–Normally we’d turn the floor over to the technical maestro here at DR headquarters, Murray Dawes. He’s been analysing the S&P 500 for free over on his Slipstream Trader YouTube channel for most of this year. Those S&P forecasts have been pretty handy for Aussie investors.
–But the bearded one is up in his native New South Wales visiting family. He’s due back tomorrow with a new update. In the meantime, he also recorded a video recently in which he explains why he bothers to do what he does, and how he’s tried to make his work useful to investors like you. You can watch that video here.
–Nothing much happened overnight in the market that’s worth reporting, to be honest. The Dow finished down in America. One reason given for the off day is that Slovakia’s government became the only one of 17 European Union members to reject a plan to increase the size of Europe’s bailout fund by several hundred billion dollars.
–This is apparently no big deal, though. Rejecting the deal has caused the coalition government to fall. The new government in waiting has promised to approve the plan. Even though Slovakia is the second-poorest member of the EU (Greece is first), its taxpayers will help bail out French and German bankers.
–You see, government is part of the oligarchy. It can’t vote against the interest of the cartel. The second it does, it’s replaced.
–By the way, this makes this moment in history a little more like 1989 when the Berlin Wall fell than 2008 when Lehman Brothers fell. True, the financial problems of the Welfare State are a direct result of a private sector crisis in 2008 becoming a public sector crisis in 2011.
–But what we have now is the crisis of the oligarchy, much like the crisis that led to the fall of corrupt and bankrupt communist regimes in Eastern Europe that culminated in the fall of the Soviet Empire in 1991. Greece, the birthplace of ancient democracy, may be the first regime that defaults. But it won’t be the last.
–There are several interest groups who have an interest in preserving the status quo. The bankers want to keep passing on losses to the public. Bondholders who lent money to sovereigns (mostly banks) want the taxpayers to bail them out. Politicians want to please the people who vote for them. But they must do the bidding of the people who’ve bought them.
–It’s getting very complicated to sustain the image that the people in control are working for the best interest of the public. That’s probably because they’re not. They’re working to save their own skins and line their own pockets. But does any of this have an affect on what’s going on here in Australia?
–Former NAB and BHP boss, Don Argus says Australia is going to have to deal with Europe’s fallout for years. The problem, as he points out in an interview with Eric Johnston in today’s Age, is that debt has to be extinguished, somehow, some way. Argus says:
“Recapitalising [Europe’s banks] doesn’t make a dot of difference if you’ve still got impaired assets on your balance sheet…The reality of debt, and particularly sovereign debt, is the Australian banks will start to see the cost of funding their balance sheet going up and that is the case worldwide…The cost of money will increase and that’s just a fact…It will be the cost of funding the big balance sheets, because Australian [businesses] rely on international markets to fund their balance sheets…Unfortunately debt doesn’t go away – it gets repaid over time or someone takes a haircut.”
–It sounds like Argus is saying that the Reserve Bank of Australia doesn’t control the real price of money. That seems like a truism when you realise that Australia is an importer of capital. The mining and housing booms have been paid for with money borrowed from foreigners. This money has to be refinanced. In the years ahead – if you can get the money in a Credit Depression – it’s going to cost you more.
–Australia’s public sector debt is only 22% of GDP. But when you add all this borrowed money for the housing and mining booms, you get a net foreign debt of $674 billion. That’s 56% of GDP. And while GDP can go down in a recession, the debt will remain. And will probably become larger relative to GDP.
–Our point? Australia borrowed a lot of its current prosperity, just like Ireland, the UK, America, and Europe. In a credit depression, the reckoning cannot be avoided.
–We’re going to expand on this subject during our speech next month at the Gold Symposium in Sydney. We’re talking about fair money and social justice. And maybe we’ll join Hugh Morgan in his call for the RBA to be abolished and for Australia to return to the gold standard.
–By the way, we don’t get any kick-back if you sign up for the Gold Symposium. It’s pretty good value at $199. And we’ve enjoyed going the last few years. Gold’s recent pull back makes now a good time to talk about gold’s role in your financial plan without the white-hot pressure of rising prices.
–How did we all get lost on the way to Bigdom? Author Michael Lewis explains in a recent Vanity Fair article called California and Bust. Lewis is writing specifically about America and how public pensions have destroyed state finances. But his thoughts on how people have acted in the last 30 years could just as well apply to Australia. He writes:
“The people who had power in society, and were charged with saving it from itself, had instead bled society to death. The problem with police officers and fire-fighters isn’t a public sector problem; it isn’t a problem with government; it’s a problem with the entire society. It’s what happened on Wall Street in the run-up to the subprime crisis. It’s a problem of people taking what they can, just because they can, without regard to the larger social consequences. It’s not just a coincidence that the debt crisis of the states spun out of control at the same time as the debts of individual Americans. Alone in a dark room with a pile of money, Americans knew exactly what they wanted to do, from the top of the society to the bottom. They’d been conditioned to grab as much as they could, without thinking about the long-term consequences. Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans, and the American people would express outrage at the Wall Street people who paid themselves to design the bad loans.”
–Maybe the attitude Americans have taken to debt (and responsibility) is a uniquely American problem. But maybe it isn’t either. Australian’s have huge household debts. And the financial services industry continues to automatically plough billion of dollars a month in the stock market while collecting a fee for it. The pensions and retirements of millions of
Australians depend on this money being there in 20 or 30 years. What will happen if it isn’t? Or there’s not enough of it to retire?
–Credit caused the world to explode. This was the real Big Bang. And the worst part about an ever-expanding universe is that we all get further and further away from each other. The only things connecting us anymore are the weak institutions of inefficient government and our Facebook and Twitter accounts. For many people, they’ve never been as connected…or as lonely and financially isolated as they are now.
–But while the real universe may keep expanding forever, our financial universe can’t. It’s contraction is going to cause people to re-develop or rediscover more natural connections with one another, connections in which the State doesn’t arbitrate or interfere. That should be an improvement.
–For investors, it means what you pay for companies will be reconnected with how well they grow earnings, use shareholder capital, make prudent use of debt and above all, deliver goods and services that people want. That will be an improvement on this current casino stock market too.
–But before that, the crash.
–Now how about some reader mail? It’s been awhile. We read everything that comes in. We don’t always have time to reply. Sorry in advance. But keep the letters coming to email@example.com.
Stop moaning all the time about things that personally irritate you and get on with the job of informing your subscribers with news that REALLY matters. You piss me off most of the time, but I still keep reading in the hope of learning things I don’t know, but need to know.
A disgruntled reader
–Okay, but it sounds like you don’t agree with what we think really matters. Your time is your own. Use it wisely.
Hi There. You asked for it.
Your ego seems to be bigger than your brain. Maybe you should return to the land of your mother’s milk and mix with your equals. Just a thought from an x-subscriber who knows that this type of behaviour will cost you in the long run.
I now know that people power is nothing you listen to. You should try to learn from others’ mistakes and also your own.
But I guess you are too ego-tripped to do just that.
–In the long run we are all dead. But this is no excuse to behave irresponsibly in the short run. But what are you on about anyway? Is this a threat? You do make a good point about the long run. It’s what Michael Lewis was getting at with debt. We are accountable for our actions all the time. Being greedy or impulsive or selfish isn’t a good long-run strategy.
Many of your comments are spot on. But you are too hard on “the battlers” whilst too soft on the bankers who are the ones to blame for the whole mess. Industrial action is a legitimate method to ensure a higher rate for your labour. Also it’s strange to complain about the government having to pay out pensions. Pensions are deferred wages. They have been earned over the working stiffs life and it’s been agreed they should be paid after he/she reaches a certain age the government is also trying to renege on paying them and when they are due to start paying them
–We weren’t taking sides with Qantas management against the unions. Qantas management has plenty to answer for when it comes to their own pay and the quality of their management. Maybe the employees would be more pliable if the management was seen to be biting the bullet too.
–But our main beef was linguistic. “Industrial Action” is a deceptive term. Words matter. Words are ideas and ideas have consequences. Calling something the opposite of what it actually is amounts to pure deception.
–The pension issue is a thorny one. Workers have paid into defined benefit pensions for their whole working life. They expect them to be there. For those pensions to not be there is unfair. But life is also unfair. And with a globalised workforce, the social contract between businesses and workers is going to have to be rewritten in the Western world.
–You simply can’t have companies like GM whose main mission is now to sell cars in order to meet the health and pension obligations of retired workers. And you can’t have cities in California where 90% of the budget goes to pay the pensions of retired police officers and fire fighters. It’s not sustainable.
for The Daily Reckoning Australia