The Reckless Greed of the Baker

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–At the rate the US dollar is declining, Australia may have to start getting ready for currency refugees from America (other than your editor). There’s no debt deal in America yet. As you can see from the chart below, the US dollar index is nearing a 12-month low. And the 10-day moving average (the blue line) has crossed under the 35-day average (the red line). Our in-house trader Murray Dawes tells us that when this happens, it’s a short-term bearish indicator. Hmm.

Dollar Day of Reckoning Approaches
Dollar Day of Reckoning Approaches

–The dollar index isn’t at new lows. And the greenback is still the world’s most widely owned reserve currency. According to Bloomberg, 60.7% of global currency reserves are held in dollars. The Euro—the other sick man of currencies—is second at 26.6%, followed by the Yen. What about Australia?

–Well, the interesting thing about the Bloomberg story is that so-called commodity currencies like the Australian, Canadian, and New Zealand dollars are gaining popularity as reserve currencies even as they “de-couple” from commodities. What exactly is going on here?

–The “commodity currencies” have been popular for a couple of reasons. The yields on them, or what you’d get from bank interest, are high. The yields are high because GDP growth in the commodity-producing countries is high and central banks have kept short-term interest rates higher to combat inflation (see the Aussie figures today, for example). And finally, the high GDP growth in the commodity producers has been driven by the huge demand for commodities in Asia and China.

–Given all that, it’s still hard to imagine that commodity currencies could become reserve currencies. China’s growth is also a function of credit expansion. Take away the expansion, and the long chain of events leading to strong commodity currencies is broken. And the currencies will fall. But will they?

–The current strength of the commodity currencies is the flip side to how awful the euro and the dollar are. Investors seem happy to take any port in a storm, particularly if it’s yielding over 4%. But investors are sea-faring and fickle. They go where money is treated best and are not inherently loyal. Which is another way of saying the Aussie will only stay strong as long as people want to own it. And as soon as investors see a better deal, they’ll take it.

–The key technical level to watch in this currency drama is just above 70 on the dollar index. A break below that would tell you that the faith global investors have in the credit of the United States of America has been weakened by the argument over the debt ceiling. We wouldn’t expect a sudden dollar crash. But we’d expect a chronically weaker dollar whose centrality in the global currency reserve system has ended.

USD vs AUD


–Keep in mind, though, that the big up and down moves in the dollar index that you see on the chart above had corresponding up and down moves in the Aussie dollar. The Aussie is just paper money too. And even though it may be relatively better than the greenback at the moment, it is absolutely not gold or silver, which are real money.

–It’s been a while since we hit the reader mail bag. So let’s have a look.

Dear Bill,

Thanks for your lucid and penetrating analyses.

Firstly, but irrelevantly, the US empire is the continuation of the British Empire, not a newby.

Secondly and relevantly, if the US retreats, get ready to be part of the Chinese (formerly Mongol) or Russian (a bit Carthaginian) empires.

The EU is a ridiculous fantasy that will be easily consumed by Islam or Russia.

Australia is, (as Paul Keating prophesied) an Anglo pond left behind by the ebbing tide of British Empire. Our only hope is to marry more Asians and assimilate gradually and placidly.

Mike

–As the Borg say, you will be assimilated. But keep resisting. Meanwhile…

Dear Dan,

I am surprised that you guys have not provided more of an expose on the Labor legislation to allow our banks to issue covered bonds so they can avail themselves of “OUR” savings as a guarantee of their bond issues.  I really enjoy having the bastards relegating my right to my money to second rate status.  NOT!  Why are not more people aggrieved by this tactic to allow banks, who are overly exposed to a potential mortgage impairment storm, to access easy credit at our expense.  Perhaps they got the government they truly deserve.  Time to buy a safe for home.

Andrew

–Andrew, we have written about it, here, here, and here. But don’t worry, because prices will never fall, bank assets will always be fine and loan arrears are nothing to worry about.

Hi Dan,

You guys have said previously that the main problem with the markets to be corrected at some time in the near future is the abundance of cheap easy credit.

I wonder how much of the cheap and easy credit has made its way into Gold and Silver prices particularly Spot prices I suppose.

When it gets switched off, or tightened up, how much are prices likely to fall?

Could easily be 20% couldn’t it?

Cheers
Phil Dorrington

–The futures exchanges have been trying to wring the speculators out of the market by raising margin requirements, especially on silver. But we won’t really find out how many speculators are in the market until there’s a major “credit event”. Keep in mind that to the extent the credit event weakens currencies, it ought to be bullish for precious metals. But there’s no way to be certain. In any event, it’s always better to buy on weakness if you can.

–Lots of mail on shale gas and our Revolution in the Desert video. There are too many letters to print, in fact. But here is a sampling of some of them.

Hi Just wanted you to know that I have cancelled my subscription due to your attitude to coal seem gas mining [sic]. Some things are just more important than money, mining and even the economy. I know it has been said before but you can’t eat money, you can’t even eat gas or oil.

Jennifer Loverock

–There are many things more important than money. Money is just a means to an end. And the ends are as different as the people pursuing them. Our goal is to help people gain or add to their financial independence, regardless of what their ultimate ambitions are. Having money gives you some freedom and independence from the vagaries of life and the predations of government. It doesn’t necessarily make you happier or improve your quality of life. That’s up to you, the people you love, the books you read, the places you visit, the music you dance to, and the wine you drink.

–And of course you can’t eat money or oil and gas. Have you ever been able to eat money? But if you’re suggesting that the shale gas industry is in conflict with food security, you’re simply wrong. Australia is not going to plough under its crops in order to export all of its energy so that it can starve in the cold dark night. There’s a very open and public debate going on right now over how best to use land and resources. Contributing to that debate with clichés isn’t much of a contribution.

–Besides, how do you think food gets on your plate? It usually comes from a store. And it got there on a truck that came from a farm. That truck isn’t fuelled by good wishes or vague thoughts. It runs on petrol. That petrol has to come from somewhere. The world needs energy. And we can get it without destroying our farm land. You’re presenting a false choice. But you’re not the only one.

This [shale gas] is one of the most disturbing things, as it takes over productive farm land, pollutes the water table destroys lives for what I ask. Surely people are more evolved and can implement better ways. We have the knowledge to do so much better, but no greed for the few with total disregard and respect for life for short term gain seems to always win. When will people wake up and act with wisdom, sadly perhaps not until everything is destroyed.

Leslie Patten

–There were quite a few readers who posed this same sentiment, that what we face is a choice between greed and profit on the one hand, and wisdom and life on the other hand. That’s an absurd way to frame the argument. It suggests that anyone involved in extractive industries is engaged in the deliberate destruction of the planet for personal gain.

–For thousands of years, men have been engaged in turning raw materials into goods, services, tools, and a better quality of life. There are useful and productive ways to do it and there are wasteful and unproductive ways to do it. The ability to make a profit—to provide people what they need and want at a price they are willing to pay—is what drives this whole process.

–Profit is a kind of feedback that allows you to pursue your interests while providing people with things they find valuable, useful, or pleasurable. Profit is also a kind of personal gain which allows for self-improvement and the ability to make your life better for you and your family. It’s strange that at some point people began to see this as evil or selfish. It’s true that profit doesn’t make you a better person or guarantee that you’ll make better choices (or choices that other people approve of). But it’s a weird world we live in where the enterprising individual seeking to improve his station in life is viewed as greedy.

— It is not greed that drives the production of scarce resources. It’s the expectation of profit. Profit is not evil. It’s what allows the division of labour and specialisation, the very things that provide people with so many choices and so much abundance. How is the baker able to bake his bread if he can’t afford flour, eggs, or an oven? Is it reckless greed that dries the baker? Or the desire to earn a living and make a life?

–Profit is the reward given to anyone who takes resources and adds value to them through his labour or his ideas. You can argue about profit that doesn’t seem hard earned (like bank profits). But to say that producing energy for the modern world is about greed, profits for the few, and the wilful destruction of the natural world is not a serious argument. But if you think you can “implement better ways”, then by all means let us know what they are. You can send a note to dr@dailyreckoning.com.au

Regards,

Dan Denning
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.
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Comments

  1. Why “Baker”?

    Reply
  2. Dan,

    “It’s what allows the division of labour and specialisation, the very things that provide people with so many choices and so much abundance.”

    Specialisation is actually not so good when everyone’s doing it. We are not viable all rounders these days and would die in short order if asked to live the way our great grandparents lived. When a way of life is based on continued economic growth predominantly delivered by consumption, marketers and advertisers expand choices to keep extracting money from the pockets of “consumers”. Why do we need 15 different types of Washing Machines, all of which are designed and manufactured to last just past the enforced warranty period before breaking?

    Where is this abundance of which you speak? A lot of western “specialists” spend their time sitting in a cubicle clicking away on a computer under fluros in an artificial climate. This seems very “standardised” for specialists. Do “consumers” choose to sit at this cubicle for 40-50 hours per week? The answer is yes they do, but they don’t feel like it’s a choice. They feel like it’s the only way to pay the mortgage on the McMansion and the loan payments on the two fairly modern cars and the private school fees for the kids.
    The first choice is to choose to stop excess consumption and stop buying into advertising. Then you have a lot more actual choice and an abundance of things that matter, like time with family and friends.

    A culture that refers to people as “consumers” is in big trouble. Specialisation isn’t all it’s cracked up to be. Agrarian generalist skills will once again be in strong demand in the near future. And all the people who bought into the western wealth dream will finish their uni specialisation course with a big bill and no work opportunities. So, they’ll be in the field growing food along with the people who probably own the field.

    Nathan Chattaway
    July 27, 2011
    Reply
  3. An overlay of Newcrest’s share price and the gold price in AUD and USD would be interesting about now. Methinks that predictive.

    Reply
  4. In my “It’s plainly obvious what is going to happen” opinion:

    I reckon that the German people will not accept its’ politicians accepting the debt risks of other Euro nations such as (gosh the list is getting long these days) Ireland, Greece, Portugal, Spain, and Italy. The ECB and the FED will then be in a currency devaluation race to try and reduce the burden of the sovereign debt piles. So expect more money printing from the ECB and clearly QE3 is coming too.

    If this happens, then (as the Age seems to have been speculating) a $1.50 $AU could be on the cards. If that happens, we could find our own government forced into a reciprical currency devaluation in order prevent a collapse in our economy.

    Are we likely to be witnessing a breakout of currency wars?

    If so, I know which one will win as the size of their army of dollars is the biggest.

    Reply
  5. “It suggests that anyone involved in extractive industries is engaged in the deliberate destruction of the planet for personal gain.”

    A consequence of extractive industries is that the planet gets destroyed. Some industries are worse than others. You know that Dan. You have the choice whether you invest in an industry that fcks the environment or another that has less impact or even enhances our environment. The impacts from your investment decisions are yours entirely whether they are good impacts- profiteering or bad ones-environmental degradation.
    Dan.. You sound like a drunk in a pub trying to flog me a car CD player that “fell off the back of a truck”.
    Shareholders like you are the biggest problem this world has ever faced… People who invest for short term profits with no regard for the associated negative social or environmental impacts. Total disregard of any consequences of your actions. If people like you didn’t invest in environment degrading activities they wouldn’t be able to fund it. Enjoy your bloody profits mate but take full responsibility for your actions and the effects it will have on future generations.

    Reply
  6. @mooboo

    Without customers you have no demand for your product. Without demand for your product you have no profits. Its not the extraction companies, nor their share holders, to blame for ‘destroying the planet’. Look in the mirror mate!

    Reply
  7. DD: “Investors seem happy to take any port in a storm…”

    Why the Baker, Michael?

    Even in a storm, he repels water.

    Apparently he even gets ‘dried’. ;)

    Reply
  8. Why the Baker, Michael?

    Even in a storm, he repels water.

    Apparently he even gets ‘dried’.

    On the home brew Biker?

    Reply
  9. All that QE printing pressing did what?

    http://www.bloomberg.com/news/2011-07-27/fed-says-growth-moderated-in-eight-of-12-regions-on-restrained-spending.html

    Saved the arses of the kleptocratic elite and built new fortunes for the those that were awarded free “risk” financing by the hand of government.

    Reply
  10. http://www.wabusinessnews.com.au/article/CBA-makes-changes-to-financial-reports

    It’s all right though, Ralph is already leaving the building and the RBA has our back on the NZD for a few days more….

    Reply
  11. Profit v Greed

    I think that you’re missing the point here.

    The free market system is a tool just like any and such it needs a skilled operator. A lawnmower is a great tool but would you start it up and just let it go by itself?

    The capitalist system has been hijacked by operators who have no regard for the “greater good” that capitalism is meant to represent. There is nothing wrong with the system but when it’s allowed to run wild it can cause chaos. The real question is how do we get a “committee” with whom we can trust the powerful tool?

    I don’t know who I’d trust but it isn’t government and it certainly isn’t bankers.

    Reply
  12. Michael: “Why “Baker”?

    Comprehension skills a problem, Michael?

    Michael: “On the home brew Biker?”

    Travelling in North America for three months, Michael.
    Very little ‘home’ brew here, son. :D

    Reply
  13. Dan,

    How many companies involved in open cast mining have filled in the hole they leave when all the ‘profitable’ digging has concluded. How many mining companies are required to reserve funds to reinstate the land to its original form, and more importantly how many mining companies have chosen to do this voluntarily because as you state, you can’t eat money or live in a World where there is ample money but not an environment condusive to a healthy life.

    It is always the state that clears up the mess that businesses leave behind. Capitalism (as at the height of the GFC) unloads costs to the tax payers whilst devinining profits to the few.

    Capitalism is not perfect, but it does need Global regulation to define a minimum set of ethical standards for all business to adhere to. Unfortunately the ‘new World order’ fears of the Right Wing who claim Global Warming is part of this ‘one World’ conspiracy are not unfounded. The reality is, the World is now too small, too populated, and too exploited, meaning there is a strong case for and need of a Global rule of law.

    Bopal is at the absolute limit of this and whilst is an extreme example, it still happens all the time, every time, and without exception whenever there is a need to move something natural out of the way in order to achieve your commercial aims.

    Be it digging and dumping or hacking and burning. If there is a dollars difference at the end of the day between doing the right thing and the profitable thing, then profitable persuit of that extra dollar always happens.

    That’s why we have big Mac’s as undigestable and unhealthy as they are. A few tenths of a cent here and a few tenths of a cent there, and you end up with something so full of preservatives, sugar, salt, and growth hormones that it cannot be deemed a nutritional food item.

    Reply
  14. This discussion may be full of law grads and other artsy degrees, but there is still some intelligence regarding the mining industry.

    Though it seems like mining companies are reckless and will stop at nothing to exploit valuable resources, there are strict guidelines set by both government and industry regarding the decommissioning and rehabilitation of mine sites (both open cut and underground).

    To say, and I quote, “How many mining companies are required to reserve funds to reinstate the land to its original form, and more importantly how many mining companies have chosen to do this voluntarily…” (@ Joe, August) is simply an opinion based on zero knowledge. It has been a requirement (for over two decades now) set by the state that a mine must withhold funds so a mine can be rehabilitated to some part of its original state. This is a legal contract set in the mining lease, so comments such as above are void.

    Yes, there have been some environmental catastrophes caused by the industry, but a world that is being over-populated as I type demanding too vast quantities of raw materials is the true catastrophe here.

    Reply

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