The Red Wheelbarrow

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so much depends
upon

a red wheel
barrow

glazed with rain
water

beside the white
chickens.

William Carlos Williams, The Red Wheelbarrow

–The wheelbarrow is China. Rain makes metal (ferrous metals anyway) rust (unless you prevent oxidation by galvanising it with, say, zinc). Who is going to eat the chickens? Discuss.

—You knew the action was going to be grisly overnight when Italy’s credit outlook was changed by Standard and Poor’s from “stable” to “negative” about an hour after the Aussie market closed. The S&P 500 was down 1.19% and the FTSE lost 1.89%. Gold-inert, yieldless, and stoic-made a new high at €1080.

–Aussie stocks had already been pasted by the time the S&P outlook on Italy changed. The ASX/200 is trading under Murray’s 4700 point of control. The index was down nearly 2% yesterday and the banks got belted, shedding close to $9 billion in market value. Murray put out two trades earlier in the day designed to capitalise on the weakness in financial stocks.

–There will be more weakness if things keep getting worse in Greece.  And frankly, it’s hard to see how it won’t get worse before it gets better. The Greek economy is growing slower than the IMF and the ECB and the government expected. Lower than expected growth makes it hard to grow your way out of debt.

–And even restructuring-the path of least resistance we mentioned yesterday-is no guarantee. You can extend maturities on debt. But you still have to make interest payments on it. And with interest rates rising, debt servicing payments are an even bigger drag on the needed recovery.

–Woe is Greece! And don’t think the Spanish, the Irish, and the Portuguese aren’t watching to see what happens. Raising taxes will not be popular (and it also cuts growth). But the ECB is dead set against restructuring. Why? It reckons that Greek private banks would be rendered insolvent if they were forced to take a haircut on their holdings of government debt.

–Ah yes! A whole banking system capitalised by government debt is a problem…when the government can’t realistically pay its debts. In the private sector, you could convert the debt to equity. Bondholders, faced with getting nothing at all or an equity stake, could be forced to accept a new arrangement. But now that Europe’s debt quandary has moved from the private sector to the public sector, turning public debt into equity isn’t as easy.

–In moments of vexation like this, our thoughts often turn to our old economic mentor, the late great Dr. Kurt Richebacher. Kurt never called himself an Austrian economist. But he did subscribe to at least one tenet of the Austrian Theory of the Business Cycle: mal-investments made during a credit boom must be liquidated in order for the cycle to bottom and growth to begin again.

–Everything that’s happened in Europe and China and America and Australia since 2007 has been designed to prevent a reckoning: the liquidation of bad investments made during the credit boom. This would result in massive write downs in the value of credits and assets like stocks and bonds and residential and commercial real estate.

–To avoid that, record liquidity in the form of bank reserves has been added to the system. This has floated asset prices (mostly stocks) higher. But banks-the Australian lenders excepted-have been reluctant to lend. The additional liquidity hasn’t resulted in real economic growth. However it has resulted in record levels of speculation in financial markets, especially commodities.

–Yep. We hate to say it. But even though several years have passed since the bursting of the credit bubble in the private sector, the problem hasn’t been resolved. It’s been made worse. And it’s never been a liquidity problem. It’s a solvency problem. The public sector in many of the Welfare States simply has liabilities it can never hope to meet.

–So that’s pretty cheerful, right?

–Which brings us back to the red wheelbarrow (China). The 16-word poem by William Carlos Williams has always baffled us. But today we found it useful. It’s an image of how Australia’s seeming prosperity depends, so nonchalantly, on China filling up its wheelbarrow with iron ore, coal, copper, zinc, tin, lead, gold and anything else that fits in the barrow.

–HSBC released its preliminary Chinese Purchasing Managers Index (PMI) for May. It showed expansion at 51.1. But that was down from 51.8 last month. And it was the slowest rate of expansion in the last 10 months.

–Remember that the People’s Bank of China has raised reserve requirements at select Chinese banks five times this year. That’s beginning to bite on Chinese manufacturing growth. Naturally, this would begin to bite on demand for Aussie commodities. It doesn’t help that Japan’s economy entered a recession in the third quarter.

–So what should you do? Well, that’s a good question. Our first suggestion is not to take Australia’s economic strength for granted. The strong dollar…the market value of the banks and the resource companies…these both depend on China’s perpetual expansion and the perpetual expansion of global credit.

–Just keep in mind that the credit contraction that began in 2007 hasn’t stopped…it’s just been delayed. The white chickens will be slaughtered and plucked and cooked for lunch. Maybe fried. It’s better to eat than be eaten, even if you’re a vegan.

–And finally, those crazy, carbon-hating Greens are at it again. Senator Christine Milne seized on the Government’s climate change report yesterday and repeated her party’s call for no new coal mines, no extension of current coal mines, and her desire to see Australia, “go to 100 per cent renewable energy immediately”.

–The Green policy on Australian energy has gone from mildly amusing to slightly embarrassing and now, finally, to completely extremist and destructive. Senator Milne is arguing for a quick transition to an economy that runs on renewable energy instead of fossil fuels. She aims to accomplish this transition by making the carbon price “as high as we can possibly get it”. This is the only way to make renewable energy technologies cost competitive with fossil fuels…by raising the price of fossil fuels to the stratosphere.

–Someone needs to say it…these people are bat-$#@* crazy. They are hell bent on transforming Australia’s economy into a neo-feudal agrarian backwater (with Canberra as feudal overlord). It’s a bizarre and increasingly strident kind of economic death wish. Very strange…and dangerous.

–In the meantime, everyone’s ignoring the obvious discussion: if Australia harnessed its shale gas reserves, it would have more than enough cheap and clean energy to run the domestic economy on natural gas and save the coal, oil and conventional LNG for export. This would be a sensible energy strategy that provided cheap and abundant energy to local industry and delivered Australia the highest value for its exports.

–Why is no one talking about it yet? Well for one, the Greens punch way above their weight in terms of their influence on public policy. And second, there is way too much public policy and not enough private innovation. The government is constantly getting in the way of the market and preventing it from delivering the cheap energy Australia needs.

–Is there a more over-governed country in the world than Australia? Flipping through the pages of today’s Financial Review, every other story is about this government regulation or that new law or this new policy. How depressing.

–There are still innovators and entrepreneurs out there though. Did you know a whole session at the recent Offshore Technology Conference in Houston was about Australian natural gas? Over 70,000 people attended OTC over five days. And in one session, the room was packed with people from all over the world interested in conventional and unconventional gas projects in Australia.

–That’s pretty exciting stuff for investors. And it’s what we’ll focus on the rest of the day as we write up our next issue of the Australian Wealth Gameplan. Besides, if the Greens are going to eradicate coal from the face of the Australian economy, that should be good for gas, shouldn’t it?

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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6 Comments on "The Red Wheelbarrow"

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reginald
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Shale gas reserves? Do some open-minded, in depth research on this and you will confirm it is no solution.

spruiker
Guest

the Georgina Basin is being touted as similar in many respects to the Bakken, by Ryder Scott. A drill or two are likely going down within weeks to a month in a joint venture between Barak Petroleum and Petrofrontiers.

worth a look, but as always, don’t hold your breath

Biker
Guest

We actually made some serious money when Julia Corp abandoned their shale exploits and gave birth to DYL. Glad to be out of both!~

Gas offers a stop-gap between technologies, but recovery from shale isn’t without its issues, particularly alleged ground water contamination.
Already effectively blocked by some vigilant WA communities.

Red Wheelbarrow is China? 80+ years ago? Seriously???!~ ;)

Paul from Prahran
Guest
I have been reading your DR AUS site since 2007; I bought gold in the early 2000’s (400US) just before the tech bubble. I have not bought a house because I have been monitoring the credit boom (housing bubble) since 2001. Yes, Australia is over governed and I wish I was a free American and not a servant of the queen. But Dan, Shale is the worst energy source available to humans. Read below the effects: “BHP Billiton will be facing an assortment of class actions in the US as Arkansas landowners claim that mining techniques used in the company’s… Read more »
chris Y
Guest
I like to be constructive. Maybe that’s why I became an engineer. If carbon dioxide abatement is to be taken seriously, then a swift conversion of baseload coal generators to natural gas is the most obvious and feasible course, considering this country has abundant supplies of natural gas. An exemplar of this approach is the UK. So, I calculate the complete conversion of 20 GW of baseload coal (most in east Australia) to N-gas would reduce emissions by 80-100 million tonnes/year. [I humbly invite others to check my estimates] If the government has so much money to throw around on… Read more »
Biker
Guest
“…the next ‘bubble’ will have the fingerprints of the renewable energy industry all over it…” Driven by the failure of Japanese reactors, it’s interesting to see DR reawakening to the prospect of thorium, flagged by DRA three years ago. Gas does appear to be the appropriate stop-gap. Solar? When we first started putting panels up, they were 122w and huge. The last six sets of eight which we erected on our rentals were 180w… and the next set will be 300w. It doesn’t take much imagination to predict wattage trebling again within a decade: 1kW panels may be the standard.… Read more »
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