Bankers Going Galt

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The short version of today’s DR is this rather depressing point: unless reversed by a personal wealth strategy of some sort, pensioners and retirees are getting poorer and poorer with each passing day. Probably less free as well. But definitely poorer.

It’s not just that stocks are falling, although they did that yesterday in both Sydney and New York. It’s that in the rush to the fill void of bankers who’ve currently gone on strike, more and more tax and pension money is being put at risk in markets. At this rate, if you’re serious about your retirement plans, you’d better have a close look at what your government is doing to your money and your pension/retirement assets.

But let’s go back to the beginning, with bankers going Galt. Going Galt, of course, refers to the strike of the wealth producers in Ayn Rand’s book Atlas Shrugged. High taxation, wealth confiscation, and wealth redistribution drive a whole class of hero industrialists to take a runner on capitalism and retreat to a secret fictional valley in Colorado called Galt’s Gulch, where they catch and grill trout and wait for the world to burn down.

The comparison breaks down now that we think about it. A small portion of today’s bankers are not wealth producers. They are wealth stealers (or destroyers). But let’s run with the idea that they are going on strike. What do we mean and what does the idea mean for Aussie mining companies?

By bankers going on strike, we mean that local Aussie banks are not doing much to help local Aussie miners raise money to stay in business. While the government has set up Rudd bank to fund “viable” commercial property developments (which indirectly supports bank loan portfolios), it apparently thinks the best thing to do for the miners is let them go broke (as they do at this stage of the resource cycle) or sell them to China. It is clearly of two minds on this last option (or of no mind at all, perhaps).

Why aren’t the banks lending locally and what are they doing instead? Well, they’re probably terrified that commodity prices won’t recover any time soon, rendering the collateral posted by mining companies worth a lot less. Or, worried about future losses in commercial property, the banks are saving up for a rainy day.

In fact, one place they are saving is at the Reserve Bank of Australia. That’s where banks can park money in RBA’s exchange settlement accounts. Late last year, the banks were parking billions of dollars there overnight. For three days in October, the total figure crested over $10 billion and on December 19th, it spiked to over $16 billion. Using our crude Excel skills, we’ve built a chart of your showing the overnight balances in ESAs since the credit crisis broke in June of 2007, when two hedge funds owned by Bear Stearns went bust.

Source: Reserve Bank of Australia

The RBA pays an overnight interest rate on ESA balances that’s 25 basis points below whatever the current cash rate is. It does this to encourage banks to lend money into the marketplace and not hoard it at the RBA. Or in the Bank’s own words, “the rate on ES balances is set 25 basis points below the cash rate target to encourage ES account holders to lend surplus funds into the market rather than leave them with the RBA.”

But here we are over eighteen months into the great global deleveraging and Aussie mining firms can’t seem to borrow money from Aussie banks. “Mining companies will be forced to consolidate and seek further support from Chinese and other Asian state-owned interests as local and foreign banks baulk at committing to $36 billion in loans due from the sector in the next two years,” report Jo Clarke and Katja Buhrer in today’s Financial Review.

“The collapse in commodity prices has threatened the viability of new projects and slashed mining profits, pushing more producers down the path taken by Rio Tinto (ASX:RIO) and Fortescue Metals Group (ASX:FMG), which have sought large capital injections from Chinese state-owned enterprises.” And Lachlan Edwards, head of corporate financing at Goldman Sachs, adds that, “The majority of mining companies in Australia are going to be dependent on fighting for limited bank availability,”.

If you grant that a large portion of the debt that comes down is Rio Tinto’s US$18.9 billion to pay for the Alcan acquisition, you still have a lot of company’s left on the outside looking in. They really have only four options: tap private bond markets as BHP has in the last two weeks (although smaller firms won’t be able to do this), rights issues to raise money from existing shareholders (hello Rio), asset sales, or…find a capital partner in China.

“But wait,” says Australian Small Cap Investigator guru Kris Sayce. What about the $50 billion Future Fund? Does it have a role to play in capitalising Australia’s credit-starved small cap miners?

“We’re not sure what’s going to happen to the Future Fund, but its chairman David Murray has put himself about recently.” Kris writes in today’s Money Morning (his daily e-letter on Aussie share markets) “We wonder if this is the first step in the transformation of the Future Fund.”

“If you recall, the Fund was set up to cover the underfunded public defined benefit pension fund. The main sources of the funding were from government profits (i.e. It taxed more than it spent) and the transfer of the last batch of Telstra shares….So why the sudden increase in David Murray’s profile? He’s been pouring forth on the global economy, on the Australian banking system, and now according to The Age newspaper, credit ratings agencies.”

“Our guess is that with billions of dollars under management, and the clamour for more stimulus packages, the temptation for the government to dip into the Future Fund and spend it ‘in the national interest’ will be too much to resist.”

Hmm. Interesting. China Inc. has much deeper pockets than the Future Fund. But if Aussie banks and foreign banks won’t extend new lines of credit to miners like OZ Minerals, maybe the Future Fund will. Stay tuned.

Also be warned. Investing the assets of public pensioners in the stock market doesn’t always work out. Remember, the stock market is not a retirement machine. It involves risk. Just ask the Pension Benefit Guaranty Corporation (PBGC).

The PBGC is the agency set up by the U.S. government to cover the defined benefit pensions of employees of bankrupt companies. When companies aren’t going bankrupt, it’s not necessary for the PBGC to funded by Congress. The company can manage its own assets.

But lately, the PBGC has been pretty busy. And with Chairman Obama indicating that General Motors is headed for bankruptcy, the PBGC will have even more defined benefit pensions to pay out in the coming years. Too bad it dumped most of its assets into the stock market in the last few years.

The Boston Globe reports that, “Just months before the start of last year’s stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks. Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.”

Be careful if you ever hear these words, “We’re from the government. We’re here to help you retire.”

Run.

If the government can’t manage pension funds, how do you think it’s going to handle managing a company a complex, bankrupt industrial/financial enterprise GM? Granted, GM’s deposed CEO Rick Wagoner is a model of incompetence. But is Barack Obama going to much better? Have you taken a look at HIS business plan for America? You know…the one that ends up with over $10 trillion in debt over the next ten years?

At first Obama’s rhetoric was disarmingly pleasant and most vacuous. Change. Hope. A better tomorrow. Who is against those things? Who is for a worse tomorrow?

But behind the million dollar smile is a mind of malice toward free markets. WE are entering the age of command capitalism where the government becomes the lender (not real capital when you’re borrowing Chinese money, but let’s not quibble) and manager of last resort. The audacity of the command economy is that the folks in the White House can run GM better than the folks in Detroit. Truth be told, neither has been doing very well, which doesn’t bode well for the country.

But if Australia is facing the consolidation of the mining sector as the number of cashed up capitalist and willing bankers dwindles, than Washington is witness to a consolidation of failed and failing institutions. Bear Stearns, GM, and who knows who is next are gradually swallowed up by the biggest and most wobbly institution of all, the Federal Government of the United States and its paper thin dollar.

Having said all that, the dollar rallied yesterday against foreign currencies and commodities. Oil was down. Gold was down. The greenback was up. How can that be?

We turn to the report we mentioned yesterday from the Economist (Manning the Barricades). The economist warns that repeated cycles of competitive currency devaluations could keep the U.S. dollar stronger for longer than most of us dollar bears expect.

“While devaluation does not rescue countries from weak global demand, it does provide help at the margin, as well as alleviating deflationary pressures. Consequently, under our main risk scenario, governments are happy to see their currencies devalue provided it does not have adverse consequences for solvency of borrowers.”

“This results in repeated cycles of competitive devaluations. There are periodic calls for co-ordinated action to stabilise foreign-exchange markets, although agreements prove elusive. Under this scenario, the U.S. dollar proves stronger than U.S. policy makers would like, as investors continue to view the U.S. currency as a safe-haven of sorts.”

There are lots of global players like the Chinese and Russians who clearly do not view the dollar as a safe haven at the moment. But at the moment, they don’t have much to choose from. So perhaps the Economist is right. Competitive devaluations will continue, making the dollar a winner by default.

This means that the whole project of ruining the dollar is going to require even more effort by Obama and his sidekick Tim Geithner. And as Edward Chancellor points out in today’s Financial Times, until bank lending rises to match the expansion in the global monetary base, inflation will not pass into the real economy.

“Monetarists concede,” Chancellor writes, “that central banks are printing money in vast amounts to stimulate their economies. This will not lead to inflation, they say. The newly minted cash is not being lent out but stored in bank vaults.

“The ‘money multiplier’, to use the technical term, has collapsed. It is no secret why this is happening. Households and businesses are over-stretched and fearful about the future. As a result, they are borrowing less and saving more. As long as such fears persist, according to monetarist logic, the Federal Reserve can carry on printing money with impunity.”

But there must be a penalty for such a rash expansion of paper money. The Economist explored that too in its dollar doomsday scenario. More on that tomorrow.

Dan Denning
for 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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19 Comments on "Bankers Going Galt"

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BT Humble
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You need to either remove 3 zeroes from each number on the Y-axis, or change the label to “millions $A”

BTH

8020 Financial
Guest

Interestingly ‘Atlas Shrugged’ is currently number 24 on the Amazon bestseller list. Very impressive performance for a very old book. I know Ayn Rand was not a very nice person in real life, but some of her ideas are so prescient its scary.
Dan, if you know John Galt, could you put in a word for me?

John
Guest

Dan,

I like the Atlas Shrugged reference, but I’m currently reading the book (not too far into it) and you kind of spoiled a part of it for me. You really should be more careful to announce a spoiler alert before you do that.

The Outback Oracle
Guest
My daughter is currently buying a house and can get the money at 5.25%. Sales to First Home Buyers are at all time highs. So we have plenty of money for people to buy houses, plenty of money (Rudd Bank) to lend for more shopping centres and Unit blocks, but no money for miners. For a country with a Foreign debt of $40,000 per every man woman and child these are strange priorities. The answer of course lies in the fact that if we lend the money to miners, and not into real estate, the real estate market collapses, our… Read more »
Greg Atkinson
Guest

Oracle…what is this news about Michael West. Do tell?

Perth Investment Returns
Guest
Perth Investment Returns

“Meanwhile, the analysis showed rental yields in the city were now 4.82 per cent for houses and 4.92 per cent for units.

The figures have catapulted the city from the lowest-yielding among the state capitals to one of the highest.

Mr Joye said “for the first time in probably 40 years” investors were able to positively gear – or earn more from rent than they were paying out in loans and other expenses – properties.

“That should lead to investors returning to the market (this year).”

Kev
Guest
Dan Would love to think that if the Future Fund is ‘deployed’ – it might be for something relatively useful like mines, ports, railways and attendant services ( accommodation, roads, power, water ). Apparently out-of-fashion ‘neo-liberal’ concepts like generating wealth and creating jobs. But try taking that concept to KRudd and Team. Given their intention to crush the life out of mining in general and coal in particular via the CO2 cap-and-trade ( see press today re Greg Combet getting ready to fillet the coal industry for not meekly jumping on board the Suicide Express aka CPRS ) – what… Read more »
Travis
Guest

John, Ayn Rand is a terrible author anyway. Its several hundred pages of narcissistic waffle dressed as fiction. The worst blight on this site has been the mention of her….thank god it was just a token reference (unlike radio nationals segment).

Novista
Guest

Golly gosh, Travis. Your literary criticism is positively incondite. I’m awed. Maybe you would have liked “The Foutainhead” better?

Seriously, don’t you see any parallel between her waffle and current events?

george
Guest

Travis has got his head so far up his fundamental orifice that I’m surprised he can still see to type…….Ayn Rand arrived in the USA at the age of 19 to escape from socialism and would, if she were alive today, be saddened at the state of the western world today(mostly due to greed and socialism). She wrote those two books for the masses who needed the fictional presentation in order to understand it…… I suggest travis read a few of her other books; in particular “The value of Selfishness.”……..Well said Novista!

Travis
Guest

Novista, I actually made it to the end of fountainhead…trash. How is that for incondite! Good old Rourke the genius outlaw, the kind of person all of us intellectuals would like to be, no?

But is the proof in the waffle? Perhaps…(in amongst the trans-fats!)

Charles  Norville
Guest
I took the time to read the hyper link in DR ‘Australia Ponders its Chinese Future’, it was the highly regarded The Economist Intelligence Unit Report 3 and on the second last para on page 15 it states “Unlike most countries, the US has few liabilities in foreign currencies, so sharp depreciation has only a modest impact on the country’s ability to service its debt. Foreign holders of US liabilities, however, and the countries against whose currencies the dollar depreciates, are hit.” If I’m not mistaken the money lent to Aus by mainly China is in the form of US$… Read more »
Pete
Guest

Charles I am sure quite a few Chinese (in China) would agree with your speculation here.

If we think about it from their perspective – imagine if we were overcrowded and poorly resourced here, yet New Zealand had loads of space and resources and a better standard of living? We’d be jealous and see it as ‘wasteful’.

How exactly they might go about changing this is another matter…it might come down to the things you’ve said…or something different altogether.

Greg Atkinson
Guest
Mind you over-crowding is all relative. People can live quite well in densely populated modern cities. I would guess many people living in a nice apartment in Shangai probably have no desire to move to Wagga Wagga :) As for the resources issue, well China is fixing that now, they just buy mining companies or buy stakes in mining companies. Oh and remember the Chinese are very active in getting mines up and running in Africa. If Australia does not move seriously into high tech industries then we will become simply the world’s quarry and farm. A nation inhabited by… Read more »
Pat Donnelly
Guest
China invaded to become twice its size in the last century, Tibet and the Mongolia? part. It is engaged in colonizing these areas. Australia reinvented smallpox from the DNA recipe alone….There will be no invasions of Australia. As a result, Russia and USA decided not to destroy the vaccinations against small pox. We are world leaders. It follows that we do not need more industry. We are a post industrial society, according to Hermann Kahn in the 70’s. We are one of the most equitable societies so we need not fear internal problems whereas China et al all have problems.… Read more »
Pat Donnelly
Guest
Gregg, don’t you know we are nearly overcrowded as it is? No water…too many crocs… Africa is not a competitor as wars are common and usually started over mining. Our mines are vast and attractive by comparison. We are into high tech. Hypersonic transport anyone? EM energy with Wal Thornhill? Biowarfare? Why bother with labour intensive factories? WWW links across the continent would be nice tho. High tech can be obsolete quickly. What we need to do now is wait to see what malinvestments are wiped out. The automobile industry seems set to shift. Investment in electric motors is probably… Read more »
Charles  Norville
Guest
We do not need to borrow from anyone and certainly not US$ that not even the US care about. We have hundreds of billions in compulsory super that the Feds actually own via tax deductions. That money could be recalled to the coffers, fire sale over seas assets, doesn’t matter. We establish Aus purpose designed defence industries such as ocean going patrol boats that can be manned with 20-30 personnel with high tech anti-missile technology, about 500 patrol boats will do for starters. We develop purpose design helicopters for Aus defence needs, helicopters can form part of a patrol boat’s… Read more »
daniel d
Guest
If its ok for chinese state-owned enterprises to own australian mines, what is wrong with the creation of australian state-owned enterprises in order to own australian resources? why do we still have a failed obsession with supposed private enterprise? there is not much private about todays global financial system, it would have entirely evaporated without state funding. if aussie banks don’t lend to aussie mining companies, why doesn’t the government fill that void instead of handing out 900 to the punters? our government seems fine with the totalitarian communist-capitalists next door, why can’t we salvage some sort of democratic socialist… Read more »
Greg Atkinson
Guest
The government is creating a state owned enterprise…it is going to rollout and then manage the national broadband network. Mind you they do not have a business case and also do not have a clue how it will make money, but never let a business plan get in the way of spending tax payers money. Do you want this same sort of business acumen applied to running mining companies etc? Actually what could be done though is for Australia to set up another investment fund and use that to take stakes in various companies such as those that own important… Read more »
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