Weekend: Panic at the Pentagon

Brian Hicks

Updated October 30, 2010

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

So much for the New World Order…

While the United States has been happy to move its military chess pieces all about the globe, the rest of the world has decided not to play.

And why would they?

After all, Pax Americana has meant that great power conflict has been taken off the table…

In its wake, we are left with something that doesn’t quite bend to the power of brute force.

Instead, it’s a whole new ball game — one in which economics is more important than megatons.

A war by other means

So while we don’t have to worry about Russians pouring through the Fulda Gap anymore, today’s battle lines are being drawn with currency, trade, and economic strength.

In this arena, an upstart newcomer — otherwise known as China — has been playing the game to win, if not dominate.

From keeping a mercantilist lid on the yuan to trashing its own environment, China has managed to build a pipeline attracting a good portion of the world’s wealth to its shores.

Meanwhile, the U.S. is left to play a game of catch-up that it can’t really win. Let’s face it: Big corporations care more about earnings per share than lines on a map.

China, on the other hand, is all about those lines — and is more than willing to defend them, firing whenever they feel threatened. And more oft than not, the Chinese are firing from a position of strength.

Rare earth dynamics

Take rare earth elements, for instance.

Nobody ever heard of bastnasite, cerium, lanthanum, praseodymium, neodymium, europium, or yttrium until China cornered that market.

Since then, China has been wielding them like a Shaolin Staff.

Now, rare earth elements have practically become household words; they are found in almost every 21st century product, including high-tech weapons systems, flat screen TVs, mobile phones, and computers.

These elements are so important that virtually no modern items can be produced without them.

(By the way, that list also includes the same high-tech batteries that are supposed to be at the forefront of the green car revolution…)

Without rare earths, we are basically screwed… Unless we agree to some shake down.

Comrade Deng Xiaoping seemed to recognize this fact years earlier when he noted, “The Middle East has its oil, China has rare earth.”

Since then, China has developed a monopoly on these elements, producing 97% of the world’s current supply.

What’s more, when they announced their plan for these elements looking forward to 2015, the Chinese said they would continue to reduce the export of these materials, and may actually stop some of them altogether.

That notion has sent the Pentagon into practical panic.

China has shown of late that it is willing to halt the export of these items when it suits them. And as it turns out, our smart weapons aren’t so smart without these Chinese exports.

The Pentagon has been incredibly negligent,” said Peter Leitner, a senior strategic trade adviser at the Defense Department from 1986 to 2007. “There are plenty of early warning signs that China will use its leverage over these materials as a weapon.”

Rare earth investments

But here’s the catch: rare earth elements are not exactly “rare” by definition…

What is rare is the number of mines that can produce them and make a profit. It’s expensive and not very environmentally friendly to do so, which is how China ended up with the lion’s share of the market in the first place.

Until the mid-80s, the U.S. actually dominated the production of rare earth elements — before all of those jobs were eventually shipped overseas (earnings per share again)…

The larger truth is that rare earth metals are relatively abundant, and now the search is on for alternative sources with new mines planned for California, Australia, Canada, and a very promising new mine in Greenland.

The bad news is that it will take years to rebuild this industry outside of the walled Chinese garden…

But that gives early investors in these rare earth commodities a great chance to turn a profit on them in the space between today’s market shortfalls and the new supply that will take years to come online.

That’s exactly why rare earth metals companies like Molycorp Inc. (NYSE: MCP) have been on a tear lately. It’s as simple as supply and demand.

Which is why Molycorp President Mark A. Smith can’t find a bubble anywhere within the industry.

Smith recently told Bloomberg, “The Chinese are only exporting 30,000 tons of material to the rest of the world right now and the rest of the world needs 50,000 tons of this material a year… We don’t see the fundamentals of this changing anytime in the near future. The demand is like I’ve never seen it in 25 years in this business.”

Those, my friends, are the words of a true bull market — even though it has its limits.

After all, this is one war China can’t dominate forever.

One rare earth play worth keeping an eye on is the Market Vectors Rare Earth Strategic Metals ETF (NYSE: REMX). It gives investors exposure to 24 publicly-traded businesses involved in the mining, refining, and manufacturing of rare earth metals. It began trading on Thursday. 

As for some other places to invest your hard-earned labor, here are a few of the best investment ideas from the pages of this week’s top-read Wealth Daily and Energy & Capital articles.

Have a great weekend.

Your bargain-hunting analyst,

steve sig

Steve Christ
Editor, Wealth Daily

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