Investors are digging at the key levels on U.S. Australian indices. Let’s see if they can defend their territorial gains. Or if they have overshot already and will be forced to retreat.
Enthusiasm for the war on Dow 12,000 was dampened in America when the Labor Department revealed that new jobless claims were up by 24,000 thousand last week. This shows us that the changes in America’s job market are structural, not cyclical. When you off-shore your manufacturing base, Wal-Mart becomes your largest employer and average wages fall (as they have been, in real terms, since 1974).
But Australia doesn’t have anything to worry about, does it? China’s GDP grew by 11.9% in the first quarter, according to figures published yesterday. You can see the immediate local effect of that China boom in Gloucester Coal’s announcement that in secured a 100% rise in coking coal prices from its Asian customers. This theme – coking coal – was one Dr. Alex Cowie recently wrote about in Diggers and Drillers, although Gloucester was not the stock he recommended to take advantage of the high prices.
Is there anything alarming in the China data? Well, maybe. The National Bureau of Statistics reported that real estate prices rose 11.7% in March year-over-year. Hey…that’s not a bad month is it? And it followed February’s year-over-year gain of 10.7%.
Nah….no chance that there’s a real estate and fixed asset bubble in China fuelling demand for Aussie resources is there?
Meanwhile, back in New South Shanghai, Kevin Rudd is doing his best to collaborate with his partners/overlords in Beijing. The Daily Telegraph reports that the Rudd government will offer a savings scheme designed to boost the deposits of the Big Four banks, cutting the need – often cited in this space – of funding new mortgage lending from foreign borrowing.
This would inflate, or at least maintain, the Ruddbubble in Australian housing.
To be fair, the article did not exactly describe the scheme in precisely those terms. It said investors will qualify for a special savings rate if they agree to “lock up” the money for a longer period of time. It’s designed to promote a culture of saving in Australia, which wouldn’t be a bad thing.
But, in theory, locking your money up in a high-yield savings account exposes you to the ravages of inflation. In addition, it negates one of the chief benefits of being in cash to begin with – liquidity. It’s nice to have your own money to do with as you please whenever you choose. Perhaps the simpler reform would be to not tax interest earned on savings at 50%.
Don’t hold your breath, though. Governments everywhere are in money-scrounging mode. How else are they going to pay for $300,000 bar tabs (although, to be fair, if we had to implement the foreign policy of a government that didn’t realise it was bankrupt, we might need a drink too). Keep in mind that when you work for a for profit business, these kinds of expenses are simply verboten in a recession. But if you’re working on the public dime, have another whiskey brother!
Maybe the Feds are toasting their own success in saving the world from itself (or capitalism from itself, as the critique goes). But not so fast! Global curmudgeon and policy fix-it man George Soros says that the old problem – too much corporate and private sector debt – has been replaced by a new problem – too much public sector debt.
In remarks reported by The Economist, Soros told a dinner audience that, “The success in bailing out the system on the previous occasion led to a superbubble, except that in 2008 we used the same methods.” By ‘methods’ we assume he means the process of paying down old debt by taking on new debt (otherwise known as Ponzi finance).
“Unless we learn the lessons, that markets are inherently unstable and that stability needs to be the objective of public policy, we are facing a yet larger bubble….We have added to the leverage by replacing private credit with sovereign credit and increasing national debt by a significant amount.”
It is not just the total amount of debt that presents the long-term problem. It’s the cost of servicing that debt. Returning back to our friends at the Bank of International Settlements we produce a chart from their paper. It shows that adding to the public debt imposes a major burden on the economy and becomes an even larger percentage of GDP the further you go out in time.
Granted, thirty years is a long time. No one even knows what’s going to happen tomorrow. But the issue here is that the reliance on debt (especially short-term, interest rate sensitive debt) makes an economy even more unstable in the way Soros described. This is different, and worse, than the natural state of volatility in free markets. But we’ll get to that in second.
The BIS paper authors write that “When a country starts from an already high level of public debt, the probability that a given shock will trigger unstable debt dynamics is higher. The risk is increased when public debt is already on a steep upward trajectory, as is it is now in several countries.”
But Australia? The May federal budget may show a smaller future debt and deficit than expected, thanks to the rebound in export prices and the strong terms of trade Australia currently enjoys. But as we’ve pointed out, the health of government “revenues” depends to a large degree on property and China. And those are pretty slender reeds to lean on.
What Australia has going for it is that the public debt as a percentage of GDP is small, relatively speaking. What it doesn’t have going for it is that the government is increasing its role in the economy and committing more money to long-term programs on what could be really bad assumptions about the cost of borrowing and the regularity of national income. And to repeat, the country is a net capital importer.
But hey, someone else can figure out what to do about all that in the next election cycle. And somebody else can worry about paying it off later. The Soros emphasis on public policy – and the way in which it is embarrassed at a deep level of belief in Australia – seems sensible. But it’s a kind of well-meaning idiocy.
By the way, ifyou don’t like disussions on liberty and the proper role of government in regulating society, you’ll want to give the rest of today’s DR a miss. But if you’re in for that sort of thing…read on.
We’re going to paint with a broad brush and say most well-meaning government interventions in public and private life are designed to promote equality of outcome, social justice, or reduce the seeming unfairness and volatility of life in market economy.
But have you ever wondered if, in the earnest attempt to eliminate risk in our society (financial, physical, emotional), we’re actually make people less safe and society more inherently risky?
Wear your seat belt. Don’t binge drink. Don’t drive too fast. Be politically correct. Be tolerant. Be diverse. Be multi-cultural. All these commandments coming down from the Nanny State on high are given to use presumably because we are too stupid or unthinking to look out for ourselves, or too unsensitive to the feelings of self-worth held by others.
We won’t eat right unless told what to eat or invest enough to provide for our retirement unless compelled to. And in the world would be better, in the words of principal Skinner, “If nobody was better than anybody else and everybody was the best.”
But what if all this bullying, nonsense, nannying, and government coercion is eroding the very healthy and natural ability to identify and manage risk? We’d argue that in nature, the ability to identify risk promotes survival. The amygdala – that tiny part of our brain that controls the fight or flight instinct – is evolution’s way of keeping us on our toes. It reminds us that in the tens of thousands of years human history, the margin between life and death has been pretty small.
Over most of human history, people haven’t had surplus time or energy to think about what to do with surplus, quantitatively or qualitatively. You spent most of your time surviving and finding food. And this pursuit, knowing what to fear was probably your most important survival skill.
But we live in a world of profound and seemingly endless abundance and surplus today. It’s a product of the division of labour (which has been so successful most people don’t even know what it is), cheap energy, and cheap credit. We’d argue that all of these things have dangerously dulled our sense of risk and exaggerated our expectations of what to expect from life, each other, and our public institutions.
Wealth, material wealth anyway, is a product of surplus. And surplus is another way of saying profit. It means combining raw materials, labour, and your talent to make the whole worth more than the sum of the parts.
In this respect – by communicating accurate prices so people can make informed decisions about what to buy and sell – the free market delivers extraordinary outcomes. It unleashes the sheer productive capacities of millions of people who do completely unpredictable and unplannable things with their life that no central committee could possibly organise.
The trade off for such an open system that produces so much surplus, choice, and income mobility is instability and relative inequality. Unless you are in a rocking chair, you can’t really be moving and staying put at the same time. But for some reason, some people find this instability – a natural feature of a dynamic system – threatening. They want to freeze things and give up growth and change for the sake of predictability and security, which they would choose as personal goals.
To be fair, change freaks some people out. To be ideological, the people (usually in government) opposed to the instability of the free market just don’t like what other people choose to do with their economic liberty. They find prosperity morally vulgar and are offended by obvious inequality – failing to see that free markets have elevated all people everywhere to standards of living that would have been unimaginable even 100 years ago.
One possible explanation is that the meddling central planners of the world are just egomaniacs who get off on telling other people how to live. More worrying is that these people actually believe they are right and that someone should have the role of regulating, with the power of the State to coerce, how people behave in the minutest detail.
That’s not to say – and we’re winding up our rant here – that you can’t have good government. But we’d say it would be much smaller and less morally ambitious than today’s institution. Today’s big government exists for the sake of perpetuating itself. It’s finding that harder and harder to do as it sucks up – and eventually kills – the lifeblood of the productive economy, taxes in the form of suplus on personal and corporate incomes.
Mind you none of this is in defence of the predatory financial capitalism run by Washington and Wall Street oligarchs that’s been masquerading as the free market. As Ron Paul correctly pointed out last week, the current system is more accurately described as “corporatist” in which the banks, the defence contractors and corporations of size (to use a PC term) lobby, cajole, and generally purchase favourable laws from legislators (on the right and left) that are themselves bought and paid for.
Frankly, the whole thing could use a little creative destruction. And no matter how badly its defenders (like Bernanke) fight for it, the system is inherently fraudulent and wasteful of resources and capital.
And in addition to that, it’s just ethically offensive. We won’t miss it or mourn it when it’s gone. As we mentioned last week, we don’t encourage people to get involved with that political system at all. It’s like snogging with a vampire. We’d urge you to deprive that system of your time, talents, and creative energies.
The best defence of liberty begins with financial independence. And taking care of your own money and your own life is something you don’t need to go to the ballot box to do. And you don’t have to take anyone else’s money either. It also puts you in the position of helping people you really can help – your friends, family, and neighbours.
So why isn’t financial independence the highest calling in public life? Hmmn. Granted, a high material standard of living is not the same thing as a high quality of life. And we’d even say that spiritually, there are more important things. But it’s something to think about over the weekend.
Returning to the markets, for investors, we’d continue to sound the warning: be ‘ware the lofty indices. Be vigilant with your trailing stops and stop losses. And enjoy the weekend!