Are Australian banks going to be able to sustain their dividends? Over the last ten years, bank fee income has become a big driver of bank profitability (and the source of the dividends paid by banks). The credit crunch has crunched the amount of money banks make lending money. The net interest margin - the difference between what Aussie banks pay to borrow from overseas and what they make lending domestically - has been shrinking.

Here's a question then...if the bank's cut their fees, are they cutting off their own heads? For example, NAB is axing its penalty fees for overdrawn accounts. A Reserve Bank study published in May showed that so-called "exception fees" resulted in $1.2 billion in fee charges to Aussie households - or 10.34% of total bank fee income for the year.

Total domestic bank fee income for Aussie banks was up 8% last year to $11.6 billion. You can see from the chart below that fee income has been growing by about 11% the last few years. But keep in mind that aggregate profits of the Big Four banks last year were $15.9 billion. That means fees accounted for nearly 73% of total bank profits, according to our back-of-the-envelope math.

This actually shows you how bad a business banking typically should be. You can only make money lending money by taking more risk (both as a borrower on international capital markets and a lender on the domestic residential real estate market). If you take less risk, you have to make up for the fall in income by raising fees, which infuriates customers and law makers. Banking isn't a low margin business. But maybe it's headed that way.

Speaking of cash, should BHP sending more cash to share holders? That's the question some investors are beginning to ask, according to Bloomberg. Our co-Melbourne based commodity giant told investors that its record of seven consecutive profit results has ended. Underlying full-year profit for 2009 was down 30% to $12.8 billion on the back of lower commodity prices and demand in the fiscal year.

But the company left its dividend in line with the second half of last year at US 41 cents per share. It did not increase the dividend. However that dividend is 17.1% larger than the year before. So why not give back more cash to investors?

Mining is a capital-intensive business. BHP has been around the commodity block a few times. It knows that to expand production when commodity demand picks up requires cash. You have to keep that cash around for a rainy day for when the cycle turns.

Or, conversely, if the cycle turns down again - as it might if the global recession takes a second, depressionary dip - the cash is a bulwark against weak demand. It's also nice to have a war-chest to buy out asset-rich, cash-poor firms that cannot ride out a sustained drought in earnings when production is shuttered. BHP remains in a better capital position than nearly all its global rivals.

But if you don't want to put your capital risk in common stock, why not have a look at the new inflation-indexed bonds being issued by the Federal government for the first time in six years? Yesterday's Age reports that the Australian Office of Financial Management plans to introduce the bonds back to the market in September or October of next year.

Finding assets that deliver a return greater than the rate of inflation is going to be the big challenge in the years ahead. Inflation-indexed bonds are one strategy. Small cap growth stocks are another (especially precious metals and energy stocks leveraged to higher gold and oil prices). Emerging markets are a third. We'll ask the Australian Wealth Gameplan editor what he thinks of these bonds and get back to you tomorrow.

Dan Denning
for The Daily Reckoning Australia

• Australian Banks Must Increase Fees or Expand Loans to Remain Profitable
• Commonwealth Bank (ASX: CBA) Nearly Doubles Bad Debts Over Last Year
• Note to Australia: Buy Resources, Not Banks
• Aussie Banks Addicted to Foreign Borrowing
• One in Four US banks Announce Unprofitable Quarter

First up is an issue that definitely affects the future of Aussie dividends: profits. You can't pay 'em out if you don't got 'em (unless you borrow 'em, which is just plain stupid). "Profit season looming as worst for 20 years," reports Lucy Battersby in today's Age. She says that analysts expect profits to be twenty percent lower than last year with "growth prospects" pretty dismal.

Maybe we're getting ahead of ourselves with the idea that Aussie companies will begin boosting dividends to attract shareholders. After all, Bloomberg reports that Aussie firms tapped the equity markets for over $90 billion in capital in the last fiscal year. It's what you do when you're rebuilding your balance sheet and paring back debt.

In fact, RBA Governor Glenn Stevens-in addition to letting everyone one know the cash rate would remain at a 49-year low of three percent-encouraged corporate Australia to boost the stability of the financial system by bolstering balance sheets (more capital, less debt). Stevens said yesterday that, "While the considerable economic policy stimulus in train around the world should support recovery, it is likely to be slow at first. For it to be durable, continued progress in restoring balance sheets is essential."

What does that mean, though? Well in the long-run it's very good! In the short-run, it means slower growth and less business investment (capital spending). That probably means either increased unemployment, or much slower growth in employment, which puts pressure on wages (not that their moving up much anyway).

Here's a story commodity punters should keep an eye. The U.S. Commodities Futures Trading Commission is thinking about new regulations that limit positions sizes on commodities contracts. The agency says it wants to reduce "excessive speculation" in the commodity markets, especially the oil market. The agency will hold hearings in August.

Well, one way of looking at oil's rise to $147 is that it was all a beat up engineered by Goldman Sachs. That's what Matt Taibbi says in his latest Rolling Stone article, "The Great American Bubble Machine." It's a claim that the oil market is heavily manipulated by speculators and that the price of oil is divorced from the laws of supply and demand in the real economy.

Taibbi's piece is worth a read. But the CFTC is barking up the wrong tree if it wants to blame high energy prices entirely on speculators. One factor in oil's rise is clearly investment demand from traders and institutions that foresee the decline of the U.S. dollar. Another factor-subject to much debate-is Peak Oil itself (that global oil production is peaking). More on that tomorrow.

For now, we'd say this is another sign of increasing government control of the markets. Some people think this is good and long overdue. Some people don't. Either way, it looks like the world we're headed to. And it looks to us like a sure sign that the U.S. government wants to have a lot more control of what you do with your money (capital controls). We reckon the oil trading will just move to London.

More about dividends. Today's Financial Review reports that Aussie investors may miss out on $7 billion in dividends this year. The report cites research from Macquarie Securities which shows that Aussie companies paid out $48.6 billion in dividends last year but are on pace to pay out just $41.5 billion this year. Companies are preserving capital.

Again, we're not sure this is a bad thing. But it does mean that if you pursue a dividend strategy, you may have to look beyond traditional sources (banks) and do your homework. We've got Kris Sayce in the trenches doing just this work now and will report on it later this month. But what else might this renewed focus on dividends mean?

Well, it might mean the debauched age of capitalism-where companies borrowed money to speculate or invest in projects for which there was no sustainable demand-is well and truly over. It might mean companies will go back to returning earnings that are not reinvested to shareholders, where they belong.

Of course, for a company to return surplus earnings back to investors it must first have those earnings. And that is no mean feat in the post-industrial global economy. So rather than relying on the market itself to generate your dividend income for you, you'll probably have to work for it (find it).

And there is the risk that common stocks may simply be the wrong asset class to own for the next ten years. That is, there is the risk that even dividend stocks are still stocks. And if stocks are in secular bear market, it won't matter how much you get paid to own them. They will appreciate very slowly, and perhaps not at all versus inflation.

And now to debt. We've run across a few articles and charts on debt that were eye-opening. Speaking of which, please keep an eye out later today for a special invitation to an event we're putting on here in Melbourne. It will be a night dedicated to discussing this very subject.

And the main point? Not only are large (and growing) household and government debt levels making life tough for Aussies, they are part of a global power shift that threatens the economic security of industrial countries like Australia. Despite its tremendous resource wealth and proximity to developing giants India and China, Australia risks drowning itself in debt.

Or, as James G. Neuger writes for Bloomberg on the eve of the G-8 summit in Italy, "The run-up in debt has hastened a power shift that is sapping the industrial world's authority to impose its economic doctrine, currency arrangements, or greenhouse gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip on the global recession they spawned."

"The industrial world is beset by the harshest economic conditions in a lifetime: a projected U.S. budget deficit of 13.6 percent of GDP in 2009, unmatched since World War II; an annualised 14.2 percent contraction in Japanese GDP in the first quarter, also the worst since the war; in the first three months of 2009, German exports had their steepest quarterly decline since 1970 when the date were first compiled."

But is debt really a problem here in Australia? The chart below from the Bank of International Settlements (BIS) shows that it is, and a big one at that. Australian households have the highest household debt to disposable income ratios in the world, according to the BIS. Most of household debt, of course, is mortgage debt. And households are happy to take on mortgage debt as long as house prices are rising, interest rates are low, and the job market is good.

But as you can see, in markets where interest rates have risen and house prices have fallen, households have already begun seriously deleveraging, repairing their balance sheets by saving more and spending less and relying on asset appreciating a lot less. This process-as much psychological as financial-has yet to happen in Australia. We believe it will (it's one of the things we're going to discuss at the Debt Summit.)

But debt is not just a household issue. It's a pension issue too. That's because Australia has a huge portion of its pension assets in stocks. And as the world economy deleverages, assets bought with borrowed money are sold or revalued. For Australians, that means a huge write down in the value of assets held by pension funds.

Check out the chart below from the International Monetary Fund (IMF). It shows that Australia's pension assets (mostly superannuation funds) are not only about 100% of GDP (or nearly $1 trillion), it shows that the bulk of those assets are not diversified at all. Most of it's in stocks. The rest is in property (a highly leveraged sector arguable even more vulnerable to deleveraging).

Click to enlarge

What does the chart really mean? It means that it's time for a serious rethink of how you manage your retirement assets. Super...stocks...porperty...how you make, keep, and grow your wealth is a serious challenge for the future. And the accumulation of vast household, corporate, and government debt is making it even more challenging.

In fact, government debt may be the other shoe to drop. We won't get into too much detail. But we'd suggest that Australia is treading down the path to where questions about the quality of its bonds-or worst case, its fiscal solvency itself-might start to be asked.

Granted, the public debt-to-GDP ratios in Australia are modest compared to the U.S. and the U.K. And even if they grow to around 16% of GDP (as the IMF suggests they will), they will still be much lower than other places around the world. But it's the casual attitude toward accruing these long-term liabilities that worries us. And it's also the affect rising public debt has on interest rates.

The IMF puts it this way: "Doubts about fiscal solvency-the risk that governments find it more convenient to repudiate their debt or to inflate it away-could lead to an increase in the cost of borrowing. In turn, higher interest rates (and exchange rate depreciations, particularly in countries with significant borrowing in foreign currency, like most emerging economies) could further add to government debts-in some cases, resulting in 'snowballing' debt dynamics. This scenario would be deleterious for global growth."

Yes, it would be bad for growth. And a 2003 study from the Federal Reserve (cited yesterday in the Times of London) says it would also be bad for interest rates. The study concludes that "a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points; a typical estimate is about 25 basis points."

It was referring to increased borrowing costs for the U.S. government because of rising deficit-to-GDP ratios. But in the current Credit Depression, we have no reason to believe Aussie borrowing costs wouldn't rise too with rising deficit-to-GDP ratios.

"All else equal," study author Thomas Laubach concludes, "The results of this study suggest that interest rates rise by about 25 basis points in response to a percentage point increase in the projected de_cit-to-GDP ratio, and by about 4 basis points in response to a percentage point increase in the projected debt-to-GDP ratio."

And what does it mean? "The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research called a 'debt explosion.' Mr. Congdon said the study illustrated the 'horrifying' consequences for leading Western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending. He said the markets had failed to digest fully the scale of fiscal largesse."

To be sure, if the cost of refinancing public debt doubles, it's going to be particularly nasty for the U.S. and the U.K., where public debt to GDP ratios are on the rise. But what would it mean for Australia, where public debt to GDP would be smaller, but a lot larger than it is today? Stay tuned...

Dan Denning
for The Daily Reckoning Australia

• Buying Stocks for Dividends Makes Sense…
• Corporate Debt is Just One Aspect of the National Debt Problem
• Dividend Drop-Off: When Cushions Turn To Rocks
• A Sea Change In Our Love of Debt
• Banks or BHP?

"Building and construction activity has weakened for a 16th straight month as firms grappled with delayed projects and difficult credit conditions...The Australian Industry Group-Housing Industry Association performance of construction index (PCI) fell by 4.3 index points in June to 42.6 points. The index has been below the 50 level, which separates expansion from contraction, since March 2008."

But let us not be accused of being pessimists. Take a look at the chart below. It's from a 2002 book called Triumph of the Optimists by Elroy Dimson, Paul Marsh and Mike Stanton of Princeton University. It shows that over the last one hundred years-and importantly, prior to the blow-off phase of the credit bubble in 2000-dividends accounted for half of your total return in U.S. and U.K. common stocks.

Dividends went out of fashion in the tech boom. To be fair, many companies had no earnings at all from which to draw a dividend. But as you can see from a second chart (below), the dividend yield on the S&P 500 is coming off a historic-low in 2000. Even so, the current yield on the S&P is just 2.4%, compared to the 3.5% yield on ten-year Treasury bonds.

The yield on Aussie stocks, for whatever reason, has tended to be higher than U.S. stocks. For example, let's say you read the APRA report on Super we mentioned yesterday and decided your best approach was to passively track the ASX/200, thereby reducing management fees and not trying to beat the market with your own skill. How would you do it?

Well-we're not recommending it-but this is precisely what Exchange Traded Funds are for. The SPDR S&P/ASX 200 Fund (ASX:STW) tracks the ASX. It's also going to sport a yield near 10%, based on 2009 earnings projections. So for investors interested in "one-decision" stocks, this one decision on the whole market that pays a surprising high-yield.

That's not to say there's no risk, or that you couldn't do better picking your own high-yield stocks. And that's only if you thought yield was the way to go. But the idea occurs to us because we believe that with financial assets anyway, the name of the game in the coming years is to find a rate of interest (or yield) that exceeds the inflation rate.

Come to think of it, that's always the name of the game. It's just particularly the case when fears of inflation are more pronounced. And incidentally, this also bears on the housing market. That is, it's possible Aussie house prices will stay the same or even rise nominally, but fall in real terms as the rate of inflation in the rest of the economy far exceeds the rate of price appreciation homes (homes propped up by government aid and reluctant sellers, but not powered higher by new buyers because of rising rates and affordability issues.)

But leaving the housing debate aside, we turn the case for dividends over to none other than Ben Graham in The Intelligent Investor. Chapter two of that must-read is called "The Investor and Inflation" and in it Graham writes the following (emphasis added is our own):

Inflation, and the fight against it, have been very much in the public's mind in recent years. The shrinkage in the purchasing power of the dollar in the past, and particularly the fear (or hope by speculators) of a serious further decline in the future, have greatly influenced the thinking of Wall Street.

It is clear that those with a fixed dollar income will suffer when the cost of living advances, and the same applies to a fixed amount of dollar principal. Holders of stocks, on the other hand, have the possibility that a loss of the dollar's purchasing power may be offset by advances in their dividends and the prices of their shares.

It's an intriguing statement, isn't it? We have every reason to believe that deleveraging in the economy is generally bearish for stocks. But Graham is looking past debt-deflation and toward the moment when monetary excess begins driving prices up again (inflation).

In that environment, Graham reckons you hedge against inflation best with common stocks that pay dividends. At least, that's our reading of it. And if it's correct, it means you need a two-stage plan. Stage one is to survive further deleveraging by being more in cash and tangibles than shares. The second-again speaking generally-is to be ready to deploy your cash into assets going up faster than the rate of inflation.

That is enough on the subject today. More tomorrow. And we meant to discuss another 100-year trend, that of global energy production per capita. But it will have to wait. Until then, we've published some more reader mail on property and adolescence.

--Guys,

I am truly disappointed to see you give any credence whatsoever to these clowns.

A fair cop. We're not saying the ratings agencies are going to get it right. But in the aftermath of their complicity in subprime crime, we expect them to err on the side of caution going forward. And correct or not, the downgrades-if they come-will have an impact on what pension funds and other institutions can own debt that is not investment grade. It will have consequences.

--Just read your Monday report. What a load of Crap! Didn't anyone tell you if you have nothing worth saying, then keep your mouth shut.

David P.

We're afraid you misunderstand the purpose of the DR David. It's not to tell you what to do with your money. It's to make you think-or at least share in our own thoughts. If you're not enjoying it, we suggest you get off the pot. And if you want analysis of specific shares, that's for paid subscribers to Diggers and Drillers and Australian Small Cap Investigator.

--Dear Dan,

Ross

Dan Denning
for The Daily Reckoning Australia

• S&P 500 Index Total Return Was Actually Negative
• Stocks Better than Bonds When Inflation is a Big Threat
• Dividend Drop-Off: When Cushions Turn To Rocks
• Consumer Price Inflation has Spooked Investors Everywhere
• After the Bailout of Wall Street, Everybody Wants Cash

It's the dumb money that thinks you can correct a generation-long period of credit growth in 24 months...with less than 10% unemployment...

Stocks have now been in a rally for three months. The longer this goes on, of course, the dumber money gets. People come to think the bounce is a permanent bull market.

Yesterday, not much happened. Stocks held steady. Oil too. Gold fell $8...closing at $952. And the dollar rose to $1.39 per euro.

But while the dumb money has its eyes on the stock market, the smart money is watching the economy.

Unemployment has risen to 9.4 million in the United States. Experts think the rate of job losses is slowing. But month after month, more and more people are not collecting wages. Instead, they're coming to rely on handouts from the government. The press reports that one in every six Americans is now on some form of government life-support. (More on that...tomorrow...)

Same thing in the housing sector. Robert Shiller says the housing slump has already knocked prices down 32%...and has a long way to go. This alone guarantees a long period of adjustment. Bad decisions - usually those with huge debt bombs attached - will blow up...then they need to be cleaned up...and then, after the destruction, comes the constructive rebuilding. All that takes time...years.

People whose houses are going down in price...and whose incomes are falling...do not buy more stuff. Sales go down...profits go down...and dividends go down. Why would investors buy stocks when earnings and dividends are falling? Good question. Pull your shorts up, dear reader...pull your shorts up.

House prices are still going down - but not as fast. Still, big resets, defaults and foreclosures are still on the way - in prime and Alt-A mortgages.

Meanwhile, when companies don't sell...they don't ship either.

The trucking industry says traffic is off 13% from a year before - the biggest drop in 13 years.

Airplanes are carrying 21% less cargo. And the commercial airline industry says it is losing $9 billion this year.

As for shipping...well, don't even bring it up. Shipping has been in a catastrophic slump since last year - with cargo rates down 90%.

Obvious conclusion:

"Every smart trader I know is massively short the stock market," says Jeff Clark.

You should be short the stock market too...or look to the 'anti-stock market'. This market can never go bust...and it doesn't care about earnings reports, clever accounting, analysts' upgrades or downgrades. But the best part of this 'anti-stock market' is the virtually unlimited profits. In fact, the nastier the stock market gets, the more money readers have the chance to make in the Anti-Stock Market. Just ask the readers who've already seen 85%, 72%, 67%, 100% and 80% gains so far in 2009.

Bill Bonner
for The Daily Reckoning Australia

• We’re Not Threatened by Inflation but by Depression
• Two Ways to Deleverage an Economy
• Three Kinds of Money in the Marketplace
• What’s a Consumer Economy Need in Order to Keep Growing?
• Stock Markets All Over the World are Getting Whacked

The Economist magazine says, "A share's value must be the present value of all future dividends - otherwise stock markets would be a giant Ponzi scheme" which is made chillingly instructive today with the huge Bernie Madoff and other Ponzi scheme scandals that are popping up everywhere.

It's the same thing when people ask, "Why does Mogambo go to work at all, since he never does anything while he is there except play computer games and download pornography until it is time to leave early?"

Naturally, I immediately want to respond, "That is not true!" In fact, when I see my boss come snooping around, I try and look real busy, and sometimes I get something done, albeit mostly incorrectly and late, which opens another can of worms with everyone yelling, "I asked you for this six months ago, you moron!" or they hold my report with two fingers and say, with obvious distaste in their voices, "What IS this gibberish?"

Since I only took this stupid job because I needed the money and I am tired of defending myself about my poor work performance, I cleverly change the subject and note that we were originally talking about dividends from stocks, which I was going to use to say that dividends are being cut since company revenues are falling even as taxes and expenses are going up, and that people are responding by selling stocks, which makes their prices go down, which is what you expect ANY time there are more sellers than buyers! Hahaha!

The Economist magazine ignores my glib remark and notes that "Financial companies contributed about one-third of the $736 billion of dividends paid globally by quoted firms in 2007" although they do not mention the fact that financial companies and government spending have grown until they are now the two biggest industries in America, probably because they know that if they did, I would probably start getting Unglued In Outrage (UIO) when it is obvious that I am not all that tightly-glued in the first place, damn it!

They do not even mention glue, nor that dividends of the S&P 500 have fallen from a high of almost $29 a share to today's $25, which doesn't seem that bad until they say, "Standard & Poor's, rating agency, reckons that dividends in America could fall by about a quarter this year - the steepest drop since 1938" especially since that would only take them back to where they were in 2004, and that "Pessimists point to 1931-35, when dividends per shares in America fell by 45% from peak to trough."

In fact, things got so bad back then, and companies were so reluctant to cut dividends (probably figuring that nobody in their right mind would buy their shares otherwise), that "in 1933, American earnings per share dropped below dividends"! Wow! The companies paid out more money to shareholders than the company made!

I know what you are thinking, because it was exactly what I am thinking. You are thinking, "What does this have to do with me, and how can I make a lot of money in a hurry without working?"

Bill Bonner here at The Daily Reckoning does not actually say that you and I are a couple of greedy, impatient, lowlife, lazy scumbags, which I already hear enough to last me a lifetime (thanks anyway), and that it is waaAAAaaay too early to be talking about profits when there are so many losses ahead, and that we ought to be selling all the belongings of our wives and children to get money to buy gold, gold, gold against a global economic crisis, using every fiat dollar upon which we can lay our greedy, filthy hands, but he seems to imply as much when he says, "Major cycles take time. So far, the Dow has only gotten down to the '66 TOP. Now, it has to get to the '82 BOTTOM...adjusted for inflation. Where would that be?"

Uh-oh!! I thought he was asking me for the answer, and I had no idea what he is talking about! And I sure don't want to do any work to find out, which is what you would naturally expect from, you know, a greedy, impatient, lowlife, lazy scumbag like me. So I was slinking down in my seat, trying to be invisible, when he thankfully answers his own question, "Well...as we recall, the Dow was barely at 1,000 when the bull market began."

Apparently, Mr. Bonner noticed the way the blood drained from my face at the thought of the catastrophe that would ensue from the Dow dropping all the way to 1,000, when it seems like it had reached around 15,000 a couple of times in the last decade or so, considering all the zillions of dollars in money and dreams that were poured in the stock and bond market and which are now lost, lost, lost.

Perhaps to make me feel better because he figures I am as stupid as I look and as stupid as I sound, he mistakenly thinks that I would not understand the idea of "money illusion" which is the phenomenon where it looks like you are doing fine, financially, but you are actually doing worse and worse, going downhill, because the decline in the purchasing power of your dollars is more than the increase in the number of dollars you get as your stupid little annual raises at your stupid little job, not to mention your pathetic "bonus" which you did not even get last year, and says, "And if we adjust that to consumer price inflation, we come to 2,000-3,000" which I agree certainly sounds a lot better than 1,000 in mere nominal terms when the Dow is now about 7,000, which is a satisfying self-delusion - which, of course, is the best kind of delusion.

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

• Dividend Drop-Off: When Cushions Turn To Rocks
• Dividends and a Sea Change in Corporate Behaviour Toward Shareholders
• Nixon and Exchanging Dollars for Gold
• Patching Up The World With Golden Glue
• A Government of Spendaholics

In a similar vein, Giovanni Bisignani, director general of the International Air Transport Association, says that volumes of air cargo traffic are in "free fall", dropping 29.5% from a year earlier, and 17% of it in December alone!

One of his associates quipped, "It's gone from terrible to unprecedented" which is clever and humorous, and thus the only bright spot in the whole mess, as far as I can tell.

Then Bloomberg.com notes that it's not just earnings that are falling, but dividends, too! They report "The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century."

The explanation for this cryptic remark is provided by James Swanson, chief investment strategist at MFS Investment Management. He says that dividends are what matters, and "It's a greater fool theory if we always buy stocks based on earnings and we never get a penny out of it, hoping for someone to buy that stock at a higher price."

In fact, he says, "Dividends have been a cushion in bad times" and the Really Bad News (RBN) about this drop in dividends is that "If they go to zero, it's a disaster".

Now, as a bad husband, a worse father, a terrible neighbor and an incompetent employee, I obviously know a lot about "disasters", and trust me when I tell you that it's going to Cost You Plenty (CYP).

Bloomberg, taking no interest in my insightful observations gleaned from a lifetime of paying for my screw-ups, is still talking about dividends, and reports that "Twenty-six companies in the S&P 500 saved more than $21 billion by cutting or suspending outlays this year, more than all the reductions from 2003 to 2007. On a per-share basis, S&P 500 companies may trim payouts 13 percent this year, the biggest drop since 1942."

This big drop in dividends is plenty bad by itself, but the news is doubly bad because "saving more than $21 billion" means that a lot of companies got $21 billion less in revenue! Which doesn't even talk about the multiplier effect as that money cascades through the economy!

Econometrically, applying a mysterious "constant growth version of the so-called dividend discount model", which "values a stock as the sum of all its future dividends," the Really Bad News (RBN) is that it "shows equities are still overpriced. With S&P 500 companies projected to pay a combined $25.57 in dividends this year, the index would need to fall to 526.46 before investors are compensated for owning shares."

This means another drop of 25% in the S&P 500 index, assuming that there are no more dividend cuts, and I would have to be an idiot to think that! Okay, I really AM an idiot, but I am still freaking out here!

This is not, as you could expect, a dire economic forecast based on the "velocity" multiplier-effect of a third less volume in transportation traffic, meaning a huge drop in transactions, which implies that less money is coursing through the economy, or about dividends being cut and stocks falling precipitously in price as a result, but about gold - glorious, wonderful gold - and how if you aren't buying it, then there is something Very, Very Wrong (VVW) with you if you can look at this stuff, and look at economic history, and look at the Austrian school of economics which you can get free at Mises.org, look at the dismal economic situation of the world and then not buy gold. It amazes me!

Until next time,

The Mogambo Guru
for The Daily Reckoning Australia

P.S. Through all of this, I remind myself that "the majority of investors must lose money", which means that the only reason I can make so much money with gold is that I am in the minority, who are the guys who make the money that the majority loses!

Whee! This investing stuff is easy!

• Dumb Money Eyes Stock Market While Smart Money Watches Economy
• Price-to-Earnings Ratio of the S&P 500 Index
• Buying Stocks for Dividends Makes Sense…
• June Producer Price Index Indicates Slower Inflation in Australia
• Value of Derivatives Held By U.S. Commercial Banks Has Plunged By $8 trillion