Australia’s Response to the U.S. Bailout Plan

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Normally, bank robberies work the other way. An armed and masked gang walks into the bank, fires a few shotgun blasts, tells everyone to get on the floor, and asks the clerks to fill up canvas bags with the fabulous moolah. It’s simple.

That is not the way it works in modern central banking, though. Today, it’s as if Hank Paulson is pointing his “big bazooka” bailout plan at Wall Street and demanding it opens up its wallet so he can fill it with other people’s money. The Paulson Gang (or Goldman gang) is lining up for its share of the loot accordingly. But the real robbery is taking place in Washington.

Today’s theft is a lot more subtle, mostly because it’s taking place right underneath your nose. That is the trouble with the obvious. You become so used to it that you fail to find it unusual. Sadly, it is as business as usual in Washington D.C. this week.

First, the Wall Street Journal reports that the shclubbs in Washington have agreed on the “principles” of the bailout plan. The words “lawmaker” and “principle” probably don’t belong in the same sentence. But our job is to investigate the facts, not pass judgment (yet) on the protagonists in our story. So what are the facts?

Surprisingly few! The principals involved all met at the White House and walked out of the room with no real agreement. They did, however, agree to four principles which any future agreement must address. Not exactly Wilson’s 14 points. But give them time.

What are the four principles? First, a bailout plan must provide taxpayer protection. Second, it must provide oversight and transparency. Third, it has to preserve home ownership in America (though how it will or even CAN do this is anyone’s guess). And fourth, the US$700 billion lump sum sought by the U.S. Treasury will be doled out incrementally, to make sure Hank Paulson doesn’t spend it all in one place.

It doesn’t sound like much was resolved, does it? Still, stocks appear to be trading exclusively on the idea that a bailout plan will be passed by the Congress and will rescue the banking system from the edge of the abyss. The Dow was up nearly 300 points early in the day. It faltered later, but still closed up almost two percent to 11,022.

While Wall Street tries to save its own neck at taxpayer expense, the sell-off in Australian stocks is making the assets of junior miners even cheaper to the parties that are happy to acquire them at any price.

In fact you could argue, as my colleague Al Robinson has in Diggers and Drillers, that one of the prime results of the market volatility is increased merger and acquisition activity in the juniors. Share prices are down. Yet many quality mining projects clearly have the potential to lead to growing earnings for the firms behind them.

There are two possible complications to Al’s bullish scenario, though. One is commodity prices. If the equity market volatility turns into a full-fledged collapse, it’s hard to see this being too terribly bullish for commodities. A major recession in the U.S. won’t kick start commodity prices from their current doldrums.

But if the bailout plan in Washington is perceived as inflationary, but also just enough to prevent a U.S. recession, well then you may have the conditions necessary for a rebound in certain resource prices. High energy and labour costs have already pinched supply in some key markets. The spring is coiling.

The other complication is capital. With Aussie bank lending plummeting and the share market not an ideal place to raise money right now, how will small companies fund their big projects? Are there enough risk-taking investors to make it happen?

One group of investors that don’t seem to care about the credit markets or valuations (perhaps because they find them so stunningly attractive) are the Chinese. Today’s Australian reports that, “Chinese- controlled Australian Bulk Minerals has agreed to a reverse takeover of Grange Resources in a deal that secures future iron ore pellet production for China’s biggest private steelmaker, Shagang, and will lead to the listing of Tasmania’s Savage River mine and pellet plant.”

If you keep looking for the action in the big blue chips like Rio and BHP, you will probably miss the flurry of action brewing beneath the surface. And it’s definitely brewing. This brew, however, is not toxic like the mess in Washington. THAT brew could still poison us all. But we’ll have to wait and see what the Paulson Gang cooks up before we know how much lower stock prices are going to go before we can buy. Until Monday…

Dan Denning
The Daily Reckoning Australia

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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Comments

  1. Resource juniors with “quality prospects” and little or no debt can always leave the stuff in the ground for a while AT LITTLE OR NO COST. Alternatively they may be bought out or melded by larger companies including Chinese concerns.

    The key risk to my Gold juniors (and they have everything else going for them) is production cost. There is a supply/demand price misbalance at the moment – but inevitably, limited supply and an absence of easy to find, easy to exploit multimillion oz. discoveries will have to push the long term pricing upwards.

    Stock price movements don’t make sense at the moment Can anyone explain why ALK with a 15% interest in BCI goes down a few percentage points on the news that BHP lost its high court battle for exclusive use of some railway infrastructure? Can anyone explain why the gold juniors drop (with the market) when the price if gold increases significantly.

    Dan is probably correct in saying that there simply isn’t a lot of speculative money around. Are investments in good “inferred” or “proven” resource finds really that speculative? Ignoring current volatility the long term answer has to be NO. I would therefore recommend buying resource juniors that satisfy a range of “undervalued” investment benchmarks that can be easily researched. In my view, these would include 1) good prospects in uncontroversial locations 2) well funded and knowledgeable major shareholders 3) ongoing partnerships with the majors on some prospects 4) real prospects of good cash flow within 2 or 3 years and 5) capacity to find more resource prospects.

    Good prospecting! A resource junior can strike it rich regardless of what is happening on Wall Street.

    Coffee Addict
    September 26, 2008
    Reply
  2. It is not Socialism, but Aristocracy

    In many of these posts critiquing TARP most writers are describing this proposed legislation as either Socialistic or Fascist. I imagine it is because the true nature of what this bailout represents is an assault on modern vanities.

    The assault on modern vanities comes from the fact that this bailout is nothing more than a return to Aristocracy. A small group of very wealthy, and now very powerful people, are able to direct tax dollars to the protection of their wealth. Prior to this overt action on the part of the Bush Administration, transfers of this amount of wealth from the working class (we do not call them peasants, but I am wondering if the word peasant has not etymologically changed into working class) were usually accomplished through the awarding of government contracts to “the right people”.

    Since most of these government contracts required the performance of some service or the delivery of a manufactured good it did not cause to much concern. This is because everyone in the process, including the guy driving the truck delivering the stuff got a cut of the money.

    With TARP it is all economic theory in justification and a Billionaire Bailout in execution. The money pledged by the taxpayer is going to go directly to wealthy individuals so that the debt encumbering their assets will transfer to those subject to US withholding taxes.

    Just as fear of the Norseman was used to create a privileged hereditary class in Northern Europe, fear of an “Economic Disaster” is being used to create a privileged class in the United States. There will now be endless claims to US treasury funds whenever a threat to this class’ asset base is perceived; from jus primae noctis we now have jus primae pecunia.

    The most interesting aspect of this phenomenon is how the white collar worker is subtlety accepting this transformation as a fait accompli. I am not sure if this is an example of the pluralis imperialis, identified by Ludwig von Mises, or just capitulation in the face of perceived historical trends in the hope of fair treatment. However, the white collar worker needs to take notice of Kelso v. New London. In that Supreme Court decision it was held to be perfectly constitutional for the state to take private property from one citizen and give it to another citizen. The deciding factor in the case was the second party was wealthier and asserted that it could pay more taxes to the state. What is most astounding about the case is that the second party was/is going to develop the taken property with taxpayer supplied “Urban Development Funds”.

    So, for all you Bloggers looking for the right ism to describe the current proposed bailout, look to an acy; that is: Aristocracy.

    Anthony Teamson
    September 27, 2008
    Reply
  3. To Anthony Teamson.

    If only all DR Aussie Readers were as smart as you.

    You nailed this right. Your words speak truth in a way that no others who write about the U.S. economy ever have.

    Well done!

    Smack MacDougal
    September 27, 2008
    Reply
  4. What was the point of that post Anthony? What is TARP? Are we expected to understand latin in order to figure out what you are saying?
    If you cannot write for the audience, then don’t waste our time trying to figure out what you are saying because you like to use big words, acronyms and latin.

    I did like your point about Aristocracy, however it does lack examples to support it

    Reply
  5. I understood his point Pete.

    These parts apply to you Pete:

    “Prior to this overt action on the part of the Bush Administration, transfers of this amount of wealth from the working class (we do not call them peasants, but I am wondering if the word peasant has not etymologically changed into working class) were usually accomplished through the awarding of government contracts to “the right people”.”

    “The most interesting aspect of this phenomenon is how the white collar worker is subtlety accepting this transformation as a fait accompli.”

    Reply
  6. eh!… off with their heads, I say. Long live the REVOLUTION.

    Reply
  7. The struggle to find an appropriate ‘ism’ to label the bailout bill just demonstrates how the issues have been entirely usurped by ideology.

    Reply

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