Wednesday, November 19, 2008

How to Save The US Economy Part Two

The global credit crunch has brought virtually all economic activities to a grinding halt, except for one which is booming: Piracy from Somali. But even the pirates, despite of their lucrative and booming business, can not get a loan from CitiBank (C) to expand their fleets. I predict the pirate business will collapse as there will be no more ships to hijack: With BDI Shipping Index dropped to 666 on 12/04/08, cape size ships (100K+ tons) are leased for only $2,345 a day, a 99% drop from $234,000 a day just 5 months ago. Ships are now better off laid at harbors than to fight the pirates. Is BDI = 666 a sign of Armageddon for the world?

I think there is big hope in global economy and there is little hope in the US economy. I actually started to aggressively buy shares of Dry Ships (DRYS) near its recent lows, around about $4. Many ironic things happen for reasons. During the WW II, non-Christian China extended helps to the European Jews escaping from Hitler by letting them come to Shanghai without a visa, while Christian western nations kept their doors shut. Today, the communist China which Jim Rogers called "the best capitalist in the world", is coming to the rescue of the world's capitalism, by doing the right things. Today the man with a Muslin middle name could save America!

China's aggressive plan to boost spending and stimulate domestic demands will save and revitalize the global economy. Based on its huge population basis, China's per capital consumption of many basic things are still far below even global averages and hence have a lot of rooms for growth. With 1/5 of global population, China consumes 1/12 of the world's oil, owns 1/28th of the world's passenger cars, Read "China Eats the World" to get a better picture what Chinese demand means for the world. China's relentless economic growth amid global resources depletion is the fundamental basis for a long period of commodities bull, regardless any temporary set backs. As China turn its economy from one which is export oriented to one that's domestic consumption oriented, the demand on global commodities will be stronger, not weaker. There is a good reason that well over half of China's overseas investments are in the mining sectors.

But the Americans people will have to wake up and do right things to save the US economy. We either succeed, or we will be marginalized and become irrelevant as the rest of the world moves forward, leaving America behind. I voted for Obama as I hope he is humble enough to listen to humble people like me instead of special interests. He needs a lot of helps to get his job done. I am willing to do what I can to help him, but only if he listens. Obama is calling all Americans to contribute ideas. I know exactly how to save America from an economic collapse so I am hoping that my ideas can make it into his ears in some way.

My first help to Obama is helping him with his difficulty in picking a proper inauguration gift for his wife. Obviously Obama must have thought about a rhodium ring, but then backed off the idea. I think he was smart to have considered rhodium, and wise to give it up.

There is no better indicator of the health of global economy than the commodities sector. As I discussed, rhodium was the brightest star in the commodity boom, haven raised from $300 to $10000 per ounce. But rhodium was also hit hardest, having fallen to $700-ish recently. The rhodium price swing is just too much change even for Obama, and it surely will raise public eyebrows that you purchased the perceived most luxurious precious metal during hard times.

Obama should buy Michelle an Iridium Ring. Iridium, just like rhodium, is a PGM metal. The noble metal iridium is just as rare and precious as rhodium, but it is much humble than rhodium. Iridium price never experienced the glory and then the collapse of rhodium. Out of all noble metals, iridium is the noblest one: Its melting point is 500 degrees higher than platinum; It's the most corruption (corrosion) resistant metal in nature, and extremely hard. The character of iridium is so precious and unique it is a perfect expression of an eternal bond and commitment, a perfect fit for a gift to our next First Lady. Iridium is the second densest element in nature and the most dense one is Obamium (oops, Osmium). Some say the densest is Bushcronium, an element that like they say in Texas, is all neutron and no proton. Unlike rhodium's freefall from glory, iridium is a phoenix raised from ashes.

So President-elect Obama, be sure to buy a custom made iridium ring for the first lady as it is a perfect symbol in defining your presidency and your character, and a daily reminder to yourself that American people deserve an Obamium that's different from Bushcronium.

The root of America's economic problem is we create too little and spend too much. We live beyond our means, which is unsustainable. We created one debt bubble after another to pop up the system and continue reckless spending and accumulation of debt, only to make it worse. We must head directly to the problem of over-spending and under-producing. The budget must be balanced, but it can NOT be done by tax hike or spending cut. The solution must be found outside conventional thinking. We need some revolutional thinking to solve the problem.

  1. Stop throwing trillions of dollars at financial institutions. They are blackholes and anything thrown at them makes the blackholes grow bigger. Soon the blackholes will be big enough to swallow America in one swoop. Let them fail! What's good of banks if they are not lending money out? I can lend my money to my neighbor without a bank's help!

  2. Get rid of the Federal Reserve System; get rid of IRS; get rid of personal and business income tax. This gets rid of the need for people to file annual income tax return. If there is no income tax to pay, then there can not be any tax fraud or tax evasion.

  3. Tax consumptions, NOT incomes or profits. The government provides public services and protections so people can go about their lives. If you are consuming more goods and services, you are likely also using more government services so you need to pay more tax.

The third point is the most important point: Tax on consumptions, not on incomes or business profits. Is this unfair that billionaires like Warren Buffet who lives a modest life could end up paying little tax compare to his fortune? Not at all! If a billionaire spends his fortune on luxuries, he will surely pay the consumption tax for it. But if he re-invests his fortune to expand business and create more jobs and do all kind of good things to the economy, and at the end of day he donates the bulk of his fortune to charities that promote the well being of the society, why should he pay more tax beyond what he pays for his own personal consumption?

California's current budget woe is a good example why it's bad idea to tax on business and personal incomes. During bad economic times, when the government desperately needs to spend more money, the tax revenues dry up, as individuals lose jobs and businesses are not making profits, hence paying no tax. The government then has to tax the remaining profitable businesses even harder, driving them out of business as well, or driving them out of state. Likewise, on the national level, businesses are moving operations to overseas and bring away jobs with them. Rich people migrate to foreign countries and even denounce their US citizenship. Capitals are flowing out; cheap foreign goods are flowing in. The whole reason of the downfall of the country is the irrational tax and spending system.

President Obama's job No. 1 is to bring America's Most Famous Fugitive back home! Not the terrorist, but a true patriot and believer of free market capitalism, named Jim Rogers, he openly confessed to have sold almost all of his US assets and dollars, sold his house, sold all furniture: sofa, bed, tables and chairs, and moved to Singapore. He is a billionaire refugee as he sees no hope left for the country. Send Air Force One to bring him home! Offer him a good job and he might be helpful to salvage America. Likewise, use people like Peter Schiff and Karl Denninger. They have good ideas what's wrong and how to fix things.

Why Jim Rogers would call China the "Best Capitalist in the World" is quite striking. Thirty years ago China was a completely different world. In 1978, China was on the brink of catastrophic social, economic and political collapse, after ten years chaos of the Cultural Revolution destroyed the country's remaining economic infrastructures. To Americans today it may sounds like an ideal society: "bankruptcy" and "unemployment" were phrases never heard about as they simply did not exist in a socialist system. Are we going in the direction of socialism if we now bail out every one and no failure is allowed?

Deng Xiao-Ping changed China and the world forever. He visited America to learn how free market capitalism works and why is it successful. He adopted Dr. T.D. Lee's suggestion and started a series programs to send Chinese students to study in America, including the CUSPEA which I personally benefited from. More importantly, he started some experimental special economic zones to invite overseas investors to come and open businesses, promising full support of the government in all means possible, relaxed labor laws, prohibition of labor unions, and not a penny of the business profit shall be taxed. The only tax is a low, symbolic land usage tax. It was quite controversy at the time, because how could any communist allow a capitalist come and open a sweatshop to rip off local workers, and get off with the profits and not paying a penny? But it worked; capitals flowed in, first in trickle and eventually like flood. China's economy prospered. The rest is history.

Exactly thirty years later, President Obama needs to pay a return visit to China and learn how the Chinese succeeded in the economic reform and how America can benefit from it. Things can be turned around quickly; stop taxing any business profits, then capitals from all over the world will flood into America and open business here and create jobs at home. When Americans have good jobs and they don't need to pay income tax, they will have more money to spend and create more consumption tax for the government. Wouldn't it be wonderful?

In light of current economic crisis, I am hoping for the best and preparing for the worst. So my investment strategy reflects both possible outcomes. I am hoping that somehow my humble words can make its way to some one close to Obama, and somehow indeed he is persuaded to buy an iridium ring for the first lady, and some how the iridium metal will get him interested in the rest of the noble metal family, particularly palladium. Mr. Obama needs to know that America is blessed with a world unique palladium mine in Montana: Stillwater Mining (SWC), and that palladium enable cold fusion, a physics discovery which is being suppressed by the establishment science camps, but which could bring to the world virtually inexhaustible cheap new energy source. He needs to take cold fusion seriously, as it is the best solution to the looming global energy crisis and bring about long lasting global peace.

Short of a quick cold fusion break through, America needs to rely on its own natural resources. We have a tremendous amount of coal. But vehicles burn oil, not coal. There is a chemical process that turns coal into synthetic fuel; it needs cobalt, which is in the same family as rhodium and iridium! Iridium's little sister is rhodium; rhodium's little sister is cobalt. I hope any day Obama sees his iridium ring, he thinks about cobalt and how it can contribute to America's energy future. We need biofuel. But we first need lots of fertilizer to grow biofuel efficiently. We need platinum, palladium, rhodium in making chemical fertilizers. All these metals are critically important to a nation's survival and prosperity, both during peace time and during war times.

On the night that the auto bailout failed in the Congress, let's pray for America's tomorrow. Let's hope that Obama is truly a leader who can listen to the people and can bring about change in Washington as well as change in Wall Street. GM might only have days if not hours to live as market confidence in its survival has now been lost. Let's hope President Bush can do one last thing right before he goes home: Use executive power to bail out GM immediately. Meanwhile Obama should promise Bush that he will be pardoned if he exceeded his legal authority in directly bailing out GM, as it is in the national interest to protect millions of jobs. Stop the bipartisan finger pointing already. We have only one America and one future for our children.

Full Disclosure: The author is heavily invested in SWC and PAL, two palladium mining companies, in OMG, a cobalt chemical company, and in DRYS, a dry bulk shipping company. I have no GM position either way.


Anonymous said...

JJ/Mark Anthony:

(I'm gonna sound a little negative here, as am long SWC and down -85%.)

I think you need a better investment theses for SWC than "Obama might buy a palladium ring" or "cold fusion might be true."

Also, I think you're contradictory on "America is blessed with a palladium mine." It's owned by SWC, which is majority owned by NILSY, a Russian miner.

A little less time on hoping and more on "what will the Russian oligarchs do with their SWC ownership?" would probably improve your investment track record.

Lastly, you claim the bank bailout is just a financial black hole. Why would the auto industry bailout be different? Why is a $73/hr auto laborer's job more valuable than a $25/hr bank clerk's job? Or than an auto laborer's job at a plant owned by Toyota, a competent auto maker? At least the banks (used to) lend money to profitable businesses. GM and F have been junk investment quality since May 2005, when they were downgraded to junk.

Tulsa Harmon said...

One day in the not too distant future your critics will look back at your blogs and wish that they had fully digested your words. When I listen to the news which is now full of “supply destruction” I think to myself “Mark Anthony predicted this”. Please write often and keep sharing your knowledge so we can be better prepared for the future. There are many of us out here quietly waiting.

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