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The Daily Reckoning | Saturday, February 16, 2013 A snake-like year for one of the world’s most dynamic economies... Readers weigh-in on the real value of cyber currencies... Plus, all of this past week’s reckonings, neatly compiled for your leisurely reflection... --------------------------------------------------------------- He broke down St. Peter’s Pearly Gates and stole God’s awesome power He made the old young again — this video clip is the proof. Profit-hungry day traders will leverage its impact to shoot for quick double- or triple-digit gains. Let them. If you’re patient, you could gain more — far more. His company has the unrivaled potential to be the single most lucrative investment you could ever make. Once this video clip is released to the general public, on YouTube and elsewhere, probably within the next few days, the noise and excitement it will generate in the financial markets will be deafening. Watch it now. Joel Bowman, checking in today from Buenos Aires... Your editor’s weary old fingers are still on the mend...so we’ll break with the habit of a lifetime and keep our introductory comments brief. Fortunately, however, where we have fallen short, our Fellow Reckoners have again stood tall, spilling no shortage of ink in service of our ongoing investigation into the nature of money. Their comments are to be found in the mailbag section at the end of this virtual page. But first, a fascinating contribution by the always-informative Mr. Frank Holmes. Please enjoy... [Nota Bene: This column originally appeared in these pages on Thursday, February 14, 2013.] The Daily Reckoning Presents Out With the Dragon, In With the Snake By Frank Holmes During this Chinese New Year, more than a billion people will be welcoming in the Year of the Black Water Snake, celebrating with family and friends all week long. The previous Year of the Black Water Snake was in 1953, which was when China launched its first Five-Year Plan and the average annual income for a family in the US was about $4,000. As the Dragon took its last breath of the year, it exhaled plenty of fire into China: Looking at year-over-year data as of the end of January, new bank loans, passenger car sales and exports all rose while inflation was slightly lower. Imports of key commodities we track, crude oil, aluminum and copper, were also exceptional, with month-over-month increases of 6 percent, 4 percent and 3 percent, respectively. Increasing money supply and easing policy in China have also helped to breathe life back into China’s equity market. Below is an update of the chart we showed Investor Alert readers back in October when the venomous sentiment toward China was at extreme levels. We believed Chinese stocks were significantly undervalued compared to emerging markets and that its equities were due for a rebound. I indicated that an increase in money supply would be the needed oxygen for an equity resurgence. Over 2013, we expect the government to continue its accommodative efforts, which should reinforce the equity rally. In addition, the new pyramid of power is focused on growth, as it seeks to improve and reform policies that will provide its residents with opportunities and social security, increase incomes and raise standards of living, which should encourage domestic consumption. Growth is set to be considerable over the next several years: Jefferies Equity Strategy team anticipates that China’s GDP will grow at a compound annual growth rate of 6.9 percent and by 2025, will almost equal that of the US. In addition, China’s GDP per capita is projected to climb to about $18,000 on a purchasing power parity and domestic consumption is likely to make up a larger portion of its GDP, jumping from about 49 percent in 2012 to 73 percent of GDP by 2025, says Jefferies. To achieve these goals, there needs to be significant reforms to promote a “new urbanization.” While China has been anticipating the rise of urbanization by building out the country’s infrastructure of medical services, housing, water, high speed rail system, and roads, the mobility of many residents remains restricted by its internal residence status, called the hukou (pronounced “who-cow”). First put into place in 1958, the hukou system was a means of controlling migration throughout the country. It designates where a person or household may reside by geographic area. According to J.P. Morgan’s Jing Ulrich, “the system’s primary function was to maintain a sufficient agricultural labor force, while preventing excessive strain on urban resources.” Under this registration system, if a resident does not have an urban hukou, the family has no access to social benefits such as free education, health care and pensions that are provided to permanent residents of that city. Michael Ding, portfolio manager of the China Region Fund (USCOX), was raised in rural Dalian and remembers what it was like living under the registration system, which he says was driven by the government’s need to ration food. Still fresh in leaders’ minds were memories of millions of people dying from starvation, and the government wanted to ensure there was enough food for urban residents. With this upbringing, Michael developed a knack for quickly understanding rationing systems, as his family was unable to purchase additional food regardless if they had money or grow vegetables in their backyard. So while it was reported that more than half of China’s population lives in an urban area, only about one-third of the total population holds an urban hukou. Andy Rothman from CLSA calls these roughly 250 million migrants “quasi-urbanized,” which means that one worker lives in the city, while the rest of the family remains in the rural home. This equates to a real nationwide urbanization rate of only about 35 percent. You can see in Jefferies’ chart how the official urban residence status differs across the country compared to the urbanization ratio. If the government reforms the hukou, it is estimated that 600 million people might move to the cities over the next 20 years. This includes 300 million migrants becoming “new urban residents” and 300 million rural residents moving to urban areas by 2030, says Citi Research. According to its data, “urbanization could bring another 150 million surplus rural laborers to the cities.” “[P]otential reforms in hukou registration and healthcare systems together with extended substance allowance will likely encourage more migrant workers to live in cities for the long term with higher consumption propensities,” says Morgan Stanley. Because urbanization is a big driver for the housing market, CLSA believes property sales in China’s 600 third-tier cities could significantly benefit from hukou reform, as about 100 million migrant workers currently reside in these cities. The government has begun to factor in the massive ramifications of these families moving to the cities. According to J.P. Morgan, “investments in urbanization are already placing a heavier emphasis on the human benefits of development.” Regarding social housing, in 2012, the country met its goal of starting on 7.2 million units and completing about 5 million units, according to the research firm. For 2013, China’s plans call for an additional 10 million units that will be under construction or complete by the end of the year. What to Expect in the Year of the Snake: Bite or Might? Maybe both, if you follow CLSA’s Feng Shui Index. Every year since 1992, CLSA Asia-Pacific Markets team takes a lighthearted look at the fortunes that may befall the Hang Seng Index. During the Year of the Dragon, CLSA’s predictions of the Hang Seng Index came amazingly close to how stocks actually performed. Equities in China fell into a bit of a slump toward the beginning of the year. Then the Dragon woke up and fired up the markets toward the latter half of the Chinese year. Over the next several months CLSA foresees Chinese stocks to slink like a snake, rising in the beginning of the year before sidewinding in the latter half of the year. According to CLSA, the elements fall out of balance, as “the crucial Fire element all but dies away, Earth falls, Metal overshoots and Water puts a damper on prospects.” In times of growth, a young snake sheds its skin often, sloughing off a worn exterior to reveal a fresh layer of scales. The Asian giant has experienced growth the world has never seen before, and during the Year of the Snake, we look forward to seeing a new leadership take action, sloughing off worn policies to unveil a stronger vibrant economy. See how we’ve positioned the China Region Fund to benefit from this potential growth. Regards, Frank Holmes, for The Daily Reckoning Don’t miss the presentation that received more than a quarter- million page views on businessinsider.com. To download your copy, go to www.usfunds.com, follow us on Twitter or like us on Facebook. Frank Holmes is CEO and Chief Investment Officer of U.S. Global Investors, Inc., an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients. If you think tablet computers were big... ..wait until you see what’s coming next! It could have people lined up at the door like never before! Click here now for full details. ALSO THIS WEEK in The Daily Reckoning... Student Loans Going the Way of Housing By Douglas French Colleges are good at getting people enrolled. They get kids lined up with education loans. The money goes to pay exorbitant prices on textbooks. It pays for meal cards. Tuition is crazy high. Parents go along and shell out until their bank accounts are barren. What colleges are not good at is getting the kids degrees. And those without those degrees have a hard time getting a good job to pay back a student loan. Instead, they fall into delinquency, starting off life saddled with an unpayable debt. A Redistributive State of the Union By Michael Tanner [Note: This piece was originally published on January 25th, 2012] Shortly after President Obama was elected, NBC News interviewed a young woman from Detroit named Peggy Joseph. She explained that she was excited about Obama’s election because “I won’t have to worry about putting the gas in my car. I won’t have to worry about paying my mortgage.” Failure of Leadership By Bill Bonner Those who would presume to meddle should have their own mettle tested first. In addition to getting roughly handled by the press and the politicians, candidates for any post — elected or appointed — leaders should have to bear certain ordeals, to test their courage and their resolve. These should be designed not to reveal weaknesses or shortcomings, but merely to allow the man (or woman) to demean himself in petty and irrelevant ways. For example, a candidate for the Secretary of Treasury might have to fish a wedding ring from the bottom of a Manhattan sewer. A mayoral candidate might be locked out of his house...stark naked...just to see how he handled the situation. Bond Guru Still Likes Bonds By Chris Mayer He has what seems like the easiest job in the world. He manages $4 billion of assets on which he earns fees. And all he does is buy US Treasuries. His name is Van Hoisington. No man has been more right about interest rates in the last two decades. Van thought they would go down — and has thought so since 1990. So they have. As they fell, the value of Van’s bonds rose. Since he’s been right, his track record is ridiculously good. He has posted a 9.1% annualized return over the last ten years...in a bond fund! World oil production is about to be shaken to its core... You won’t believe which nation analysts at Wall Street’s biggest banks expect to become the world’s biggest energy producer by 2017 — or the effect it will have on America... our economy... our future... Click here to see who is set to become the new king of oil — and how you can use the news to go for big profits as early as this month! The Weekly Endnote... It was the controversial cyber currency, bitcoin, that ignited the discussion on the nature of money that has filled this space for the past couple of weeks. We’ve been talking, in case you missed it, about intrinsic vs. subjective value, about fiat monies and the evolution of exchange...among other light and fluffy topics. Let’s continue... First up, this one from Reckoner Thomas... Of course gold has intrinsic value, the cost of production. Most miners right now produce gold for about $950 dollars per oz. Don’t like dollars to define intrinsic value? Then use barrels of oil, pounds of sugar or any other traded entity that has real intrinsic value. What is the intrinsic value of bitcoin? ZERO! It is only worth more than nothing when everyone agrees to agree to such but it costs nothing to produce....just like US dollars. DR: Sounds awfully close to the labor theory of value, a Marxist theory which holds that something has value according to the cost of labor that went into making it. Historically, systems based on this theory have not tended to do so well... Note also the tendency toward infinite regression with this position, i.e., something has intrinsic value because of the intrinsic value of that which is expended in its production. And that thing has intrinsic value because of... Here Reckoner Elf chimes in... Let any currency have its day, but at the end of the day let me be found to be holding whatever should have been backing that currency, be it silver, gold, land, food, water, shelter, oil, etc. Just let it be something I and others cannot live without. I hear that China might be using its US holdings to buy pieces of the US. Trading something that is 94% the value of its former self, before it becomes 100% useless, smart move. And here’s Reckoner George A., who writes to say... I suspect (or at least hope) that Bitcoin will start to appear much more frequently in Agora publications in the weeks and months to come. To comment on GJX’s question, “Market Fiat?” [from last week’s mailbag], I would point out that the conjunction of these two words is a perfect oxymoron. Money is the good most likely (or, more loosely, one of several goods highly likely) to be accepted in a free market in exchange for any other good. Fiat currency is a good which must be accepted in the market in exchange for any other good, on pain of state violence. A market where such a thing exists is not a free market. Bitcoin is the latest attempt by the shackled market to free itself of the chains of fiat, state-managed “money”. As to the question of intrinsic value, it is true that in the dim past, and even today, gold and silver have had value apart from their utility as money. If I were the last man alive, and there was no one left to trade with, I might still find gold useful for its ductility, or silver for its electrical conductivity or reflective properties. Bitcoin, on the other hand, would be of absolutely no use to me. However, the exchange value of money is perhaps the most significant property possessed by any human invention, and Bitcoin is the most exquisitely useful form of money yet devised. To the traditional properties of fungibility, divisibility, durability, and scarcity, it adds entirely new properties, some of which cannot be described with a single word. It is instantly transmissible across the globe, between parties who will never meet, with no intermediary; it can be copied (or backed up if you prefer), so that loss is much less likely; any quantity can be carried on the owner’s person, or even in the owner’s mind. In sum, the new properties of Bitcoin make it invulnerable to the clumsy attempts of the criminal state to manipulate money. I would recommend that any readers who are not already familiar with Bitcoin get up to speed immediately. The price action since Jan. 1 indicates that the train is leaving the station. Once you fully understand the technical underpinnings of this new currency, it is impossible not to recognize that it represents the germination of a new world of post-statist money, and the promise of a truly free market. DR: At time of writing, the cyber currency that proudly boasts no intrinsic value was trading for twenty-seven United States Government Dollars. --- As always, we welcome your thoughts. Email them to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, feel free to cancel your free subscription here. 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