The Needs Justify the Ends

Remember back in the good old days? Back when there was no government in Canberra and stocks rallied because investors knew there wouldn't be any moron law makers to pass moron laws? Ah yes...the good old days. Sigh.

If there's a deal that puts a Labor/Greens/Independent government in place, you might expect that to be a negative for shares, inasmuch as it could mean mining tax and, down the track, some kind of carbon tax. However that negativity could be offset by the probability that the Reserve Bank Board, meeting in Adelaide today, will decide that the price of money in Australia is neither too high nor too low, but just right.

And in any case, everything is getting better and better anyway. The GFC is over and Australia will always have Chin, whether it likes it or not. BIS Shrapnel chief economist Frank Gelber - in tour de force of conventional thinking - is quoted in today's Age speaking at a conference in Brisbane and saying, "All of the pre-conditions that led to the GFC are gone."

Gone baby gone. Or at least hidden.

For example, today's Wall Street Journal reports that the so-called "stress tests" of 91 European banks earlier this year may not have included the full exposure those banks had to the sovereign debt of nations like Spain, Italy, and Portugal. This is an important point because, according to spreads in the credit market, there is a fair chance that a lot of that debt will be marked down, if not defaulted on outright.

The Journal article says that, "Some banks excluded certain sovereign bonds from their tallies, and many reduced the sums to account for 'short' positions they were holding - facts that neither regulators nor most banks disclosed when the test results were published in late July." Shocking, innit?

This reminds us of a point we made last November in Canberra speaking at the Gold Standard Institute conference: the collateral of the global banking system was STILL compromised by bad mortgage debt. But in some places, the bad mortgage debt and merely been traded for bad sovereign debt, with the risk transferred to the public balance sheet. The fundamental health of the bankingsystem - the quality of assets - had not substantially improved since the heigh of the GFC.

In fact, that seems truer than ever in Europe. And don't even get us started on America. Banks are stuffed to the gills with bad housing loans. One of the chief drivers of bank earnings in the last reporting quarter was based on reduced provisions for loan losses. But that does not seem like a real improvement in bank earnings, especially since the underlying conditions in the American housing market (and thus the American banking system) are, to be precise, really bad.

Yet as we are often reminded by patient readers, that is America. This is Australia. Australia is not America. Who cares what happens over there?

As Dr. Gelber reminds us, "The mining drivers are here for another five years at least. Five years from now this economy is going to be really strong coming from an undersupplied, under capacity situation...The boom won't mature in 18 months, it will take six or seven years, or eight or nine."

Well. Gee. If he's right, there is absolutely nothing to worry about, except maybe inflation when all that Asian cash comes pouring into Australia and all that business investment creates new jobs and pushes up prices. That is certainly one way of looking at Australia: that its economic fortunes and corporate earnings are now fully correlated with Asia and that Asia is not America either.

And to be fair, perhaps we have been taking too many hits lately from the crack pipe of despair. As a native-born American, maybe we over-consume on bleak American financial news and it clouds our objectivity on just what is really happening Australia. Maybe.

Or maybe not.

Time, as they say, will tell. And in the meantime, regarding Australia, you might want to read this thought-provoking piece. It was the cover story from the recent edition of Business Week. You can see the picture that ran with the cover above.

The story has a lot of food for thought, which is good, considering it's lunch time. Are minerals any good to a country if you don't sell them? Is Australia taking for granted that it will always have customers for its mineral resources and could bad tax laws drive away those customers? Profit margins on extractive industries are low compared to businesses further up the value-added chain, even taken higher commodity prices into account. How will the Australian economy develop industries that deliver more higher-wage jobs to more people?

Of course from a geopolitical angle, this story goes well with the terrible movie we saw this weekend, "Tomorrow, When the War Began." It's about a group of Australian teenagers in a fictional coastal town that are out camping in the bush when the country is invaded by a coalition of people from the North, all of whom look suspiciously Chinese, but are never referred to as such.

The movie is not really political. It shows that even in the middle of a foreign invasion, teenagers can still manage to be insecure and unsure and moody. And when their private dramas and romances are not playing out, their plotting a guerrilla insurrection against the foreign invader who's come to steal Australia's resources so they can more equitably shared, based on the needs of the Australia's neighbours.

Hey. Maybe resources really DO belong to everyone. What's the saying? From each according to his ability to each according to his need.

Of course needing something doesn't justify the taking of it, generally speaking. And for now, no one needs to take what Australia has when the country is perfectly happy to sell it. For now.

Dan Denning
for The Daily Reckoning Australia

The Needs Justify the Ends, 7.9 out of 10 based on 9 ratings

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