Yesterday's market action was a big fat nothing burger. There was at least one item of black humour. Today's Age reports, that, "Debt recovery specialist Collection House was at its best share price levels since 2007 after managing director Tony Aveling produced unaudited profit guidance figures suggesting its after-tax performance will be about 55 per cent better."
"Mr Aveling said Collection House, which sources most of its business by recovering customer debts for banks and service providers like phone and energy companies, opted to use its money to pay off debt, rather than borrow more to buy the debts of others and try to chase defaulters. He also said shareholders could expect an increase in interim dividend, contributing to Collection House shares rising beyond 90¢, before settling to a 12¢ gain at 84¢."
How about that? A debt collection company growing earnings, paying off its debt, and paying a dividend? What does that tell you about the world when the debt collection business is booming?
To be fair, earnings were up at a few companies like Flight Centre and Computershare. But the banks sold off and the market closed down about 1%. So which is it? Are Australian earnings going to be stronger than expected? Or are stocks already priced for earnings perfection?
We'll ponder that on the tram on the way into the CBD today. A group of investors touring Australia is in town and we're on our way to speak to them about our forecasts and strategies for 2010. Mostly this involves more cash, fewer shares targeted to industries where there is scarcity, and a handful of energy, precious metals, and small cap shares.
That may seem like a bit of contradiction: bearish on the stock market but bullish on the riskiest sectors of it. But we'd make that case that it's owning the banks and other so-called blue chips that's the bigger risk - given the rewards on offer. It's better to have at least some shares where when one good thing happens, the share can go up 3-1, 5-1, or 10-1.
But true to form, 2010 is going to be the year the solvency of the welfare state dominates the front pages. People are slowly beginning to understand that huge social welfare states have to be paid for by someone. And if your economy isn't growing, it's hard to "spread the wealth around." You have to "borrow it around." And that puts you in debt.
For example, Greece has a fiscal deficit that's nearly 12%, or four times what the suits at the European Union in Brussels say you're allowed to have and still be a member in good standing. What's worse for Greece, its total debt-to-GDP ratio is working way to 120% - which is pretty bad, even by American and British standards (although modest by Japanese standards).
It may be satisfying for the EU's finance chiefs to scold Greece. But they all live in the same very large monetary glass house. This is the proverbial Achilles heel of Europe's monetary union. Twelve economies, one interest rate, zero flexibility. It's hard to imagine a better recipe for a fiscal crisis.
Our old friend Marc Faber says to beware the PIIGS - Portugal, Ireland, Italy, Greece, and Spain. These are the Euro nations that borrowed up in the boom and now have to pay it back. If these nations ran their own monetary policy, they could set interest rates low or print money. That would inflate away some of the accumulated debts.
But Europe's central bankers are not as willing as their Fed counterparts to throw their currency to the dogs. Thus the PIIGS don't have the any monetary or fiscal stability left. They must live within their means, cut spending, or get some kind of bail out from their neighbours.
The whole situation makes you realise how much of modern "wealth" is just debt dressed up in fancy clothes with a flashy car. And that's just at the household level. We think some European nation's will realise this year that you can't infinitely redistribute wealth to achieve the goals of social justice and equality...if the economy itself isn't producing that wealth in the first place.
Faber reckons one of the PIIGs will default in the next few years. Whether this provokes a currency crisis in Europe is the open question. What the euro has going for it right now is that it is not the U.S. dollar nor is it the yen. That's not saying much.
Australia doesn't yet face the kind of fiscal reckoning that the PIIGs, the U.S., Britain, and Japan face. We meant to show today how that could change quickly in the future. It's a new scheme to put ultimate responsibility for bank solvency on the Aussie tax payer. But we have a tram to catch, so the story will have to wait until tomorrow. Until then!
Dan Denning
for The Daily Reckoning Australia
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Related Articles:
- USA Has Fives Times As Much Sovereign Debt As All the PIIGS Put Together
- It’s the Little Economies that Have Trouble
- America Completes Collection of Welfare State Essentials With Health Care System
- Africa: Open For Business
- Central Banks Play: Print…Ready…Aim
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 In the clear on 21 January 2010:
I am unsure of whether the article relates to OZ or not as you state the fore mentioned countires 'PIGGS' are running economies that have faultered or in reverse and are in a downward spiral of debt Vs income (taxes). Does this then highlight such problems will be avoided in OZ as our economy defies what seems to be logic and pushes through inflationary expectations, suggesting a very very strong economy, strong employment and an ability to sustain the debt.
I know you seem set on the idea of an economic debt ladened tsunami but i can't see this happening here. My first thoughts were that we are seceptable to global events but now my view has changed. It appears we are relatively self contained, the economic world of US and
UK fundamentally had a meltdown and we as a nation had growth in employment and in housing. The US and the UK appear to be over the worst and if anything we look like we here in OZ are on the cusp of another boom. I havent seen anything to contradict this of late so i too have been seduced by how minimal the impact has been. It has given me great confidence for the future, if the GFC didn't effect us part from armagedon what could??
Housing has jumped 17% in one year and a fair portion of those were FHO which means that current house prices and mortgages are for now sustainable and if they can manage ofr the next 5-8 years they to will be looking at 2nd homes pushing the market even higher and closer to that expected 40% increase in a decade the media has been sprooking.
Some propserous times ahead!!
Comment by wasabu on 22 January 2010:
A few problems with your post 'in the clear'.
You say that the aussie economy 'defies what seems to be logic'. A minor point here, is that if you stay on a boat that seems to be defying logic, you're abandoning reason and joining the hope camp. This is not advisable if you're a rational person.
You talk about housing doing great. What great is it doing exactly? It doesn't produce anything except construction jobs. Thats OK, but there are far more stable wealth producing investments aussies should be putting their money into. Houses do not grow like businesses. Their notional value fluctuates, but generally just keeps up with real inflation. The Housing investment cult down under is the pokey machine for advanced gamblers. They sit there hoping for the jackpot to keep going up, using the last 30 min as evidence that it always goes up.
Now, all this debt that has flowed into housing investment, where is most of this debt coming from in your 'self contained' economy? Oh.. the overseas part of the self contained economy.
Very dangerous game you're playing at this juncture! Beware the hope camp.
Comment by Matto on 22 January 2010:
In the clear,
I think you'll find that australia is in a very strong position provided china and the developing economies continue to grow strongly which may well happen. But alternatively, if these countries faulter or enter a prolonged 'hiccup' in their growth path we may be in serious trouble. Australia and the rest of the world seems to be betting big on the notion that china wont faulter with little thought of a contingency plan.
Comment by Matto on 22 January 2010:
^ Australians and the rest of the world seem to be placing big bets on our country under the notion that china wont faulter, with little thought of a contingency plan.
Comment by dutilleul on 27 January 2010:
Dear Sirs,
I beg you the superior grace not to repeat the use of the acronym by which some people pretend to designate the (economics of) Mediterranean countries - "invented", if I am not mistaken, by a schizophrenic creature that writes for the telegraph and passes to be a economist since the day he had the idea that Europe should have adopted the pound instead of the euro.
It is a rude, histrionic barbarity, adopted by barbarians. Please notice I’m not accusing this people of sleeping over their own vomit and/or urine. Just remembering that, at end of the day, I’ve seen a fair amount of compatriots of them that wouldn’t be proper to describe as unsoiled people.
I will not be ungraceful to the point of reminding the regrettable fact that those people exited the pig stalls were his ancestors used to live precisely because of the Mediterranean civilizations with whom they have learned almost everything that is worth to be known in this business of being alive.
I would suggest them to respect themselves in order to be worth of respect.