Notes From Underground: U.S. and Japan look to new sources of Rare Earth as they” Get Ready ” to China’s I am “Losing You”

The weekend news brought further acrimony between China and the developed nations as the Chinese have threatened to curtail the export of several import elements that are needed to manufacture high-tech products. The Chinese export 97 percent of the rare earth elements that go into military and electronic equipment. It will take some time for the world to find alternative locals and substitutes so China is able to flex its muscles and show how important it is to the developed world.

The Chinese actions, though possibly a violation of WTO rules, lets the SCHUMER/GRAHAM know that trade issues and currency values are a far more complicated process than just threatening to implement tariffs. The Chinese are putting the world on notice that they have cards to play, so any attempt at unilateral action by the U.S. will be met by a counteraction. The world is never as simple as the media wants it to appear and the Chinese are master players at the nuances of international power politics. Chinese policy makers can be much more patient than Western leaders as they do not have to face the wrath of the electorate on a frequent basis.

Before the onslot of FED news this week, we have the results of the Brazilian elections. LULA‘s hand-picked successor won an overwhelming victory. There is no surprise here but the markets willl be watching to see if Ms. Rousseff stays a centrist course on economic matters and follows in the footsteps of LULA. Although Rousseff was a jailed guerilla fighter agains the GENERALS, she has taken a much more centrist position as the left under LULA sought to use the markets to bring Brazil to a position where it would be able to meet its great economic potential.

It is always interesting to us at NOTES FROM UNDERGROUND, how Wall Street has a tendency to place the emerging economies into one giant growth basket. I believe that 2011 will create some cracks in this model and some emerging markets will become investment pariahs. I am watching South Africa closely as the rhetoric of nationalization heats up, while in Russia there is talk of privatizing presently owned state assets. Not all developing economies are equal. Some are certainly head and shoulders above others and again we caution that this will be one of the big stories of 2011.

Monday night we hear from the Australian Central Bank. The markets is predicting that the Aussies hold rates at 4.5 percent as the poll of economists reflects an 80 percent probability of no change. Australian bank announcements are always key for us at NOTES because the Aussie growth story is a mirror of the global econmoy with a heavy Asian component. Even though the Aussie dollar is near all-time post float highs, the Aussie has been weak on many of the crosses so a move to 4.75 percent would put a strong bid to the Aussie against many other currencies. The rate announcement will be made at 10:30 p.m. CST so be alert to possible volatility in the Aussie crosses.

The last bit of news was from the European summit and Frau Merkel pushed hard to get some type of reopening of the Lisbon Treaty. How much cooperation she was able to extract from others is really hard to say as the reporting has been nuanced. The Brits seem to have supported the Merkel idea of a “crisis resolution mechanism” in exchange for Merkel support for holding the line on the 2011 European budget. The French do not seem happy at Merkel attaining some support after the compromise Sarkozy was able to come away with two weeks ago. The French riots against newly instituted austerity meaures have waned, but don’t look for the streets of Paris to stay quiet for long. If Europe does not improve its growth picture, there will be more budget restraints in France and the previous riots will have be seen as a warm up.

There will be French elections in 2012 and the LEFT will begin to voice its outrage in an effort to undermine Sarkozy and diminish his already low public standing. The European Union has always rested on the German/French axis so the peripheral nations will be watching the French’s response to fiscal austerity. French Socialists have been in the background for quite awhile and their leadership is looking to find its voice. That is why the French domestic political situation is beginning to take on importance. How can the leaders of the PIIGS ask so much of their citizens if the French are not willing to swallow the same medicine? Europe will move back to center stage post-U.S. elections and FED decisions.

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2 Responses to “Notes From Underground: U.S. and Japan look to new sources of Rare Earth as they” Get Ready ” to China’s I am “Losing You””

  1. Danny Says:

    Its hard to disagree with you on the forecast for increasing dispersion between emerging markets. The timing of your estimation is interesting as I have just encountered some arguments newly minted arguments asserting that individual stock selection, or country selection in this case, is a dead art because of the evolution of investment instruments – namely ETF’s. According to these folks, the increased correlation among stocks, or assets generally, can be attributed predominately to passive investment vehicles.

    I tend to disagree with this argument as I believe the lack of dispersion between countries/assets was really more of a fuction of a robust boom period accross practically all markets for 10 years followed by a financial market collapse/economic recession that occurred virtually everywhere simultaneously. Going forward, economic fundamentals, which you discuss above, should re-emerge as the driving force behind asset returns. As this occurs, asset returns between countries and stocks will begin to diverge from one another – thus by implication, it will be more important to invest according to your views of the fundamentals for each security, asset, and country going forward than it has in the past.

    As always thanks for the blog,


  2. yra Says:

    Danny–your view on ETF’s is correct.First and foremost they were created so that the series 7 people could invest in commodity type products without going to the futures markets and possibly losing some of their retail customer base.I sat in some of those discussions and the number of series 7 sales personnel compared to series 3 was geometric—wall street prevailed and created products that would ensure their hold on their clients.I personnelly think that the closet indexers are lazy but at the end of the day they take a great deal of commission money out of the market for doing nothing.As Keynes said”worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

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