All Quiet on the Fronts

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It’s quiet….too quiet. Stocks in New York were mostly unchanged over night. So now what?

Well yesterday Aussie stocks were up 2.5%. The question is whether this the leading edge of a liquidity driven rally in shares…or just an old-fashioned but impressive short squeeze.

One thing to keep your eye on is the G-20 finance ministers in Busan, South Korea this weekend. They will get together and agree to do nothing urgent. The one thing they will definitely NOT be doing is raising interest rates. They are too creeped out about a sovereign debt crisis in Europe leading to another liquidity crisis, according to Bloomberg.

Of course we’re already reading some reports in the press that Europe is not Lehman and that the stock market rally is a signal that Europe’s debt woes won’t put a lid on stocks for the rest of this year. But Simon Kennedy and Shamim Adam of Bloomberg report that, “Group of 20 central bankers are delaying their withdrawal of emergency stimulus as Europe’s debt crisis shakes financial markets and threatens to hinder the global recovery.” (Mmmm….gushers of free cash to boost bank profits. Yummy).

There’s a global recovery? How did we miss this? Just for the record, we reckon it’s going to be very hard for economies in Europe, America, the UK, and Japan to put up big annual growth numbers when they are saddled with so much public debt. The servicing of this debt is going to consume a larger and larger share of tax revenues, which will struggle to grow as it is.

“China property risk worse than in US,” reports Geoff Dyer in the Financial Times. “The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank.”

Hey. That sounds familiar…

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and the UK before your financial crisis,” Professor Li Daokui told the FT.

By now you might be thinking we see housing bubbles everywhere we look. That might be true. You can never predict where credit will go during a credit bubble. It picks an asset class that is accessible to the public and whose boom benefits multiple groups.

This article by Fan Gang, a professor of economics in Beijing, shows that China’s credit bubble was driven by local government borrowing. Local government’s borrowed big to achieve double digit growth rates. Part of that growth came from infrastructure spending (resource bullish) and housing development.

With Europe’s troubles and America’s oil spill (yet another example of how the modern centralised State is increasingly ineffective in dealing with a crisis), the prospect of a bubble blow out in China has receded from the investment landscape. But it hasn’t gone away.

Here in Australia the big news yesterday was Xstrata’s decision to cancel jobs and spending on coal projects in Queensland. Xstrata deemed that those projects would be adversely affected by the Resource Super Profits Tax. It canned them.

Some analysts think the re-rating of mining and oil shares (for different reasons) has already made both sectors attractive. Value investor David Dreman says, “We think the proposed 40 percent Australian tax is likely to come down some…And since both Rio Tinto and BHP have gone down very significantly, we think there’s some value there.”

He continued by saying, “We also think there’s a good deal of value in some of the exploration and development companies in the United States that have been going down since this enormous BP spill…I think there’s value in some of these natural resource stocks now.” Both Kris Sayce and Alex Cowie seem to agree, although both are being cautious about managing risk right now.

And finally, some reader mail in response to the mostly constructive criticism we received last week. Have a great weekend!

Hi Dan,

Have followed your Reckonings for years now. Call it my cross to bear. Subscribed to the Reserve for my sins because I like what you write – along with that Bonner fellow.

Sure, mining can be a neat way to poison the environment and given half a chance any miner will cut corners – this is what they do in terms of risk mitigation for their costings in a) determining mine viability and risk in the first place and b) maximising profit. But the same applies to most industry – paper mills, tanneries – what have you. Weak legislation is the culprit, along with poor prosecution.

However, I am a big fan of small government and being left the hell alone to lead my life my way in peace. So it seems I am on the horns of a dilemma – I don’t trust big business enough to do the right thing but neither do I trust government to do the right thing. I think that in this we are possibly in the same boat.

There is therefore but one sad solution. And when I become the benevolent dictator and sole ruler of my country, I’d be grateful to have your services as counselor and lord high executioner for whomever I see fit to be put up against the wall and shot.

Keep up the good work. I enjoyed the essay a lot. I would not have been as polite [to critics] but since I am an alleged passive aggressive personality type I guess my views would have been more forthright. As in ‘eat s$*t and die m*&#$r f&^@#$rs!. Die!’ (ESAD for short – drop it into conversations with bankers and other people you don’t like – it’s great. Makes me laugh every time and it is Amazing with a capital A to see what happens in your favour when laughing). I call it Dictator Prep.

I digress.

So I appreciate your efforts to keep it on the level without losing the plot as I most assuredly would have done.

Warm regards

William

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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11 Comments on "All Quiet on the Fronts"

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Ross
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The Economist has got into the inflation v deflation debate here
http://www.economist.com/economics/by-invitation&fsrc=nlw|hig|06-03-2010|editors_highlights

have a good weekend!

John
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Thanks, Ross. Have a good one yourself. Wonderful how so many experts managed to avoid really answering the question. It’s like reading Hansard. This fellow has obviously been watching the rising value of gold for some time: http://www.perthnow.com.au/news/world/gold-stolen-from-watchmaker-rolex/story-e6frg1p3-1225875415166

Steve
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Steve’s quote of the day

“Steve want to use a house for the reason they are built for A ROOF OVER YOUR HEAD, Evil want to use it as a money maker and to Fu@k over those like me who want to use it for what it was built for”

Biker
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Just a quick reminder that we’re all visitors to a site whose express purpose is to help us all _make money,_ Steven.
But here’s your free Sydney house, anyway:

http://www.perthnow.com.au/money/home-for-free-but-theres-a-catch/story-e6frg2uc-1225874732724

Don’t say we’re not _all_ trying to help you, son!~ :)

Steve
Guest

Is that the best you could do?

Lachlan
Guest

Crumbs that house aint bad for free. Chuck tiles of course and go tin on roof but the pink tubs just gotta stay, oh yeah baby ;)

Stillgotshoeson
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Comment by John on 4 June 2010:

Thanks, Ross. Have a good one yourself. Wonderful how so many experts managed to avoid really answering the question. It’s like reading Hansard

They answered the questions with their opinions and that is all they or anyone can do..

Same goes for Property vs Shares vs Gold
Liberal vs Labor
Living in a society or an economy
All can offer arguments for their beliefs, pros and cons of both, depending on your own beliefs is how much you agree/disagree with someones opinions.. as for “answers” they can not be found as it all comes down to opinions..

Biker Pete
Guest
Steven: “A ROOF OVER YOUR HEAD” It’s all you said ya needed, mate. I found you a floor and four walls, ya ungrateful b@stard (large, flightless Australian bird). Yes, that’s the best I can do for now. I did try to talk my wife into _giving_ you one of our houses. I told her you were a hard-working young baggage-handler, with $130K+ frugally saved, who was being held forever captive in his bedroom by cruel parents. Hearing a loud *clunk* I turned around… and to to my horror, I discovered the love-of-my-life had laughed her head off… . Once sold… Read more »
Biker Pete
Guest

Loved Bill’s recent piece on Harleys, though. Nice piece of logic!~ :)

Biker Pete
Guest

Lachlan: “Crumbs that house aint bad for free.”

But the bonus was the free boats, each with its own fireplace, Lachie:

http://www.perthnow.com.au/money/home-for-free-but-theres-a-catch/story-e6frg2uc-1225874732724

*Clunk*

Drron
Guest

And maybe the China housing bubble has stalled.Several articles over recent days of the drop off in sales in May-
http://www.chinadaily.com.cn/cndy/2010-06/05/content_9937981.htm

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