Warren Buffett may be buying. But everybody else on Wall Street spent the day selling. The Dow fell 231 points during New York trading. Volatility has declined. But now, apparently out of sheer panic mode, investors have surveyed the corporate earnings landscape for 2009 and found it bleak.
Here in Australia, two items are likely to preoccupy inquiring minds for the day. First, BHP issued its production report for the first quarter of 2009 to the ASX this morning. Iron ore production was up 15%. That's the good news. The bad news? Copper production was flat for the quarter compared to the same period last year. Alumina production was down 5%, aluminium down 8%, nickel down 31%, and metallurgical coal down 4%.
And what about China? It was Tom Albanese's comment that China was taking a breather that sent the two big Aussie miners down double digits last week. BHP was more circumspect. It said, in effect, that China was taking a sicky for the quarter, but that it expected a full recovery from the Middle Kingdom's economy.
BHP wrote in it ASX release that, "China has not been immune to the global slowdown. Macroeconomic indicators show that Chinese growth has softened during the quarter, albeit from very high levels. We expect volatility and uncertainty to continue in the short term."
Translation, "Whoa. Would you look at that? Well, still, pretty amazing story in China. We'll just have to buckle up until this whole global financial collapse is behind us."
"Notwithstanding this short term uncertainty," the release continued, "we remain confident that the ongoing industrialisation and urbanisation of China and other developing economies will continue to drive strong longer term demand for our products." It's the business we chose. That's our story, and we're sticking with it.
The other big story in Australia today is the soap opera surrounding the government's guarantee of bank deposits. The Australian reports today that some 24 mortgage and property funds have frozen $14.4 billion in funds to prevent redemptions by investors. Those investors want to take money out of the non-insured funds and put them in the government-insured funds (the banks).
What a kerfuffle! This is when politics truly gets entertaining. One party intervenes in the market. The other party, too scared to really object, goes along. Then, when we find out the action taken causes unintended and negative consequences, hilarity ensues.
Well, maybe not hilarity. This is real money we're talking about. The government has already revised its plan to prevent a further, "serious dislocation in financial markets". Those were Glenn Stevens' words in a letter to the Secretary of the Treasury, by the way, not ours.
But what would you really expect? When one kind of investment is government guaranteed and another is not, consumers will do the rational thing, especially in the midst of a panic. There's probably money to be made in selling guarantees on deposits now. In a similar vein, Macquarie Group just received a license in the States to insure municipal and infrastructure debt.
This kind of insurance is what the Masters of the Universe like to call "credit enhancement". You get all the benefits of an investment without any of the risk. But selling insurance against defaults or guaranteeing deposits delivers investors and savers a false kind of assurance. It's really what got so many people into so much trouble to begin with. Investors bought securities they didn't understand because they were insured by companies like AIG, which allowed the credit agencies to deem them investment grade, more or less.
No one can ever really guarantee you that your money (or your purchasing power) is fully insured and 100% safe. That's simply not possible in a fractional reserve banking system. But then, let's not mention that inconvenient truth too loudly, shall we? Confidence in the system is just starting to recover. It needs more time to convalesce before it's assaulted by common sense.
Indeed, the market has a nice pink flush about it the last few days. As we said, credit is flowing to the extremities of the financial system again. And in a speech yesterday, RBA Governor Glenn Stevens said, "The likelihood of a global catastrophe has in fact declined over the past couple of weeks."
You know you live in extraordinary times when a central banker can talk about the likelihood of a global catastrophe in public, and it's actually good news. But these are the times we live in. And for all the good vibes in the air, we didn't think stock market bottoms were meant to feel this good. Shouldn't there be more despair?
Speaking of despair, what stocks would you want to own on Robinson Crusoe's Island of Despair? We're talking about stocks you'd own for the next ten years, stranded as you were on an island with a few goats, stalks of rice and barley, and some wild grabs you can dry into raisins. The reader mail has been pouring in on the subject. We'll report back to you tomorrow.
Dan Denning
for The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by Charles Norville on 22 October 2008:
The thing to remember about China is that it is a national socialist type structure in so far as the Govt calls all the shots in China and is really the biggest company in the world. It can if it wants promote its own internal capital works indefinitely, so it would seem, to keep its huge work force working - cheap energy, cheap food, cheap materials and abundant cheap labour the main economic ingredient. So long as the environment holds out
But there is technology on the horizon, to be developed every where, that would make the cost of labour irrelevant requiring abundant energy using relatively less materials per capita with a labour force supefluous to need. Where does the sustenance for an abundant population come from which would have essentially nothing to do?
This technology would be a global phenomenon and we always have had the problem of balancing technology with unemployment, some nations don't even use the unemployment statistic - I think this is the fad of Keynesian technology. The word 'poor' is analogous to 'cannot provide technology at a reasonable cost to an individual or living thing'. Technology increasingly advanced is inevitably energy:material costly perhaps not in monetary terms depending on the ease of abundance, even with less entropy when materials are efficiently applied.
A relatively small population like Aus would have all the material and energy needs it required for such advanced technology and with the cost of labour irrelevant would not need the massive industrial machinery synonymous with the old BHP steelworks in Newcastle.
Most of the Aus population could go about doing the same non productive work they do now having the abundance of advanced technology with its abundant energy:material on demand, the essential productive work being done by a core of technicians and engineers (fairly usual). It seems to good to be true and in it is.
Aus does not have this wonderful technology and we have long since deindustrialised, we just enjoy doing the same non productive stuff and let the rest of the creditor nations pay for it and the good we use. Most deep recessions and certainty depressions require industrial capacity.
So in answering my own question, viz the quandary of sustenance for abundant populous nations, I would say that it may be necessary for Aus to help out voluntarily or otherwise the access to advanced technology energy:material, per capita needs of the more populous nations and I note that Kevin Rudd's immigration policy has got a handle on this prospect already.
Comment by The China Perspective on 21 January 2011:
Two years out and China's economy continues to chug along, looking at recent data for China's economy in 2010 http://thechinaperspective.com/articles/china039smacroeconomicindicatorsin20108123/index.html looks very strong across all fronts, except for concerns on inflation, one has to wonder how much longer it will last.