The Mailbag: Our Joke About Housing & Chinalco’s Interests

Thanks for your articles, they're great. I understand that housing is not your thing, but it is isn't it? In a way, I mean, the subprime fiasco unwound all those mortgage backed bonds, CDO's etc. Which awoke the sleeping credit crisis. I mean, housing is directly related to credit, and a credit crisis is the current systemic problem, which you guys certainly know a bit about.

Anyway, my main point is that you call yourselves contrarian, or at least say that way is what you prefer, so why, (granted, you don't follow housing) did you guys in your last letter say, based on the figures, to buy houses? This at any rate is following the mob isn't it?....At the top of a cycle? There are so many gremlins waiting to at least stagnate [sic]the price of housing (some pointed out by DR). I would have thought you would say; "sell your house near or at the top of the cycle and buy gold, it still has a way to go! (after consulting your financial advisor).".

Also, the American who wrote in about Australia being a potential target for invasion may be right, if there weren't another commodity more valuable, more relevant to manufacturing, and totally strategically significant....OIL! I think this is the biggest motive for war; already proven - one is in progress. There will be hell in the Caspian Basin, we ain't seen nothin' yet!

By the way, I'm buying silver, is that even more contrarian?

I'd just like to make a comment regarding the Chinalco/Alcoa/China development bank/central Huijin investment/Chinese govt. situation with regards to Rio, BHP & Xtrata.

The Chinese are very astute negotiators/deal makers, as evidenced by Xiao Yaqing's "hide & seek" statements to the Oz media yesterday.

You quoted Xiao below:

"--At the very least, China, through Chinalco, has influence over a BHP takeover over Rio. It can try and block the takeover by increasing its stake in Rio, although Chinalco Xiao Yaqing says this is not the plan. "We do not have plans to increase our stake," he told investors yesterday in Sydney. "The objective of this investment is to make a return. So if the return is attractive... we'll be happy," he added."

I do not believe a word of his statement, because it would not be in the Chinese financial interests to allow a merger between Rio & BHP to happen, that is why the Chinese govt. through it's investment arm, the central Huijin investment co. ltd. Injected US$20 billion on 31st Dec. 2007 into china development bank. China development bank is THE financier for Chinalco, so I would hazard a guess that the 20 billion or 16.5 billion part thereof ended up in Chinalco, which ended up in the stake of Rio.

However this plays out, I do not believe for 1 second that Chinalco are acting completely for their own aluminium and copper interests, but rather, for their own interests as well as the interests of the Chinese steelmakers. It would've been too obvious for markets, if the Chinese steelmakers made this transaction, since they have already shown their hand in December & January regarding Australia iron ore assets.

By using Chinalco as the front in this transaction, the Chinese govt. are hoping to not attract as much attention than if they used the steelmakers, because the cost of the transaction would end up being higher if they did. Using Chinalco, gives the markets the impression of a benign investment for returns. This is more about "resource security" for china, than it is about "return on investment", although it'll be a nice return, which ever way one looks at it.

At the end of the day, the Chinese govt. has foreign exchange reserves to burn, so they will be hunting global iron ore resources, miners, producers & explorers for the best possible price, in the foreseeable future. They are also currently interested in Glencore's 35% stake in Xstrata, which corroborates this fact.

Regards,