—This can’t be good. The Associated Press reports that, “Scores of Iranian students have attacked the Saudi Arabian embassy with firebombs to protest the Gulf country’s role in cracking down on anti-government protesters in Bahrain.”
–But first, one way of looking at the emerging events in the Middle East—and this is the way we looked at it last month’s issue of Australian Wealth Gameplan—is that everything is quickly becoming a proxy war between the Iranians and the Saudis. That is a gross simplification, of course, given the local complexities in each country.
–But the main idea is that the modern national borders in the whole region are fairly recent (historically speaking) and fairly artificial. If there was ever a time to re-draw them, now would be it. Surely all the parties with strategic interest in the region (Russia, China, the U.S., former colonial overlords from Europe, various ruling royal families and dynasties and of course major religious groups) see the current turmoil as their best chance in years (or ever) to gain influence or control over the world’s major proven oil reserves.
–The big scramble for proven natural gas reserves is not so surprising in this Middle East long-term oil war context. Of course as we write that this morning the oil price is actually down. The International Monetary Fund cut its growth forecasts for Japan and the United States overnight. This again proves the point that high prices for anything are usually the best cure to curb demand.
–Speaking of curbing demand with high prices, did you see that China reported a $7.3 billion trade deficit in February? Since February follows the quiet period of the Lunar New Year, there is a perfectly logical explanation for why Chinese imports (in dollar value) would exceed Chinese exports. But is there another explanation?
–Yes, at least in the form of a question! What if China’s huge demand for imports (both for food and raw materials for its manufacturing industry) is driving up prices to unsustainable levels? An article in Forbes by Gordon Chang digs deeper into the trade deficit details and finds rising prices are to blame for China’s first quarterly trade deficit since 2004. Chang reports:
For the January-March period, imports were up 32.6%, posting a quarterly record of $400.7 billion. Surging commodity prices accounted for much of the increase. Customs data shows that China imported 14.4% more iron ore in the quarter but paid 59.5% more for each ton. That meant the cost of the imported ore was up 82.5%. Soy bean import volume decreased by 0.7%, but China paid 25.7% more per ton.
In the quarter, oil imports went up by about 12% by volume and 39% by value. China was helped by the Japanese earthquake-tsunami, which initially resulted in lower prices for crude. Yet Japanese buyers are bound to contribute to rising energy costs this year as they begin to rebuild as well as restart production lines. And look for copper to also drive up China’s import bill soon.
So China is now importing inflation. At first glance, price increases look manageable. The National Bureau of Statistics announced that the consumer price index increased 3.3% last year. In February, inflation was 4.9%. Sometime toward the end of this week, NBS will tell us inflation crossed the 5% mark last month. Analysts are thinking 5.2%.
But in reality inflation is closer to 10%. Beijing technocrats are getting desperate, and they showed their hand in January when they lowered the weighting of food in the CPI. If they had not done that, inflation for February would have been, say, 0.2% higher than the officially reported 4.9%. Food inflation in China is somewhere near 20% at the moment.
–If you were commanding an economy of 1.3 billion, you wouldn’t want to pay record prices for soybeans and other food imports. Not only is food inflation politically destabilising, but frankly, you have to wonder if we’ve reached a point where the rest of the world is going to find it hard to supply the raw materials China needs to keep growing at 9%.
–The alternative is that China won’t or can’t grow that fast, no matter how much the political leadership needs pedal-to-the-metal growth to keep unemployment under control. That inevitably means the rosy scenario for Australia will end sooner or later. Australian firms love it when export values soar thanks to rising underlying commodity prices even if export volumes don’t. But if volumes and values both go down, so do earnings. And so do stock prices.
–We’ll get to some reader mail in just a moment. But first a rather unpleasant warning. It has come to our attention that some stock brokers and financial planners are distributing entire issues of our newsletters and trading alerts to their clients. This is illegal. If you’ve been doing that, please stop now.
–A few readers have written in saying they received the entire issue from their broker on the same day it was published to paid-up subscribers. While we appreciate the desire to share valuable information, we do not appreciate distributing copyrighted material to large lists of non-paid subscribers. Not only is it illegal, but it has a negative effect on subscribers when share prices are pushed up by investors who read about the recommendation through their broker.
–If your broker has forwarded you copyrighted material published by Port Phillip Publishing, please let us know by sending an email to email@example.com. Those emails will come directly to our inbox. Your privacy and confidentiality will be fully respected. All we’re trying to do is find out who’s been doing it…so we can request they stop and follow up with legal action if necessary.
–It sounds threatening and draconian. But we take our copyright seriously because it affects the usefulness of the advice our readers pay for. Even if your intentions are right, to share important stories, it is NOT right to distribute our material to your own clients. If you’re doing that, please stop now and be on notice that we’re compiling names of offenders and will take action if necessary.
–Now, on to a few reader e-mails…
Dear Sir/ Madam,
I understand that gold in 1980 was US $ 1,800 per oz this is the highest price recorded to date..I stand to be corrected, but your US $ 1,471 per oz is incorrect.
–Hmm. Consider yourself corrected Mr. Thomas. The nominal high for gold in 1980 was US$850. In today’s US dollars, that’s more like $2,417. This is one reason why Dr. Marc Faber thinks gold may be cheap today, even after making nominal new highs.
–What about the Aussie gold price? You can see from the chart below that Aussie gold made its all-time high in February of 2009 at $1,535.68. Since then, the strong Aussie dollar has effectively capped the Aussie gold price from making new highs. Still, the price has been rock solid. And obviously, a China-related drop in the Aussie currency would will probably lead to a rise in the Aussie gold price. That makes buying on weakness a good strategy.
–Here’s a note in reply to our essay on H.C. “Nugget” Coombs, Australia’s first central banker.
What a great shame that you had to sully an otherwise excellent article on Nugget Coombs with your right-wing idealism! Please note most people in Australia have had a surfeit lately of right-wing/left-wing ideals and are sated with politics. To say that, “we find Coombs’s intellectual point of departure…deeply repellent” is itself repellent for an Australian to read.
Please stop trying to Americanise Australia. We don’t want it. Can’t you see that it’s right-wing people like yourself that have been the ruin of America?
Belief in liberty vs. government regulation has been the direct cause of Wall Street’s destruction of America’s economy, caused largely by the repeal of the Glass Stiegel [sic] Act. Your expressed desire for liberty connotes the licence of the ruthlessly greedy to exploit the country while the govt stands by and watches America self-destruct.
Please let’s spare Australia from such a fate!
–That’s a bit harsh to blame us for ruining America, Janice. We haven’t even lived there since 2002. But you’ve made a rather large error when you say, “Your expressed desire for liberty connotes the licence of the ruthlessly greedy to exploit the country while the government stand by and watches America self destruct.”
–The only way you could have possibly concluded that from reading our essay is if you believed it already and were just looking for a chance to scold someone. And you’ve proven our point anyway. You share with Coombs an inherent suspicion of liberty.
–Why do you hate freedom so much?
–It sounds like you think that when people use the word “liberty” they are really using a code word for greed and exploitation. That’s not what we mean by it at all. What “caused” Wall Street’s destruction of America is not “capitalism” or “liberty” but a kind of corporatism where Washington and Wall Street colluded to destroy sound money and put the nation in enormous debt and profit by asset inflation.
–The hero of real capitalism is the entrepreneur, not the money shuffler. He delivers the goods and services that people want at a price they can afford. If you think that’s “right wing radicalism,” there’s 300 years of Western prosperity to contradict you. That prosperity is based on free enterprise, the rule of law, low taxes, and free trade. But argue with history if you’d like.
–You might think—and we’re totally guessing here—that Coombs was trying to protect “the people” from the destructive forces of “the market”. But our point is that his view is based on unsound money and inherent distrust of liberty and what people will do with it. To be fair, he may have thought Australia was too vulnerable or young to thrive without strong centralised institutions.
–But for whatever reason, historical or personal, Coombs seems to have been that particular type of Australian who believes that authority belongs in the hands of a technocratic elite. That usually turns into a system where the people running the bureaucracy and the government place their judgement over your liberty.
–That’s deeply repellent to anyone who values liberty. It’s also dangerous to cede authority to anyone because you believe they have your best interests at heart. But it’s a free country for now, so you don’t have to respect liberty if you don’t want to.
For Daily Reckoning Australia