May 22, 2007 by Addison Wiggin & Ian Mathias

• China puts their chips in play… the lead stone in an avalanche?
• Dollar sleeps: This crisis started on Volcker’s watch… it will end on yours
• Is cheap gas a birthright? The knuckleheads in Iran seem to think so
• USDA releases some much-needed good news… but why are farmers feeding their livestock french fries and chocolate?
• Inflation-adjust this, buddy…
• Rise of the “amero”? The U.S. = military, Canada = resources, and Mexico = cheap labor
• After years of sitting atop a mountain of low-yield U.S. Treasury securities, the Chinese have finally decided to put some skin in the game.

After years of sitting atop a mountain of low-yield U.S. Treasury securities, the Chinese have finally decided to put some skin in the game. They bought nearly 10% of the giant private equity group Blackstone yesterday.

The Chinese government agreed to hold its $3 billion stake for at least four years. And at their own insistence, they will not exercise voting rights or seek influence over the company.

“This purchase has no precedent,” commented Capital & Crisis’Chris Mayer. “We are in uncharted waters.” But you can expect to see more purchases like this… and soon. “Every avalanche begins with a single stone,” Chris reminded us. “Expect to see China buy more bits and pieces of the U.S. stock market over the coming months and years.”

The Shanghai index rocketed a full 1% higher yesterday. The freakish index has now grown 52% in 2007 alone. The Chinese central bank also announced another interest rate increase yesterday -- the second of the fastest back-to-back hikes in 17 years.

 The dollar slept on the news. But the Chinese foray into the capital markets may awaken speculators very soon.  

"How long can it last, and what's the endgame?” asked Paul Volcker during a Grant’s conference we attended last year. He was asking questions about the dollar that we’ve had for some time here at The 5.

“There seems to be a lot of unknowns that are facing this de facto world currency called the U.S. dollar and its increasing importance in the world,” said Volcker “Does that increase in importance have some natural limit?"
 
He offered no prediction on the timing of when it would all unravel. But later, in a private conversation we had with him, he suggested that the potential for a dollar crisis had built up on his watch and would likely end on ours…

This potential crisis became so important to us that we wrote a book about it called Demise of the Dollar.  Learn more about it here. 

Today, the numb nuts in Iran begin their gas-rationing program. Apparently, even the world’s most oil-soaked nations can’t control the price of fuel.

“The Iranian government has held the price of gasoline at such low levels for so long that most Iranians view ‘cheap gas’ as a birthright,” commented our geopolitical guru Dan Amoss. “The gasoline shortage in Iran will worsen as long as ridiculously low prices remain the norm… and the clerical regime is probably going to err on the side of keeping prices low in order to prevent social unrest.”

Economics 101 tells us that price controls always lead to shortages. They led to shortages in the 1970s in the U.S. and they will lead to future shortages in Iran. “No free market entrepreneur in his right mind,” comments Dan, “would ever construct a capital-intensive refinery with crude input prices of $60 per barrel and refined product prices of $16.80 per barrel (or 40 cents per gallon).”

The USDA reported a few positive farming stats after yesterday’s market close:

• 92% of the corn crop was planted and 78% of it was rated good to excellent.
• 59% of the soybean crop was planted, up from 32% a week ago.
• 60% of the cotton crop was planted, up from 46% a week ago.
• 95% of the spring wheat crop was planted and 81% of it was rated good to excellent.
• 59% of the winter wheat crop was rated good to excellent, up from 58% a week ago.

Given the spring they’ve been having, this rare good news is surely a relief to farmers, especially those with ethanol fever.

“Feedlot operators and farmers are feeding livestock anything they can… besides corn,” Kevin Kerr told The 5 early this morning. Kevin has embarked on his second Midwest farm tour, and he is shocked to see farmers favoring people food over traditional corn feed.

“These cows are eating leftover trail mix from factory floors, old chicken guts from the local poultry processing plant, leftover chocolate scrapings from Hershey’s and burned cookies from Keebler… anything but corn and the legendary DGSS (an ethanol byproduct that can be fed to livestock). Farmers have been telling me that DGSS lacks the sugar and nutrients needed to fatten up hogs and cattle… not to mention… animals don't seem to like the taste.”

“Garbage in, garbage out, as they say,” concluded Kevin. Here at The 5, we’re anxious to see how this will affect livestock prices in 2007 and 2008. “If your steak at Ruth Chris tastes like burnt cookies, you’ll know why.”

On Monday, our colleagues at EverBank announced big news. They’ve reached an agreement that will increase assets to approximately $7 billion, deposits to approximately $6 billion and the customer base to over 550,000. How so? They plan to acquire NetBank's direct banking and small business financing divisions, as well as their mortgage servicing portfolio.  

“WOW!” writes our buddy Chuck at the EverBank trading desk. “Just think about that for a minute... We almost double our assets, and I get 150,000 potential new readers, and maybe... just maybe they'll see that diversifying their investment portfolios is a very important thing to do!”

As you may have seen, Chuck and company recently created an FDIC-backed World Energy CD aimed at mitigating and even making money from the global juggernaut of rising energy prices. We’ve secured an exclusive offer of this CD for Agora Financial readers. If you call or e-mail now, you can lock in the World Energy CD before your local utility hikes rates again. But this exclusive offer ends next week… so get to it.

(For details on the Energy CD, including interest rates and potential upside, e-mail worldmarkets@everbank.com or call 800-926-4922. Please tell them you learned about the Energy CD in The 5-Min. Forecast.)

 “George Will and the tools/mouthpieces of the present administration,” writes a reader, “hype that stuff about how gas just now got to its ‘highest price since 1981,’ and many like you seem to be accepting the smoke and mirrors.

“Did they ‘adjust for inflation’ for those who don't need food and energy in that estimate too? If I use another comparison, such as how much gas can a minimum wage earner buy today compared with 1981, I don't think gas was nearly as expensive for those whose lives are actually affected by the price of gas.
 
“In 1981, a worker at minimum wage could buy about 2.5 gallons of gas by working for an hour, whereas today (or at least yesterday) he could buy only 1.6 gallons. I'm sure thankful that the government doesn't think we need heat, housing, food or fuel when they talk about inflation or about the minimum wage.
 
“Of course, congressional pay only increased from $60,000 to $162,000 (excluding bribes, kickbacks and other perks) over this same time. If you divide by their hours worked (probably more than 1,500 hours then and less than1,200 hours in 2006), their hourly rate went from $40 to $135. You have to believe there is significant influence by the French on Congress when it comes to their work and pay -- they even take off the month of August!”

For the record, we did our own inflation adjustments.

“As for the loonie,” writes another reader, this one from Alaska, “if we do not end up with something like the ‘amero,’ I believe it will trade par or better than the dollar.

“Just the increase in the exchange rate has made me a bundle. Throw in the fact that I have been in the game for many a year and sit on GG under a buck, SLW at under $3 and a lot of others at prices that would bring tears to a grown man’s eyes and you can see why I cheer the loonie on.

“I am about to collect a few gold nuggets from bets on where the loonie was going and I feel confident I will win a few more on this one. A lot of miners, like most other folks, make wagers on what they hope will happen. This is one I hope I lose.

“Unfortunately, I believe we will see the day when all three currencies disappear to be replaced with one. The U.S. = military, Canada = resources and Mexico = cheap labor. The under-the-mattress crowd had better pay attention to what happened in Europe.

“And yes, I am aware that many Americans and Canadians are against this, to which I would simply say ‘wake up.’ Since when has Washington or Ottawa given a shit what the people think? The spin doctors will play it like it is the best thing since mom’s apple pie and Joe Six-pack will cheer it on.

“As long as they have their government handouts, beer and TV, the schmucks are happy.”

Hey… you said it, not me.

Best regards,
Addison Wiggin

P.S. If history is any guide, the diminishing status of the dollar as the world reserve currency would likely be accompanied by violence. It took two world wars, for example, before the dollar surpassed the pound sterling on the world stage. For one possible friction point, check out this report: 
 
The Coming US-Mexico Border Wars