the invention of a succession of devices, including iPhones and X-ray machines, which rely on their specific properties.

Global demand has tripled from 40,000 tonnes to 120,000 tonnes over the past 10 years, during which time China has steadily cut annual exports from 48,500 tonnes to 31,310 tonnes.

Worldwide, the industries reliant on REEs, which produce anything from fibre-optic cables to missile guidance systems, are estimated to be worth £3 trillion, or 5 per cent of global GDP.

Beijing announced last month that it was setting exports at 35,000 tonnes for each of the next six years, barely enough to satisfy demand in Japan. From this year, Toyota alone will produce annually one million of its hybrid Prius cars, each of which contains 16kg of rare earths. By 2014, global demand for rare earths is predicted to reach 200,000 tonnes a year as the green revolution takes hold.

Nearly all of China's supply of rare earths comes from a single mine near the city of Baotou, in Inner Mongolia. The remainder comes from small and sometimes illegal mines in the south of the country, leading to devastating pollution from the poisonous and sometimes radioactive ores.

Environmentalists argue that this, coupled with widespread criticism of China's stance during the Copenhagen climate summit, adds to the need for a "plurality" of rare earth resources. One campaigner said: "There are legitimate questions over Beijing's control of these resources. Copenhagen showed they are not above putting national interest ahead of global efforts to curtail global warming."

Once extracted and refined, the rare earth metals can be put to a dizzying range of hi-tech uses.

Neodymium, one of the most common rare earths, is a key part of neodymium-iron-boron magnets used in hyper-efficient motors and generators. Around two tonnes of neodymium are needed for each wind turbine. Lanthanum, another REE, is a major ingredient for hybrid car batteries (each Prius uses up to 15kg), while terbium is vital for low-energy light bulbs and cerium is used in catalytic converters.

In October, an internal report by China's Ministry of Industry and Information Technology disclosed proposals to ban the export of five rare earths and restrict supplies of the remaining metals. Beijing strenuously denied that the document was an accurate reflection of its strategy, saying it had no desire to reduce trade in rare earths. But The Independent understands that the level of demand in China means that supplies of at least two crucial REEs - terbium and dysprosium - are likely to be curtailed by as early as next year.

Dr Ian Higgins, general manager of Birkenhead-based Less Common Metals, which specialises in rare earth products, said: "There is a threat that in the next 12 to 18 months, there might be some quite severe shortages of these rare earths. That is certainly going to impact those hi-tech green industries outside China."

Both Western countries and China are already dashing to secure new sources of rare earths. Last year, Australian regulators imposed restrictions on the purchase of one of the country's richest rare earth mines, causing a Chinese company to walk away from a £400m deal to buy its operator.

European and North American companies are meanwhile racing to open or re-open mines in Canada, South Africa and Greenland amid calls in the US for government-backed loans to secure supplies of some REEs which are used in the guidance systems of missiles and laser-guided munitions. Toyota has effectively bought its own rare earth mine in Vietnam by signing an exclusive supply deal.

The Department for Business, Industry and Skills acknowledged the growing concern in Western capitals. A spokesman said: "We are monitoring the situation, particularly with regard to World Trade Organisation rules. We are working with UK industry to assess the long-term demand for strategically important resources, including rare earth elements."


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Have U.S. Markets Been Rigged?


We'll let this video speak for itself...

Monday, January 11th, 2010 - By Ian Cooper

We'll let this video speak for itself, but it is interesting to note that some well-known names are now asking the questions that we and some others have been asking for a very long time.

 

Are the markets of 2009 and this year being rigged?

Charles Biderman, CEO of Trim Tabs Investment Research, believes the Fed and the U.S. government have been behind an illogical stock market rally. "We have no evidence they are, but they could be," Biderman says. But "since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion serving to soothe investors' frazzled nerves..."

"The U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well? So far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government should support stock prices."

Unbelievable...


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Doomed to Repeat the Mistakes of 1937?


A double-dip recession is possible...

Monday, January 4th, 2010 - By Ian Cooper

In Sunday's New York Times commentary, Nobel Prize winning economist Paul Krugman warns Obama and the Fed not to make the same mistakes that were made some 73 years ago, when the U.S. was sure that the worst was really behind it.

"There will be lots of bullish commentary - and the calls we're already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder," wrote Krugman. "But if those calls are heeded, we'll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over."

Unfortunately, once the monetary policy was tightened, the U.S. economy fell hard, he says.

If stimulus is not increased and the Fed does not continue to intervene (including keeping interest rates at zero), the lifeline for our economy could shut down... and send us plunging into a double-dip recession, say others. Even the Wall Street Journal, which is reporting that the markets could struggle in the New Year unless more stimulus is seen, agrees.

While we agree with those positions, our deficit and rising national debt could be met by a rise in interest rates, sending us into a double dip recession, too.

But that's just our opinion. Here's more of what Krugman had to say.

We'd love to hear what you think, too. You can leave comments below.

That 1937 Feeling
Paul Krugman
New York Times

Here's what's coming in economic news: The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary - and the calls we're already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we'll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened - and the economy promptly plunged back into the depths.

This shouldn't be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama's Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.

As you read the economic news, it will be important to remember, first of all, that blips - occasional good numbers, signifying nothing - are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that "the economy has finally entered a phase of self-propelled recovery." In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they're usually caused by an "inventory bounce." When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P.

Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can't be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers - who are $11 trillion poorer than they were before the housing bust - are in no position to return to the buy-now-save-never habits of yore.

What's left? A boom in business investment would be really helpful right now. But it's hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we're on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That's far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected.

But nothing was done - and the illusory good numbers we're about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an "exit strategy" from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It's widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn't raise interest rates directly - and there's a lot of pressure on Mr. Bernanke to do that too.

Will the Fed realize, before it's too late, that the job of fighting the slump isn't finished? Will Congress do the same? If they don't, 2010 will be a year that began in false economic hope and ended in grief.


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Villain of the Year


A Well-Deserved Award

Monday, December 21st, 2009 - By Ian Cooper

I couldn't have said this better myself. It's a great read.

Weeks after Time named "Helicopter" Ben Bernanke Person of the Year, the National Inflation Association named him the Villain of the Year 2009.

Bravo, NIA.

Here's more from the National Inflation Association:

The National Inflation Association today named Federal Reserve Chairman Ben Bernanke 'Villain of the Year 2009'. Although the mainstream media is widely praising Bernanke for preventing the next Great Depression, all Bernanke has done is create unprecedented amounts of inflation in unprecedented ways. When it costs $20 for a gallon of milk in a few years, Americans will have nobody to thank more than Bernanke.

While Bernanke believes the artificial excesses of the past decade to be normality, NIA believes normality would be going through a much needed recession in order to correct the imbalances that Bernanke made worse in 2009. The U.S. economy is riding high on its last dose of stimulus before the entire financial system overdoses and collapses. Bernanke has pushed the inevitable recession down the road while setting up the upcoming currency crisis.

The Great Depression of the 1930s came as a direct result of the Federal Reserve's creation in 1913 and their rapid increase in the money supply during the 1920s that led to an unsustainable credit-driven boom known as the "roaring twenties". This artificial boom needed to be corrected with a recession, but by the government interfering in the free-market, they increased the duration of the recession and turned it into the Great Depression.

Bernanke believes the government didn't do enough during the Great Depression, when in fact it was the Federal Reserve that caused it and the government's interference that made it worse. Bernanke was determined in 2009 to prevent the next Great Depression and although he has temporarily done so, he has accomplished this at the expense of a Hyperinflationary Great Depression next decade.

NIA finds it an insult to the world that Time Magazine today named Bernanke 'Person of the Year'. As further insult, they named "The Chinese Worker" runner-up. NIA believes "The Chinese Worker" should've won 'Person of the Year', because it is their hard work and sweat that has allowed Americans to live beyond their means for so long. Americans have taken their standard of living for granted, not realizing their non-productive jobs are a sham and their wealth is a fantasy, created by Bernanke's ability to print money as a result of the U.S. dollar being the world's reserve currency.

As shown in our documentaries 'Hyperinflation Nation' and 'The Dollar Bubble', the dollar's days as the world's reserve currency are coming to an end. We are now at a point where the U.S. national debt is increasing exponentially. It took over 200 years for the U.S. national debt to reach $1 trillion, but then took less than 10 years to grow by the next $1 trillion. In fiscal year 2009, our national debt grew by $1 trillion in just the first nine months of the year. Congress is now looking to increase the debt ceiling by nearly $2 trillion going into 2010.

Time Magazine fails to understand that the U.S. is no longer the world's most important economy. The people of Zimbabwe are perfectly capable of consuming goods just as well as Americans. Bernanke needs to take a vacation in Zimbabwe to see where the monetary policies he is practicing led them.

Bernanke's only tool to suck back in the monetary inflation he created in 2009 is to substantially increase interest rates, not just to 1% or 2%, but to 10% or more. Higher interest rates will mean not only a sharp contraction in GDP, but higher interest payments on our national debt. Therefore, we will be forced to pay higher interest payments on our debt at the same time as tax receipts shrink from our economy contracting. To make matters worse, the imminent surge in retiring babyboomers will mean even less tax revenues and a huge increase in government entitlement spending, at the same time as Obama is rapidly expanding the size of government.

We are two weeks away from the end of America's last ever decade of prosperity. The U.S. would've survived the depression Bernanke temporarily prevented, but it won't be able to survive the emerging hyperinflation catastrophe that Bernanke is creating. It is up to you to help your friends and family prepare for hyperinflation by telling them about NIA and having them become a member for free.


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This Crash is Far From Over...


Do this One Thing and You'll be Fine

Thursday, December 17th, 2009 - By Ian Cooper

We're not overly pessimistic on the economy, but it's hard to ignore truths when every one else falsely cheers a housing recovery.

So do yourself a favor... when housing bulls, for example, tell you all is fine, ignore them.

Sure, construction of new homes, helped by good weather, rebounded in November. And sure, the gain is a hopeful sign of a housing recovery. And yea, sales have surged in recent months, as homebuyers scrambled to take advantage of the first time home buyer tax credit.

But there's only one problem with the bullishness. It's overdone. There is no recovery... the crash is far from over. Even Moody's doesn't see any end to the housing meltdown, believing that home prices will soon start moving back down because of coming foreclosures.

Another obstacle for the housing recovery is the number of mortgages that are underwater where borrowers owe more than what the house is worth. This negative equity doesn't qualify those people for refinancing and even prevents them from selling the home.

But the most devastating of all could be the coming Option ARM resets of 2010 and beyond. It could easily lead to higher unemployment, housing glut, decreased home values, and the death of the cash-strapped consumer. And if you want to make money on this, you simply short housing, housing-related retailers, and the financial community.

What do you think will happen to housing when the resets happen? What do you think will happen when monthly payments on a $400,000 mortgage jumps from $1,287 to $2,593?

We're not trying to scare you... this is reality. And you have to play it smart.

The Year of Option ARM Resets. . . and Why There's No Foreseeable Bottom.

Just as 2007 and 2008 were the years of subprime woes, this one will go down as the year of Option ARM resets (or adjustable rate mortgage resets). With billions in Option ARM resets in 2009 and 2010, this crisis is about to unleash a fury no one's prepared for.

It won't be as bad as subprime, of course. It'll be worse.

That's because lenders created these ARMs with "teaser" features for borrowers, which included making lower minimal payments for the first few years before the loan reset to a higher payment schedule.

And if that weren't bad enough, there was another feature called "negative amortization," which meant you weren't paying back any principal.

In fact, with negative amortization loans your loan balance increased over time. Incredulously, every time you made a payment, you owed the bank even more. These are the loans that allowed consumers to buy houses they couldn't otherwise afford.

As for speculators, they may use negative amortization loans if they believe prices will increase at a fast pace. But with the opposite happening, they're out of luck.

And the banks will be left holding the bag.

So do yourself a favor. Ignore the housing bulls... they want to learn the hard way.


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Is the Recession Over or Not?


These Two Aren't Helping Much...

Monday, December 14th, 2009 - By Ian Cooper

According to two White House economic advisors, yes and no.

According to Larry Summers, "everybody agrees the recession is over... These things happen in stages. First, GDP goes up. That has happened. Then, hours that are worked by workers who already have jobs go up. That's starting to happen. Then employment goes up. We got very close to that this year, this month, with only 11,000 jobs lost. And then unemployment starts to come down. So these problems weren't made in a month or a year, and they are going to take a substantial time to solve."

"But what we can take satisfaction from is that we've walked back from the brink. And you know, forget what we say. Most professional forecasters are now looking for a return to job growth by spring," he said.

But according to Christina Romer, "of course [we're} not [out of recession]. We have — you know, for — for the people on Main Street and throughout this country, they are still suffering. The unemployment rate is still 10 percent."

Sadly, not only does the clash speak to the differing economic opinions in the Obama circle, but to the contrasting signals of the economy. And we're all left to figure out what the heck i's going on.. because people in the White House certainly can't.

So, if you've ever wondered why the market is insane these days, and for the past few months, it's because no one has any idea of what's happening with this economy. While I'd like to agree with Summers, and hope that he's right, you can't ignore the problems underlying our economic system.

The only known known is that there's an incredible disconnect between these two advisors.


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Bernanke Grilled by Senator Bunning


Video: Harsh words for the Fed chairman

Thursday, December 3rd, 2009 - By Adam Sharp

Senator Jim Bunning (R - KY) doesn't pull his punches in this lecture aimed at Chairman Bernanke. Here's an excerpt from the speech, which can be found at Mr. Bunning's Senate site:

"Instead of taking that money and lending to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in bonuses. Because you bowed to pressure from the banks and refused to resolve them or force them to clean up their balance sheets and clean out the management, you have created zombie banks that are only enriching their traders and executives. You are repeating the mistakes of Japan in the 1990s on a much larger scale, while sowing the seeds for the next bubble."

 

 


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Why Financials Really Are in Trouble


The Crisis of 2010

Wednesday, November 18th, 2009 - By Ian Cooper

An end to our woes is as premature as Jim Cramer calling an end to the depression fears. Unemployment will continue to climb. Consumer spending will suffer. And housing is only expected to worsen, as more resets rear their ugly heads.

Just ask Meredith Whitney. . .

She believes that financials still sizable headwinds, as the banking sector is "not adequately capitalized today." She's even calling for a double dip recession.

Cramer, of course, thinks she's dead wrong... writing at least three articles pointing out her errors. But if he spent more time doing research and less time criticizing, he'd realize she was right... (We wouldn't want to remind Cramer of his "brilliant" Bear Stearns call, would we? Too soon?)

Financials really are in trouble, especially this January 1, 2010.

That's when FAS 167, or the Federal Accounting Standards 167, effective January 1, 2010, will take effect. It'll basically force financials to bring bad, off-balance sheet asset back to the books... which could trigger substantial Street disasters, comparable to that of Lehman.

"In June 2009, the Financial Accounting Standards Board issued an amendment to the accounting standards for transfers of financial assets (SFAS 166) and an amendment to the accounting standards on consolidation of variable interest entities (SFAS 167). Both amendments are effective and will be applied prospectively by the company on January 1, 2010 ... Under these accounting standards, the company will record the underlying mortgage loans in these single-family PC trusts and some of its Structured Transactions on its balance sheet. These mortgage loans have an outstanding unpaid principal balance of approximately $1.8 trillion as of September 30, 2009... While Freddie Mac continues to evaluate the impacts of adoption, the company expects that the adoption could have a significant negative impact on its net worth."

Worse, check out what Wells Fargo had to say recently on FAS:

This comes from Wells Fargo's Q3 report:

"I want to update you on our most recent analysis of the impact of the application of FAS 166 and 167, which is expected to result in the consolidation of certain off-balance sheet assets currently not included in our financial statements. We provided a preliminary analysis in our second-quarter 10-Q. Based on our continued refinement of this analysis, we now expect approximately $55 billion in incremental GAAP assets to be brought on balance sheet, representing approximately $28 billion in incremental risk-weighted assets."

And they're probably not the only ones with this hanging over their heads. 

Long story short, financials and our consumer cash-strapped society, are in trouble... big trouble.

We'll look to short some of the big names in Options Trading Pit as we near January 2010.


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