--The Aussie market is up 2.77% since the Federal election on August 2nd, if you're using the ASX/200 as your proxy. This whole "not having a government thing" is working out well for investors. It turns on the uncertainty of having no-one in charge is better than the certainty of having someone in charge. Maybe that will all change this week, though.
--To begin with, the jobs data from the U.S. gave the market a positive lead. We're not sure this matters one little bit. True, the private sector in the U.S. added 67,000 new jobs. But that doesn't have a lot to do with Macquarie Group's earnings, does it? It just goes to show you how vapid most headlines.
--By the way, those Macquarie Group earnings were a bit of a revelation. The Group told the ASX that it expects first half profit to be 25% down on previous expectations. The new number for the half-year set to end September 30th - $360 million - is not small. But it's smaller than expected. Why?
--Well the obvious answer is that in a deleveraging world with more risk and uncertainty, it's hard to be a profitable investment bank and securities dealer. Mind you, Macquarie is still profitable. But corporations seem less eager to take on debt, so they don't need Macquarie to arrange the offerings. And individual investors are scaling back the volume and frequency of their share trading.
--Mac Group's little peek behind the scenes led to an 8% fall in its shares earlier this morning. That took the steam out of a strong start. And for what it's worth, we're wondering when affairs in Europe and America are going to begin weighing on the Australian mind again.
--For example, the Financial Times is reporting that Eurozone governments will try to raise about double the amount of cash in September that they did in August. Last month, Eurozone borrowing was only about €43 billion. This month, about €83 billion in new bonds on offer to anyone who will take them.
--How will you know if the Eurozone debt problems are hotting up again? What the spread between Germany bonds and Irish, Spanish, and Portuguese bonds. In Ireland, the spread between Irish and German bonds of similar durations reached its highest level ever at 356 basis points. There is also a 24-hour strike in France to watch out for.
--The French are always good for an entertaining strike. It can be mildly inconvenient if you have to take a taxi, a bus, a train, or have garbage that needs collecting. But it is a French tradition of standing in solidarity with your fellow workers, even if you don't collect garbage, drive a taxi, drive a bus, or engineer a train.
--Is it serious, though? Well, it will start to be more serious when people in France, and the U.K., and Italy, and Greece, and America realise that austerity measures and reduced government spending and higher taxes all add up to one simple fact: a lower standard of living. When you have to pay lots of big bills out of current and future cash flow, there's less money to save and spend.
--This is why we reckon the next stage of the Sovereign Debt Crisis (originally the Global Financial Crisis) will be political and sociological as much as it is economic. But then, economics is really the study of choices people make with money. So all economics is political. It's just going to get political in an angry way in the coming months.
--To the extent that angry people are nervous investors, this is probably a good world for traders and a horrible world for pensioners.
--For traders in Australia, there is the added element of the new quarterly pricing system for iron ore and coking coal. There's a nifty little article on the back page of today's Financial Review about the subject. The article points out that the increased variability in underlying prices for steel-making materials introduces a new level of variability to the quarterly earnings of iron ore and coal producers.
--Does it change the way you value them? We'll ask the stock Doc when he gets back from London on Wednesday. But our view is that the variability in underlying steel-making materials prices is essentially a derivative of fixed asset investment in China (residential and commercial real estate investment in China). If THAT turns out to be a bubble (like we think it is) the volatility in iron ore and coal prices is just a prelude to a 2008-like reversion to the mean.
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 chris on 7 September 2010:
When house prices were rising, all the people who had loaded up on toxic debt to buy houses were very happy indeed- they partied like it was 1999, they drank triple vodkas from the bar, and they danced on the spot at nightclubs. Their favourite past time was to tell you how stupid you were for missing the boat, and that they were going to get rich overnight, and that you were going to stay poor forever, and that your pants were too baggy, and that you needed a new haircut, and a new image.
Now that house prices are going down, they are all very angry and they want to punch you in the nose. They have switched the party music off and they drink coffee now instead of triple vodkas because that's all they can afford, and they are on the prowl for someone else to blame for their mistakes. Their roots are growing out because they no longer go to the hairdresser for $150 foils. They have suddenly "decided" that kmart clothes are in and that "thrift is in" instead of their usual designer label clothes that they used to shove in your face. When you go out with them now they no longer go through each piece of clothing on their body and tell you the desingner label price of it.
Beware of these people as they are keenly on the lookout for someone else to blame for their "investment" issues. If you open your mouth and say that you knew it was coming, they will forget all the times they called you a boring nerd who reads too much, and they will wail "WHY DIDN"T YOU TELL ME THERE WAS A DEPRESSION COMING? IT'S YOOUUURR FAULT!!
So my advice dear friends is to keep a lookout for these people because they will soon be coming to a living room near you, when they "just happned to be in the neighbourhood and thought they'd drop in for coffee. And "if you could you lend them a couple of thousand bucks with that coffee, that would be great" they'll say. After all they will tell you "we are friends you know, and that's what friends are for"
My advice? Remember that old militray strategy- the best form of defence is attack. There is a reson why this military tactic is a clssic- because it really does work!! Before they can open their mouths- shove your hand out and say "DARLING FRIENDS I'm so glad you came. I am so behind in my bills could you lend me a couple of thousands to get me through this rough patch?" I can guarantee that you will never see them again and they will leave skid marks on the floor as they run out the door.