“Super profit tax calls industry’s bluff”

And on the front page the AFR leads with:

“Henry ramps up pressure on miners”

With the subheading, “Claims tax will boost growth.”

To back up the arguments the AFR reproduced a chart and pie chart which I’m pointing at with a red pen while Diggers & Drillers editor Dr. Alex Cowie cleverly took a photo with his fancy iPhone:

In a wonderful piece of casual/causal flummery, the chart on the left shows how oil exports went ballistic after the petroleum resource rent tax was introduced.

Thanks to that piece of, erm, evidence, treasury secretary, emperor Ken Henry believes:

“It is the strong and clearly stated view of Treasury that the resource super profit tax [RSPT] will grow the mining sector and the economy.”

The two pie charts to the right provide more, [hehem], proof that the mining companies are ripping off ordinary Australians.

In case you can’t see it clearly, the pie chart shows how the government swiped an average of 55% of mining profits between 1999-2004, but merely 27% in 2009. Obviously something must be done to redress this heinous crime of profitability.

Fancy making a profit eh? Mining companies should take a leaf out of the government’s book and not make a profit. That’s how it’s done.

But do you see the problem with these claims by the Treasury? I’ll explain in a moment. Before I do, there’s other comments made by the deputy drones at the Reserve Bank of Australia (RBA).

As reported in Tuesday’s AFR, deputy drone Ric Battellino said:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

Then there’s the comment from deputy drone Phillip Lowe, sorry, Dr. Phillip Lowe:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Perhaps we’ve gone over the top on the quotes this morning, but I’ve included them all for a reason. Because they have one thing in common…

The overwhelming belief by the bureaucracy that it can manipulate an economy at will. That it can decide which resources companies will prevail and which won’t. It’s megalomaniacal bureaucratic interfering at its worst.

Anyway, let’s work through these kindergarten-grade arguments put forward by the bureaucrats who seem to be long on qualifications but short on logic.

First up, let’s look at the case that the super profits tax will be great because it will only cream off extra tax from the big profitable companies, but at the same time “smaller and more marginal projects would become more viable.”

This must be true because it’s all according to “modelling” undertaken by KPMG Econtech.

Now, as you’re probably aware, the recent record of “modelling” by the financial industry whizz-kids hasn’t been too good. Remember all those models that said a subprime property crisis wouldn’t spread to other investments?

But don’t take my word for it, just type “KPMG auditing scandal” into your favourite search engine and you’ll get a bunch of records returned. We picked out this one from the Irish Independent: “Were the bank auditors conflicted?”

According to the article, “Irish Nationwide, which last week revealed a loss of €2.5bn for 2009, was also a customer of KPMG… AIB paid KPMG a whopping €11m over nine years for services outside its audit…”

KPMG aren’t the only ones, PricewaterhouseCoopers and Ernst & Young get dishonourable mentions too.

Let’s put it this way, just as the auditors felt compelled to give their banking clients the news they wanted, KPMG has given the Treasury the news it wanted – something to justify the imposition of a new tax.

I mean, how likely is it that KPMG would return a report saying the Super Profits Tax will be bad for the industry?

Not very likely considering KPMG is paid a fee by the government in return for providing the report. You couldn’t imagine KPMG getting asked back again if it proposed something against the government’s intentions.

But look, as with all modelling it can only produce a result based on the parameters it’s given. And just wait until you read what those parameters are. You’ll be flabbergasted…

Take this assumption made by KPMG in its report to the government:

“In the model, this implies a zero economic cost for the new RSPT, since it will simply be a transfer of a portion of the surplus (over and above the required return on capital) from these industries to the government sector.”

Got that? A “transfer of a portion of the surplus from these industries to the government sector.” That’s mindboggling in itself. We do like how they’ve used the word ’surplus’ rather than profit.

What chumps.

Anyway, it goes on:

“In KPMG Econtech’s MM900 model, the RSPT has an excess burden of zero. This outcome rests on the modelling assumption that the RSPT only taxes the economic rents earned from immobile factors, in this case mineral reserves. If only these rents are taxed, then the investment decisions of mining companies will not be distorted. Since the tax base in the RSPT will not shrink in response to the tax, activity in the mining industry will not be distorted, and there will be no economic costs associated with the RSPT in MM900.”

It sums up with:

“The incidence of the RSPT is also a result of the immobile nature of the natural resources on which it is levied. Since there is no change in the supply of mineral resources, their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

Phew! I don’t know about you, but I’m out of breath after that…

OK, now I’ll try to paraphrase that junk into plain English. In other words, what our friends at KPMG Econtech are saying is that – because the government is just creaming off profits then it won’t impact either the cost of the resource in the ground, nor will it put miners off from exploring because the tax will come from the profits.

Correct me if I’m wrong but I’d say that’s the gist of it.

It goes without saying that the “brains” behind KPMG Econtech are clearly professional academics or professional number crunchers or wet-behind-the-ears university graduates with no idea about the concept of risk versus return.

It appears to your editor that the fatal flaw in the KPMG Econtech modelling is that because the model doesn’t see the Super Profits Tax as a cost it assumes that the Super Profits Tax has “zero economic cost.”

What a ridiculous claim.

Think of it this way. Let’s say mining plant equipment company Caterpillar changed its terms for providing big trucks to the mining sector. Let’s say that instead of miners buying or leasing the equipment Caterpillar decided to take 5% of the mining company profits instead, and that this 5% would lead to an increase in the money paid by the miner to Caterpillar.

Now, under that circumstance, would you say that there was now a “zero economic cost” to the mining company for plant and equipment? Would you now say that the mining company was now getting its mining equipment for free because the “cost” was only coming from profits?

Anyone claiming that would be mad.

To claim that something isn’t a cost because it comes from after-profits rather than before-profits is accounting chicanery of the highest order.

It’s no wonder the Irish banking system went to the wall, if this is the kind of auditing those banks were subjected to – “Yeah, don’t worry about those collateralised debt obligations, our modelling says they’re fine!”

As I’ve pointed out before, the bureaucracy and now clearly the auditors, have no concept of profits. And they’ve no concept of the difference a lower anticipated profit has on the willingness of an investor to invest.

I mean, if we tipped a stock in Australian Small-Cap Investigator that was super-high risk but which only offered the prospect of a 9% return would you back it? Probably not. But if it offered a high risk potential of a 286% return then maybe you would.

Then again, maybe you wouldn’t. Maybe you’d want an even bigger potential return.

The point is, the risk to Australian mining companies hasn’t changed one jot. But what has changed is the potential return. In other words, same risk but lower return. Seriously, we’re talking Investing 101 here. It’s not some abstract concept we’re trying to get to the bottom of.

You don’t need a Certificate IV in accounting from Chisholm TAFE to work out that if the potential return is lower, investors will reconsider making the investment.

But it doesn’t end there, KPMG makes another terrible blunder. And it’s this. It assumes that because the minerals are immobile it will have no change on the supply. What?! How does that work. Ah yes, that’s right, “their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

I’ll be straight up with you, this is perhaps the most ludicrous statement we’ve ever seen. It’s claiming that because the Super Profits Tax is being taken out of profits then it will not impact the investment decisions of miners.

Not only that, but according to the pen-pushers and tax-stealers in the Treasury, increasing taxes will not only be a zero cost to the mining industry, but it will actually increase growth… Hahahahahahahaha, stop it guys, seriously.

The evidence? The chart faithfully reproduced by the AFR which shows the CASUAL relationship between the introduction of the petroleum resource rent tax and the increase in oil exports.

For Treasury to claim that the introduction of a tax will actually increase production is absurd. But if it is true then maybe the Treasury should reconsider the tax increase on cigarettes. After all, going by their logic increasing the taxes will increase the supply of cigarettes and most likely increase the number of cigarettes smoked!

Nuff said. Clowns.

Finally there’s the statements from Tweedle-Battellino and Tweedle-Lowe. If you thought the comments from KPMG Econtech and Ken Henry were ridiculous then the comments from the RBA drones really do take the cake.

Their statements that:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

And:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Have you ever come across anything so weird as for a bureaucrat to wish that Australia’s most productive industry suffers the collapse of a big mining project. Is he serious?

We’re talking about something that provides a genuine benefit to the economy. We’re not talking about the Ponzi banks and housing sector that are a drag on the economy. We’re talking about an industry that is the sole reason for the Australian economy not collapsing in 2009.

But then again, these are the same guys who are keen to argue that the property market isn’t in a bubble.

Ah, but now the penny’s dropped. Actually their thinking on the resources sector and the housing market is exactly the same now we think about it.

In both cases they want to see “a gradual and sustained increase in investment over time for the economy to benefit.”

In other words, just as the RBA is keen to keep house prices sky high in order to try to avoid a bursting of the property bubble, it is equally keen to see commodity exploration fall so that prices remain high.

It goes to show you how much the Australian economy relies on the resources sector for economic growth. The obvious fear is that if too many miners extract too much of the natural resources it could push commodity prices lower and therefore have a negative impact on the value Australian exports.

Or, to put it another way, a potential commodity price crash.

You can hardly blame them for being worried. After all, the RBA and the bureaucracy have succeeded in driving all other productive industries offshore or into oblivion.

It figures it can manipulate the resources bubble by increasing taxes and therefore putting a brake on supply.

Talk about playing with fire.

The trouble is that rather than protecting the resources industry, these tax-grabbing measures are more likely to destroy the industry than save it. While it’s true that these resources aren’t movable it’s also true that they are available elsewhere.

Look, I’m not saying that the entire resources sector will collapse, but what I am saying is that in many cases – as we’ve seen already – the Super Profits Tax will be the difference between whether a company explores here or whether it targets projects in countries with a less burdensome taxation regime.

But as usual, what it all really comes down to is the fact that a handful of power-hungry bureaucrats believe that they can manipulate an economy to suit their purpose. That by pushing and pulling levers they can get the economy to move exactly as they planned.

Soon enough they’ll work out it’s not possible. In the short term these things can give the impression of working, but in the long term all it does is increase the distortions in an economy and create a huge mess with massive unexpected (for them) consequences.

It’s proof that bureaucrats and number-crunchers don’t have a clue about how an economy functions.

Cheers,
Kris.

Think about it, would you go to all the trouble and expense of building a copper mine, if it looked like the price of copper was going to fall for the foreseeable? Although as an investor you’re not personally building the mine, you’ve still got to take the same approach.

Copper was around US$7,000/tonne when I looked for good copper companies in January this year. It had already more than doubled in a year, and no one could believe that the price would go up further from there.

There were a few tell-tale signs that copper had further to go. And recently the price has hit US$8000 a tonne.

First up, the increase in copper stockpiles around the world was worrying investors. But when I compared it to the amount of copper the world gets through each year, the stockpiles measured up as pretty small. In fact, the stockpiles would only have lasted about a month.

And as it happens, in the last month global stockpiles have actually fallen by 3.4%. Instead of flooding the market and pushing the price down as many predicted, the price actually jumped 6.6%.

Another thing that got me fired up about copper is its good-old fashioned supply and demand dynamics. Like platinum, the copper industry has a hard time increasing production when the world asks for it.

You can get a measure of supply from the price that copper refiners charge. These guys take the miners’ product and turn it into useable copper. When the miners aren’t coming up with much, the refiners have to drop their prices to drum up business. They are now charging almost half what they charged last year, which tells you there’s not much copper coming through.

The latest statistics on copper supply is that it actually fell by 1.3% between January 2009 and January 2010. At the same time, demand increased by 8.8%. As long as supply keeps falling, and demand keeps rising, the copper price should stay nice and buoyant.

So where’s the demand coming from?

Not surprisingly, China is part of the equation. It used 28% of the world’s copper last year. And it’s also expected to be the biggest engine of demand growth for the next five years. The data coming from China at the moment fits into this picture.

But it’s not just about China. Last year Europe took 25% of the world’s copper, and the USA about 14%. And now the latest Purchasing Managers Index (PMI) figures show that it looks like demand is growing here as well.

So, from where I’m sitting, the copper price is looking pretty stable and could easily head higher.

The copper company we tipped in the January issue of Diggers & Drillers is now up 36% in three months. That’s helping it to get a lot of attention. In the past two months a bunch of brokers have recommended it, and then last week, a multi-billionaire investor swooped in to snap up a significant stake in the company.

For a big private investor to buy in now suggests he has a good long-term view of the copper price, and of the company itself.

Incidentally, our other copper recommendation has gained 43% in six months, and I believe it’s set to do great things this year, but that’s another story.

Right now it’s an exciting time for the resources sector, and copper in particular. The chatter on the mining websites is hotting up with plenty of talk about how the big copper miners are keen to snap up the copper juniors to quickly increase their copper production.

As you can imagine, this tends to fuel speculation, sending prices higher still. How much higher can copper prices and copper stocks go? That’s the big question no one knows the answer to. But looking at the trend for the stocks we’ve tipped, my guess is there’s still more upside to this rally yet.

Regards,

Dr. Alex Cowie
Editor, Diggers & Drillers
for Money Morning Australia

Your editor is taking a long weekend. However, we’ve lined up a couple of guest essays to give you something to read while you’re tucking into your Easter eggs.

Tomorrow, BullionVault’s Adrian Ash will give you more info on China’s gold buying spree. And on Monday, Diggers & Drillers editor Alex Cowie will give you the lowdown on Australia’s second largest export commodity – coal.

In between, assistant editor Shae Smith will have the usual weekly round-up of events for you in Money Weekend on Saturday morning.

But until then, this…

If you want to get a good picture about how much money you can make as an investment banker, look no further than the latest press release from the Federal Reserve Bank of New York.

The press release states:

“The Federal Reserve Bank of New York today announced that it has expanded the information that it makes available to the public related to the Maiden Lane portfolios.”

So what? Well, the Maiden Lane portfolios are the quaint and innocuous sounding names given to the government owned holding of former Wall Street heavyweights Bear Stearns and American International Group (AIG).

For your pleasure, Maiden Lane holds USD$74.9 billion, Maiden Lane II USD$34.8 billion and Maiden Lane III USD$56 billion.

But funnily enough, that’s not even the full picture. Because as the Fed points out:

“The new information includes nearly all of the holdings of Maiden Lane LLC (ML)-with the exception of residential whole loans as that would violate individual borrowers’ privacy…”

In other words, it doesn’t contain all the crappy subprime mortgage loans that are rotting away on the balance sheet.

But it’s not the dollar number that amazes us so much – we expected that – rather it’s the number of ‘assets’ in the portfolios.

Each asset represents a deal that has been lovingly crafted and nurtured by a caring and responsible parent – or, investment banker.

Take this one from the Maiden Lane portfolio:

IVYL_06-1A A1 144A (cusip: 46601QAC2) – USD$102,286,000

Or this valuable asset from the Maiden Lane III portfolio:

ALTS_05-1A ALTB 144A (cusip: 02149RAC2) – USD$1,102,582,000

Beautiful aren’t they!

Unfortunately your editor doesn’t have access to the wildly expensive Bloomberg Professional service which would reveal exactly what these investment gems are. So we’re somewhat in the dark.

[Ed note: If you do use the Bloomberg Professional service, feel free to send a screen grab of the description page of these assets to moneymorning@moneymorning.com.au, we'd greatly appreciate it].

The first one we’ve got no idea what it could be. The second we’ll take a wild guess. It could be a coincidence, but we do recall the bank examiner to the Lehman Brothers collapse referring to ‘Alt-B’ residential mortgage backed securities.

Without going through the 2,000+ page report again, our addled brain tells us Alt-B mortgages were almost as risky as Alt-A loans, which themselves were only slightly less risky than Subprime loans.

But, as we say, it could be a coincidence. Whatever they are, USD$1.1 billion is a heck of a lot of money. And remember, that’s just one deal. And it’s also just the amount held by Maiden Lane III. Consider how much of this stuff is being held by the banks and funds that haven’t gone bust.

We haven’t counted all the individual ‘assets’ in these portfolios, but looking at the number of pages they run to, you’re looking at thousands of them. And as we say, these are just the ones revealed by these bust companies.

And each asset represents part of a deal crafted by the bankers to rip money from investors. Investors who for the most part have absolutely no idea they’ve bought any of this stuff.

It helps to give you an insight into how investment banks like Macquarie Group became known as the ‘millionaires factory.’

Quite frankly, it all backs up our ages-long skepticism towards any investment that’s ‘packaged’ for retail customers. It doesn’t matter whether it’s a packaged property investment, a packaged share investment or a packaged bond investment, I just don’t like them.

The trouble is, part of the reason these types of investment are so popular is due to compulsory retirement savings schemes both here and overseas.

When individuals don’t have direct personal control over their savings, it ends up in the hands of investment managers or advisers who prefer to take the easy route. And what could be easier than chucking millions of dollars at an investment banker who tells you that investment ‘ALTS_05-1A ALTB 144A’ is the best thing since Google went public.

Compulsory savings schemes are just like any other compulsory scheme. Because you’ve got no choice but to do it, you see it as an impost or a burden, and therefore you take less care and less interest in it.

If there was no compulsory savings then investment managers would have to try and attract your savings. And chances are you’d want to know exactly where that money was going.

If your monthly retirement contribution came out of your pocket rather than being paid for before it gets to your pocket, don’t you think you’d want to know where it’s going?

Can you imagine any investment manager saying this to you:

“Oh, I thought we’d buy you $10,000 worth of ALTS_05-1A ALTB 144A. It’s a lovely little investment. It’s got an exposure to over-leveraged, marginal home owners in Michigan, Alabama and Wisconsin. The clever thing is, we’ve managed to engineer the investment so that all these crappy borrowers with low credit scores are classified as a triple-A credit rating. It’s clever because it means I get to make the sale and earn a million bucks by making you think it’s low risk, but you still lose all your money when investors figure out how rubbish it is. Everyone’s a winner – except you! Sign here…”

Would you buy? Thought not.

Of course, when investments are pooled, you’ve got no idea, and very little say in the matter. When the individual has control, then it’s a different story.

Don’t get me wrong, individuals make investing mistakes too when they’re left in charge of their own money. People who fell in with Opes Prime and Storm Financial are a classic example.

But the point is, when individuals have control over their investments they should have a better understanding over where that money is invested.

And even the Storm and Opes Prime examples – as we understand it – are more of a case of investors being told what to do rather than the whole process being explained to them properly.

But the way we see it, much of the cause of the excesses in financial markets is due to financial engineers having too much access to investor’s cash, too much access to bank-created credit, and too much of an incentive to get create new products and investments for the sake of earning a fee rather than because it’s a good investment for the punters.

Our fear is things will only get worse if trade unions and property spruikers have their way and convince politicians that retirement money should be compulsorily invested in pointless infrastructure projects, residential mortgage backed securities or government backed annuities.

What’s the solution? Well, that’s something Dan Denning and I are working on in Australian Wealth Gameplan. But I’ll also fill you in with some ideas in the next few weeks in Money Morning.

Cheers,
Kris.

We liked the headline – “China playing with fire” – and we liked Kohler’s opening sentence:

“Chinese Premier Wen Jiabao is playing a dangerous game by upping the ante in the Cold War of words with the United States over exchange rates. And it’s a game in which Australia, and Eureka Report members, are more than interested spectators: we are on the field, in danger of being trampled by elephants blinded by rage.”

I’ll tell you why we liked it. Not because of the content of the article – which we don’t completely agree with – but rather the use of the term ‘Cold War’ to describe the stand-off between the US and China.

We liked it because it got us thinking. Are there more similarities between the Cold War and the ‘US and China War’ than we’ve dared think of?

We won’t carry the comparison too far, but let’s take a look…

There are many candidates who lay claim to having helped end the Cold War – Ronald Reagan, Maggie Thatcher, the Pope – but one of the most convincing is that the Soviet Union was beaten economically rather than militarily.

The Soviet Union didn’t ‘lose’ the Cold War because it had fewer aircraft carriers, or less nuclear warheads to threaten the West with. And it didn’t necessarily ‘lose’ because it spent more than it could afford on its military growth.

It ‘lost’ the Cold War because it insisted on pursuing a centrally planned economy. A planned economy that cost more than it produced.

It doesn’t matter whether the Soviets were spending millions and billions of dollars on military hardware, or whether it was spending millions and billions of dollars on factories. The point is, it was trying to support production for products that nobody wanted.

It was spending all this money but had no sustainable source of income. Think about it, there was hardly a massive demand for Soviet industrial output. Russians and Ukrainians could barely afford to buy what the empire produced, and as for the West, well, the West wasn’t in any hurry to choose Trabants over Volkswagens.

So, it’s arguable to say that the Cold War was ultimately an economic war. In effect, the West succeeded in producing and spending the East out of existence.

Whether it was military or non-military spending it doesn’t matter. According to a report in the New York Times from 1994:

“Sadly for admirers of Ronald Reagan, the study concludes that the increased Soviet defense spending provoked by Mr. Reagan’s policies was not the straw that broke the back of the Evil Empire. The Afghan war and the Soviet response to Mr. Reagan’s Star Wars program caused only a relatively small rise in defense costs. And the defense effort throughout the period from 1960 to 1987 contributed only marginally to economic decline.”

The article is referring to a study by William Easterly of the World Bank and Stanley Fischer from the Massachusetts Institute of Technology.

We’ll have to take their word for it on the amount of defence spending as a proportion of the entire Soviet economy. But as I say, in reality what the Soviets spent money on doesn’t matter. The more crucial point is that aside from revenues from natural resources – oil and gas – the economy didn’t produce anything else of value.

The simple reason for that is a centrally planned economy by its very nature puts the entire decision process making in the hands of bureaucrats, leaving no room for entrepreneurial activity and no incentives for individuals to improve their lot.

And of course, no ability or incentive for businesses to make profits.

Therefore, the lack of access to capital from external sources invariably meant, well, the Soviets ran out of money.

The West, by contrast had heaps of capital and so could invest the capital productively. The result was the Soviets couldn’t keep up. As the West progressed further it made it even less likely that Western investors would have anything to do with the Eastern Bloc, and even harder for the central planners to compete with freer markets in the West.

So, where are we going with this? Surely we can’t compare the US with the former Soviet Union.

Well, yes and no.

Yes, in that to some degree the fate of the US economy is out of its hands. The US no longer has ultimate control over its future.

But ‘no’, in that the US isn’t likely to suffer from a carbon copy collapse of the Soviet Union. The US may collapse, but probably in a different way. As I mentioned, I don’t want to carry the comparison too far as there are more differences than similarities.

But here’s where it is worth looking at the comparison. We’re thinking about where the capital for investment is located. Right now, China is holding all the cards. It’s holding billions and trillions of dollars worth of assets – much of it US paper assets of course.

However, it is in effect money in the bank. Compare that to the US which is loaded up on the other side of the ledger – debt, debt and more debt. While it still has a workable economy, and while it still produces products and services in demand by the rest of the world, the fact remains that like the Soviets, the US is spending more than it earns. Of that there is no doubt.

But let’s get back to China. China, despite being a centrally planned economy, has at least grown it’s economy by producing lots of things that people want at a cheaper rate than anyone else.

Western businesses and consumers have bought all those things, largely on credit. And, in return for selling things to the West, the Chinese receive some goods, but mostly it receives a bunch of depreciating paper currency.

As far as the Chinese are concerned, as long as the West is still buying, and as long as the paper currency retains some value then both sides are happy with the deal.

The problem occurs when neither side likes the deal anymore? And that’s the stage we’re at right now.

The West doesn’t like it because they’re spending more money than they earn, and they don’t like it that the Chinese are competing ‘unfairly’ due to a lower currency. And the Chinese don’t like it because the West is just giving the Chinese paper money in exchange for manufactured goods.

They don’t like the fact that all the paper currency they’ve got isn’t worth what it used to be. And now they’re worried that the US government is going to make things worse.

What are China’s options? The simple answer is they’ve got to get rid of those dollars – dump them. Wherever they can – Australia, Argentina, Africa, back to America… anywhere, it doesn’t matter.

The problem for the West is, dumping currency isn’t like dumping rubbish at the tip. You dump some stinky old lounge suite at the local tip and no-one cares.

You dump $50 billion of cash on the market and, well, everyone’s paying attention. But here’s the real problem for the West.

If the Chinese just dumped all their US dollars and bought Yuan, that would naturally weaken the US dollar, strengthen the Yuan and potentially have a negative impact on China’s exports. That’s exactly what the West is saying the Chinese should do.

So right now, just dumping dollars isn’t an option. Instead the Chinese want to get something in return. After all, they’ll argue they’ve earned it.

In effect the Chinese are looking to exchange their soon-to-be-worthless US dollars for things it hopes will retain or rise in value. That could be oil, iron ore, copper, and even entire companies if national regulators will let them.

But once it’s got all that stuff, what are they going to do with it?

The answer seems clear – use it. Hence the billions of dollars spent on constructing skyscrapers, freeways, shopping malls and power stations. So what if there isn’t the demand to use it yet.

Perhaps the Chinese are just making an investment decision on which is of most value. Is it USD$100 billion in US bonds or fifty skyscrapers with no one to fill them? At the moment the skyscrapers seem to be winning out.

If you’ve got cash in the bank and you can see that measures are being taken to devalue that cash, then why not build those fifty skyscrapers now? In a year’s time they may only be able to build forty skyscrapers for the same cost.

When you’ve got trillions of dollars worth of US dollar investments, each extra dollar you get is of less value to you.

Over the last few years that’s exactly what the Chinese have done. They’ve saved and now they’re spending.

The argument all along has been that China is growing because it’s a great new industrialised nation. It’s building and making stuff for the West, plus it’s building and making stuff for its own people.

Perhaps it’s doing that. But maybe there’s a chance it’s just building stuff in order to get rid of all those US dollars.

Is that so far-fetched?

And maybe an added bonus for the Chinese is that this plan will end up sending the US broke. Not by doing something fancy with US treasury bills or with exchange rates, but rather spending as much of its stash of US dollars as it can in return for other assets.

Take the recent numbers from the International Energy Agency, China’s oil demand increased 28% compared with last year.

Reading that news we’re just left scratching our heads trying to figure out how it’s going to use all that oil. Surely global economic demand isn’t going to pick up that much.

Or maybe with all those savings in US dollars the Chinese figure that oil makes a better investment than cash. Or that it will use the oil to make and build stuff no one needs. Whatever it is they end up with, it’s got to be better than holding US paper currency or bonds.

But perhaps all this is just crazy talk. Who knows? Right now China has the upper hand. It’s a net saver, it produces products that are in demand, and it’s able to buy as many foreign assets as it wants.

Which all seems rather similar to when the US was building its economic empire.

In contrast, the US is a net borrower, it produces some products that are in demand, but it isn’t able to buy foreign assets without going further into debt.

While that may not be painting the same picture as the former Soviet Union, it’s certainly painting the picture of an economy in decline.

Trying to figure out what that will mean for investors is the hard part. Get it right and it means a big pay day for investors. Get it wrong and the downside is big.

Either way, our guess is that the next ten years of investing will be just as volatile as the last ten years. But that’s why we’ve got Alex Cowie, the editor of Diggers & Drillers checking out what’s happening around town.

Cheers.
Kris.

Platinum has the makings of being the commodity story of 2010. Right now, the stars are aligned for this super rare metal, and this year I expect it will even outperform gold and silver.

Over the last three months Platinum prices have already risen 15.8%. And that’s set to continue.

So why are investors worldwide getting so excited about platinum? Let me tell you.

First of all, the supply of platinum is really tight.

When the world asks for more of the stuff, the industry is stuck in first gear and just can’t increase the supply. For instance, it’s taken the industry thirty years to just double production.

This is partly because it’s so rare. For every trillion particles in the earth’s crust, just three parts of them are platinum. Last year the entire industry managed to squeeze out just six million ounces, which would fit in a box measuring two metres on each side!

Second, demand is rising fast.

The four main groups of users take everything the industry can provide already. With demand rising, a global platinum deficit is on the way.

Autocatalyst manufacturers are the most notorious users of platinum, but last year they used just over a quarter of the supply. Between them and other industrial users, such as computer hard disk manufacturers, they bought about half of global platinum supply last year.

If the global economy continues to recover, these two groups will need more platinum.

Funnily enough, the biggest users of platinum were jewellery manufacturers. They took up 42% of supply last year.

They mopped up what other industries didn’t need that year.

And now the world has got an increasing taste for platinum jewellery. The Chinese platinum market is in its early days but is taking off fast. This has the scope to be a huge destination for the world’s platinum.

But the most exciting source of platinum demand by a mile is the new kid on the block – the Exchange Traded Funds (ETFs).

Between 2006 and 2009 they have gone from zero, to ten per cent of the market. They buy the metal and hold it on behalf of investors. The Investors can then buy a portion of the platinum, like they were buying a share in a company. It’s an easy way to invest directly in the metal.

For example, Gold ETFs do this and have been a massive winner. The one on the New York Stock Exchange has now got the sixth largest gold holdings in the world.

And platinum ETFs are also growing rapidly. A new platinum ETF (ETFS Physical Platinum shares) listed on the New York Stock Exchange earlier this month.

Investors buy in for one reason – they expect future price rises. This new ETF has been given a whopping seven percent allocation of the world’s platinum supply.

This is game-changing news for two reasons.

Firstly there isn’t a spare seven percent to go around. It’s just not there.

Secondly the ETF puts a massive investor base in front of the platinum market which is basically miniscule. It’s just a tenth of the size of the gold market which in the big picture is also tiny.

So ETFs will mop up at least 17% of the market this year. If the new ETF is a success, it will grow and others may follow its footsteps.

Make no mistake; demand for platinum is on the rise.

So we have the makings of a perfect storm:

• Super-tight supply.
• Rising demand from multiple users.

This is exactly what I’m always searching and hoping to uncover for Diggers and Drillers readers: A commodity right in the centre of a perfect storm.

In mid-December, platinum was ticking all the boxes and then some. So, I tipped a stock that was well placed to reap the benefits. Already, Diggers & Drillers readers that acted on the tip are already enjoying fifty percent gains on their investment within a month.

From where I’m sitting, platinum looks like it is going to have a great ride well beyond the end of this year as well. Even before the new ETF burst onto the scene, there was already a forecast platinum shortage for the next few years. The ETF will only multiply this shortage.

And where there’s a shortage there’s a price rise.

Regards,

Alex Cowie
Editor, Diggers & Drillers

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 was boosted after the announcement of a lower than expected unemployment rate. Unemployment was down to 5.5%. The index closed up 29 points to finish at 4,898.00.

The Dow Jones Industrial Average had a shaky start based on disappointing December retail results. The market was expecting a 0.50 increase and instead the results showed a 0.3 decrease in spending. Thanks to the technology sector, the Dow managed to close up 0.28% and finish at 10,710.55. Read more here.

Overnight in the UK, the FTSE added 0.45% to close at 5,492.20 despite a weak retail sector. Mining companies, like Xstrata [FTSE: XTA] ended the day 4% higher which helped the index finish in the black.

The Nikkei posted its highest close in 15 months, ending the trading session at 10,907.68, up by 1.61%. Panasonic Corp [T: 6752] was up yesterday by 6.10%, based on hopes of a positive earnings season in the US. Find out what else drove the Nikkei here.

The price of spot gold in Australian dollars is trading at $1,225.87 while in US Dollars it is trading at $1,141.90. The price of silver in Aussie dollars is $20.05 and in US Dollars it is $18.67.

The Aussie dollar versus the US dollar is trading at USD$0.9316, and against the Japanese Yen JPY84.96

Crude Oil has continued its yo-yo like pattern. High stock levels and a sharp decrease in demand are the drivers behind the overnight decline. Crude Oil closed at USD$79.19

For the biggest movers on the market yesterday click here…

Lord Monckton’s essay is after your editor’s contribution to today’s newsletter.

But before I get on to today’s subject, a small bit of housekeeping. Quite rightly, several readers have written in questioning the authenticity of the draft treaty that we linked to yesterday.

After all, the link we had used was a link to a climate change skeptic website. Perhaps the document had been fabricated was the charge.

Well, that’s a fair point. So we thought it was only fair to link directly to the source – the United Nations Framework Convention on Climate Change.

In all honesty, once you know the name of the document – FCCC/AWGLCA/2009/INF.2 – it’s not that hard to find on the UNFCCC website.

So, for your pleasure, if you click here that will take you to the UNFCCC document library. Just scroll down to the bottom of the page and then click on the second document from the bottom.

You have a choice of Arabic, Chinese, English, French, Russian or Spanish. Click on the language of your choice and voila! you’ll be in possession of the draft treaty.

If that’s too hard just click here for the English version direct from the UNFCCC website.

But while we’ve been beavering away doing some home study on climate change and the Copenhagen Treaty, Diggers & Drillers editor Dr. Alex Cowie (or “DrAC” as he’s known here at the Moon Factory) has been doing some beavering of his own.

You see it’s all very well to rail against the encroachment of government and the continued and gradual loss of personal freedom, but what about the idea of protecting your wealth against the actions of government?

One way is to buy precious metals of course. But there’s another option too.

If the treaty is signed in Copenhagen in December then based on the contents of the draft treaty it will cost Western taxpayers – er, that’s you and me – billions of dollars each year.

Well, Diggers & Drillers editor Alex Cowie has put in the research. This is what he wrote to subscribers just last week:

“We are less than a month away from Copenhagen. But I can tell you already that there will be one big winner from the U.N. Climate Change Conference. In fact, whether the summit produces any real effective action to mitigating the effects of alleged man-made global warming, there is going to be one sure energy winner…”

Like all investments it’s not risk free, but it’s certainly worth checking out what Diggers & Drillers readers are getting into. You can click here for more details.

While “DrAC” is busily making money for Diggers & Drillers subscribers we thought we’d have another dig around on this whole climate change issue.

Look, as I’ve mentioned before I’m as far away from being an expert on this subject as you can possibly get.

But that doesn’t stop us from firing off a few pot shots. After all, the modus operandi of government and their scientific cronies is to try and make everything sound extremely complicated so that all we can do is trust [chuckle] what they say.

Anyway, some of the stuff we’ve read in the press over the last few days about so-called climate change has been laughable.

The first was the article in The Age over the weekend, “$10bn worth of coastal homes at risk” screamed the headline. The article was based on a report released by the federal government which says 247,600 individual buildings across Australia will be flooded when sea levels rise by 1.1 metres by 2100.

That’s the average in a forecast range of a 75cm to 190cm rise in sea levels.

What do they base that on? According to the article it’s based on “if greenhouse gas emissions continue at the present rate, coupled with a one-in-100-year storm.”

So let’s see how they’ve come to that figure. The report claims that between 1842 and 2002 the sea level around Australia rose by about 17 centimetres, or 1.2 millimetres per year.

Of course that long term average isn’t good enough to fit the theory of a catastrophic increase in sea levels. If you extrapolate that long term figure over the next ninety years then you’ve got a 10 centimetre rise in sea levels.

That’s not enough to flood a Brighton beach box let alone a coastal mansion.

But let’s look at that number in more detail. The report from the Department of Climate Change reckons sea levels will rise by 1.1 metres in the next ninety years. That means an increase of 12.2 centimetres per decade, or 1.2 centimetres per year.

In other words, this ‘research’ suggests the average annual rise in sea levels over the next ninety years will be ten times greater than the average for the previous 160 years.

But you only have to look at the Department of Climate Change website to see the politicians and the bureaucrats have got their blinkers on. They’ve set themselves on course to ’save the world’ from – as Lord Monckton would put it – a non-problem.

The Department of Climate Change has a “Science – Facts and Fiction” section on its website. It asks the following question of itself:

“Can the warming of the 20th century be explained by natural processes?”

Well at least they’re asking the question. Let’s see what their answer is…

“It is often claimed that the observed warming of the climate system results from natural climate processes rather than being human-induced. However there are no known natural factors that can explain the observed warming. The Intergovernmental Panel on Climate Change finds it is very likely that 20th century warming is due to the observed increase in anthropogenic [man-made] greenhouse gases.”

I’ve put in bold their conclusive unequivocal statement. As a non-scientist I can think of one possible natural factor. How about that great big yellow blob that mysteriously appears in the sky every day. We believe it’s called a “Sun.”

I don’t know whether the Sun is a possible cause, but it could be one reason right?

But you only have to go to one of the reports the Department of Climate Change references to see their own argument knocked for six. The Bureau of Meteorology’s (BoM), The Australian Baseline Sea Level Monitoring Project, Annual Sea Level Data Summary Report states:

“Variations in sea level and climate are inextricably linked, with both undergoing interrelated seasonal, interannual and interdecadal fluctuations. Fluctuations associated with natural phenomena such as the El Nino – Southern Oscillation can be large and cause significant social and economic impacts.”

That’s another possible “natural factors” that can explain the observed warming. So we’ve gone to absolutely none, according to the Department of Climate Change, to well, maybe two in the space of a few paragraphs here.

The same report kicks the Department of Climate Change in the face this time. But first I’ll give you the Department’s interpretation of the BoM’s research:

“Global mean sea level has risen about 20 centimetres since pre-industrial times (Figure 2.6), at an average rate of 1.7 millimetres per year during the 20th century. Since 1993, high-quality satellite observations of sea levels have enabled more accurate modelling of global and regional sea-level change. From 1993 to 2003, global sea level rose by about 3.1 millimetres per year, compared to 1.8 millimetres per year from 1961 to 2003. These rates of increase are an order of magnitude greater than the average rate of sea-level rise over the previous several thousand years.”

Is that enough to scare you? An average of 3.1 millimetres per year between 1993 to 2003. Quick, we need to do something before it’s too late. But hold on, let’s see what the Bureau of Meteorology actually had to say.

For a start the BoM says:

“A useful datum to distinguish abnormally high sea levels is the Highest Astronomical Tide (HAT), the highest level that can be predicted to occur under any combination of astronomical conditions. Likewise the Lowest Astronomical Tide (LAT) is the lowest level that can be predicted under any combination of astronomical conditions. To properly determine HAT and LAT tidal predictions must span at least 18.6 years, which is the period of a full rotation of the moon’s orbital plane about the ecliptic.”

In other words, using a ten year timeframe is not scientifically valid as it doesn’t take into account the full 18.6 year orbit of the moon. And every fifth grader knows that the moon influences the tides – by the way, there’s another natural factor!

But look at the quote above from the Department again. It states, that since pre-industrial times the global mean sea level has risen at “an average rate of 1.7 millimetres per year during the 20th century.“

It then says that between 1961 to 2003 the rate was “1.8 millimetres per year.”

But shock horror, between 1993 to 2003 (too short a period to measure remember) it was “3.1 millimetres per year.”

That surely proves the man-made effect and that it has increased rapidly during the last sixteen years, right? Only, there’s one small sentence the Department didn’t include in their summary of the BoM’s report. It’s this, and it relates to the increase between 1993 and 2003:

“Studies have shown that comparably large rates of average sea level rise have been observed in previous decades.”

In other words, far from this being a unique phenomena, BoM has “observed” similar large increases in previous decades. Why would the Department not include this in its report?

And it doesn’t quite fit in with the Department’s artistic licence when they claim, “These rates of increase are an order of magnitude greater than the average rate of sea-level rise over the previous several thousand years.”

That’s just not true as BoM says they’ve seen these increases observed in previous decades.

And there’s something else it doesn’t include either. And that’s the margin of error. According to the BoM, the margin of error “over the last century” and from “1961 to 2003″ is plus or minus 0.5mm per year.

So, the difference between the 20th century average of 1.7 millimetres per year and the 1961 to 2003 average of 1.8 millimetres per year is statistically neutral.

The whole ’science’ or the interpretation of the science behind climate change is getting ropier and smellier the more we look.

Look, I’m not saying there is or isn’t climate change. And I’m not saying it is or isn’t man-made. But what I am saying is that even a financial newsletter writer who spends 90% of their day researching small cap stocks and income stocks has been able to poke massive holes in the supposed climate change research.

We just wonder why the real journalists in the mainstream media, and politicians with their thousands of dollars a year in research allowances haven’t been willing or able to do the same thing.

The arguments used by the politicians about climate change are the same arguments they used about the financial meltdown – something had to be done. Their argument was that the consequences of doing nothing were too bad to even contemplate.

It led to the revival of Keynesian economics.

Well, now we’ve got Keynesian Environmentalism – something must be done about climate change. You don’t even want to think about the consequences.

We know for a fact that the Keynesian approach to economics is a sham. And based on what we’ve seen so far the “Keynesian” approach to the environment is an even bigger sham.

To be honest, we thought uncovering the arguments behind climate change was going to be hard. But when we come across such obvious schoolboy errors and outright deception as that provided by the Department of Climate Change, it isn’t that hard at all.

We’ll keep digging, but until then read on for Lord Christopher Monckton of Brenchley’s take on what’s about to happen in Copenhagen…

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 ended at 4,729.40 down 25 points. Despite the positive start yesterday, many traders backed away preferring to take profits. However, the ASX has opened up 27 points this morning. Keep an eye for how the market reacts when Westpac and the Melbourne Institution release their Indexes of Economy for September.

On Wall Street the Dow Jones Industrial Average finished the day up again, although only by 30 points, closing to 10,437.42. An increase in commodity prices helped both material and energy companies end in positive territory. Read more about the US market here.

In the UK the FTSE100 reached at a 14-month high overnight, but ended the trading day lower by 36 points to 5,345.93.

The Nikkei dropped overnight by 61 points to 9,729.93

The price of gold in Australian dollars is trading at $1,228.48, while in US Dollars it is trading at $1,143.57

And Sexy Silver has increased just under USD$2 since 1st November 2009. Have a look at the chart below:

As of this morning, price of silver in Aussie dollars is $19.88 and in US Dollars it is $18.51.

The Aussie dollar versus the US dollar is trading at USD$0.9301, and against the Japanese Yen JPY83.09

Crude oil gained slightly, closing at USD$79.14

For the biggest movers on the market yesterday click here…