Deal Or No Deal


–If you missed Friday’s YouTube update from Slipstream Trader Murray Dawes, do yourself a favour and go have a quick look now. Murray shows what might happen on the ASX/200 and the S&P 500 if a debt deal in the US is reached. You can look for the obvious rally. But he’ll show you where the key technical levels are for the coming days. Here’s a hint: 4450 and 1295.

–Murray’s analysis assumes some sort of debt deal will get done today, which is Sunday in the US. He also assumes, quite rightly, that in the long run it won’t matter. Not the long run 50 years from now. But the long run in which the US defaults on its debts anyway. Even if that does not happen in the next 24 hours, you can bet the farm that the US AAA credit rating is on borrowed time. And that is such a momentous event/subject that we will have to give more time to it tomorrow.

–For now, the All Ordinaries is at an 11-month low, as you can see from the chart below. Not that we know much about technical analysis (we leave that to Murray) but it seems like an important juncture. We chucked the chart in this morning to illustrate the pivotal battle of our time, in financial markets anyway: debt deflation versus easy money and loose credit. So what is it telling you? Read on…

Stocks in need of reflating
Stocks in need of reflating

–The August 2010 low in the All Ords corresponds to the launch of QEII, or the second round of Quantitative Easing from US Federal Reserve Chairman Ben Bernanke. The Fed announced in August of 2010 that it would buy over $600 billion worth of US Treasury bonds and notes in the coming months. Its aim (other than funding US government deficit spending) was to keep interest rates low in order to spur growth in the economy.

–The economy hasn’t responded. But the stock market sure loved it. The All Ords climbed by over 15% over the next six months. That’s two good years in a row, by traditional stock market standards, crammed into six months. By keeping the price of Treasury-linked credit low, the Fed fuelled inflation in stocks, at least until February of this year.

–By February, Europe’s sovereign-debt troubles resurfaced, this time in Greece. A bailout deal was reached. But the realisation that Europe’s banking system was stuffed with governments bonds as collateral, and that government bonds were…well…stuffed…clearly scared the big pants off the market. The forces of debt deflation marched again and stocks fell.

–Then the earth moved in Japan. It seems odd that the trifecta of disasters in Japan would be bullish for Aussie stocks. After all, Japan is a big consumer of Australia’s energy exports (thermal coal, LNG). But it’s not so odd if you understand the relationship between the Aussie dollar, the Japanese Yen, and Australian stocks.

–In short, the forces of credit expansion and easy money fuelled the rally in March. The Yen rose in the early days after Japan’s quake. The belief was that Japanese capital deployed overseas (where interest rates are higher than zero) would be repatriated back to Japan to pay for the cleanup and fund the rebuilding of quake-struck zones.

–That may have happened. But what definitely happened is that central banks in Japan, America, and Europe all agreed to intervene in currency markets to stem the Yen’s appreciation. A stronger Yen would have been a big blow to Japanese exports. And Japan had enough on its plate at the time.

–Thus, Aussie investors were again saved by the flood of easy money resulting from low interest rates in another country. The carry trades—where investors borrow at low rates in one country to invest in higher-yielding assets in another country—have been a huge boon to Australian stocks. As the Reverend Jesse Jackson might say, “If the money doesn’t flow, the stocks won’t go.”

–This may surprise a lot of Aussie investors. It’s commonplace to think that China’s resource demand is what supports Australian stock prices. But the chart above proves that’s not the case. Corporate earnings are directly affected by Chinese demand, of course. But the chart above suggests Aussie stock prices don’t trade on corporate earnings but on global money flows. And global money flows depend on whether credit is expanding or contracting.

–Which brings us to today. Aussie stocks may get a short-term bounce from a done US debt deal. But where will the money flows come from? Will they come from the lure of the strong Aussie dollar? And will they be sufficient to ignite stocks to a second-half rally? Or will the forces of debt deflation continue to grind down stock prices?

–This is not a set of questions that will be answered in a day. We expect precious metals to win over paper money. But the cancelling out of global debts is going to bring down prices for most financial assets, including some of those linked to commodities. If there’s no real demand underneath the financial demand for a commodity, it will fall.

–We’d ask the commodity doctor himself, Alex Cowie. But he’s off to Kalgoorlie for the Diggers and Dealers show. Hopefully he’ll be able to file a report for you later this week. An article in today’s Financial Review discusses the prospects for uranium explorers and producers in Western Australia. It says the state’s path toward uranium production has been “slowed” by Japan’s nuclear accident.

–Alex might agree and still be bullish on uranium. In fact, we’re almost certain he would. He wrote about uranium in the most recent edition of Diggers and Drillers. In that report he made the case for African-based producers and for uranium itself. He wrote:

“The market turned a cold shoulder to uranium stocks after Fukushima. Prices of most quality uranium stocks are less than half of what they were just five months ago. Meanwhile, the market for actual uranium is as strong as ever. The long-term uranium price is what matters. And it only fell by a fraction before quickly stabilising at $68/lb. The long-term uranium price is still higher than it was for most of last year, when uranium share prices were flying.”

–Alex now has two uranium recommendations in D&D.

–Finally, poor old Dick Durbin. The senior Senator from the State of Illinois is lamenting that the impending debt deal in Washington is the death of Keynesian economics. Durbin says…

Symbolically, that agreement is moving us to the point where we are having the final interment of John Maynard Keynes…He normally died in 1946 but it appears we are going to put him to his final rest with this agreement.”

–“Normally died”?

–In any event, the Huffington Post reports, “Durbin said the economy is too weak for major cuts in spending, a view that is shared by many economists.”

–Would those be the stupid economists? Or just the idiots?

–You would expect a politician like Durbin to be a pompous ignoramus. It goes with the job description of Senator. He’s spent the best part of his adult life living like a pig at the public trough, and lording his eminence around in the way that only a US Senator can manage (although Aussie Senators are warming up to the challenge, talking about the transformation of “the whole economy and society”).

–The global economy is weak because of too much spending, not too little. It was spending financed by debt, which has replaced income for the middle class of the Western world. The massive government spending of the last few years has poured more valuable capital into failed enterprises. It was only ever an attempt to subsidise privileged financial institutions.

–Durbin, like most politicians in the Welfare State, knows where his bread is buttered. He’s received over $1.2 million in official contributions to his campaign and political action committee from securities and investment firms, according to It’s natural that he’d argue for State support of an industry that funnels him money. It’s the way Washington works.

–What we have today is neither capitalism nor communism. It’s Corporatism, where the interest of Big Business and Big Government and Big Money are hopelessly mingled together. This system is broken. And it’s broke. The sooner we put it six feet under, the better. Until then, keep buying gold on the dips.


Dan Denning
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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5 years 2 months ago

Ah, Dan has caught up with my book…. According to my book the next step after the fall is the separation of the world in both a governmental and physical sense into 4 zones of influence.

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