Hindenburg Meets Iceberg

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Another week in Australia without a new government. Not bad for a Monday. The current Prime Minister is set to meet with three so-called independent members of Parliament to discuss forming a minority government. This gives us a chance to correct an error we made awhile back.

“Every election is a sort of advance auction sale of stolen goods,” wrote HL Mencken. We misattributed that quote to Mark Twain, another great American wit. But the observation seems especially apt right now.

With Australia’s election not yet over, the auctioning of future stolen goods continues is on display for all to see in Canberra. The independent MPs each have their own Christmas list of things you must buy them. Paul Hogan must be gratified to know that his large late fee on unpaid taxes will go to making Australia a safer, better-governed, freer, and more prosperous country.

But really the big news since Friday is that the media are still taking Ben Bernanke seriously. The Fed Chairman gave a much-anticipated speech last week in which he assured the naive and the hopeful that the Fed would do whatever it takes to support the U.S. economy.

Here’s a suggestion Mr. Bernanke: fire everyone one that works for you and then resign. That would do more to promote U.S. growth and sound money that anything else you could possibly do.

But assuming that doesn’t happen, how will the Fed support an economy whose second quarter growth was revised downward last week from 2.4% to 1.6%? Buy everyone ice cream?

We’re being flippant because it should be obvious to anyone with two neurons firing in the brain that you cannot support growth by adding to the stock of debt. The Fed’s quantitative easing programs can fund higher government deficits. And higher government deficits can fund more “stimulus” even as households and businesses hunker down and deleverage.

Yet all that stimulus does is seem to support exports and manufacturing growth in places like Germany and China – where the cars and goods Americans by are made. The stimulus stimulates. Just not where you’d expect, like having your feet tickled but feeling it in your ear.

This is a critical issue for Australia. The chart we showed you last week clearly demonstrates that Australia’s stock market tracks the U.S. That means bad U.S. earnings and a weak economy would be bearish for Aussie stocks. But what about China?

The argument is made that Australia’s economic growth correlates more with Asia than America. “Our national income will soon be growing at a China-like rate, underpinning a boom investment that is already underway,” writes RBS chief economist Kieran Davies in today’s Australian Financial Review. “Iron ore is now our largest export, accounting for almost four per cent of the economy, while coal is not far behind at 3.5%.”

The argument is that strong coal and iron ore prices – even though they may fall in the next quarter as contract prices are correlated with the spot market – support national income, which supports national investment ($112 billion in projects in the mining sector alone, according to RBS), which supports national employment, which supports national spending, which supports national taxes which support all the promises made by politicians who support themselves at your expense.

This all sounds mostly true. But it all hinges on the boom in China having nothing to do with the credit boom in America – you know…the one that’s deflating and causing the world’s nastiest economic hangover in seventy years.

Here’s what worries us, though. What if China’s great economic growth story really is just a derivative or manifestation of the world’s greatest credit bubble ever? Writing about this phenomenon at Zero Hedge, Tyler Durden hits close to home:

Well, of course, China needs its resources. Soon every open mine will be a “BRIC” to be exploited by Chinese interests, which come, see, and suck the place dry as they build yet more vacant cities, ghost towns, and highways to nowhere, hoping they can sustain the illusion of the world’s greatest bubble for a few more months. Which is precisely all those who are betting on a collapse of China are playing it not with China CDS, but those of Australia: for when the worm turns, Bad in Beijing, will be nothing compared to the Massacre in Melbourne.

Gulp.

So what’s our solution? We don’t really have one, at least in terms of correcting the errors of the boom. That happens naturally if you let it. The key is to let it and not fight it. Fighting it only makes it worse. But once it’s happened, the return to normalcy is painful. There’s no easy way out, like spending someone else’s money.

This, by the way, is probably why so many people don’t like Austrian Theory. Its main prescription is that prevention is the cure to monetary madness. With sound money, the rule of law, free trade, and low taxes, you generally promote liberty and prosperity without going into massive government debt. But once you have a credit bubble on your hands, the only way out is liquidating the bad investments, not preserving them.

It was interesting that on Friday, while the Dow first fell and then rallied, copper, coffee and corn all rose. The commodities markets see the Fed’s QEII program as being inflationary. Either that, or people are starting to think about trading Federal Reserve Notes for things that are actually useful…while they still can.

Come to think of it, we like the idea. In a few weeks, we’re headed back to America for some business. Earlier in the year we looked at house prices and found they were still falling, so we stayed out of the market.

This time, our plan is to hire a storage unit and fill it with the sorts of things that disappear from shelves when people begin to lose confidence in paper money. On our list: coffee, vodka, cigarettes, petrol, vitamins, over-the-counter pain killers, petrol, batteries, bullets, a hatchet, maps, a non-North Melbourne scarf, etc.

Not on our list: U.S. government bonds.

What’s on your list? You can let us know with an email to dr@dailyreckoning.com.au . Investors who take the Fed at its word or who actually still believe the Fed can support the U.S. economy with asset purchases deserve what they get. You have been warned by these morons what they intend to do. Now is the time to get your wealth out of the places where it is likely to be destroyed.

All that said, it looks like U.S. bonds are becoming a kind of Noah’s ark for people who believe in central banking. Everybody on board the Bernanke Boat if you believe making more credit available is the solution to a world that already has too much debt. All aboard!

Judging by vanishing U.S. bond yields, there appears to be quite a few people willing to get on the good ship Death Trap, captained by Helicopter Ben. If you’re going to stay out of this trade, just keep in mind that it can run longer than it should or than you might believe is possible, which is fine with us. It gives us more time to stock up on vitamins at Wal-Mart.

Iceberg. Hindenburg. Call it what you will. Here’s a note from our friend Ron Kitching on what’s really going on.

Stimulations, Booms and Busts.

History shows that freedom of the individual, and the open, competitive spontaneous organizations, customs, and procedures in a free market, secure private-property system, is much more efficient than centralised consciously rational-directed systems of organising the human economic activity.

The mystery for any economy, is how people’s actions are impersonally coordinated by the market. All classical liberal monetary theorists noticed, that the price system – free markets – does a remarkable job of co-ordinating people’s actions, even though that coordination is not part of anyone’s intent.

The market, wrote F. A. Hayek, is a spontaneous order. By spontaneous Hayek meant unplanned – the market was not designed by anyone, but evolved slowly as the result of human actions. But the market does not always work perfectly.

The main cause of market distortions is increases in the money supply by the central bank. Such increases make credit artificially cheap.

Entrepreneurs then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market.

Artificially low interest rates cause investment to be artificially high, and cause mal-investment and the boom turns into a bust. As readjustment to reality occurs many people are thrown into temporary unemployment.

Monetary theorists see the bust as a healthy and necessary readjustment. The way to avoid the busts, they argue, is to avoid the artificial booms that cause them.

The “stimulation” commended by many was and remains an artificial boom. Bernanke is getting ready for another one.

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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Comments

  1. The ASX and AUD believed Bernanke today but by 2000hrs local DJIA futures are back to near zero after being up at 2%. The weekend carry after the little ben talking up helicopter dropsis ridiculous

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  2. “Gulp.”

    You _swallowed_ that, Dan?!~

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  3. Agreed Ross. So lets use it as a shorting entry point..a tad higher perhaps ;) I reckon this is the last mini pop before we break support into another leg down. mind you I reckon gold wants a drop here too but thats a hard one to gauge (how far?)
    I see how desperate the plunge boys get to push the correction into the future (sideways markets) including many false rumblings about QE from BB and other… but I think they will pull that QE trigger… but not until another episode of deleveraging is underway. The crisis paves a path for justifying the actions. Oh well maybe a few buys to had down the road a little. I’m interested to see how we fair here in Oz in a second leg down. Will money move similarly to the first leg in 08. At some point will a larger chunk move back into the commodity currency. Although I wouldn’t bet on it, will we bring in newbies to buy our houses also with so many desperate to get here..maybe with cash to spend?

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  4. Tut tut BP. Still making fun of those bears? You know you’ve made your fortune by investing mainstream…and nothing wrong with that either. But the masses are turning bearish. Yep bearish is now mainstream. Be careful BP :(

    Proof ???? we cant deny it any longer BP…..

    http://www.youtube.com/watch?v=K4uDdggw6c

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  5. HaHa… They were playing _both_ kinds of music: Country AND Western!~

    “…you’ve made your fortune by investing mainstream…”

    I prefer “Fortunately we’ve created our comfort…”, Lachlan.

    Thought the opening lyrics about being lost were highly appropriate!~ ;)

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  6. WA’s Minister for planning just presented a 20-year-plan for urban development, Ned: Medium density (which he described as five-storey multiple dwellings) along existing transport routes.

    Surprise, surprise: Our major developer immediately rejected that plan, preferring low-density development. From what we can see, that’s the build-the-houses-then-worry-about-transport-and-infrastructure-model.

    It all looks a little primitive against the Chinese 100-year high-density model!!~ ;)

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  7. Good to see you back Ross. I was starting to think doing that 1 to 84 think might have taken more out of you than should be asked of any mortal man given the [lack of a] result! I assume we still don’t have a new PM yet? Kind of peaceful with them all having their hands tied isn’t it.

    Just got my latest electricity bill – Yep, definitely NO deflation in Oz!

    “storage unit … vodka, cigarettes” – Hmmm … You’ll need someone to guard that! Cummon Dan we’re mates – You can trust us – What’s the GPS reference? ;)

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  8. “five-storey multiple dwellings” – Lots of partial solutions Biker. We’d be wise to support them all. And let the buying public decide. Developers will just have to learn to roll with the times and adjust (as and if necessary) along with everyone else. IMO.

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  9. Agreed, Ned. As I’ve implied before, I think some of our developers may have over-stretched, pushing out well beyond the rational limits. Easy for me to say, after-the-fact, but I can’t help but think these fellas have gone too far too fast.

    Now, if I’m _wrong_ about this, we’re probably going to make some real money.

    More likely that suburbia will, during the next decade, creep out and gradually engulf these satellite communities. Some major leaps in technology may make it happen sooner, but anyone who builds out there is going to be waiting a while for services… .

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  10. Biker Pete’s quote of the day:

    “These Australian mugs will keep paying grossly inflated prices for property Forever and ever hahahahaha”

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  11. “Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them.”

    – Ludwig von Mises

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  12. Perth has had 8 months of property price decreases, the ninth one should be released today by RP Data! Brisbane 3 months straight decreases and waiting on 4th. Last month was the first that ALL markets decreased in 17 months but there are signs that the down turn has happened already.

    robertsherlock
    August 31, 2010
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  13. Ned & Lachlan, at least Dan has bought into my favourite pick as an anti inflation and deflation commodity – ammo. BP can keep his slingshot or arrows or whatever it is his ms lets him use to shoot the gourmet mixy dosed rabbits. The only problem with ammo is having to meet the sort of people who will want to trade with you. Desperate is as desperate does.

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  14. Steven Baggagehandler’s quote of the day:

    “This Australian mug will keep living with his grossly deflated parents Forever and ever hahahahaha”

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  15. Things will look up for you, Ross. Always darkest before the dawn, etc.
    Keep your powder dry! :D

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  16. “…my favourite pick as an anti inflation and deflation commodity- ammo.”

    The Odd Angry Shot

    Now Ross was a reloader
    with a lyman bullet mould
    when ammo was in short supply
    he made bullets outa gold.
    No looting mob would ever guess
    the fineness of his slugs
    “My projectiles are _subtle_”
    he remarked to the goldbugs.
    And when the world went belly-up
    as Ross long prophesied
    Our Ross was hid beneath the lid
    of a saucepan helmet wide.
    With .222 he shot them through…
    His .243 and old 12 bore
    were blazing hot with golden shot
    of carat twenty four…
    Now the ballad be told
    of Ross’s gold
    and the bullion he defended
    in his bunker sheltered
    with his muzzle melted
    and all his ore expended…

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  17. “gourmet mixy dosed rabbits” – Don’t do any research on the venereal diseases of cattle and pigs or you’ll be a vegetarian for life Ross! Even chooks aren’t safe. In fact you just might have to starve to death on the off chance your vegies could have been grown using some animal poo product – Fish could be OK; But maybe we just haven’t studied them enough to know yet? :)

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  18. Wouldn’t be dead for squids, Ned!~ :D

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  19. Ross does make excellent points about ammunition Biker. When things are ugly I can vouch for the fact that those who still have jobs are at particular risk of being targeted by their people’s foe as they are the ones earning cash to pay for everyone else’s bullets. (Guns are never a huge issue – An enterprising bloke can even make his own if absolutely necessary.) Yes, it is a funny old world we live in. Although not necessarily always HaHa type funny everywhere! How do you do that great big grin thing? :)

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  20. I think Ross (wrongly) imagines he has more ammunition in his gun safe than I do, Ned! :D Let me show you my collection, ranging from .71 black powder to heavy-calibre modern firearms, when you eventually get over here. I don’t expect to ever have to defend our territory. I’m simply a collector. (And an optimist!~ ;) )

    If we were ever in dire need of protein, we do have our own mob of roos.
    They bring such joy to OS visitors, I simply browse on vegetation, as they do, until I’m in the midst of a mob. I teach visitors to browse, until they too are in the middle of a feeding family, human paws up, chewing on orchard leaves. The internet records scores of these filmed episodes…

    How to get that really big smile? Type colon D. :D

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  21. “my collection, ranging from .71 black powder to heavy-calibre modern firearms”…….those country bears got ya freaked hey Biker ;) You and Ross are both sounding like Mad Max material. My ex wife.. shes a reloader too…there all coming outa the woodwork… even my son is counting down the days till his eleventh b’day and a gun license…meantime he just shoots everything else available from Toyworld. Now with deer feeding ten metres from my kitchen window I oughta be licensed to shoot too but they wont be copping any gold tips from Scrouge mc mampleleaf. Fishing sinkers will do or I’ll go out to the shooting range with my metal detector ;)
    Of course this only applies until Mad Max comes and theres nothing more productive to be done and nothing better to eat…until then I’m gonna stick with beef, eggs and country veges
    Hey Ned I watered my lettuce and tommys with liquid cow pooh on Saturday…mmmmm salad and leptospirosis…get it while its still green :D …:(

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  22. “they wont be copping any gold tips from Scrouge mc mampleleaf” – Golden bullets are good Lachlan; Providing your kids don’t miss and they can easily recycled. Not so sure I’d want to use Au for sinkers though – Too many potential snags for mine? ;)

    “I watered my lettuce and tommys with liquid cow pooh on Saturday” – Must admit that I see advantage in us moving at least a little way back towards the simpler life – But have seen no indication that is government’s plan for us mate?

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  23. Deer?!~ Mate, I couldn’t resist, I’m afraid. Love venison and venison chorizo. My Canadian inlaws are plagued with herds which devastate their gardens… and I’ve had to be _restrained_ at times!

    We do have a few bows (five) but I really can’t see the need to kill our roos. Maybe a ‘The-Road-Type-Scenario’* might change that. I’m an ex-pistol shooter (club secretary for many years) so I’ve held as many as nine handguns at times. I’m still reasonably competent.

    “I watered my lettuce and tommys with liquid cow pooh on Saturday”

    We make a tea from manures. I used to inject it into our retic lines, using a fertigater (inverted 2L coke bottle), but eventually it clogged the lines. I’ll fit filters and try again, one-of-these-daze.

    * Have all the Max DVDs. The Road, extreme-as-it-is, fits the DR Armageddon model better than Max’s world merely-deprived-of-guzzoline. Remember that delicious can of Pal??!~ (And remember _lingerie???!!!!_)
    Ross’s comments begin to make very good sense if The Road ever winds our way…!!~ ;)

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  24. “Golden bullets are good, Lachlan…”

    The Lone Ranger’s choice was sterling, Kimosabe. :)

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  25. Excuse my ambiguity and rushed spelling Ned….sinkers to make projectiles and mample should be maple.
    I’ve got some gardens all set up here Ned but its only a hobby/diversion and chemical free veges while the economy is ok and I can earn a crust. Im gonna hit da sack now Ned…markets arent playing my game tonight ;)

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  26. I’m pretty basic and pretty rough (my father informs me) BP but yeah I do like venison in crockpot super slow cooked. My old place sounds like your canada. It was set inside dairying land with forestry totally surrounding that. In Winter the native feed dried up in the forestry and up to fifty head of deer per night would raid the rye paddocks. One morning a neighbour shot (with his 270) 4 does and a stag pretty quick. They could have scattered into the bush but the gunshot sounds reverberated off the mountains and caused them to run in circles (not knowing where shots came from). I butchered two of them. This sort of thing just goes on all Winter long around the valley and then in Summer hunters are looking for trophy stags. I saw a decent one in the scrub last week while collecting seeds…he just stood there with almost no fear…unusual.
    Got a date with those zzzs’ now ;)

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  27. “The Lone Ranger’s choice was sterling, Kimosabe” – He didn’t have all the blood sucking vampires to kill that we do though Biker? Just a few few poor benighted Injuns who couldn’t see the true and only way forward as our fearless leaders can … :)

    Never tried venison; Must admit it sounds positively succulent though. Get a couple of breeders in maybe Biker?

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  28. So the Nikkei was down 325 and the Dow is currently up 42. PPT anyone? What a bunch of whankers.

    Yep, ni nites for me too! :)

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  29. “I’m pretty basic and pretty rough” – Wouldn’t worry too much about something your old man might have said unless it worries you also Lachlan. Then only after you have sat him down straight and said just WHY do you reckon same and DO you reckon it’s really a problem. In the somewhat unlikely circumstance you might feel that is the best way to go?

    You’re a more biblical bloke than me so presumably know a verse about “The sins of the Fathers [potentially ???] being visited on the children” – Which I never figured was a really great thing if it could be avoided. And while I have no idea if that is at all applicable in your case, I reckon you sound alright bloke. ;)

    Sleep eludes me tonight? And I’m probably talking even MORE crap than usual!!! Hmmm …

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  30. I bought a book about growing survival foods. In there it lists so many foods that you can use that don’t look like anything we are used to. Advantage is, if anyone tries to raid your food garden they will leave these ones as they are so different. You can dry them and crush them for protein drinks as well. Also sets out what you should have in storage for 7 days, or 3 months or a year. Interesting read.

    Not into the bullets as such, but partial to trap doors and and trip wires.

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  31. BP, I’m optimistic that I’m going to finish this book. +52,000 words and I’ve got a half day clear to write again straight out of the blocks this morning. I’ve done the Sydney half and am now onto the bush. The revision side is a bit labourious so I’m leaving that for when I get a block.

    Why not vote on how you think it will end?

    Thumbs up for optimistic, thumbs down for pessimistic.

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  32. Annie, there’s a trapdoor in my book but no ammo at all. For me ammo is a likely trade, speaking of which, watch the AUD-NZD again. Remember my buy the kiwi over 1.3? Still the same for mine. Remember currency is risky even if the 4 pillars & RBA can’t afford the kiwi to be at that level and they can manipulate the flow because major kiwi exports are in foreign currency except for Australia. Its the carry punters and the NZ asset buyers versus the Australian racketeering industry that did the kiwi asset bubble on Australian bank balance sheets due having only branch operations in NZ. Pretty much treasonous behaviour from APRA when they publicly identified the unacceptable level of the risk in papers in the early noughties. Now we have the 4 pillars all trying to split their NZ units and push all the risk assets into the localised subsidiaries. Trouble is that any decent regulatory regime commands them to put in capital that they don’t have, and thats on the old pre Basel II criteria. Anyway last time it worked. Don’t blame me if you take the risk and burn and this is not my advice etc etc. As they put capital into subsidiaries the 4 pillars have to buy kiwis. Its one of the riskiest swap markets in my book but I would like to hear from others on it and the GBP-EUR too which are the world’s most interesting exchange pairs. Going long on my book doesn’t mean gearing into it either. If you are leveraged they will try to shake you out. 30-45 day play. Last time was a bit less. I wouldn’t be going early either, clearly over 1.3 before I’m interested again.

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  33. Wondering about the _vulnerability of Australia_ to commodity markets, that is, China. It seems criminal negligence that successive govts could have allowed the situation to get so out of hand. We should have been investing big time in R and D years ago. This period of transition is going to cause enormous pain in Australia.

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  34. @Ross AUD NZD Its one of the riskiest swap markets in my book but I would like to hear from others on it and the GBP-EUR

    Longer term (2 years) I would be shorting the Aussie and going longer on the Kiwi and shorting the euro and going longer on the pound..
    I don’t play the forex market though.. got burned bad once and never went back in..
    Still like a portfolio to be made up of Cash, Bullion, Shares, despite what Biker may think even Property and superannuation.

    Goodluck with the book.. Advanced copies for your friends here at the DR? :)

    Stillgotshoeson
    September 1, 2010
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  35. We’ll see shoes. I don’t want to self publish. It might be either the greatest book ever written or the greatest book I could ever write. Former may see it printed, the latter may not.

    It could be seen as 1984 with more sympathetic characters, less raging protest, and more contemplation. Each half of the book has a piece of theology which is themed on the basis of a proposition that rejects “nanos gigantium humeris insidentes” which was attributed to Bernard of Chartres in the 12th century (we are like dwarfs on the shoulders of giants) in matters of revelation for human consciousness and hence Theology itself.

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  36. Hope this is legible to everyone it is my day zero of the ASX indexes versus today

    ASX sector Indexes current vs 7 May 08

    XEJ energy 14723 17700 -16.8
    XXJ financials 4923 5600 -12.1
    XHJ healthcare 8207 9500 -13.6
    XNJ industrials 3511 5300 -33.8
    XMJ materials 11836 16250 -27.2
    XPJ property 877 1800 -51.3
    XSJ consumer stap 8014 7800 + 2.7

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