Rule Thumb for Modern Times


Here is a rule thumb for modern times: never put anything in an e-mail you wouldn’t mind seeing on the front page of the New York Times. We learned over night that while running the New York branch of the Federal Reserve, now U.S. Treasury Secretary Tim Geithner told the bosses at insurance AIG to limit some of the details about its credit default swap settlements with large U.S. banks.

To be fair, Geithner was only being prudent. He wouldn’t want the public to know that Goldman Sachs and other banks were paid nearly $62.1 billion for their swaps, or about one hundred percent on the dollar. Remember these swaps were tied to subprime loans. That means they were probably worth a lot less, in which case Goldman got a pretty sweet deal at a time when things were going sour at AIG.

Yep it’s pretty clear that Geithner wouldn’t want the public to know its money was being used to make Goldman whole. But putting that in an e-mail was pretty stupid. The easy prediction from here is that if Friday’s labour report in the US, it will be just the pretext President Obama needs to make some “needed changes” and get a new Treasury secretary.

Not that a change of face would help the dollar in its losing public relations battle with the rest of the world. But gold and oil took a rest, at least for a day, and both were down slightly overnight. Stocks on Wall Street were mostly indifferent.

Here in Australia, John Garnaut at the Age reports that, “Australian resource exporters are struggling to keep up with surging Chinese demand, pushing prices to levels not seen since before the financial crisis.” The article is called “Panic Buying by Chinese fuels surge in commodity prices.”

That might sound bullish. But it probably isn’t. Panics are short lived and unpredictable. Besides, we’re sticking with the position we outlined yesterday. This is the year the Chinese bubble pops.

“What did you think of America?”

We were asked the question standing in the sun at the St. Kilda Bowls yesterday. It came from another American. He told us that people seemed really unsettled and unsure of themselves when he was back for Thanksgiving.

“It depends on how good the economy is I think. If you’ve got a job things are fine. But I agree, people seem very political and very unhappy.”

We got to wondering about the Americans who settled the continent. The fur traders, the pioneers, the families that set out across the country in covered wagons. These people were risk takers…and independent…and self-sufficient…and skilled.

Would they recognise today’s Americans? Probably not.

In the same context, you wonder what anyone on the First Fleet would think of today’s Australians. What virtues would they recognise and value? And what vices would seem comfortable and familiar? Hmm.

That’s it for the week. We apologise for a less than rigorous accounting of the markets. Some kind of cold/flu is again making its way around the office. Until next week!

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.


  1. cold and flu?… bastards need to keep your vitamin D up. governments don’t want to call it, but research shows that it prevents and treats about 80% of ‘lifestyle’ disease….including flu. long and prosper!

  2. Yeh, but unlike your lot, we can afford to be over indebted self indulgent bloated pigs coz we’ve still got some minerals in the ground … Until something changes and we can’t! :)

  3. Australia continues to be regulated by those using the same techniques of the rum rebellion era. Whitlam’s govt, with Rex Connor leading the charge behaves the same way as the Queenslanders did in the 1840’s, and Rudd/Swann show every sign of doing the same. Our bankers and treasurers and ticket clippers take their lead from 1890’s Melbourne. The only change is that large shareholder directors had significant ownership stakes and used to be ruined by capital calls, now they are a crew of Sydney rum rebellion styled gangsters that have a system of socialising those capital calls among disenfranchised superannuants controlled by banksters and unionists and the director class that are either ticket clipping paid up members of the gangster class or pretend to be significant owners with hyperleveraged stakes in bubble businesses that get personally bailed out if the banks stand to lose money (the collateral is crap and mark to market needs to be put on the never never).

  4. So you’re not confident of a economic recovery then Ross?

    Nor am I, but with corporate bond yield spreads collapsing I am quite confident of at least an irrationally exuberant boom in the stockmarket!

  5. Justin, I believe the local equities bubble will last as long as the AUD holds. If the AUD slides so too goes the stocks running the carry. I also think there is now local HFT making prices in some stocks like CBA and Challenger where it rides on top of the govt guarantee and the carry trade.

  6. The six month trend in the 10yr UST yield has turned up, AUT’s are much the same, ‘junk’ bonds spreads way down, in fact I think it was Doug Noland’s article on Friday that said GSE spreads are at their lowest in 17 years!

    The RBA is ‘rediscounting’ at higher rates ie. is forcing up the cash rate, the Fed is talking tough, I think they will at least attempt to move the Fed Funds Rate higher.

    I’m getting exuberant!

  7. The Fed has a very, very long history of being “full of it”. I’d be extremely surprised if they actually DO anything re putting the cash rate up (except a one off token show or two maybe?) They really will milk this to the last drop to look after their banks – IMO? And Yes, that continues to be good for stocks. (For them that have the nerve – I’ll continue to cling to Oz’s government protected property bubble! :) )

  8. November credit data from the RBA shows housing related credit beginning to increase, on a 12 month ended basis, once again, courtesy of your AUD bank account Ned, and Biker Pete’s.

    New business credit is still slowing but may turn up again soon, or at least it has on every other occasion in the last 20 years as housing credit ‘inflates’.

    I agree with Doug Noland, monetary disorder is blowing bubbles left, right and centre, there is no ‘standard measure of value’ (except gold, but governments choose to ignore it, at least on the surface).

    With all the ‘hot money’ that’s been gushing from central banks, a rise in benchmark yields & lower spreads would indicate a move from ‘safe’ bonds into assorted junk, stocks & commodities.

    I’ll see you in the Caribbean on my 144 foot, three masted, ocean going yacht with sauna, after I sell at the top of the market!

  9. “This is the year the Chinese bubble pops.”

    Holy crap!. Did I just read DR put a date (albeit a long one) on a prediction :O

    First Home Buyer
    January 13, 2010

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