China’s One Belt, One Road Grand Plan

Two years ago I was in Kazakhstan visiting my brother. We were taken for a drive one day out to a national park 3 hours east of Almaty. Part of the trip was on your average Soviet era road system. However, for about 30 km we intersected a brand new concrete four lane highway. It was world class. It was part of China’s One Belt-One Road infrastructure grand plan. Its real, its being built. When we flew out a few days alter I could see this concrete snake taking shape over hundreds of kilometers.

I just read this interesting summary of the plan by John Mauldin. Enjoy.

China’s Belt & Road Initiative looks like a giant infrastructure program, and it is, but that’s not all. It is Xi’s mercantilist version of the US-led postwar Marshall Program. Where we carved out leadership via institutions and trade agreements, while at the same time supplying much-needed money, China seeks to do the same by physically connecting itself with the Eurasian continent. I have said from the beginning that this may be one of Xi’s most profoundly disruptive and transformative policies of his career. There was some skepticism when it was first announced as the scope was so massive, but I think everyone is now a true believer. China is committing to putting its hard dollars into completing this project’s multi-decade vision.

(Click to enlarge)

As my friend George Friedman often says, China’s main strategic challenge is that the US controls the seas. Geography means China’s imports and exports must traverse coastal bottlenecks the US could easily close if it wished. That’s intolerable if your goal is to be a superpower, and that’s definitely what Xi wants.

One Belt, One Road is the answer. It will link the Eurasian land mass into a giant trading bloc with Europe at one end and China at the other. The project will open land routes the US cannot interdict, thereby letting China take what it feels is its rightful place of leadership. The scope is breathtaking, but Beijing is determined to make it happen. Again, I would not bet against Xi on this.

Notice all the smaller Asian countries that the One Road goes through. It will give you access to not only East Asia but Europe as well. China is building a “main pipeline” not unlike Eisenhower’s interstate highway system. And that means all those little countries will access that main road. Ultimately, China wants to pay for all the products it buys in Renminbi and have those small countries make it part of their central bank holdings. That is part of the process of becoming a reserve currency, which is something China covets. The same thing is true for the project’s ocean and seaport aspects.

Whatever your feelings about Chinese leadership, you have to admire a country that can undertake such a huge project that will take decades to fulfill. While Xi and his team may be starting it, it is unlikely anyone currently on top will still be on top in 30 years. That is Vision with a capital V.

Texas and Russian Economies Compared

From time to time I find an article that is particularly interesting. This one, by Frank Holmes compares Russia and Texas, and then goes on to talk about America’s debt levels and future gold prices.

Everything is bigger in Texas

You’ve no doubt heard that everything’s bigger in Texas. That’s more than just a trite expression, and I’m not just saying that because Texas is home to U.S. Global Investors.

Want to know how big Texas really is? Let’s compare its economy with that of Russia, the world’s largest country by area. As you probably know, Russia’s been in the news a lot lately, so the timing of this comparison makes sense. The U.S. just levied fresh sanctions against the Eastern European country for its alleged meddling in the 2016 presidential election, and early last week President Donald Trump warned Russia that the U.S. military could soon strike its ally Syria in response to its use of chemical weapons—a promise he kept Friday evening.

The Russian ruble traded sharply down following the news, decoupling from Brent crude oil, the country’s number one export.

Russian ruble decoupled from Brent crude following US snactions
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But back to the comparison. Even though Russia has nearly five times as many residents as Texas, the Lone Star State’s economy is more than $40 billion larger. Texans, therefore, enjoy a gross domestic product (GDP) per capita of around $58,000, whereas Russians have one closer to $8,700.

Texas Is So Much More than Oil Country

The Russian Federation is the largest single producer of crude in the world, pumping out 10.95 million barrels per day (bpd) in January, according to the country’s energy minister. Texas is no slouch, though, as its output came close to 4 million bpd in January. That’s the most ever for a January since at least 1981. And from December 2017 to February 2018, its oil and gas industry accounted for nearly 30 percent of the state’s employment growth, according to the Federal Reserve Bank of Dallas.

But whereas Russia’s economy is highly dependent on exports of oil and petroleum products, the Texas economy is broadly diversified. The state ranks first in the U.S. for not only oil production but also wind energy. It has a robust agricultural sector, and it’s a leading hub for advanced technology and manufacturing, aeronautics, biotechnology and life sciences. Austin, the state capital, is steadily emerging as the most dynamic U.S. filmmaking city outside of Hollywood.

Texas exports

All of this has helped contribute to Texas being among the fastest growing states in the U.S. In 2017, it grew by more than 1,000 new residents per day.

Meanwhile, Russia’s population is slowly shrinking because of low birth rates and low immigration. Its population peaked at 148 million in the early 1990s—right around when the Soviet Union fell—and by 2050, it’s estimated to sink to 111 million. 

Can Russia Root Out Its Corruption?

One area where Russia trumps Texas is in corruption. If you think Texas—or any other state—has a corruption problem, Russia takes it to a whole new level.

But Russia takes it to a whole new level. Last year, it ranked 135 out of 180 countries on Transparency International’s Corruption Perceptions Index (CPI), released in February. Among Eastern European countries, only Uzbekistan, Tajikistan and Turkmenistan ranked lower. Watchdog group Freedom House was similarly critical in its most recent analysis, giving the country an overall democracy score of 6.61 out of 7, with 7 being “least democratic.”

So notorious and widespread is Russia’s mafia that a number of movies have been made about it. One of the best among them is David Cronenberg’s excellent Eastern Promises(2007).

Having said all that, I believe it’s prudent for investors to underweight Russian stocks for the time being and overweight Western Europe. Because of U.S. sanctions, Americans have until May 7 to divest completely from a number of Russian names, including Rusal, En+ Group and GAZ (Gorkovsky Avtomobilny Zavod), all of which saw serious outflows last past week. The MSCI Russia Index, which covers about 85 percent of Russian equities’ total market cap, plunged below its 200-day moving average, but last Thursday it jumped more than 4 percent, its best one-day move in two years.

Weaker Greenback and $1 Trillion Deficit Helps Gold Glitter

Gold is rallying right now, but as I told Daniela Cambone in last week’s “Gold Game Film,” it has little to do with Russian geopolitics, or even trade war fears, which have subsided somewhat in the past couple of weeks. Instead, the price of gold is responding primarily to a weaker U.S. dollar. For the 30-day period, the greenback has dipped close to 20 basis points—for the year, more than 11 percent.

I think what’s also driving the yellow metal right now are concerns over the U.S. budget deficit and ballooning government debt. This week the Congressional Budget Office (CBO) said it estimated the deficit to surge over $1 trillion this year and average $1.2 trillion each subsequent year between 2019 and 2028, for a total of $12.4 trillion. By the end of the next decade, then, debt held by the public is expected to approach 100 percent of U.S. GDP.   

US deficits projected to be larger than previously estimated
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According to the U.S. National Debt Clock, government debt now stands at over $21 trillion—or, put another way, $174,000 per taxpayer. Imagine what the interest payments on that must be.

The CBO, in fact, commented on this. Believe it or not, the government’s annual payments on interest alone, made even more burdensome by rising rates, are expected to exceed what it spends on the military by 2023. And remember, defense is one of the country’s top expenditures, alongside Medicare, Medicaid and other entitlement programs.

US government is expected to start spending more on interest than defense in 2023
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There was even more news last week on debt and the deficit, as Congress tried, and failed, once again to amend the Constitution by requiring a balanced budget. The amendment could not get the two-thirds support it needed.

You can probably tell where I’m headed with all of this. Savvy investors and savers might very well see this as a sign to allocate a part of their portfolios in “safe haven” assets that have historically held their value in times of economic contraction.

Gold is one such asset that’s been a good store of value in such times. As I’ve shown before, gold has tracked U.S. government debt up since 1971, when President Richard Nixon ended the gold standard. I always recommend a 10 percent weighting in gold—5 percent in bars and coins; 5 percent in high-quality gold stocks, mutual funds or ETFs.

Has Trump Just Nailed the Presidency?

Along with so many, I have been following the American presidential race with fascination. The latest twist, the re-opening of the FBI investigation, is yet another of a long list of “black swans” that have surfaced in the last year or so.

My take on this last sensation is that it puts the presidency back on even keel. This is not good for Clinton either way. If she wins she will face ongoing scandal, investigations and possible impeachment within two years. If she loses, she definitely faces prosecution. The best and cleanest way forward for the country from here is a Trump victory. Consider the link below for a good synopsis of the way forward.



Who Were The Gulenists?

Since the attempted coup in Turkey recently we have been hearing about a purge of Gulenists from their military, educational establishments, politics and the media. The Gulenists follow the teachings of an elderly Turk of the same name living in the USA who is the intellectual, spiritual and financial leader of a worldwide Islamic cult that sought to infiltrate and eventually control Turkey, and then other countries as opportunities came up.

I found the following link on a Russian website and found it very intreguing as to how subversive, clever and widespread the Gulenists are. As an example they own over a hundred publically funded charter schools in the USA alone. The article is essential reading for anyone who wants to understand what it’s really happening in Turkey


Reasons Why Gold Crashed

There are a few very strong and healthy reasons why gold crashed last week. Here they are:

1. It hit its bear market trend line two months ago and could not punch through it, and eventually collapsed. This will fall on th second attempt.

2. In the short term price is determined by the futures market and there was a fifteen year high in the number of speculators betting on a continuation of a rising price. This is music to the ears of short sellers. There was no one left to buy and once it fell to resistance they ran the stops.

3. The Chinese stock market was closed for a week last week. The last two years  have seen identical sell offs in the US when demand from China was absent.

4. Gold and gold stocks had run so far ahead of their 200 day moving average that the yen were virtually in the stratosphere. Sentiment had to be rebalanced before the next leg up could begin. The bear market usually topped out on the 200 day moving average and now the bull market is bottoming on the 200 day moving average.

Trust this helps


Why a Bernie Supporter is Voting Trump

Below is the executive summary of a huge manifesto on why a highly intelligent and left wing voter cannot vote for the extreme right wing Clinton, but can vote for the progressive socialist Trump. It is fascinating reading and a real revelation as to how Trump is so much closer to a rational democratic, average persons position on social issues, big banks, the military/industrial complex, global terrorism, than the neoconservative war monger int Clinton. A fascinating read…

Here are the ten key issues:

1: Sanders favors “breaking up the big banks.” Hillary Clinton opposes that.

2: Sanders has fought consistently against Obama’s mega-‘trade’ deals. Hillary consistently favored them.

3: Sanders favors working with Russia against jihadists in Syria. Hillary opposes that.

4: Sanders says jihadists are America’s top foe. Hillary says both jihadists and Russia are equally anti-American, equally dangerous to America. Hillary is simply a neoconservative; Sanders isn’t. Her having voted to invade Iraq was no mistake on her part; it was consistent with her entire international outlook, all of which is neoconservative, like invading Libya, Syria, etcetera. Bernie’s vote against invading Iraq was likewise consistent with his international outlook.

5: Sanders has been consistently opposed to fossil fuels. Hillary has aggressively supported them.

6: Sanders says that the system is rigged. Hillary says that it’s not.

7: Sanders says the system is rigged specifically against the poor. Hillary says the problem that keeps people poor is instead individual bigots — against Blacks, Hispanics, women, gays, etc. Not the system itself. She is proud to represent the system. She’s not against it. She’s for it.

8: Sanders’s political career has been financed by small-dollar donations. Hillary’s has been financed by mega-donations.

9: Sanders favors every possible means of reducing the influence big-money donations to politicians has over politics. Hillary opposes that idea.

10: Sanders favors socialized health insurance, like exists in the European nations that spend per-capita half what America does but have higher life-expectancy than America does. Hillary opposes that — she favors the existing profit-based system of health-care, and opposes the European system where basic healthcare is a right, no privilege (that’s based only on ability-to-pay).

Here is the link to the full article…

What’s Really Happening in Syria

It takes a while to get your head around the fast moving events in Syria. I am no apologist for the Russians or the Syrian government, with their massive violation of human rights and human dignity. However we also know that America’s number one goal is the overthrow of the Assad regime, not the destruction of ISIS. Why? Well it has a lot to do with trying to weaken Russia’s stranglehold on European gas imports via a new pipeline from Qatar to Turkey.

With that in mind I think something fishy is going on at the moment and we are not being told the truth by Washington. Let me take you through the events of the last two weeks:

  1. There was the brokered ceasefire that was going to lead, after seven days, to a significant level of cooperation between the US and Russian defence in routing ISIS. This would significantly unwind the heightened tension between Washington and Russia that has built up over the last decade, and especially since the war in Syria began. However, the head of the Pentagon, defence secretary Ashton Carter, has been openly opposing any deal with Russia.
  1. Then there was the “accidental” American allied bombing of a Syrian Army base resulting in the killing of 62 soldiers and the wounding of a hundred more two days after the ceasefire began. This was at a time when the Syrian Army had opposition forces in that area on the run.
  1. This was followed by an assault on that base by these American allied rebels, in direct contravention of the ceasefire, The Syrian government then claimed the ceasefire was violated some 300 times in the next few days. There is no way to verify this claim.
  1. A few days late there was the bombing of an aid convoy by a weapon that looked suspiciously like it came from an American drone, but was blamed on Russia and Syria.
  1. So who destroyed the ceasefire? It looks suspiciously like the American military did it, against the wishes of the President and John Kerry. The only possible motive for this is that the American military want nothing to do with Russia. Cooperation for them is anathema.
  1. With the breakdown official, Syria, Russia, Iran, Hamas and Iraqi Militia have now launched an all-out offensive to finally crush all US allied opposition forces in Aleppo. Contrary to popular myth, Syria’s largest city is not in the hands of ISIS, but rebels aligned to America. When Aleppo falls America will have lost its last major bargaining chip in the conflict.
  1. Checkmate.

I hope this helps you understand things a little better


Inflation Brewing in the USA

Below is an edited copy of a blog by Michael Ashton from NFTRH discecting the recent inflation number out of the US. There is clearly an uptick in inflation data and this has huge implications for financial markets going forward as they are simply not pricing it in to their future scenarios.

  • Fed’s job just got a lot harder, with weaker growth but a messy inflation print. 0.25% on core, y/y rises to 2.30%.
  • So it wouldn’t be hard to get a 2.4% or even 2.5% out of core by year-end.
  • Housing rose to 2.58% y/y from 2.45%. Medical Care to 4.92% from 3.99%. Yipe. The big stories get bigger.
  • Starting to drill down now. Core services 3.2% from 3.1%; core goods -0.5% from -0.6%.
  • Core goods should start to gradually rise here because the dollar has remained flat for a while.
  • Primary rents were 3.78% from 3.77%, no big deal. OER 3.31% from 3.26%, Lodging away from home 3.31% from 1.57
  • Medical Care: Drugs 4.67% from 3.77%. Professional svcs 3.35% from 2.86%. Hospitals 5.81% from 4.41%. Insurance 9.13% vs 7.78%
  • y/y med care highest since spike end of 2007.
  • CPI Medical – professional services highest since 2008.
  • On the good news side, CPI for Tuition declined to 2.53% from 2.67%. So there’s that.
  • Bottom line: can’t put lipstick on a pig and make it pretty. This is an ugly CPI report. It wasn’t one-offs.
  • I STILL think the Fed doesn’t raise rates next week. But this does make it a bit harder at the margin.

The sticky components, the ones that have momentum, continue to push inexorably higher (in the case of housing), or aggressively higher (in the case of medical care). The rise in medical care is especially disturbing.

What makes this even more amazing is that inflation markets are priced for core and headline inflation to compound at 1.5%-1.75% for basically the next decade. That’s simply not going to happen..

Now, about the Fed..

I have long believed that Yellen will need to be dragged kicking and screaming to a rate hike. There is no evidence that Yellen cares very much about inflation. I think the Fed believes inflation is low; if it’s rising, it isn’t going to rise very far because “expectations are anchored,” and if it does rise very far they can easily push it lower later. I think they are wrong on all three counts.

Looking forward, Core and Median inflation look set to continue to rise. PCE will continue to drag along behind them, but there is no question inflation is rising. In the US, core inflation has not been above 3% for twenty years. That is going to change in 2017. And that is not good news for stocks or bonds.

Young Brits Stuffed Up Their Brexit Vote

Unless you have been living under a rock lately you would have been inundated with media alarm bells in response to the shock Brexit vote. In response to the vote to leave we have seen mass demonstrations by the youth of Britian, millions more sign online petitions and noisy vocal outrage. Talking to British backpackers in Vietnam and Laos straight after the vote was a fascinating experience. They felt betrayed. They were bitter and angry. This cohort is clearly not used to not getting what they want.

However, what few know is that most Britons between the age of 18 and 25 failed to bother voting. Projections suggest only a little over a third of Brits aged 18-24 voted in the referendum. For those aged 65 and over, that number was closer to around 80 per cent. Given there are more than five million people in Britain aged between 18-24, and the vote was decided on a margin of only 1.3 million, it’s safe to say that if the younger generation matched the participation of the older generation, Britain could still be a member of the EU.

The entrenched laziness and political cynicism of today’s youth cost them a “Remain” victory and now it is all over bar the shouting.

And shout they will as the greatest sin you can commit against a spoilt millennial is to offend them. They will turn on you, label you and fight you. I saw this first hand on Ha Long Bay when talking to a Young Brit. He labelled all those who voted for Brexit as uneducated rednecks. Which, by definition, means nearly all older people, the very people who have a memory long enough to understand the difference between British sovereignty and subservience to the arrogant EU superstate. Yes, name calling is still the lowest level of debate!

So what happens now? Well Britian will regain control of its courts, it’s trade, it’s parliamentary sovereignty it’s regulations and its future. This used to be called freedom! Benjamin Franklin once said that a people who trade freedom for security deserve neither. In the years to come the millennial a will thank those “rednecks” for getting them out of the EU. Britian has just left an already sinking ship. The age of the elites is over, long live nationalism.

Which nation will be next?


The Approaching De-population Bomb

I have posted several articles over the years on the ticking time bomb of demographics. The link below takes you to a another disturbing article.

The financial and spiritual implications are enormous and explain much of what is happening in the world today, for example:

1. Why Europe is importing so many Muslims and Africans

2. Why debt levels are rising exponentially

3. Why interest rates are continually falling

4. Why health budgets  in the developed world are under enormous strain

5. Why Islamic extremism is running rampant in poor Middle Eastern countires

6. Why Christianity is collapsing in the west, but exploding in poor countries right around the world, including Mulsim countries.

7. Why the world is about to become a lot poorer.

The cosy consumer oriented world of the western baby boomer is coming to an end. The global domination of the white westerner is coming to an end. The colonisation of the west by the rest has begun, and the greatest spiritual harvest of souls in the history of the world has also begun. What an interesting century we live in…