Happy Friday, and welcome new subscribers! It’s great to have you on board our Kung Fu Finance battleship. With all of the gloom and doom foisted upon us by the financial media these days, it’s hard not to believe that maybe the Mayans had it right after all and the world really will crumble into pieces on December 21st. (I certainly hope not!)

If you’ve watched the movie “2012”, you probably remember the battleship or “ark” that wealthy people (seriously wealthy people—tickets were €1 billion each!) could purchase to obtain passage and save themselves from the utter collapse of civilization.

2012 ark from the movie

Spooky-yet-awesome ark from "2012"

While I highly recommend building yourself a strong financial ark or battleship to weather the coming storm, luckily here at Kung Fu Finance we don’t require you to pay €1 billion to learn how!

The ticket price here is simply:

  1. Strong desire
  2. Willingness to learn and practice
  3. Commitment to achieving your goals

And if you’ve been reading for any length of time I know you’ve got all three of those in spades!

So welcome aboard the Kung Fu Finance battleship—we are so glad to have you with us!

Back to doom and gloom for a moment…this week alone has featured some pretty gloomy headlines:

  • “Dow average erases 2012 rally on disappointing economic data” (Bloomberg)
  • “El-Erian: Global Leaders are ‘Losing Control’” (Bloomberg) (gee, you think?)
  • “US Employers add fewest workers in a year” (Bloomberg)
  • “Dismal data confirm stalled US recovery—Unemployment rising to 8.2%” (FT) (KFG cough, ahem…and that’s a severe underestimate!)
  • “Eurozone jobless rate hits record 11%”(FT) (KFG ahem, again, severe underestimate—it’s 24% in Spain!)
  • “China’s factory output weakens” (FT)

So far, our three-prong base strategy of owning gold (up $50+ today), having cash on hand to take advantage of the volatility (DOW down 221 points today), and using trailing stops to protect our losses is doing its job—to help us “lose the least” in the coming storm!

I cannot see how we will avoid another QE in our future, but heaven (and Ben Bernanke) only knows when it will come. Stay tuned!

I am working on a “Frequently Asked Questions” (FAQ) page that will hopefully answer some of the most common questions in the future, but now, onto this week’s questions!

First, Jeremy from Australia asks,

Hi KFG, Long time reader, first time responder.

China’s situation represents an interesting conundrum. I am based in Australia and our mining products are currently largely exported to China. It is also my personal view that if it weren’t for the mining sector then Australia would be in recession (although I think we may also be on our way there none the less – I work in Retail Real Estate Management and sales are slowing dramatically here in Melbourne).

Mr. Chang makes an interesting argument, but I question whether the US would be in a ‘better’ position than any other country in the case of a downturn in China because there would be no one to finance their deficit. The Fed is currently financing the deficit, so nothing new there, but – there would have to be a reduction in government spending otherwise the country would risk hyperinflation.

I would be interested to know whether Mr. Chang mentioned whether in his scenario the US would have a devalued dollar in order to gain an advantage and be able to manufacture competitively. I would also be interested in your thoughts/views. Kind regards, Jeremy.

Hi Jeremy! Thanks so much for your nice email and your excellent questions. I am no expert on China, but I will give you my opinion for what it’s worth.

There are many moving parts in the equation so it is difficult to predict exactly what will happen, when, and in what order.

I do believe that China’s economy is slowing dramatically, and that this will heavily impact the rest of the world. Their currency, like all worldwide currencies, is also based on debt and is impacted by consumer spending, and as their economy slows and their citizens “consume” less, that will of course negatively impact all countries who export goods and services to China.

If you remember Jim Rickard’s GDP equation:

GDP = Consumption + Investment + Government Spending + (Net Exports)

It appears that all of these look rather grim for China—consumption is down, investment is down, and as Europe and the U.S. slow and buy less “stuff” from China, their Net Exports will go down, too. That leaves good ol’ government spending…and history has shown that when government spending makes up the majority of your GDP, you’re pretty much sunk.

It’s true that China continues to purchase U.S. Treasuries and thus is an important player in financing our government debt. It’s difficult to say just how many treasuries they are continuing to purchase, however. It’s no secret, like you say, that the Fed is also purchasing enormous quantities of U.S. Treasuries to finance our ridiculous government debt.

Last June, China was given a direct link to the U.S. Treasury’s auction system, allowing them to bypass Wall St.—the first time that a foreign government has ever been given direct access. You can read more about this in this article from Reuter’s, but this means that China’s central bank, the PBOC (People’s Bank of China) now buys U.S debt using a different method than any other central bank in the world.

What does this mean?

Well, there are many conjectures, but the one that stands out to me is that China is now more easily able to camouflage their purchases, which may allow them to buy U.S. debt at a better price than they could before when Wall St. was alerted to their presence at the auctions.

China is still the largest foreign holder of U.S. debt, with $1.17 trillion, and therefore could have a huge impact on U.S. interest rates if they were to suddenly execute a massive sale of their U.S. treasuries. While this is theoretically possible, I’m not sure this would ever actually happen, although you can’t rule anything out! China also benefits from holding our debt, as Gordon Chang said—it is an income-producing asset, albeit with a very low return these days!

Anyway, the relationship between China and the U.S. is tenuous at best…most analysts seem to think that the direct link was given to China to encourage them to continue buying U.S. treasuries. Whether they do so or not, of course, is anyone’s guess!

But back to your point—yes, the Fed is still buying U.S. debt, and I foresee no end to this in sight, despite the so-called “end” of QE and Operation Twist…I just don’t see how they can possibly NOT do another round of quantitative easing (although again, who knows when they will actually announce this!).

Back to Australia and mining and commodities…I agree with you and think that Australia’s economy is slowing and will probably slow more as China purchases fewer commodities. That might not be immediate however—if Gordon Chang is correct, China will still be buying copper and gold (and oil).

He didn’t comment directly on the devaluation of the U.S. dollar, unfortunately, (at least not that I can remember), but the U.S. needs a devalued dollar both to be able to manufacture competitively, as you mentioned, and also to be able to afford to pay the interest on our horrific debt. It’s much easier to pay down our debt with cheaper dollars, so that is definitely in the U.S.’s best interest!

But walking that tightrope between hyperinflation and deflation will be difficult, which is why there is so much discussion amongst the experts over “which will happen”—inflation or deflation? The Fed for their part, absolutely does not want deflation, but the risk of hyperinflation is there.

I’m not sure I’m helping all that much—I feel like I am somewhat stating the obvious instead of telling you exactly what will happen, but then again no one knows exactly what will happen (or when)…even the “experts” and “gurus” disagree!

I do believe that the U.S. could do “well” (relatively speaking—we will still do poorly overall, but in comparison to Asia and Europe) if these black swans cause the euro to break apart “first”, or if China’s growth slows enough “first”, before the U.S. suffers from our own debt problems. In that case, I can see people “rushing to the safety and security of the U.S. dollar and U.S. treasuries,” although just stating that makes me want to vomit after looking at our own abysmal balance sheet.

But the U.S. has problems of its own…we have another debt ceiling debate coming up which could be a nightmare for us—it’s an election year and the shots are already being fired from both sides, most recently with Speaker John Boehner threatening to hold up another increase in the debt ceiling unless we agree to more spending cuts. (And on, and on it goes…)

Also, U.S. banks are heavily exposed to derivatives and to everything happening in Europe and in Asia…so I certainly don’t see “smooth sailing” ahead for us, either, unfortunately.

Well, I hope that was clearer than mud…   🙂  Thank you for your excellent question!

And if anyone has anything to add, please let us know in the comments!

Next, Yuan asks,

Hi Susan- thanks for all your writing. I really enjoy it. I was wondering if you could share with me your favorite gold/silver mining companies. I am not asking for financial advice. Just curious what companies you like if you don’t mind sharing.
Also, do you ever hold any finance-related meetings in the bay area?

Thanks again.
Yuan

Hi Yuan, thank you for your question! I am currently debating over whether or not to share more specifically what I’m doing with my own portfolio, including companies I’m interested in, etc. I’m not quite ready to give you any this moment (I’m sorry!!!) but I may do so soon—just give me a little time to mull that over. Thank you for your patience!

Currently I don’t have any finance-related meetings in the Bay Area, but if there is enough interest I’m happy to hold one, and if you’re here I’d love to meet you in person. I met a subscriber last week at SFO and we had a GREAT conversation—I love meeting people in person so I’m happy to grab coffee with you anytime; just shoot me an email!

Next, Danny asks,

Hi KFG, Thank you for providing great information online and via emails to me directly. After the facebook IPO I was wondering what companies I can invest in so that I can sell overpriced shares to the public in the future. I found the website: http://www.absoluteipo.com/offer.html. I’m wondering if it’s a scam or something concrete. Please advise how I can verify if this will be a real company with a real offering.

Danny

Hi Danny, thank you for your nice words!

I can’t tell whether you are joking or not from your email 🙂 but I can comment a bit on private equity (“selling overpriced shares to the public in the future”)  and on shell companies. You also mention the Facebook IPO, and I commend you for restraining yourself from calling it the “Faceplant” IPO or the “Facepalm” IPO or other funny-yet-sad terms, LOL! IPO’s are generally a terrible deal for retail investors (that would be us…) as we saw with Facebook. Usually the only people who make money with IPO’s are the founders, the promoters, and the underwriting institution (although even Morgan Stanley is having a tougher time with Facebook!).

Anyway, onto your question re: the website you mention—I am not familiar with that particular website, so I can’t tell you definitively whether it’s a scam or not, but these “shell companies” are often used as a quick way to take companies public, many times via a reverse merger or takeover. This happens on the Toronto Stock Exchange with Canadian “CPC’s” (Capital Pool Companies), and on the OTC markets all over the world using variations of that theme.

I have two words for you that pretty much sum up my advice on this (and any investment, really…): Due Diligence.

It really comes down to doing your homework, particularly on the management and promoters.

If you are interested in the private equity space, I highly recommend you check out two articles from my friends Mark and Chris—they wrote a great write-up on the shell company process and what to look out for and I consider them “Private Equity Masters”:

Thanks for your question!

Next, Andrew asks,
Just read your article in Early to Rise titled “What Do You Mean, Life Isn’t Fair?” Really enjoyed it, especially given that I am a father as well and am of course constantly wondering how to guide my daughter to help her have a successful life. I was wondering what you thought of the whole Tiger Mom concept, if any of it appealed to you? Obviously it’s been blown way out of proportion by the constant media focus, but at the same time, the methods to seem extreme. If anything, I’m wondering how you approach teaching your kids about finances.

Hi Andrew!

Welcome to Kung Fu Finance! Thank you for your nice comment, and you’ve reminded me that I should write an article (or several) on “Kids and Money” sometime soon (although I am no expert myself…mine are 6 and 4 so my “vast experience” stops there!).

But I am happy to talk about how I teach our girls about money (and also how I wish I did, because sometimes the two don’t quite mesh, although I give it my best!). Hopefully as a parent you understand…there is how I “wish” I parented every day and how I “actually” parent every day.

Yes, I’m not sure about the Tiger Mom concept—to be honest, I probably don’t know enough about it to be able to comment on it very well (I guess it depends on the definition of “Tiger Mom”, and like you said it’s been blown so out-of-proportion on the media it would probably be difficult to agree on a definition for it!).

In general, I think Kung Fu Guy and I are probably somewhere in the middle—we don’t necessarily want our girls to go to Harvard or be the number one pianist or other such ambitions unless that’s what they want (and they are willing to work hard for it), but on the other hand we can be pretty strict—before we had kids we sat down and more or less came up with our “brilliant” parenting philosophy of:

“We don’t want to raise brats!”

(I know, deep stuff, huh?) LOL. But seriously, this simple philosophy has worked pretty well for us so far (knock on wood!)– we are not their “friends”, although hopefully one day we will be, but we are their parents, and we can be pretty strict (especially about getting along with other people—manners, respect, politeness, etc.).

So in that sense I can be a bit of a Tiger Mom I guess, and I also do believe in having them stick with things they’ve started, so maybe I’m more of a Tiger Mom than I thought!

Anyway, I don’t mean to ramble and yes I will happily write a post on Kids and Money (and hopefully get lots of feedback from the community, too, as again, my actual “real-world experience” stops at age 6!). So far my 6-year-old definitely values money—she is obsessed with finding pennies, nickels, etc. when we are walking around and faithfully puts them all in her piggy bank!

And she also knows the value of gold, and honestly we don’t really talk about it that much around the dinner table (although possibly more than most families), so it surprises me that she somehow innately understands that gold is valuable at such a young age.

Thanks so much, and welcome to Kung Fu Finance!

Next, Keith asks,
I am just starting out on investing.
Would this website and your advice be useful for people who live outside the States? I live in the UK.

Hi Keith!

Welcome to Kung Fu Finance! I get this question frequently, and my answer is “yes,” (at least I hope so!). Especially in today’s globalized world, it is difficult to talk about the U.S. without discussing Europe (Greece, Spain, Germany, and even the UK although you guys aren’t in the eurozone) and also China, Japan, India, and Australia. We are much more interdependent than we have ever been, and the crises that affect one country propagate to many of the others. Also, unlike many sites, I am not solely focused on “the U.S. stock market”—while that is what most Americans immediately think of when they hear the word “investing”, I prefer to consider that as just one part of the whole investing universe (not to mention the corruptness of Wall St., but I digress…)—stocks (and global stocks and exchanges, not just the U.S.), bonds, commodities, real estate, currencies, and more.

I also talk about macroeconomics quite a bit because particularly in today’s global economy they are more important than ever. Geopolitics, history, and macroeconomics—these are the driving forces behind the major trends that you want to be “on the right side of” (to the extent possible!) as an investor. And most of the basics like “how to read financial statements”, “how to value a company”, “what is ‘yield'”, etc. apply to all places equally…

So in short, I hope that you find this useful no matter where you live! Welcome to Kung Fu Finance, and thank you for your question!

Next I have a comment from Gary in Australia, though while not necessarily a question per se brings up an interesting topic regarding Europe:

Gary in Australia says,

The open door policy between European countries, which was a requirement to joining the Euro community; is now becoming a major issue. In Greece there have been calls to “close the borders” and to “kick out foreigners living there”.

When my eldest son toured through France, Italy and Spain he said he was fed up with homeless Albanians (and other Previously East Europeans) coming up to him with hand written notes in English begging for money. It was especially bad around the Eiffel Tower where there were armed para-military in flack jackets keeping the peace. These people cannot gain legal employment in the countries they are in and cannot get financial assistance from the government.

The open border policy allows them to leave their homeland and travel through Europe with many trying to get into England as their dream destination. The Euro is doomed to extinction and the issue that will kill it off will be the open border issue. Watch if the Nazi party equivalent in Greece win a majority in the next round of elections. The borders will be closed and Greece will say sit on it and spin we are going back to the Drachma.

Thank you Gary! You bring up another important issue affecting Europe right now—their open door policy and immigration. David Galland referenced a very provocative article that he received from a friend on this topic in last Friday’s Daily Dispatch, and I encourage you to read it:

http://www.caseyresearch.com/cdd/golden-constant

Scroll down to “The Spirit of Geert Wilders” and see what you think…it’s a very provocative article and will definitely make you think. This article refers to the Muslim immigration into the Netherlands, but the open-border issues are similar to those of Greece.

Finally, I will end today by saying that Kung Fu Finance received its first-ever comment in a foreign language, so muchas gracias a Renato!

Renato says,
estoy completamente de acuerdo contigo kfg es un buen boletin yo estoy suscrito a los irreegulares muy bueno
saludos y feliccitacciones por tu web
renato

I will stop there and let you get on with your weekend…have a wonderful weekend and thanks as always for reading! Please let me know what you think about any or all of these questions and answers in the comments…thank you!

To your financial success,
— Kung Fu Girl

P.S. It’s June 1st today…are you 40% closer to your goals? That’s right…the year is 5/12’s OVER already!