Wednesday, December 7, 2011

Watching The Board

Most people ask the question, "So what is going to happen next?"  They have little understanding of how things really work.  There is not a linear solution that one person knows and prescribes to a problem.  The person asking this question is hoping to push the responsibility of thought onto someone else.

People, groups and nations are driven by self interest.  The key to predicting what comes next is to focus on the whole board.  In chess, consideration must be given to every piece not just the one currently in play.

China controls 35% of the world's naturally occurring rare earth elements.  More importantly, they control 97% of current production.  The west is desperately trying to develop production but this takes time.  Current market conditions have sucked the bid from equity related to non-core asset classes.  The world is broke and severely under capitalized.  When central banks slow the pace of money creation, or even redirect it, asset markets quickly develop drought conditions.

While this is taking place, we notice that the nation holding the key to our rare earth needs also controls the world's most critical shipping lane for manufactured goods.  We must clarify that as the most critical oil shipping passage, the Strait of Hormuz, is also being challenged at present.

As we survey the entire chess board we notice two key situations.  First, equity related to non-Chinese rare earth developers is being priced near or below liquidation value.  Second, the US is still behaving as if China must obey its every demand.

The disparity between these two factors is shocking.  In this case, adding to rare earth positions in companies who aim to be in production prior to 2015 seems logical.  The financial risk on this trade has been reduced by  central banker decisions and how those have effected asset markets.

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