Rushing for the Exits

Posted On Jan 8, 2016 By Dave Gonigam

  • Bottom line to this rough week: Money is fleeing China
  • But where’s it going? And how can you capitalize on the trend?
  • Why 2016 is gold’s year
  • Another sign of Saudi Arabia’s desperation for cash… a “meh” unemployment report… readers have many opinions about our “trading desk” (who knew?)… and more!

If money goes where it’s treated best, as the saying goes, then that place in early 2016 is “anywhere but China.”

The best way to play the trend? A bombed-out asset class that might well have just hit bottom.

China has rudely gotten in the way of our attempt this week to roll out the Agora Financial team’s 2016 predictions. Especially yesterday, the forecasts have had to take a back seat to our need to make sense of whatever nutty headlines were emerging from the Middle Kingdom and tanking the Dow hundreds of points in a day.

Today, though, we reveal the best way to play the turmoil in 2016. And our story begins in Singapore last summer.

“For reasons not hard to figure out, Singapore’s government is friendly to foreign capital,” says Byron. “That is, political powers promote investment and banking on the island nation.

“Singapore is often first stop on the voyage of Chinese money, due to cultural and banking ties between China and the much-smaller nation. Then from Singapore, funds move to more distant safe havens like Melbourne, London, Vancouver, New York and Los Angeles.

“So it’s no surprise that Singapore is home to more than a few offices full of lawyers and accountants who advise wealthy people on how to move money across borders.”

Byron met with several of them last August. What they told him seemed a little outlandish at the time — a “stampede mentality” to get funds out of China in recent years.

“Money floats,” said a tax lawyer to Byron. “Money can remain in one area for a long time, as long as there’s equilibrium with the economy and political culture. If authorities treat money well, and allow it to do its work, it’ll stay where it is. But if authorities make it too hard for money to do its job, then funds move away to other jurisdictions.”

Chinese leaders are “making it too hard for money to do its job”… and that, more than anything else, is what’s driven this week’s turmoil.

We mentioned briefly yesterday that China’s foreign exchange reserves registered a record drop in December… and that they’d been falling steadily the last 18 months. Here’s what it looks like on a chart.

MoneyFleeingChina (2).png

To some extent, Chinese leaders have encouraged this movement — actively pushing both individuals and companies to invest more overseas. After all, it grows China’s influence abroad. It also relieves the deflationary pressure from those all empty skyscrapers at home — or, as The New York Times politely puts it this morning, “chronic overinvestment and overcapacity.”

But Chinese leaders became alarmed at the volume of the outflow last month, prompting the “stealth devaluation” we wrote about the week before Christmas — a slow and steady weakening of the yuan’s daily fix against the dollar that aimed to stop the outflow.

The move had the opposite effect: By Monday, Chinese citizens and companies were fretting that their yuan was losing purchasing power by the day. So they scrambled to get even more of their money out of China.

Where’s it been going? It’s true, Chinese buyers are snapping up foreign real estate — especially in those aforementioned havens like Los Angeles, Vancouver and Melbourne.

But that’s not all: “Lots of smart money is buying physical gold and silver,” one of those Singapore financial advisers told Byron King last summer.

“I don’t mean a few coins or small bars, either. I mean shipping containers filled with hundreds of 10-kilo (22-pound) bags of silver and 1,000-ounce bricks of gold or silver. Man… you should see some of the storage vaults in Switzerland, Panama and… other places.”

Sure enough, gold has been the standout performer in a week when most asset classes have been pummeled mercilessly.

Gold has popped nearly $45 since Monday. At last check this morning, the bid is $1,105.

All of which tees up a new/old forecast: “Our estimate is that gold has now found a bottom and is posed to move steadily upward from current levels,” Jim Rickards said in this space just before Labor Day.

Yes, there was some wiggle room in that forecast. But gold hit a six-year low of $1,050 in mid-December.

Right around that time, Mr. Rickards introduced us to the “Rogers Retracement Rule.” As stated by adventure capitalist Jim Rogers: “No commodity goes from a baseline to a permanently new high without a 50% retracement along the way.”

[As several readers pointed out at the time, the concept has origins going back nearly a century. But calling it the “Rogers Retracement Rule” has alliteration going for it…]

Description: TheRogersRetracement.png

From a base of $200 an ounce in 1999, gold zoomed up to $1,900 in September 2011 — a move of $1,700.

A 50% retracement of that $1,700 move brings gold back to $1,050 — where it hit in December.

Back to Byron King for today’s takeaway: “Some people — you know who you are — don’t own any physical gold or silver. Well, if you don’t have real metal, get some.

“Go for everyday bullion, not fancy numismatics. Don’t get talked into some story about 1908 $20 gold pieces that lack the ‘In God We Trust’ stamp. Interesting coins, to be sure, but… don’t pay premium for a story; just go for basic bullion.”

[Ed. note: If you have your bullion already, perhaps you’d be interested in a way to play the “Rogers Retracement Rule” in a different asset class. Jim Rickards has done just that… with impressive effect for some of his premium subscribers. Jim explains in a short video at this link. Please note: The video comes offline at midnight Monday night, so it pays to watch now.]

The U.S. stock market is stumbling to exhaustion as the week comes to a merciful end.

Traders exhaled as they went to bed last night; China’s stock market did not melt down in the absence of the “circuit breakers” that so badly backfired this week. Heck, the Shanghai Composite rose 2% on the day. It helped that the Chinese government moved the yuan-dollar peg up a skootch after eight straight days of devaluation.

The Dow opened up 100 points on a “good” jobs report (about which more shortly) but has since surrendered about half that gain. As we write, it stands at 16,566. The S&P 500 rests at 1,946. Treasuries are resuming their New Year’s rally, the 10-year yield now 2.14%.

Crude is losing ground, a barrel of West Texas Intermediate fetching $33.07.

Wanna buy shares of Saudi Aramco, the state-owned oil company of Saudi Arabia?

Seems the Saudi government is getting sufficiently desperate for revenue that it might float shares of Saudi Aramco in an IPO.

“I believe it is in the interest of the Saudi market, and it is in the interest of Aramco,” Prince Mohammed tells The Economist. Yes, that’s the same Prince Mohammed we introduced you to on Wednesday, when he was wearing his hat as defense minister. Today he’s speaking as deputy crown prince. Well, really, he’s speaking as the son of King Salman.

We’re trying to wrap our minds around the fact that at age 30, Prince Mohammed wasn’t even a gleam in his father’s eye during the 1973 “oil shock” that turned Saudi Arabia into the premier global oil power for a generation.

The jobs report, you ask? Meh.

The headline number was certainly impressive: The wonks at the Bureau of Labor Statistics conjured 292,000 new jobs for December, more than the most optimistic guess among dozens of economists polled by Bloomberg.

And it was nice that a few people who’d given up looking for work are starting to look again. That’s why the unemployment rate didn’t fall but instead held steady at 5.0%. The labor force participation rate — the percentage of working-age adults either working or looking for work — rose a bit off 38-year lows.

But in the real world, legions of Americans want to work full time and can only find something part-time. And legions more who don’t have a job aren’t trying to find one. Thus, unemployment as measured by John Williams at Shadow Government Statistics — using the methodology the government used during the Carter administration — remains 22.9%.

Too, we’re reasonably sure the number of “breadwinner jobs” — a term David Stockman uses for good-paying jobs that can actually support a family — remains below its peak in the year 2000. David’s crunching the numbers as we write; we’ll hear from him on Monday.

“So where is the Libyan gold now?” says a brief reader email after we described yesterday how Col. Gaddafi’s gold stash was one reason he was subjected to Western regime change in 2011.

All we can say is that’s a great question. While Hillary Clinton, Susan Rice and Samantha Power were certain power would pass swiftly to a bunch of budding Thomas Jeffersons over there, the country has instead sunk into a five-year civil war, still ongoing.

Considering some of Gaddafi’s weaponry has found its way into the hands of ISIS, it’s not a stretch to think the same occurred with Gaddafi’s gold, no?

“All that Jonas says is true, but there is one overriding factor, and it’s a doozy,” writes a reader after seeing Jonas Elmerraji’s call on Wednesday for the S&P 500 to grow at least 10% this year.

“With the world markets in turmoil — and 2016 will bring greater fear around the world — the only ‘perceived’ safe haven for money is the U.S. dollar, and the safest investment on the planet is still the U.S. stock market.

“Maybe ‘safest’ is too strong, but where else to invest that huge influx of foreign capital in dollars?”

The 5: Good point. Jonas doesn’t evaluate too much “macro” stuff like that when making his recommendations, but if that stiffens your resolve to take advantage of those recommendations, more power to you.

“I like ‘chart chimps’ better than ‘trading desk,’” reads the first of several emails on the topic of just what we should call Jonas and colleague Greg Guenthner. “Guess I am just a sucker for alliteration.”

Says another: “I always took The 5‘s use of the term ‘trading desk’ to describe your two editors who focus on short-term investment ideas as a tongue-in-cheek appropriation of the Wall Street term. It still gives me a little chuckle whenever I read it.”

And a third: “When I read the comments about your ‘chart chimps,’ all I could think of was: ‘I’m a rooster illusion!’ You either get the reference or not.”

The 5: We didn’t, but that’s why God made the Interwebz. (It’s a non sequitur Ben Stiller uttered in the 2008 satirical action flick Tropic Thunder.)

“The latest part of The 5 to draw the ire of the chronically complaining crowd is the term ‘trading desk’?” writes our final correspondent.

“Really? With all of the great information that is packed into this free newsletter, this is what Mr. Happy takes away? Funny stuff!

“I would imagine that given human nature, folks in the pre-Internet age were as generally miserable as they are today, but with the ability to share their angst over the most inane topics a few keystrokes away, they now get to not only vent their utter disdain for words, but they provide the added bonus of supplying a few laughs for the rest of us who don’t happen to take this stuff quite so seriously and are apparently missing out on the joy of nitpicking.

“As always, thanks for The 5!”

The 5: You’re welcome. It could always be worse. Yesterday, my wife emailed me this Venn diagram about the comment sections of most Web articles…

In the first place, The 5’s readership is much more thoughtful and reads more thoroughly. In the second place, our virtual mailbag is curated for maximum entertainment value. Win-win!

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. Last chance: Access to Jonas Elmerraji’s latest trading challenge closes tonight.

Unlike in his previous challenges, Jonas has an explicit goal: He’s out to make his premium subscribers a total $2 million this year. And he wants you to grab a share of it.

The fun begins next Thursday, Jan. 14. “I want to prove to you,” he says, “that you have what it takes to make impressive gains in the markets over and over and over again.”

No previous trading experience is necessary. “Previous participants have since generated extraordinary gains,” Jonas enthuses. “One reader even exceeded $30,000 in a single month.”

It doesn’t cost a thing to take part in this event. All we need is your email address and we’ll reserve a spot for you. But slots are filling quickly and we’re compelled to close down access at midnight tonight. Here’s where to sign up.


Other Articles In 5 Min. Forecast