China Heads West

Beijing's New Silk Road to Europe

By Erich Follath

China is building new roads, railroads and pipelines from Central Asia to Europe in an effort to build new connections to the rest of the world. The results may be good for the Chinese -- but less so for the other countries involved.

In Kashgar, on the western edge of the Peoples' Republic of China, the view is reminiscent of the Bible and the days when the ancient Silk Road began to take shape here in the 1st century B.C. Today, the government plans to use Kashgar as the starting point for a new, global trade route -- but at this point, there is still little evidence of it.

"Posh, Posh," the men shout on their horse-drawn carts, as they make their way to the meadow where drivers are selling camels. Potential buyers expertly reach into the animals' mouths to examine their health. The air is dusty and filed with the sounds of animals neighing, braying and bleating, as if the horses, donkeys and goats know that they won't stay tied up for long.

Women, only a few of them wearing veils, walk through the chaos carrying sacks of apricots and raisins.

The Sunday market in Kashgar, one of the world's largest, attracts several thousand livestock owners and traders to the oasis city on the edge of the Taklamakan Desert, near the high mountains of the Pamir and the Hindu Kush. It is a fascinating mix of ethnicities. Uighurs, wiry men with knives in their belts, are in the majority. There are Nomadic Kyrgyz wearing felt hats, and occasional light-skinned, green-eyed boys who look like descendants of Alexander the Great. The market is policed by the region's true rulers, the Han Chinese.

Here, people can still taste and feel the myth of the old Silk Road.

On the edge of the market, an artist captures the past on old silk paper. He paints images of the ancient caravans that struggled through deserts and across high mountains beyond the Jade Gate Pass, passing through the Kashgar oasis on their way to cities like Samarkand, Bukhara, Tehran and Baghdad, or transferring their precious goods, in a relay race of sorts, to other caravans that continued to the Mediterranean and the Roman Empire. The caravans introduced silk and jade, ceramics, paper and tea to the Western world, and brought garlic and castor oil to the Far East. The Silk Road was a meeting place of world cultures and a missionary route for religions, first for Buddhism and later for Islam. When Mongolian dominance collapsed in the 14th century, the trade routes petered out.

Massive New Project

Xi Jinping, 63, the president of China and general secretary of the Communist Party, wants to revive the myth and build a New Silk Road, in large parts along the old trade route. It would mark the return of a legend. For some time now, many of his speeches have included references to "yi dai yi lu," or "a belt, a road." It is a gigantic project, and China envisions about 60 countries being involved, or about half of humanity.

China wants to expand trade along the route and develop infrastructure. Beijing has earmarked $40 billion (€36 billion euros) for the project, to be invested in building new roads, and in railroads, pipelines and ports from Lithuanian to the Horn of Africa, Sri Lanka to Israel, and Pakistan to Iran.

Two railroad lines lead to Germany, one from Zhengzhou to Hamburg and the other from Chongqing to Duisburg.

In order to finance the massive project, the Peoples' Republic initiated the establishment of a financial institution: The Asian Infrastructure Investment Bank (AIIB). For years, Xi Jinping was displeased by the fact that Washington provided his country with little say in organizations like the World Bank and the International Monetary Fund (IMF). In June 2015, 57 countries signed the charter of the AIIB, against the will of the United States. They included France, Great Britain and Germany.

Everyone wants to be involved when the Chinese are planning big things.

But what is Beijing trying to achieve with its Silk Road plan? Does the Chinese leadership want to promote economic development in nearby and faraway countries and "bring together" the world, as it insists in its government propaganda? Is it because Chinese companies need globalization to bolster their stuttering economy and create new export routes for surplus production of goods, as well as routes for importing oil? Or is the real goal to break the West's political dominance -- a plan, in a sense, to conquer the world?

Beijing has deployed officials to work on the major project in Kashgar, where it is developing a new economic corridor. The high mountain road to Pakistan is being expanded, and when it is finished it will lead across the Khunjerab Pass to Gwadar, a port the Chinese are building from scratch on the Arabian Sea. Feasibility studies for ambitious new railroad lines to Kyrgyzstan and Kazakhstan are stacked on the engineers' desks. And although the proposed lines present enormous technical challenges, everything seems possible since the Chinese built a railroad line to Tibet, at altitudes above 5,000 meters (16,400 feet).

It's clear that China's Communist Party is investing enormous amounts of money in its transit routes toward Central Asia and in new economic zones. The standard of living among Kashgar residents is rising, and tax-advantaged high-tech parks have created new jobs in the provincial capital of Ürümqi.

The economy is growing at 9 percent in the Xinjiang Autonomous Region, outpacing growth in many other parts of the country.

In return, Beijing expects gratitude and compliance -- mistakenly. For most Uighurs, there is something far more important than having a better choice of goods to buy: respect for their people and their religion, Islam. Instead, they often experience the opposite. Mosques are placed under video surveillance, Muslim men are no longer permitted to wear long beards, and Chinese officials force their children to break the fast during Ramadan.

Economic and political elites welcome the opportunities brought by Beijing's financial injections, but the local population in Xinjiang view the new Silk Road, and the domination by Han Chinese that comes with it, with considerable skepticism. This is a recurring pattern, with concerns becoming even greater immediately beyond China's borders.
Almaty, Kazakhstan

Two airlines now serve the route from Ürümqi to Almaty, the biggest city in Kazakhstan. New roads and railroad lines now bridge the 1,500-kilometer (930-mile) distance between the two large cities. A special economic zone is being established in the Chinese border town of Khorgas.

China's neighbor plays a key role in the Silk Road strategy. It is no accident that Chinese leader Xi Jinping first mentioned the new project in Kazakhstan, in September 2013, during a meeting with Kazakh President Nursultan Nazarbayev. On the surface, at least, his host seemed enthusiastic about the project. He had his railroad minister announce that the country would invest several billion US dollars in new trains and lines in the next five years.

Nazarbayev, 76, the son of a shepherd and head of the regional Communist Party during the Soviet era, has been president of the independent Republic of Kazakhstan for a quarter century. He's an authoritarian ruler and ever since he built Astana, a new capital of glass-walled skyscrapers in the middle of the desert, the West sees him as a megalomaniac.

Nazarbayev rules a country that is almost eight times the size of Germany but has a population of less than 20 million.

He can afford extravagant projects because he controls massive natural resources, including oil, natural gas and uranium. So far, he has managed to sedate the population with revenues from these mineral reserves, but now Kazakhstan is also suffering from falling commodity prices. The per capita income, measured in dollars, has declined by half since 2013, and the economy is stagnating.

Nazarbayev skillfully cooperates with the various major powers, allowing the Americans to exploit Kazakhstan's natural resources, making the European Union the country's biggest trading partner and cooperating with the Russians in the Eurasian Economic Union and in security groups.

But he pays special attention to his country's "strategic partnership" with China. In recent years, pipelines have been completed to bring crude oil and natural gas from the Caspian Sea directly to the Peoples' Republic. The Chinese now control almost a third of Kazakh natural resources and are in the process of buying their way into the agricultural sector on a large scale.

At the beginning of this year, Nazarbayev signed a law that granted foreign investors 25-year leases on real estate, triggering a storm of protest that shook the foundations of his power.

"Down with the Chinese, Kazakhstan for the Kazakhs!" an agitated crowd chanted in a demonstration near the National Museum in late May -- despite the fact that Nazarbayev had already withdrawn the law by then and dismissed his economics minister.

The public anger was directed against the alleged "selling out" of the country. A short time later, armed men attacked members of the national guard in the industrial city of Aktobe.

Twenty-five people died in the ensuing firefight in early June. And the protests continue.

For many Kazakhs, the new Silk Road is not a promise but a threat. This suspicion is especially palpable in the Korgas special economic zone on the border. On the Chinese side, new businesses sprang up, apartment buildings were built and luxurious shopping developed. On the Kazakh side of the border, only a few gas stations and kiosks are complete, and gaping empty lots alternate with giant garbage dumps. Kazakhs come to Korgas with the new fast train from Almaty, buy cheap Chinese goods "over there" and take the evening train home.

But this minor border traffic is of little importance to Beijing. It is more interested in the big picture, and Korgas' important role as a hub through which trains roll on their way to Central Asia, Iran and, ultimately, Europe. The turnover of goods has reportedly doubled in Korgas since 2014.
Bishkek, Kyrgyzstan

If there is anyone who is equally at home in China and Russia, the European Union and the United States, and who can evaluate the Silk Road project from a Central Asian perspective, it is Djoomart Otorbaev, the former prime minister of Kyrgyzstan. After a year in office, he became an independent political consultant in the spring of 2015. Since then, he has spent his time as an intermediary between different worlds, regularly jetting back and forth between Beijing and Moscow, Astana and Brussels.

Bishkek, a four-hour drive from Almaty on an upgraded highway, was a caravan station in the days of the classic Silk Road. Today the sleepy city, with its Stalinist architecture, feels like a vestige of the Soviet era. The image is misleading, because Kyrgyzstan is more cosmopolitan, democratic and liberal than its neighbors. The small country of nomads, with a population of 6 million, maintains good relations with the West, as well as with China and Russia. Kyrgyzstan is both a member of the Shanghai Cooperation Organization and the Moscow-dominated Eurasian Economic Union.

"We are a poor country, wedged between the high mountains of the Tian Shan and the Pamir, without access to the sea," says Otorbaev. He praises his country's free election as "exemplary" but is critical of rampant corruption among the Kyrgyz elite. "For trade and tourism, we need every conceivable connection to the outside world, including open borders and transport routes. That's why we can only benefit from China's Silk Road project."

He admires China for having lifted so many people from total poverty in the last few decades, more than any other country in the past. "But China should grant its citizens more freedom at home. And it shouldn't behave like an elephant in a china shop abroad."

Otorbaev, trained as a physician, likes to dissect the situation in his native region. Whenever the Chinese overrun a place, he says, it goes like this: "They bring their own people, and they start by building what they want. And then if someone demands a permit, they bribe the relevant officials."

But Beijing cannot succeed in the long run if it continues to exploit its status as the economically stronger country. "The Chinese lack soft power. They don't understand that if you want to succeed in the long term, you need to win over people's hearts." Still, he adds, senior Communist Party officials are at least listening to his criticism now, and this is progress, but it hasn't led to any consequences yet.

A New Marshall Plan

In an ideal scenario, the new Silk Road could become the biggest economic stimulus program since the Marshall Plan, with which the United States helped Germany get back on its feet after World War II. Russia should also benefit from the initiative. And Moscow, which needs investment during its current recession, is fundamentally interested in closer cooperation with the Peoples' Republic.

Nevertheless, the Kremlin is deeply suspicious of an increasingly self-confident China. Russian President Vladimir Putin believes that Beijing aims to solidify its dominant political position with the Silk Road initiative.

Iran and Turkey strongly support the Silk Road project. The first direct train from China arrived in Tehran in February to unanimous applause. The Peoples' Republic has long been the Islamic Republic's biggest export partner, and the Iranians are grateful to the political leadership in Beijing for supplying them with high-tech goods and allowing Iran to continue exporting its raw materials during the sanctions. Even today, after most economic restrictions have been lifted, Tehran is unwilling to place all its bets on the West and reportedly intends to remain loyal to Beijing when it comes to lucrative deals.

Turkey takes a similar view of the situation. The normally self-confident Turkish president, Recep Tayyip Erdogan, is very accommodating to the Chinese. This may be because Turkey has few friends in international politics at the moment. And with an economy in crisis, billions from China come at just the right time.

But the new Silk Road is experiencing the greatest and most surprising success in a region that its "classic" precursor never touched: Eastern Europe.
Minsk, Belarus

The most exclusive five-star hotel in the capital of Belarus is called the Beijing, an ostentatious building with 180 rooms and a conference center that holds 500 guests. The hotel was a joint project by companies from both countries. The most popular restaurant in Minsk is also named after the Chinese city, and one of the items on the menu is baozi, dumplings filled with pork or bean paste.

Cantonese pop rules in the karaoke bars along the city's ring road.

More than 10,000 immigrant workers have come to Belarus from China in the last two years alone. Next to Ukrainians, they are the largest group of foreign workers. Air China recently introduced four nonstop flights a week from Beijing to Minsk -- an astonishing development, considering that the two cities are 6,500 kilometers (4,040 miles) apart, and Belarus has much closer historic and cultural ties to Russia.

The Union State of Russia and Belarus is a defense and economic community, and in better times political leaders in Moscow and Minsk even considered merging the two countries.

But now the Chinese are gaining ground in Belarus, where they spare neither prestige nor effort, nor cost, to outdo their trade rivals from Russia and the EU. When Chinese President Xi Jinping paid a state visit to Minsk in May 2015, his Belarussian counterpart Alexander Lukashenko, 61, rushed to the airport to pick up his guest in person and greet him with bread and salt. Xi had joint ventures established in which the Chinese held at least one more decisive vote than the rest.

The most significant of these major projects is called "Great Stone." The site near the Minsk airport measuring roughly 80 square kilometers (30 square miles) is currently being developed into a giant industrial park. In phase 1 of the Great Stone project, forests are being cut down and bulldozers are digging deep into the ground.

Large propaganda signs proclaim, in Russian, Chinese and English: "Time is Money, Organization is Life." Almost all the guest workers from the Far East work at the site, which will include company buildings, as well as schools, hospitals and housing for 170,000 people.

The E30, the highway that connects Berlin with Moscow, passes nearby. It is quite possible that this route will eventually become an appendage of the new Silk Road, which will then lead to Beijing.

Widespread Eastern European Interest

As important as Belarus is as a new bridgehead in the region for Xi Jinping, he isn't putting all of his eggs in one basket. Last November, the Chinese president invited 16 Eastern European leaders to his hometown of Suzhou. It was the fourth summit meeting of its kind, and it took place largely without the participation of Western media. In China, however, the newspapers were filled with stories about the two-day meeting, which was celebrated as a milestone along the new Silk Road. And just as their hosts probably expected, all of the Eastern Europeans tried to secure a piece of the big pie -- irrespective of whether this could jeopardize their own strategic interests.

In contrast to Central Asia, where some projects currently exist only on paper, many programs are already underway in Eastern Europe. Beijing reached an agreement with Serbia and Hungary in which it is paying for a new high-speed train from Belgrade to Budapest. Chinese firms are involved in the development of hydroelectric dams in Croatia and Poland. In Lithuania, funds from Beijing are being used to expand the Klaipeda port. And in the wake of President Xi Jinping's visit in late March 2016, the Czech Republic is also entertaining dreams of a privileged strategic partnership. "I would like to see the Czech Republic become China's gateway to the European Union," Czech President Miloš Zeman said during the visit.

Or will it become a gateway for something else?

Aside from the Silk Road investments, China's state-owned companies are on an aggressive shopping spree, especially in the field of high technology. At the same time, the Communist Party uses protectionism to seal off Chinese companies in the Peoples' Republic from Western competition and harasses companies from the West. There is no sign of a unified EU strategy to combat this unequal treatment, or of a unified position on Beijing's Silk Road project.

The Eastern European countries' rapprochement with the economic power from the Far East is viewed with suspicion in the EU. "It's our own fault if we in Europe do not speak with one voice," Chancellor Merkel said during a trip to Beijing last fall.

Translated from the German by Christopher Sultan

How to Fight Secular Stagnation

Michael Spence

Newsart for How to Fight Secular Stagnation

MILAN – Much of the world, especially the advanced economies, has been mired in a pattern of slow and declining GDP growth in recent years, causing many to wonder whether this is becoming a semi-permanent condition – so-called “secular stagnation.” The answer is probably yes, but the question lacks precision, and thus has limited utility. There are, after all, different types of forces that could be suppressing growth, not all of which are beyond our control.
To be sure, there is a strong case to be made that many of the growth-destroying headwinds that we currently face would be difficult, if not impossible, to counter in the near term without endangering future growth and stability. The result of these persistent conditions can be called “secular stagnation one” (SS1).
The first indication that we are experiencing SS1 relates to technology. If we are, as the economist Robert Gordon argues, experiencing a slowdown in productivity-enhancing technological innovation, long-term potential growth would be constrained. But even if innovation has not dropped off too much, or picks up again soon, the structural adaptation and behavioral changes needed to take advantage of the concomitant productivity gains will take time.
A second condition supporting SS1 is rooted in the impact of heightened uncertainty – about growth, job security, policies and regulations, and the many developments that could affect any of those factors – on investment and consumption. People simply don’t know whether their governments are going to start making progress in combating deflationary pressure, countering rising inequality, addressing social and political fragmentation, and restoring economic growth and employment.
With future demand far from guaranteed, private investment has been declining in many countries, including, most recently, China. The same goes for household consumption, particularly in the advanced economies, where a larger share of consumption is optional (for example, replacing consumer durables, traveling, and eating out at restaurants). Given how long it took the US economy, for example, to recover fully from the Great Depression – until World War II, when the government took over much of the demand side of the economy – it seems that a reversal in these trends will not arrive anytime soon.
The third indication that we are stuck in SS1 is debt. Households, corporations, financial institutions, and governments are all facing balance-sheet constraints, which it seems plausible to assume, are holding back expenditure and investment, elevating savings, and contributing to a broadly deflationary environment.
Actions aimed at supporting deleveraging and balance-sheet repair – such as recognizing losses, writing down assets, and recapitalizing banks – carry longer-term benefits but short-term costs. Indeed, balance-sheet repair takes time, especially in the household sector, and produces an unavoidable drag on growth.
The picture is somewhat bleak. But there is more to the story, revealed by another, more precise, question: is there a set of policy responses that could, over time, increase the level and quality of growth? Here, the answer also seems to be yes, suggesting that we are also facing another type of secular stagnation – call it “secular stagnation two” (SS2) – that is dictated by our unwillingness or inability to implement the right policy mix.
A key element of that policy mix would focus on tackling rising inequality. While the forces fueling this trend – in particular, globalization and progress in digital technology – will be difficult to counter fully, their adverse effects can be mitigated through redistribution via the tax and social-security systems. As economies undergo prolonged structural transformations, individuals and families need the resources to invest in new skills.
Moreover, monetary policy, which has been shouldering much of the burden of recovery since the 2008 economic crisis, must be rethought. The fact is that years of ultra-low interest rates and massive quantitative easing have not increased aggregate demand sufficiently, much less reduced deflationary forces adequately.
But raising interest rates unilaterally carries serious risks, because in a demand-constrained environment, higher interest rates attract capital inflows, thereby driving up the exchange rate and undermining growth in the tradable part of the economy. Given this, advanced-country policymakers should consider imposing some controls on their capital accounts (much as successful emerging economies do) – a move that would facilitate more independent and tailored approaches to exiting financial repression.
A third priority should be to strengthen fiscal responses, especially with respect to public-sector investment. Europe, in particular, is paying a heavy price for underusing its fiscal capacity – a decision that has been driven by the political unpopularity of debt and fiscal transfers. Under the right conditions, the balance sheets of pension and sovereign-wealth funds could also be tapped to fund investment.
There are many more areas where countries may need to consider reforms. These include tax policy, the inefficient or improper use of public funds, impediments to structural change in product and factor markets, and mismatches between the reach of global financial institutions and the capacity of sovereign balance sheets to intervene in case of financial distress.
SS1 will make addressing SS2 much more difficult. In fact, it seems that not even robust domestic and international policy responses would be sufficient to eliminate the risk that demand and growth will remain subdued for an extended period. But that is no reason to delay action in the areas where policy can make a difference. Just as our past policy choices helped to generate the SS1 we face today, failure to implement policies aimed at tackling SS2 could create a much more intractable and potentially unstable situation tomorrow.

The Biggest Threat to America That No One Is Talking About

Justin Spittler

America’s empire is coming to an end.

Since the fall of the Soviet Union, the U.S. has been the world’s dominant superpower. It has the world’s largest economy, an unrivaled military, and the world’s most important currency.

But that may soon change.

As Dispatch readers know, America has been in decline for decades. The 2008-2009 financial crisis only accelerated the country’s downfall, thanks to the Federal Reserve.

Since 2008, the Fed has held its key interest rate near zero. It’s also pumped $3.5 trillion into the financial system over the last eight years.

These “stimulus” measures were supposed to fix America’s economy. But they have only made it weaker.

Right now, the U.S. economy is “recovering” at the slowest pace since World War II. The typical U.S. family earns about $2,500 a year less than it did in 2008. And the number of Americans on food stamps has nearly doubled over the last decade.

In March, Casey Research founder Doug Casey warned that the U.S. is now on the edge of a complete economic meltdown.

Right now, we are exiting the eye of the giant financial hurricane that we entered in 2007, and we’re going into its trailing edge. It’s going to be much more severe, different, and longer lasting than what we saw in 2008 and 2009.

If you’ve been reading the Dispatch, you’re already prepared for this coming crisis. You own gold. You’ve stockpiled cash. And you’re out of most U.S. stocks. These simple strategies could save you thousands of dollars when the next crisis hits.
But there’s another major economic event that you need to prepare for.

• A new superpower is being born…

And that superpower is China.

China’s economy has exploded over the past couple of decades. In 2010, it overtook Japan as the world’s second-biggest economy. It’s grown at an average annual rate of 10% since 1990.

The U.S. economy has grown just 2% per year over the same period.

You may have heard that China’s economy is cooling. Last quarter, it grew just 6.7%. Keep in mind that’s coming from the Chinese government. Some analysts think China’s economy is growing much slower than the government claims.

Still, China’s economy is doing much better than the U.S. economy.

Think about it. If China’s economy is growing half as fast as the government says, it’s still growing at more than 3.3% per year. That’s almost three times as fast as the U.S. economy grew last quarter.

With America in rapid decline, China will soon become the world’s biggest and most important economy. And it could happen faster than most people think.

And that’s exactly why China deserves a look.

• Nick Giambruno, editor of Crisis Investing, just went to China in search of opportunities…

Like Doug, Nick is a contrarian. He likes to buy assets other investors hate. This simple approach often gives you the chance to buy world-class businesses for cheap.

According to Nick, China is one of the most hated markets on the planet right now. Investors are worried about its slowing economy… a potential property bubble… and China’s volatile stock market.

These are legitimate concerns. But the key is to find markets where the upside outweighs the risk. And Nick thinks China’s long-term potential far outweighs these risks.

• China wants to unseat the U.S. as the dominant world power…

To do this, China is spending billions of dollars to develop the “New Silk Road.”

The New Silk Road is the world’s biggest infrastructure project. If all goes according to plan, it will give China a huge economic advantage over the United States.

It’s one of the biggest investing stories in the world. Yet the U.S. media barely mentions it. Maybe because it’s too big and complex of an idea to fit into soundbites.

• Nick covered the ambitious project in the June issue of Crisis Investing…

Here’s Nick.

China's New Silk Road is all about tying Eurasia together with infrastructure. China is building a web of high-speed rails, modern highways, fiber optic cables, energy pipelines, seaports, and airports to span all of Eurasia.

Eurasia is a giant landmass that includes all of Europe and Asia. It contains most of the world’s resources and people. For centuries, countries that controlled Eurasia ruled the world. That’s exactly why China is going after it right now.

If China succeeds, Nick says it could “overtake the U.S. to become the dominant global superpower.”

This could trigger “the biggest shift in global power since the end of World War II.”

• China’s New Silk Road is a direct threat to U.S. global supremacy…

But it’s a huge opportunity for investors who know how to profit from it.

Unfortunately, China’s government has made it hard for foreign investors to directly invest in China.

You could own Chinese stocks that trade on the Hong Kong Stock Exchange. Or you could own one of the few dozen Chinese companies that trade on U.S. exchanges. Neither option allows you to put money directly into China.

Plus, many of China’s biggest companies only trade on the mainland, which includes the Shanghai and Shenzhen stock exchanges.

Because of these barriers, many investors don’t own any Chinese stocks at all. According to global bank UBS, China is “the biggest underweight” among global mutual funds. But that could soon change.

• China is opening up its financial system to the rest of the world…

MSCI manages indexes that track stocks from all over the world. Right now, MSCI doesn’t include mainland Chinese stocks in its indexes. But that might change son.

The Wall Street Journal reported on Tuesday,

It may just be a matter of time before shares listed in Shanghai and Shenzhen get included in MSCI’s indexes, many investors and analysts say, pointing to China’s stated goal of opening its markets.

Such inclusion means international money managers tracking the indexes would have to add A-shares to portfolios.

“A-shares” are shares of Chinese companies that trade in mainland China. If MSCI adds A-shares to the Emerging Market index, China’s weighting could jump from 2.7% to 20%.

In other words, money could soon start pouring into China’s mainland stock market.

• Nick found a way to profit before China opens its flood gates…

In June, Nick told his readers about a way to invest directly in China.

He recommended a fund that offers direct exposure to the New Silk Road. It holds a company that builds bridges and toll roads... a major Chinese railroad… and a company that’s bankrolling many “Silk Road” projects.

Best of all, this fund is easily accessible. It trades on the New York Stock Exchange.

• Nick’s China investment has already returned 15% since June…

But it could soon head much higher.

You see, this fund is trading at a 15% discount-to-liquidation value. That’s an incredible bargain. Liquidation value equals the amount of cash you’d get back if you sold every share of stock the fund owns at market value.

Unfortunately, we can’t tell you the name of Nick’s China investment. That would be unfair to Nick’s paid subscribers.

But you can learn more about this exciting opportunity by signing up for Crisis Investing. But first, please check out our newest training series below.

• You see, most people aren’t cut out for crisis investing…

It’s not easy investing in markets most folks hate. It’s hard to buy a stock that’s been falling.

But you can often make huge returns by going against the crowd. Some of Doug’s most well-known crisis investments delivered gains of 600%, 1,333%, and 1,733%.

Our four-part training series will help you decide if crisis investing is right for you. You’ll learn everything you need to know about this little-known, yet highly effective strategy. Click here to sign up for our FREE workshop.

Chart of the Day

Nick’s China investment is “abnormally” cheap.

Today’s chart shows the discount-to-liquidation value for Nick’s China fund since 2010. The bigger the discount, the better the deal.

You can see this fund’s traded at a discount each year since 2010. Between 2010 and 2015, the discount averaged 8.4%.

When Nick recommended the fund in June, it traded at a 20% discount. Today, it trades at a 15% discount. In other words, it’s still abnormally cheap, but it’s getting less cheap by the day.

This discount will continue to shrink as Chinese stocks go from “hated” to “loved.” It could even disappear entirely. To make the most of the investment, you have to act soon.

Mother of All Bull Markets Has Only Just Begun

Chris Vermeulen

The current economic landscape is changing by the day and rarely for the better.  This is from the standpoint of the middle and lower classes.

As negative rates become increasingly part of the new normal, more depositors are swept up by the creeping confiscation of their savings. I expect that the other part of the “cash trap” endgame, the actual elimination of large currency bills, will also soon accelerate. First in Europe where the ECB recently put an end to the printing of €500 bills and soon after everywhere else.

The point is that Central Banks and the FED knows this prolonged period of ZIRP (Zero Interest Rate Policy) is not only highly “irregular”, but that it is harming a healthy environment for investment and economic growth. Yet, they are paralyzed with “fear”.

Perhaps what they do not realize is that it is going to happen anyway. You cannot get back to “normalization” without incentives to save and invest. Sure, when rates go up, there will be a giant sucking sound, like the undertow of the sea after it washes to shore and then goes back out. But in time, as investors and savers get rewarded for saving their monies, they will eventually start investing those savings and that will bring the economy back after the Great Reset.

After this “Great Reset” all investors will see exceptional values if they have some monies, (gold), saved to capitalize on these. Right now? Everybody is afraid to take the risk with assets being so high, and savings so low. Even bankers are afraid, much like political leaders to make the necessary changes.

Investors of all levels of experience are attracted to gold as a solid, tangible and long-term “store of value” that historically has moved independently of other assets. My analysis shows that gold will be implemented to protect ‘global purchasing power’ and minimize losses during our upcoming periods of ‘market shock’. It serves as a high-quality, liquid asset to be used when selling other assets would cause losses.
Central Banks of the world’s largest long-term investment portfolios use gold to mitigate portfolio risk in this manner and have been net buyers of gold since 2010.

Investors should make use of golds’ lack of ‘correlation’ with other assets which makes it the best hedge against currency risk. Though we are in for a period of great financial turmoil, investors can safeguard themselves by investing smartly in gold. Do not be left behind and see your dollar assets lose value. Invest in gold!

Gold is the only asset which will increase value:

In todays’ negative interest rate environment, one should definitely be more concerned about the “return of one’s money, than the return on one’s money”. Considering the threat of negative interest rates, it is obvious why people are rediscovering the value of holding gold.

Gold tends to perform well in declining or negative real interest-rate environments. The deeper Central Banks move into negative rate territory, the more gold is going to be supported, as the cost of carry disappears. High real rates are bad for gold but negative real rates are quite good for it!

Gold is the only asset class, which will maintain its value during times of ‘financial crisis’. It has done so previously in the past and I observed its performance during the beginning of the year, in which its status affirms it as the preferred safe haven.

There will be times during this ‘crisis’ when different assets classes will be in focus.  I will continue to guide you as to the best profit making assets, during this period of time. If you are holding any stocks, this current rally is the last chance to liquidate your holdings; gold will give one an excellent buying opportunity within a few weeks of time and should be used to purchase this for the long-term period.

Unfortunately, I foresee very difficult economic times ahead for all.  Therefore, it is best to be prepared and take proactive measures, in advance, so as to avoid the pain rather than regret it later!

Rumors of a Deutsche Bank-Commerzbank Merger

Germany’s two largest banks held talks, causing many to speculate about the future of the ailing banking sector.

By Lili Bayer

Two months ago we indicated that there are serious signs of trouble brewing for Germany’s largest bank, Deutsche Bank. Now, there are growing indications that Deutsche Bank’s crisis is escalating, while the country’s second largest bank, Commerzbank, is struggling and Germany’s banking sector as a whole is facing increasingly grim prospects.
The skyline of Frankfurt am Main, Germany's financial hub, is pictured on Aug. 22, 2016. DANIEL ROLAND/AFP/Getty Images
The skyline of Frankfurt am Main, Germany's financial hub, is pictured on Aug. 22, 2016. DANIEL ROLAND/AFP/Getty Images
Reports emerged earlier this week in German media that Deutsche Bank and Commerzbank had held talks about a potential merger. On Aug. 31, Deutsche Bank CEO John Cryan quickly dismissed the idea that his bank is seeking a merger. While we do not know the content of the exploratory talks between Germany’s two largest banks, the fact that meetings were held at all about a potential merger signals that Germany’s banking troubles are accelerating.

Together Deutsche Bank and Commerzbank represent what used to be the Big Three banks, which, after their foundings in the 1870s, helped build German industry and support its export-oriented economy. While the banks are not as dominant in the German economy as in past decades, they are still financial giants, with Deutsche Bank formally categorized as one of the world’s 30 systemically important banks. These banks are subject to special regulatory oversight due to their disproportionate ability to impact the world’s financial system.

The report of merger talks between Deutsche Bank and Commerzbank is the latest in a series of ideas floated by bankers as Germany’s top lenders desperately search for ways to cut costs and improve profitability. These plans have ranged from the expected – such as restructuring and job cuts – to highly unconventional measures. For example, in June, Reuters cited anonymous sources as saying that Commerzbank was exploring the option of hoarding billions of euros in vaults as a way of avoiding paying a penalty to the European Central Bank due to negative interest rates.

For Deutsche Bank and Commerzbank, a merger could help cut costs while reducing the intensity of competition in the banking sector. German policymakers and bankers have long advocated for more consolidation in the country’s expansive banking sector. In fact, Commerzbank became the second biggest bank in Germany in part through a merger with Dresdner Bank in 2008. And despite dismissing the report of a merger with Commerzbank, Cryan has publicly called for more consolidation in Germany’s banking industry.

As the German financial community began assessing reports of the merger talks, Felix Hufeld, the head of German financial watchdog agency BaFin, warned that merging two weak banks does not usually create a strong one. He pointed out that banking mergers are no panacea for the problems confronting the sector.

The German banking sector is increasingly under pressure for two main reasons. First, German banks are relatively inefficient. The 
banking sector is bloated, with nearly 2,000 lenders and tens of thousands of branches. According to a study by Moody’s, German banks’ costs in 2015 equaled 73 percent of their earnings, while the average in the eurozone was 64 percent. German lenders struggle with high costs and intense competition in the domestic market and therefore see low profit margins.

This weakness has been compounded by a second factor: low and negative interest rates. Many German lenders are used to depending on interest rate margins for income while offering some services to depositors at low or no cost. As a result, low interest rates have significantly eroded banks’ ability to make money. In fact, it has become difficult for German banks to incentivize customers to keep their money in financial institutions. Demand for gold has increased, while Germany’s biggest manufacturer of home safes, Burg-Wächter, reportedly saw a 25 percent increase in sales of safes in the first half of 2016 compared to a year earlier, as some Germans opt to keep more cash at home.

For Deutsche Bank and Commerzbank, the long-standing inefficiencies and intense competition of the German banking sector, coupled with the new challenge of declining interest rates, has already led to serious financial difficulties. Deutsche Bank’s net profit fell 98 percent in the second quarter of 2016 compared to the same time last year. Moreover, Commerzbank’s net profit declined by about a third.
Commerzbank Net Profit
Deutsche Bank Net Income
As Germany’s banks search for ways to improve their financial positions, Italy’s ongoing banking crisis is presenting another threat to stability. German banks are the second most exposed to Italy (after France), with a total exposure of $92.7 billion, according to the Bank for International Settlements.

According to Commerzbank’s financial statements, as of the end of the second quarter this year, the bank’s Italian sovereign debt exposure was 10.8 billion euros ($12.1 billion). While around half of the bank’s total exposure relates to Germany, about a quarter relates to other countries in Western Europe.

Deutsche Bank’s net credit risk exposure to Italy, meanwhile, was 13.3 billion euros at the end of December 2015, and its gross position in Italy is 35.4 billion euros, according to the bank’s annual report. As meaningful solutions to Italy’s banking woes remain unreachable, German banks will have to contend with growing risks from the Italian market.

We have written in depth about Deutsche Bank’s troubles, but the recent talks between rivals Deutsche Bank and Commerzbank show that both banks are increasingly feeling pressured to find ways to ameliorate their precarious financial positions. Germany’s banking problems are growing quickly, and bankers are struggling to respond.