Mish's Global Economic Trend Analysis

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• China Slashes Rare Earth Export Quotas, Cracks Down On Illegal Mining
• Stoneleigh and Max Keiser on Canadian Housing Bubble: "Expect Enormous Comeuppance, Tremendous Sense of Denial, Ireland-Like Dynamics, 90% Price Drops
• Pension "Armageddon" in Pittsburgh; State Threatens Takeover of City Pension Plan
• Technology Transfer from GE to China will Directly Compete Against the Boeing/Airbus Duopoly

China Slashes Rare Earth Export Quotas, Cracks Down On Illegal Mining Posted: 29 Dec 2010 09:18 PM PST Rare earth elements are used in iPhones, iPads, hybrid-electric cars, wind turbines, flat-panel monitors, tiny magnets in the fins of bombs, missiles, laser-guided smart bombs, and a myriad of other industrial applications. China cut exports last summer, then totally blocked exports to Japan last September in a border dispute with Japan and now has reduced export quotas again by 35 percent. There is growing concern about this problem at the Pentagon and by manufacturers for obvious reasons. Please consider China's rare earths export cut spurs trade concerns China's move to slash export quotas on rare earth minerals -- vital in a slew of high-tech products -- has raised fresh international trade concerns, and Japan's Sony Corp vowed on Wednesday to reduce its reliance on the minerals. China, which produces about 97 percent of the global supply of rare earth minerals, cut its export quotas by 35 percent for the first half of 2011 versus a year ago, saying it wanted to preserve ample reserves. It also cautioned that it has not decided on the quotas for the second half of the year. The little-known class of 17 related elements is used in numerous electronic devices and clean energy technology. Sony, maker of Bravia brand flat TVs, Vaio PCs and the PlayStation 3 videogame console, will look for ways to cut its use of rare earth elements, including developing alternative materials, Iguchi said. Prices have surged for these minerals since authorities in Beijing slashed their rare earth exports by 40 percent this summer, saying China needed them for its economic development. Crackdown on Illegal Mines It's not that rare earth elements are that rare, but supply of the metals is limited because of production concerns, especially pollution. Unauthorized mining operations account for as much as 50% of China's rare earth exports, leaving sulfuric-acid poisoned streams and land in the wake. Over such concerns Illegal Rare Earth Mines Face Crackdown China's national and provincial governments [have started] to crack down on the illegal mines, to which local authorities have long turned a blind eye. The efforts coincide with a decision by Beijing to reduce legal exports as well, including an announcement by China's commerce ministry on Tuesday that export quotas for all rare earth metals will be 35 percent lower in the early months of next year than in the first half of this year. Rogue operations in southern China produce an estimated half of the world's supply of heavy rare earths, which are the most valuable kinds of rare earth metals. Heavy rare earths are increasingly vital to the global manufacture of a range of high-technology products — including iPhones, BlackBerrys, flat-panel televisions, lasers, hybrid cars and wind-power turbines, as well as a lot of military hardware. China mines 99 percent of the global supply of heavy rare earths, with legal, state-owned mines mainly accounting for the rest of China's output. That means the Chinese government's only effective competitors in producing these valuable commodities are the crime rings within the country's borders. Prices have soared for rare earth elements mined almost exclusively here in the red clay hills of southern China: dysprosium, terbium and europium. According to a new United States Energy Department report, the most important of these for clean energy is dysprosium. Its price is now $132 a pound, compared with $6.50 a pound in 2003. In the last few months, the government has deployed helicopter patrols to spot illegal mines. Teams of dozens of police officers have conducted raids into the hills of northern Guangdong and arrested at least 100 owners and managers of rare earth mines and refineries, said a Chinese mining expert who insisted on anonymity because of the issue's political risks. Government workers equipped with blowtorches have accompanied the police to cut apart illegal mining equipment and either seize it or distribute it to peasants for sale as scrap. The gangs have terrorized villagers who dare to complain about the many tons of sulfuric acid and other chemicals being dumped into streambeds during the processing of ore. Illegal rare earth mining and chemical runoff have poisoned thousands of acres of prime farmland, according to the government of Guangdong Province, and have been blamed for many illnesses. It's nice to see this concern over pollution, but cynically, I cannot help wondering if the real goal of this crackdown is to raise prices or secure favorable trade agreements. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Stoneleigh and Max Keiser on Canadian Housing Bubble: "Expect Enormous Comeuppance, Tremendous Sense of Denial, Ireland-Like Dynamics, 90% Price Drops Posted: 29 Dec 2010 01:06 PM PST Inquiring minds are watching a superb interview with Max Keiser and Nicole "Stoneleigh" Foss regarding the Canadian Housing Bubble. The interview starts at 13:42. Interview Snips Canadian banks are not as "bulletproof" as everyone thinks. When the housing bubble bursts there will be tremendous consequences to Canadian banking system. We are in a massive bubble and there will be an enormous comeuppance. Canada housing bubble currently peaking. When you are in a bubble, the psychology is such that you cannot see it for what it is. Talking to Canadians about the housing bubble is like talking to Americans in 2006. There is a tremendous sense of denial. People pay 50-70% of their income for mortgage costs in places like Vancouver, but it's not just Vancouver. Such things are absolutely characteristic of a bubble. Canada will play catch-up to the downside in the fairly near future. Ireland-like dynamics absolutely coming to Canada. There is also a tremendous commercial real estate problem that will affect Canadian banks. Canadian banks have also acted as reinsurers in the derivatives market for a number of extremely risky things. So in a number of cases "the bucks stops with the Canadian banks". Real estate prices will fall about 90% on average. Deflationary credit collapse coming. "Stoneleigh" lives in Canada and is author of the popular Automatic Earth Blog. Also see Stoneleigh and Max Keiser Flatten the Canadian Economy I agree with everything "Stoneleigh" said in the above bullet point list except I do not see a price collapse of 90% on average. I think 50-60% in some areas is more like it. Even 40% would be devastating and that would be my best case scenario. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Pension "Armageddon" in Pittsburgh; State Threatens Takeover of City Pension Plan Posted: 29 Dec 2010 10:30 AM PST Pension stories seem to be going viral lately, not any story in particular, just the sheer number of them. Please consider Pittsburgh City Council, Mayor Clash on Pension 'Armageddon' Pittsburgh's City Council ordered Mayor Luke Ravenstahl to attend a meeting today to hash out a plan to avoid a state takeover of the underfunded municipal pension, which may more than double its cost to taxpayers. A vote to compel Ravenstahl to come before the council's finance committee followed about six hours of debate on shoring up the pension system using parking fees. The retirement plan has about $325 million in assets to cover $1 billion in promised benefits, according to a consultant's report. The city has until Dec. 31 to show the state how it will bolster the plan. "It's merely an accounting gimmick to get past Dec. 31," said Scott Kunka, Ravenstahl's finance director, on the proposal to use parking fees over the next 30 years to support the pension system. "It's just a bad concept," he said. Pittsburgh, whose pension problem was called a "financial Armageddon" by two city councilors yesterday, joins cities such as San Diego and states such as Illinois and New Jersey that may cut services or raise taxes to meet ballooning retirement costs. Those states and 18 others skipped payments or underfunded their retirement systems from 2007 to 2009, according to an October report from Loop Capital Markets in Chicago. Pittsburgh's pension system includes three retirement plans for about 7,000 active and retired firefighters and government workers. Under Pennsylvania law, the state must begin taking control if the city's obligations are less than 50 percent funded as of Dec. 31. Raising taxes is not the answer. It would encourage both white flight and business flight. Higher property taxes would cause more bankruptcies from people already on the edge, barely able to get by right now. Higher taxes certainly would do nothing to attract business. Gary, Indiana twice received special permission from the state to raise taxes to meet funding requirement. The result is taxes are higher and Gary is still broke. Instead, Indiana, one of 26 states that do not allow municipal bankruptcies, is about to. For details please see Indiana Bill Would Allow Cities to Declare Bankruptcy; Gary, Lake Station, Georgetown Likely Candidates; Hands Tied in Rhode Island Interestingly, Pennsylvania is one of the states that do allow bankruptcy. I urge the Pittsburgh city council to take just that option. Five Step Plan For Pittsburgh File Bankruptcy Outsource its entire police department to the local sheriff's association Outsource it fire department to the lowest qualified bidder Outsource garbage collection and any other services to the lowest qualified bidder Seek to reduce pension obligations in bankruptcy court Pennsylvania Governor-elect Tom Corbett is a Republican. He takes office on January 18, 2011. Please consider Pennsylvania Gov.-elect Tom Corbett says transition team provides 'fresh set of eyes' on state government Gov.-elect Tom Corbett met today for the first time with the small army of volunteer advisers who form his extended transition team, but he remained tight-lipped about prospective Cabinet appointments or his promised government belt-tightening. Corbett characterized the collection of more than 400 business leaders, veterans of past Republican administrations, conservative activists, legislators and even a few Democrats as "a fresh set of eyes" with which the architects of his administration can size up state government and recommend new ways of doing things. He is scheduled to be sworn in Jan. 18 as the successor to Democratic Gov. Ed Rendell, who is stepping down after serving the maximum two consecutive terms. The transition team is divided by subject into 17 committees. One panel is assigned to the budget, pensions and revenue, for example, while others focus on topics that include health and aging, education, criminal justice and economic development. The committees will scrutinize 25 state departments and agencies, transition officials said. The committees' final reports are due by the second week of January, Corbett said. One Democratic transition team member at Tuesday's meeting was state Sen. Anthony Hardy Williams of Philadelphia, who finished third in a four-way Democratic gubernatorial primary in May. Corbett has praised Williams' advocacy of expanding "school choice" — an umbrella term for vouchers, charter schools and other taxpayer-financed alternatives to public schools. The city should be talking with Tom Corbett's transition team regarding bankruptcy right now. I bet the governor would consider it. Bankruptcy and killing untenable public union contracts, not higher taxes is all that can save Pittsburgh. The mayor and the city council should have one master, the people of Pittsburgh, not the police and fire unions. Pittsburgh's city council's obligations to the city are to produce the most services for city residents at the least cost. Public unions provide the fewest services at the most cost. It is time to put an end to this widespread practice that threatens to bankrupt numerous cities in the country this year. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Technology Transfer from GE to China will Directly Compete Against the Boeing/Airbus Duopoly Posted: 29 Dec 2010 02:25 AM PST A joint venture deal between GE and a Chinese military-jet maker will strike at the very heart of the existing Boeing/Airbus duopoly in control of most of the world's large commercial jet market. The Wall Street Journal reports China Squeezes Foreigners for Share of Global Riches Foreign companies have been teaming up with Chinese ones for years to gain access to the giant Chinese market. Now some of the world's biggest companies are taking a risky but potentially rewarding second step—folding pieces of their world-wide operations into partnerships with Chinese companies to do business around the globe. General Electric Co. is finalizing plans for a 50-50 joint venture with a Chinese military-jet maker to produce avionics, the electronic brains of aircraft. The deal with Aviation Industry Corp. of China would give GE access to a Chinese government project aimed at challenging Boeing Co. and Airbus in the civilian-aircraft market. General Motors Co. established a joint venture this year with SAIC Motor Corp., its longtime partner in China, to produce and sell their no-frills Wuling-brand microvans in India, and eventually in Southeast Asia and other emerging markets as well. The two deals show China Inc.'s growing international ambitions, as well as its increasing leverage over foreign partners. To make the GE deal happen, GE Chief Executive Jeffrey Immelt made an extraordinary concession, agreeing to fold into the venture all of GE's existing world-wide business in nonmilitary avionics. GM, in its deal, contributed technology, its manufacturing facilities in India and use of its Chevrolet brand name in that market. End of the Duopoly Please consider Competition between Airbus and Boeing Competition between Airbus and Boeing (sometimes referred to as the "Airliner Wars") is a result of the two companies' domination of the large jet airliner market since the 1990s, which is itself a consequence of numerous corporate failures and mergers within the global aerospace industry over the years. Airbus began its life as a consortium, whereas Boeing took over its former arch-rival, McDonnell Douglas, in 1997. Other manufacturers, such as Lockheed and Convair in the USA and Dornier and Fokker in Europe, have pulled out of the civil aviation market after disappointing sales figures and economic problems. The collapse of the Eastern Bloc and its trade organisation Comecon around 1990 has put the former Soviet aircraft industry in a disadvantaged position, although Antonov, Ilyushin, Sukhoi, Tupolev and Yakovlev develop new aircraft and gain a small market share. All this has left Boeing and Airbus in a near-duopoly in the global market for large commercial jets comprising narrow-body aircraft, wide-body aircraft and jumbo jets. However, Embraer has gained market share with their narrow-body aircraft in the Embraer E-jets series. There is also a similar competition in regional jet manufacturing between Bombardier Aerospace and Embraer. In the decade between 2000 and 2009 Airbus received 6,452 orders, while Boeing received 5,927. Airbus had higher deliveries between 2003 and 2009, but fell slightly short of Boeing's deliveries, delivering 3,810 aircraft compared to Boeing's 3,950. The competition is intense, and each company regularly accuses the other of receiving unfair state aid from their respective governments. There is a lot more information in the above link. Inquiring minds will give it a closer look. Short and Long-Term Risks The obvious long-term risk is China ends up with GE's technology then later dumps GE as a partner. Short-term, this deal will cost Boeing and Airbus jobs in the US and Europe respectively, starting as soon as production begins. Moreover, this will put huge wages pressures on Boeing and Airbus. Think Aviation Industry Corp. of China is going to pay US union wages and benefits to its workers? The hollowing out of US manufacturing marches on. Already Boeing and Airbus are continually griping about who is getting more government subsidies. Expect both companies to quickly start bitching about Chinese government subsidies. Finally, look for large commercial jet prices to drop. That's what competition does, and that's the good side of this deal. Regardless of how you see it, we can safely add this news item to the list of deflationary pressures. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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