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Chinese rare earth threat, bond market mess = Wednesday market dive

Written By | May 29, 2019
rare earths, bond market

Is the Yellow Kid too optimistic about the current China rare earth threat? Public domain cartoon, updated by T Ponick.

WASHINGTON. As of the noon hour (ET) Wednesday, the Dow Jones Industrial Average (DJIA) has plunged some 400 points for a nasty 1.5 percent loss. The broad-based S&P 500 and the tech-heavy NASDAQ are only marginally better. If you believe the current Wall Street scuttlebutt, the twin villains behind this decline are nasty trade threats coming from China. Like cutting the US off from their monopolistic supply of rare earth minerals and metals, which are vital to many US industries. Plus ominous recession warnings the bond market keeps phoning in. Post-Memorial Day trading action continues, entirely devoid of bullish fun.

One Chinese rare earth alternative

One bright spot: CNBC notes that at least one non-Chinese company mining rare earths got a boost today due to those increasingly explicit Chinese threats against US industrial interests

“Shares of rare earth miners in Asia Pacific surged on Wednesday after Beijing made a veiled threat toward Washington regarding the materials.

“In China, shares of JL Mag Rare Earth skyrocketed around 10% while Innuovo Technology jumped 9.95%. Lynas in Australia — one of the few rare earth miners outside of China — saw its shares surge more than 15%.”

A Norwegian fish story. By way of China

As a side note, the CNBC story offers an interesting side-note that illustrates just how touchy – and nasty – the Chi-coms can get when someone or some country interferes with their plans for world domination. Even if the complaint concerns something peripheral.

“…Norway saw its exports of salmon to China plummet after Beijing placed curbs on them — a move widely seen to be in retaliation to a Norwegian committee’s decision in 2010 to award the Nobel Peace Prize to a Chinese dissident.

“‘What it tells you is that you do not want China having a critical role in your supply chain,’ [analyst Fraser] Howie said. ‘Don’t become too dependent on China.’”

Too bad American companies like Apple and the US government didn’t figure this one out sooner. Ditto any business that uses rare earth metals or minerals in its products.

A rare earth chaser

CNBC next offers an interesting chaser paired with the rare earth story.

“On the subject of rare earths, the analyst said the minerals are ‘actually found in many places.’

“‘China has the largest mining capacity, largely because for environmental issues the States has pulled back from mining rare earths,’ he said.”

Gosh, what a surprise. Listening to that never-silent cadre of eco-freaks costs us again. There were, as I recall, at least one and perhaps two US-based companies mining rare earth minerals and metals out in the American West. But the eco-freaks, plus a bit of bad money management, put at least one of them into bankruptcy as I recall. Their mine was quite a large one, and someone could re-open it. Rare earth pockets are indeed rare. But they’re spread more widely around the globe than people might think. But you have to expend a big chunk of capital to mine them. And constantly suing eco-freaks don’t help with that aspect of rare earth mining. There’s a lesson here, but the US has yet to learn it.

Our huge uranium deposits in far-Western Virginia counties could begin to address that issue as well. But they sit in the ground to this day. And you can just guess why. But that’s a story for another day.

Speculating on Lynas?

BTW, for investors wanting to speculate on Lynas, that Australian rare earth miner cited above… The US trading symbol for its American Depository Receipts (ADRs) is LYSDY. It’s currently listed on the “pink sheets,” i.e., they’re in the way-over-the-counter category.

Even after today’s big news boost, this one is still essentially a penny stock –current price $2.25 per ADR/share, up a whopping 350 percent from Wednesday’s $1.72 per share closing price. So if you like to gamble on this sort of thing, only do it with mad money. I’m staying out, at least for now.

BTW2. For the uninitiated, ADRs are the way most non-US stocks are permitted to trade on US exchanges. The foreign stock shares are sliced and diced into roughly equivalent pieces valued in US currency and given new US trading symbols. Trading in ADRs in the US, as opposed to trading the actual stocks on international exchanges saves American investors from having to perform currency translations as well as the exorbitant fees associated with trading on those non-US exchanges.

Oh, and about that bond market…

The financial media has been trumpeting “Recession” for at least the last year now. But since the algos, the high-frequency traders and their high-speed machines appear to trade stocks only according to (often fake) news headlines rather than earnings and profit facts and figures, traders and investors continue to fear a big market crash. And after that, a long-predicted recession. Which, of course, would grip the nation just in time to derail President Trump’s chance for a second term in Election 2020.

Since the still-in-the-headlines “Russia Collusion” hoax is now sincerely dead, except for MSNBC and CNN of course, Democrats and their wholly owned media lackeys are now pushing the “obstruction of justice” manuscript Bob Mueller and his phalanx of Democrat prosecutors cooked up as a consolation prize. Gotta keep the anti-Trump stuff going thru next year’s election campaign.

But, as another added “insurance policy,” the Dems are gearing up to talk up a recession, with a big assist from the Communist Chinese government that wants to cut a China-favorable trade deal maybe in 2021 with a compliant Democrat in the White House. That inner-circle likelihood could be what’s behind the latest crash and recession fear mongering we’re seeing in the media.

A one-two punch for the bond market

The problem is, both Chinese intransigence on trade issues – they want to keep stealing our stuff – plus feverish and never-ending Democrat / Deep State efforts to get Trump and his pro-US, capitalist policies the hell outta D.C. – have got markets on all levels scared. Including the bond markets. The most recent rare earth cutoff threats don’t help one bit.

Perversely, bond markets signal investor nervousness when the price of existing bonds increase. In so doing, bond yields decline. While perverse – bondholders buy these normally boring instruments for the interest payments, not capital gains – the way this works is logical.

If something pays a fixed interest rate forever, and if its selling price goes up today, someone who buys that bond from you at a higher price will still get the same interest payment as you did. Except he’ll have to pay a higher price for the bond. Which means his effective yield is lower than yours was, because he had to pay a higher price to lock in that fixed interest rate. Get it?

Bond market yield curve offers an important warning for investors

Moving from theory to practice, another CNBC piece gives us the latest Treasury bond and note figures. And they’re starting to get a little scary.

“The 10-year Treasury note yield fell to its lowest level since September 2017 and traded around 2.22%. A portion of the so-called yield curve further inverted as 3-month Treasury bills last yielded 2.351%, well above the 10-year rate. A yield curve inversion is seen by traders as a potential sign that a recession is in the horizon.”

To pinch in on that “yield curve” stuff. Normally, you get more interest on a long-term bond than on a shorter-term bond. The reason is quite simple. If you have, say, a 2-year bond – one that matures in two years – you can expect to get a lower interest payment on that bond than, say, another bond that matures in 10 years. Or an even longer-term bond that matures in 30 years. The longer the term of the bond, the greater the “time risk.” Normally, less bad stuff can happen in a 2-year window than in a 10- or 30-year window. Therefore, the further out you go, the higher the risk. In the Wonderful World of Bonds, your compensation for that greater risk is a higher interest rate on that long-term bond.

An inverted yield curve is usually bad news for stocks

But when Mr. Bond Market flips this logic, as when the shorter-term bond starts giving you a better interest rate than the longer-term bond, that’s a clear sign that something’s rotten in Denmark. Or, in non-Shakespearean parlance, when interest-rate logic gets screwed up, investors’ crystal balls are almost always telling them to get the hell out of the stock market as the risk of a big economic downturn are increasing. In such a downturn, stocks have historically proven to be a greater risk to investors than bond holdings.

That could be what we’re looking at right now. Bond yields inverted at least a few months ago. Lately, the disparity has worsened. Either someone is playing a game. Or the worst is yet to come. The bond market is warning us. Ditto increasing tariffs and now rare earth supply threats as well. Result: Stocks are doing just awful.

If the worst is indeed on the horizon, it might be time to bail out of your riskier positions. We’ve been doing that a little bit already. But we’re accelerating those moves today. Yeah, it’s a bad time to sell, as stocks are already down quite a bit. But if you fear a significant economic downturn, it’s often best to get out, take a few losses if necessary. But, at the same time, preserve your capital so you can play again when the sun comes back out tomorrow.

Careful here. This is one very tricky market.

– Headline image: Is the Yellow Kid too optimistic about the current China rare earth threat?
Public domain cartoon, updated by Terry Ponick.


Terry Ponick

Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Senior Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17