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Kaiser Media Watch Blog - August 24, 2015 to August 31, 2015
Kaiser Media Watch Blog enables John Kaiser to share online content from other media he deems interesting or relevant to Kaiser Research Online audiences. He collects links to such content and writes a brief explanation. The KMW Blog gets updated during the evening KRO update. After a week or so the current KMW Blog gets archived and a new one is started. Tweets are sent with a link to the item in the KMW Blog when it is of particular interest.
The KMW Blog was started in late August on an experimental basis. Going forward John will post links with comments on a daily basis when he is not away at a conference or site visit. The published date refers to the date of the external content, while the posted date reflects the Kaiser comment's date. Most of the KMW Blog posts are currently topical and intended to capture the current media spin so that over time we can track the story shifts. Links to older material of independent relevance will be added. The posts will include links to KRO material restricted to KRO members, such as a KRO Search Engine query which to use one needs to be logged on as an active KRO member. Some of those search queries will be timeless; others will be time sensitive, particularly when they include any of the technical parameters.
This long article from the New York Times details the history of corruption behind the emergence of a hazardous chemicals warehouse in Tianjin run by Rui Hai International Logistics which became known as the go-to company for getting things done efficiently. On August 11 disaster struck with an explosion that ultimately led to the death of 150 people, the injury of 700 people, and anxiety about toxic fallout afflicting a district of one million residents. The details do not matter. The point of the article is that Tianjn and Rui Hai are emerging as potent symbols for why China's days as the world's lowest cost jurisdiction are numbered. Efforts at a coverup seem to have been unsuccessful. Among the violations is the storage of 700 tonnes of sodium cyanide intended for gold mines when a license existed for only 10 tonnes. But maybe Tiajin's Rui Hai facility was just a rogue that got unlucky? The article closes with the observation that in 2010 the Ministry of Environmental Protection "found that half of China's oil processing, coking, chemical and pharmaceutical plants were located within less than a mile of sites like schools and residential areas, in violation of regulations". The problem is widespread, part of China's Faustian bargain to concentrate productive capacity on its soil at the expense of "freedom busting" jurisdictions that not only have regulations but actually enforce them. Of course, if you asked the Freedom Festers you would probably get the explanation that China's problem is the existence of regulations and the way they lull citizens into a complacency unbefitting of a mouse whose entire short existence should be focused on avoiding a catastrophic demise. Get rid of the regulations and those people would avoid living near hazardous chemicals warehouses, except that there would not be any information about the nature of the stuff in those drums moving in and out of the Rui Hai warehouses. But perhaps there would emerge a market for muckraking journalists who expose the truth, individualists not compromised by working for an organization whose decisions control that employee's self-sustainability, who post on a blog that nobody pays for and thus nobody believes because the absence of a business model calls into question all online pontifications (wait for it, there is an argument why a reader of this blog would be wise to become a paying member of KRO). The reason there need to be regulations and trustworthy enforcement of them is that individuals simply do not have enough time to protect themselves against all the ways that countless other individuals are competing to engage in a one-sided economic transaction rather than a fully-disclosed fair transaction that is the basis for a flourishing market economy. Tianjin and Rui Hai is a problem for Beijing because its ugliness cannot be swept under the carpet. This problem is relevant to resource sector speculators because it signals that the next wave of growth will not be fueled by a global rush by capital to dump costs into a toilet called China (or perhaps a new one called India whose Ganges River is a renowned competitor with the Yangtze River for top toilet status), but rather by a surge to build productive capacity on the basis of "clean" rules in jurisdictions that have until recently languished because the cost of compliance with all those regulations could not compete with that great sucking sound of costs swirling down the toilet bowl into the stomachs and lungs of the Chinese people. The cost advantage of doing business in China is disappearing, and the shocking new story is that the driver of the global economy's next growth spurt will come from advanced economies such as the United States which the Freedom Festers have long dismissed as a hopeless self-crippler.
Philip Broughton of the Financial Times discusses the phenomenon of Tesla whose $28 billion market valuation is far ahead of current Tesla sales. In fact, it is half that of BMW which sells 35 times as many cars and is profitable. He argues that in buying Tesla stock one is not so much making a bet on future revenues and profits, but more so a bet on Tesla's potentially transformational role in the future of energy, cars and technology under the visionary leadership of Elon Musk. He does not say Tesla is destined to become another Amazon or Apple, but he does emphasize that Musk "thinking big" out loud is what attracts hedge fund managers and other speculators who to some degree own the stock simply so that down the road if it has become a glorious success they can say they were on board. I thought the article interesting because it reminds me of the current situation with scandium where global supply of 10-12 tonnes scandium oxide is worth only about $20-$50 million. It is used either in irrelevant stuff like sporting goods, or obscure classified military applications. Two companies, Scandium International Mining Corp and Clean TeQ Holdings Ltd, are conducting feasibility studies on production scales which together would boost global supply 10-20 fold to about 100 tonnes, potentially churning $40-$50 million annual cash flow for each company for decades. That could earn these two juniors market valuations in the $300-$500 million range, which would constitute 5-10 fold increases from current levels. The story has attracted market skepticism from investors who cannot understand that demand in the case of scandium is a function of supply that has been forever constrained because scandium does not easily concentrate to form mineable ore. They also do not understand the transformational impact a potentially unlimited supply of scandium oxide at a stable price, such as is currently the case for niobium, would have on demand for aluminum-scandium alloy materials. The Nyngan and Syerston deposits are large enough to each produce 200-300 tonnes of scandium oxide annually. So imagine future production capacity expansions to this level supporting $200-$400 million annual cash flow for each operation? What would that make each company worth? Back in 2010 when Tesla went public I suggested during a radio interview with a gold bug host that an electric car of Tesla's nature rather than the pitiful Volt represented the future of car transportation. Naturally the host scoffed at the idea, as well as my other idea that Molycorp, which had just gone public at $14 and sunk to $12, represented a major revival of non-Chinese rare earth supply. The whole idea of renewable energy and the electrification of the car industry subsequently took a hit when the Tea Party gained control of the American House of Representatives and pounded a stake into the heart of climate change policy. But something changed in 2013 after Obama managed to get re-elected. Tesla represents the re-awakening of optimism about a different, better future displacing the sorrowful moans and groans of the doom and gloomers, many of whom think a fist full of gold cures all ills. With scandium one can think big, much bigger than currently contemplated by either George Putnam or Robert Friedland through their initial operational plans. By-product producers cannot think big; they can only hope a big market evolves into which they can feed their by-product scandium. Gold bugs have a hard time understanding the scandium story because with gold, if you have a gold deposit, you develop it for optimal depletion. You build the company by finding other deposits, or using the cash flow or market cap resulting from your initial profitable mine to acquire other gold deposits, growing your company incrementally through M&A. What SCY and CLQ will be able to do is grow their companies by simply adding production capacity to their existing deposits which at the initial proposed production scales would produce for over a hundred years. These deposits in New South Wales appear to be uniquely enriched; a handful of juniors control them. They have the equivalent of an intellectual property protecting patent. Their product ties into enhancing energy efficiency, mainly as a transformational alloying agent for aluminum. Scandium piggybacks on the Tesla dream, but even better, for the Tesla dream could one day still evaporate, scandium piggybacks on Ford's more mundane and thus robust dream of the F-150 pickup truck. In the beginning the market will use textbook methods to value Nyngan and Syerston based on initial production scales, but somewhere along the way the market will telescope the capacity expansion potential into the current market valuation. That potential is a key reason a retired executive director of Bechtel Group, one of the world's biggest engineering and construction firms, personally invested CAD $1.9 million in Scandium International to purchase just under 10% of the company. Andy Greig also happens to have been the former head of Bechtel's global mine development unit. How long before the charts of Scandium International and Clean TeQ explode on the upside in the manner Tesla did in 2013?
Gillian Tett of the Financial Times offers a quick overview of the stampeding and herding effect of algorithmic trading that has contributed to the violent volatility of the past few weeks. The problem with computer driven high frequency trading, which apparently represents half of American exchange market activity, is that it operates with the help of rule based systems that take as their data feed the very arena in which it is active. The question, "what does it mean what I am seeing that I should do what about", takes place in a continuous spectrum and gets executed at blinding speeds that no human consciousness can handle. Furthermore, these algo programs are not just operating in a closed system where the trading activity is the only data that gets crunched and is vulnerable to circular feedback loops. They are also parsing all the story eruptions, trends and inflections available through digital media, computing their implications for market trends, and, trying to out-second-guess all the algo competition simultaneously doing the same thing. This is what is behind the Reflexivity Theory of George Soros. Human beings that seek to compete in this arena might as well just offer themselves up to fate which, oddly, is exactly what Chinese gamblers do in Macau casinos with "baccarat punto blanco, virtually the only card game played in commercial casinos that involves no skill or intelligence whatsoever" (FT July 19, 2015 - Gamblers on Chinese stocks abandon their fortune to fate). By the way, that article by Lawrence Osborne is a must read!
Shelly Kraft pushes me to explain why I am so pessimistic about the junior resource sector. Along with the standard explanation about the end of the super cycle for metals, the weak arguments for higher "real" gold prices that make marginal ounces in the ground profitable, and the dearth of discovery exploration, I focus on the structural changes in the financial sector that is choking the gateway of capital into junior corporate treasuries, and discouraging retail audiences from buying high risk, high reward securities.
During this interview by Vanessa Collette I express my view that China should have reported official gold holdings of 3,000 reflecting domestic production of about 2,000 tonnes since 2009 for which the Chinese central bank is supposed to be the official buyer. Instead, the 1,054 tonnes last reported in 2009 increased by only 631 tonnes, which raises the question of where the rest of the domestic production ended up, especially in view that China is perceived as a net gold importer in recent years. Aside from having resold it to Chinese citizens, I speculate that perhaps the domestically produced gold has been shunted into state-owned enterprises whose holdings do not count as part of official reserves. I further suggest that the truth of Chinese disclosures is always subordinated to a self-serving agenda, which means it is hardly in China's interest to support the gold bug narrative. I also offer the view that Chinese gold production is likely to decline if the environmental awakening in China gains traction. We also chat about scandium, which I point out is the perfect metals bear market story that is controlled by two juniors, Scandium International Mining Corp (a KRO Absolute Spec Value Buy recommendation), and Robert Friedland's CleanTeQ Holdings (CLQ-ASX). Vanessa also asked why we are not seeing more M&A activity in the junior space during this capitulation washout, to which I respond that the juniors are already about as low as they can go without disappearing entirely, and that the capitulation is happening at the level of producers who are somewhat distracted by the problem of their existing mines being marginalized by deflating metal prices.
Now that the world's biggest asset manager has bought a "robo-adviser", as reported by the New York Times, the writing on the wall should be very clear to financial institutions that style themselves as "asset-gatherers". The humans who work for such firms should especially pay attention, because the 2 and 20 compensation structure is history. In "robo-advising" the human interface disappears entirely. The client opens an account and completes the online questionaire whose underlying algorithm computes a text-book risk profile with an associated portfolio structure. The "robo-adviser" firm then automatically stuffs the various risk categories with structured products from a pre-approved list, and monitors the portfolio balance on an ongoing basis, tweaking the positions in the different risk categories to keep them in harmony with the ideal portfolio balance for the profile. The problem for the financial sector is that without the human interface, the time and physical cost of providing this service collapses, promising a future of "managed" accounts that get charged an annual portfolio value fee as low as 0.1%. That is good for the consumer who wants a low risk, low reward portfolio as cheaply as possible, but it is bad for individuals who hope to make a career as a financial advisor. It is also good for the resource juniors, which are threatened with extinction by the Client Relationship Model developed by the self-styled Canadian regulator IIROC and their establishment banking overlords. The CRM turns the financial advisor into a "suitability manager" by creating a litigation risk whenever a position turns bad for a client which in retrospect can be deemed "unsuitable" for the client based on his or her risk profile. The problem with individual securities is that even the supposedly best company can blow up tomorrow. The way around this catastrophe risk is to create structured products such as an index fund or an exchange traded fund which the financial institutions love to invent because they come loaded with fees. Unfortunately, when it comes to resource juniors, ETF's are simply not possible because the companies are small, illiquid and far too plentiful. So the current trend to fee based asset management, backed by the CRM cudgel, is neutralizing all accounts with a financial advisor as a receptacle for individual stocks. This is killing interest in the resource juniors because the only accounts that are allowed to buy individual stocks are 100% responsibility accounts, either at a discount broker where the client never interfaces with a human and enters orders online, or with a broker where one has filled out paperwork declaring oneself an absolute moron on a suicide march to financial oblivion and which broker has one function, namely to do as told. The rise of the "robo-advisers" is good for the resource juniors because it puts all but the wealthiest clients on track to what is in effect a 100% responsibility account masquerading as a 0% responsibility account. For now the majority of investors are stuck in "human-advised" accounts where buying a resource junior has become taboo. But as these get gradually converted into low cost "robo-advised" accounts that return Wall Street's random walk, clients will be one step away from opening a second "gambling" account that is clearly 100% responsibility and thus can own individual stocks, including resource juniors.
Most of the media discussion has involved hand-wringing about the implosion China's economy is undergoing and the implications for the rest of the global economy. Nicohlas R. Lardy, author of Markets over Mao: The Rise of Private Business in China in which he argues that state owned enterprises are not the overwhelmingly dominant force in China's GDP everybody assumes, argues in a New York Times opinion that the tumult in China is just a correction, not a collapse, and that the shift toward a consumption based economy has been underway for several years. Rather than call into question Chinese statistics about 7% GDP growth by pointing out the decline in electric power and cement output growth as evidence of industrial decline, we should recognize that the shift of GDP away from industrial investment will result in lower demand for energy and raw materials. He thus belongs in the camp into which I am leaning that the world is simply adapting to the new reality of a slower growing China that is not going to fuel a return of super-cycle commodity dynamics any time soon.
In a surprise development Russia has moved into first place as the world's biggest diamond producer by value and volume, displacing Botswana. Canada held its number three position. Rapaport also reported on August 25, 2015 that De Beers had cut the prices of its August sight in Botswana by 10%. This follows talk earlier this summer that sightholders had declined a significant part of the parcels offered by De Beers. Part of the explanation has been a drop in demand due to the Chinese crackdown on corruption which has discouraged conspicuous consumption. This has hit demand for luxury goods, now expected to take a bigger hit in the wake of China's stock market bubble collapse. But another explanation offered from non-quotable sources is that rough diamond dealers are suffering capital problems due to a sudden unwillingness of European banks to get caught up in investigations into money laundering and tax evasion. Disappearing margins between polished and rough diamond prices coupled with difficulties in obtaining loans has crimped dealer demand for rough diamonds. Although we do not see diamond price trends as we do with metals, the sense is that rough diamond prices are softening. That is mostly of concern to diamond producers, but the resulting pall has also settled onto juniors with advanced diamond projects such as Peregrine Diamonds, the top SVH diamond pick.
Keith Bradsher of the New York Times makes it official: the world can no longer rely on China for its growth strategies. This has been obvious to commodity producers for the past year, with iron enjoying iconic status as the example of excessive supply mobilization just in time for softening demand. It has been apparent for some time that China's reliance on investment for its GDP was unsustainable. The $600 billion China mobilized for infrastructure development in 2009 created a V-shaped commodity recovery that post-poned the current supply glut for several years. China is trying to transition to a more consumption based economy, which could still fuel 5% plus GDP growth, though it will constitute less intensive demand for metals. Emerging market economies that rely on raw material exports to China such as Brazil and Russia are already suffering from declining growth. But even bigger trouble looms for those countries which have relied on Chinese investment to develop their output capacity. The World According to China Interactive Graphic shows which countries have the greatest dependency; it could double as a roadmap for geopolitically based security of supply risks. The alarm Bradsher is sounding that is fairly new is the much broader assumption by the rest of the world that greater goods and services consumption would expand Chinese demand for consumer related goods. Lowered expectations in that regard will hit exporters such as Germany especially hard. The insert Why China is Rattling the World reveals the extent that developed economies rely on trade with China. It also has some good graphics for the Shanghai Composite and different estimates of Chinese GDP growth during the past decade. Articles like this are part of a narratological shift back to America as the center of the global economy. The United States chose after the 2008 Crash to eshew fiscal stimulus in the form of infrastructure renewal in favor of Tea Party influenced austerity policies. The gold bug narrative has been colored by an end-times angst whch encouraged pushing infrastructure investment into a future where it might not turn out to be necessary. But with the narrative turning towards America as the "last man standing" being dragged down by a floundering China, the political will is evolving to embark on the rebuilding of America. From abroad the Republican primary competition may look like a end-times farce, but from within the United States Donald Trump is understood as a Wrecking Ball who is single-handedly saving the Republican Party from self-immolation by taking every bad Tea Party idea and ratcheting it up to a ridiculous extreme that forces the other presidential contenders to either take themselves out of the running for the voting public by trying to trump the Trump with a more outlandish declaration, or wiping out their primary victory chances by alienating Tea Party extremists with sensible positions. After Wrecking Ball Trump has demolished all the contenders who would be bad for America, he will launch himself as an independent in order to fragment the Republican vote. The United States will get another four years of a Democratic president while the Republican Party claws its way back from the black hole into which Trump is guiding all the bad ideas onto which it has latched. Democrats are now starting to watch Fox News for the spectacle of Fox Trojans coping with the emanations of the Trump Horse they allowed to wheel itself into their sanctuary.
A Bloomberg article laments the death of a lucrative carry trade whose longevity was recently pumped by BlackRock. A carry trade consists of borrowing in a currency where low interest rates prevail and using the proceeds to buy another currency with a stable exchange rate but whose investments offer higher yields. The Chinese peg of its RMB to the USD offered such an opportunity, but the sudden devaluation on August 11 and ensuing bear raid on the RMB has wrecked that carry trade. Part of the market chaos is due to investors trying to unwind their carry trades to avoid losses. The 1994 devaluation of the Mexican peso and the ensuing Orange County bankruptcy is a classic example. Another was the gold carry trade in 1998-2001 where borrowing gold from the central banks and selling it short in amounts greater than production bankrupted some gold producers when the gold downtrend reversed. I suspect that some of the carnage in the metals market was due to metals being part of carry trades that are falling apart. The prevailing view is that a supply glut colliding with a demand sag is behind the weakness in metals, which has negative implications for the next couple years. But it may be the case that the "hard assets" fad where metals were held as a hedge against inflation or "fiat currency debasement", or pledged as collateral for loans to support speculation in the Chinese stock market bubble, are simply shifting from owners who held them as a "financial asset" to end-users who do not need all that metal right away. Once the metal stockpiles have been re-allocated to owners who intend to use them, the weak metal prices will turn around. The Bloomberg article is interesting because it focuses on the RMB carry trade,
