The Sinking of QE II

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–If Australia has always reminded you of the Catskill Mountains, tea at Tavern on the Green in Central Park, and the frozen vistas of Lake Erie as seen from the shores of the great city of Buffalo, now you know why.

–It’s because Australia is the New York of America. Or is it that New York is the Australia of North America?

–Okay, maybe the cool map by the Economist that compares U.S. states to various nations around the world is conceptually flawed. The map tries to match a state, as measured by GDP, with a country that has a similar GDP. The State of New York has a GDP of just over US$ 1 trillion. The country of Australia has a GDP of just under US$1 trillion.

–If Australia were a U.S. State, then it would have the third-largest economy in America, behind Texas and California. But while California has agriculture and tourism and Hollywood…and while Texas has oil, and energy, and the Dallas Cowboys…and while New York has Goldman Sachs, and the Brooklyn Bridge and Broadway…Australia has it all.

–Australia produces energy (LNG, uranium, and thermal coal) and food (wheat, rice, and beef) and finance (the Big Four Banks, AMP and Macquarie Bank). New York has the Jets. But Australia has the North Melbourne Kangaroos. New York has the Yankees. But Australia has won the last three Cricket World Cups (truly a world tournament…in the places where people actually play cricket).

–What is the point of this comparison? Australia and New York are alike in GDP but different in many other ways. The only important question for 2011 is will anyone anywhere be spared from wealth destruction as the era of Quantitative Easing implodes before your eyes.

–And implode before your eyes it is doing! Exhibit A is the fact that Irish Central Bank is printing money it doesn’t have to make loans that are secured by collateral that Irish lenders no longer possess. Irish borrowers can’t get money from the European Central Bank without collateral. So they’re getting it from the only place left, the nowhere land that is the nursery of fiat money.

–If you read the story we’ve linked to at the Telegraph you’ll reach the same conclusion we reached this morning: Europe’s debt problems will result in either default or increasingly absurd (and counterfeit) operations by Europe’s central banks (which were supposed to have surrendered monetary policy to the ECB upon monetary union).

–How can a currency retain integrity when anyone can get permission to print more of it when times get tough? This is surely a sign that at some level, the Global Financial Crisis that began in 2007 is about to resume again. For 29 months the central bankers of the world have managed to prevent a reckoning with more loans secured by more questionable collateral. Is financial entropy beginning to reassert itself?

–One sure sign that the crisis in paper money is at a new stage is that food prices are rising even in places where there’s a lot of food. Sovereign Man Simon Black reports that, “the prices of staple foods in Laos, including rice, have soared in recent months, and that the Laotian government is now under intense pressure to ‘do something’ about it.”

–And of course it’s not just food prices that are rising because of inflationist central bank policies. Fuel prices are rising too. Bloomberg reports that, “Power station coal prices rose for a seventh week to a more than two-year high and steelmaking coal gained 5.7 percent after heavy rain and flooding curbed output in Australia, the world’s biggest exporter of the fuel.”

–There’s no doubt that limited supply is a factor in rising coal prices. But oil prices are on the up and up too. All of these commodities have one thing in common: they are priced in U.S. dollars. And like the Euro, the dollar is the badly managed currency of head-in-the-sand counterfeiters who are running out of ideas and credibility.

–This is an open secret. Russia and China were sellers of U.S. government bonds in November, according to the Financial Times. Russia has energy. China has a huge war chest of foreign exchange reserves. Both must be looking at the world and wondering why they have so many liabilities backed by bankrupt government.

–Luckily, Australia is not a U.S. state in need of a bailout by a U.S. government that doesn’t have the money for it. But if rising food and fuel prices around the world mean that the era of quantitative easing is about to go up in flames, it will affect Australians as much as it affects everyone else in the world.
Dan Denning,
For 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. In Laos of all places. Plenty of arable land there one must wonder why. Shortage of ploughs, maybe.

    Meanwhile here in oztralia capt bligh was asked to look yonder at the ominous clouds and rumblings of the low pressure system that just won’t move on. More rain! belched capt bligh as her dream of saturating her wetlands is almost a reality with every approaching cumulonimbus cloud.

    With more floods certainly on the way the clean-up bill may top 70 or even 75 billion. With that amount of money that orifice of the crown queenzland will be restored to AAA+ rating and be in the red in a hail of loud yay’s from all, me too.

    Of course cost of food and energy is on the rise globally, nothing to see there just move right along ‘cause its ‘different’ here ‘cause we have the riverina with plenty to keep us going.

    Reply
  2. A heavily leveraged relative with a portfolio of 50 properties has been told by his whichbank to dump half of them , asap.
    The whichbank must be feeling angsty and a bit let-down.

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  3. A fool and his money are soon parted.

    Imagine he feels a little like all those heavily-leveraged in shares when the market fell 54.5%… . :D

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  4. Well, metals and markets do look ripe for a flash shake-out. Ben must be exercising his printing finger about now. I think he’ll manage to pull it up…after his trading mates devour weak hands.
    I don’t think Ben will allow deflation to take over. Would anyone be able to control that process? Its a choice between damaging debt implosion or a slower ending the melt up way.
    Otherwise possums, pigeons, bunya nuts and wild yams on my hunt/gather list.

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  5. Hmmm. USD indicators appear to be breaking support after recent consolidation. A trap for USD bears Dan? A trap for for share bulls to buy now at a local top maybe. I don’t trust em ;)

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  6. Farmer Pete … 2 wrongs dont make a right ….

    Interestingly in the US where shares & house prices imploded in the GFC ..

    share prices have recovered yet house prices continue to fall??? ….

    Explain that …..

    Like you say a fool & his money … now no doubt you mean in Leveraged housing..

    Not Fooled By property Spruikers Hype
    January 21, 2011
    Reply
  7. The bullion inclined were talking a while back about how Chinese buying was likely to up prices some more Lachlan. Seems curious to me that with the reports of highish inflation we’ve been hearing from there recently, that bullion has declined a bit. Maybe the effect of middle class Chinese types buying just isn’t having much impact in the bigger scheme of things. Not yet anyway?

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  8. I’m convinced Ned that bullion will be a regulated market (no moon shots) as long as today’s currency systems are maintained. And despite the financial spectacles it is interesting to note just how long central banks have kept the show on the road. Longer than we all thought. If you can print money/monetise debt you must suppress gold. I understand that many outcomes are possible with monetary metals while the fiat regimes have power. Just that these regimes have a shelf life loosely proportional to the amount of abuse given them.
    However, gold to moon as I always say but I’m guessing you won’t gauge the move in dollars on that day. Relative value against other assets.

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  9. “… just how long central banks have kept the show on the road. Longer than we all thought …”

    One of the things that helped me feel a bit more comfortable with how/why the status quo (such as it is) is able to keep being maintained, was a comment I read to the effect that China is winning: As in it’s GDP is still doing very nicely; So it is getting an ever increasing slice of world GDP; Plus getting more infrastructure and useful ‘stuff’ built in the process; So it sure isn’t likely to do anything that would rock the boat – As opposed to thoughts that were floating around early in the piece like they might stop buying US Treasuries.

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  10. Ned, judging by the over-indebtedness and debt-reliance of the US it’s hard to see how they will stop the monetisation of debt any time at all but it seems harder to kill a world reserve currency than many thought. Chinas GDP would not look so rosy now if they dumped the USD overnight. However China obviously is moving toward an exit (settlement outside of USDs with some trading partners) but it could be some time before they abandon the USD. Its really anybody’s guess what their strategy could be. Maybe we’re (people in many places) all in a similar boat. Hoping for time to get our house in order before a transition away from the status quo. I think we’ll just wake one day to find its over Ned. I note even Glenn Stevens, without being specific talks about preparing Oz’s economy for an “economic shock”. He thinks we can survive it whatever he envisages.

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  11. “Luckily, Australia is not a U.S. state in need of a bailout by a U.S. government that doesn’t have the money for ”

    not so sure about that (need for bailout, we know the fed ‘finds’ the money when it wants to),
    care to debunk this one? I see it as Oz participating in the crooked deals to indebt everyone. not a huge fish maybe, but a smelly one.

    http://www.asxnewbie.com/banking-and-finance/nab-and-westpacs-secret-bailout-revealed

    “And in the middle of all that wheeling and dealing, when a total of nearly USD$4 trillion was loaned to and repaid by “financially sound” institutions, Australia’s very own National Australia Bank and Westpac were in on the action too.

    Although it was only a relatively small amount compared to some of the other transactions, it was still USD$4.5 billion and USD$1.09 billion respectively.”

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  12. China’s gone from about 2 trillion in foreign exchange reserves to close to 3 trillion since this has been playing out Lachlan. And as well as the other things I mentioned above, has obtained long term ag land leases in Africa and energy supplies from Russia. And taken second position for % of world GDP from Japan. As I said, they very much seem to be ‘winning’. And the longer the game goes on the more they’ll win I guess.

    You could very well be right about the US not being able to stop the QE? With the effect of doing so being politically unacceptable at home???

    But despite China’s occasional bleating about it (less now than early in the piece is my impression), they seem to be doing very nicely from it all regardless. Thus Hu Jintao’s recent willingness to smile happily and say Yes, we’ve got to try and do a bit better regarding human rights.

    Just no point rocking the boat if you reckon you are on track to become number one at some time in the future is my current guess.

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  13. Both those articles are by Kris Sayce PeterG.

    At a quick glance through it seems to me he’s pointing out the obvious – Namely that 2 and a bit years ago no-one knew which banks were are risk. Although we were all pretty sure we were not being told “The truth, the whole truth, and nothing but the truth.”

    Should the banks ever go belly up then “safe as houses” just might be the go hey? Or bullion if you don’t have enough cash to buy debt free housing? Both better than stocks for mine anyway thanks Kris! ;) Though the events of the last 2 and a bit years have made it pretty obvious that the banks aren’t going to be allowed to go belly up.

    “ASX Newbie – the diary of an amatuer Australian share trader” seemed like a pretty strange place for Sayce to be publishing? But I suspect it’s just another site that makes money selling stocks tips???

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  14. 2 houses I have been watching for some time have been sold… 1st was advertised for $595000+ and sold for $550000 after about 2 months on market
    The other 1 was advertised for $1950000+ and sold for $1627000

    Lachlan my Bolivian based ASX listed Gold Miner has released a report today, some people must have been in the know yesterday as it went up 44% :)
    They estimate start up costs at $136million. The have approved financing for $100million, I see a capital raising for the rest.

    Stillgotshoeson
    January 21, 2011
    Reply
  15. You lucky chap Shoes..my shares are cooling at present.

    Ned I have my hopes on some success in China too as my seeds more than anything are used in mining revegetation which is self explanatory. The main problem will be managing the inflation which Glenn Stevens also points out…assuming this all plays out as he says. So their dollar peg means they have to print RMB to buy USD’….money oozing everywhere. Its all sounds more than a little dangerous but I’ll take as much extra boom time as I can get and hope China can navigate this disaster longer than people expect. It’s not a perfect world hey but you gotta make the best of every opportunity. Let me know if you think I got it all wrong but ;)

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  16. Peterg re: articles above. The first thing I thought when the floods came into Brisbane was a get of jail free card for Anna’s ailing economy. As per an infrastructure repair money boost based on federal deficit spending and insurance payouts. Not that I’ve checked to see where money will actually come from. There is a lot of money to be spent over a very broad area. So yes based on unsustainable growth in money but not likely to pop a housing bubble.

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  17. It does seem to me however that there has been a build up of RE stock in rural areas. I’m not thinking that’s about to change. Don’t follow residential much apart from what people say around here.

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  18. “It’s not a perfect world hey but you gotta make the best of every opportunity.” – If you can take THAT attitude to it you are streets ahead of most, including me I’d say Lachlan! Hell, I still feel sorry for myself just occasionally because I just might have to go back to work for a while one of these days maybe … :)

    First house sounds about par for the course in a flat market Shoes. Second one is a more significant reduction – Though pricey stuff can be fully expected to wear the bulk of the reductions in a correction. As you know, I am bearish, so wouldn’t personally say the seller was a mug for opting to give that sort of a discount on a property in that price bracket.

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  19. Ned, second one is interesting in that they bought the house a year ago for $1.65m.

    Stillgotshoeson
    January 21, 2011
    Reply
  20. REAL difficult to say then Shoes – My take just might be that they speculated (one year is a very short holding time), had second thoughts and decided to cut and run before there was any chance of really getting hurt maybe?

    Reply
  21. Just sold a property for 20% profit after costs. You can say that’s peanuts at 10% per year, but it’s all we were asking.
    The buyer met our price.

    N Fool Punter of Mindarie: “Farmer Pete … 2 wrongs dont make a right …. ”

    But _one_ does? The single example you post-and-repost in which a punter
    lost dough on _one_ Perth transaction provides some mirth on PerthNow,
    old son.

    It will be interesting to watch the next 15-18 months unfold.
    That’s N. Nool’s timeline for the WA property crash… . ;)

    Reply
  22. And The Fool’s as well! :D

    Reply
  23. Farmer Pete … Firstly Why sell??? … Seen the light & selling up?

    I say it is Bull you never give any verifiable detail that you can judge 20% profit on ?

    I sold a property made a 20% profit bought a house in Balga in 1980 & sold it for 20% more after holding it for just 30 years???

    Had it on the market for 3 years but managed to get a buyer to meet our price???

    Well done Farmer Pete … You say it best when you say nothing at all because it exposes your motives to not to go into any verifiable detail that could expose the fact that the Emperor has no clothes!!!

    Not Fooled By property Spruikers Hype
    January 22, 2011
    Reply
  24. Ned, probably as you say, storm in teacup perhaps. worth watching out for though, and leads to Lachlans musing, my thought (I AM a conspiracy thoerist these days) that the floods will bring on the excuse for the GFC2, if it impacts on Aus like many (doomsayers like me) think it will. of course the elites are controlling the weather too. (I am that far gone to serisouly consider such – with Alien assistance required though) :-)
    one thing Ill stand by, Australia is not so different, as its the same clowns at the top pulling the strings (and getting tangles in them I hope), and same cattle mentality amongst the proles.

    Reply
  25. Comment by Lachlan on 21 January 2011:

    You lucky chap Shoes..my shares are cooling at present.

    My Fletcher Christians have pulled back, I was going to take profits at 20 cents and sit the pull back out and re buy, got caught out on that.. still in front but missed a trade, expect them to go up again soon.

    Focus are doing nothing, in fact most of the Gold Stocks have declined or flatlined for now.. correction in Gold price may continue for a little while, hard to say, 2nd half of the year should be good for gold. March/April are the litmus tests for Gold.

    Went to buy more Silver yesterday, no physical left on site besides “ounce” ingots.. Have ordered 3 of 1kg Bars.. just over $940 a kilo. 2 week delivery time they reckon.

    My copper stocks are doing well, Oz have had a pull back, glad I got rid of them earlier… might buy back in now.

    SBM have had a big pull back to as have my PRU

    Stillgotshoeson
    January 22, 2011
    Reply
  26. Yeah I see the current pull-back as completely normal. In that I am following trends.
    Last silver I bought was a tube of koalas (20) because I wanted to use some for Christmas presents. Otherwise bullion bars only. Would buy more metal however if we get a much greater pullback than is currently seen…still only a baby.
    Gold miners/explorers are different. I just see them as cheap rather than trending so much. Shall be different story in future assuming continued QE and hot money….which I do.
    Interesting your story about lack of Ag physical. I hear that is beginning to be a big problem.
    Cheers Shoes

    Reply
  27. Thanks for your perceptions, Fool.

    As I’ve always stated, all of our properties (except our main holding) are _always_ for sale. Our two positions on this are: 1.) We will not sell a property, at any price, while a tenant, even a negligent tenant, has a lease; 2.) We set a price on a sale… and we stick to it. If it does not sell, we put the price up, over time.

    I have no issues with your disbelief.

    You live in a state of complete denial, except for your repeated, stated intent: to *POP* the market. Far more clever souls than you have been trying for more than three years now. You’re wise to retain your N Fool status. The really silly Fools have used their real names… . ;)

    Reply
  28. Biker, are you in Melbourne looking at apartments?

    Dont worry folks, soon you’ll be able to buy a nice house on beaconsfield pde for about 600k as that’s the “fair” value for the most expensive property as proved by such brilliant economists such as Prof Keen
    Pete | Melbourne – January 22, 2011, 11:09AM

    From todays Age.. :)

    Stillgotshoeson
    January 22, 2011
    Reply
  29. Comment by Lachlan on 22 January 2011:

    Would buy more metal however if we get a much greater pullback than is currently seen…still only a baby.

    Difficult to pick a bottom so buying on dips to “average out”

    Stillgotshoeson
    January 22, 2011
    Reply
  30. 7 news tonight

    Sydney house prices to the moon

    Scarry, I better go out and buy now before its “TOO LATE”

    and of course “AUSTRALIA IS DIFFERENT”

    Reply
  31. Actually Shoes I’ve never worried about timing much either with physical metal except that I’ve promised myself to lay off it a bit lately now with the uncertainty post flood…build up some extra cash etc. Its just that if a really decent pull-back came I might lose control :)

    Reply
  32. Melbourne? Not me, Shoes. Could be one other Pete in Victoria, perhaps?~

    There are three good reasons we’ve continued to buy (and sell) where we know the property market well. The first one is ‘location’.

    Mind you, Keen thought he knew _Sydney_ well, too. N Fool Punter of Mindarie believes he knows _Perth_ prices and, like you, Shoes, he’s not slow to put on record not only what he thinks will happen, but _when_ it will happen. Our knowledge of the Aussie economy is limited in comparison,
    so we’re reluctant to make scattergun predictions.

    If you believe the l-o-n-g wait for a 40% reduction in east coast property prices is nearly over, I wish you (both) well, fellas. Please let us all know when you’ve actually bought something… . I’m patient too.

    Reply
  33. Not so much storm in a teacup as old news, maybe PeterG? Biker just might laugh at me I reckon, but back in those dim dark days I had enough cash stashed in my house and a safe deposit box to buy another very basic house – I just didn’t trust the banks at all! Gave myself a month to have a good long hard think about Krudd’s bank deposit guarantee before I took it back into the bank and let them convert it back into electronic form too! :)

    Reply
  34. And as you like conspiracy theories here’s a fun one on the $550 billion bank run that got Ben Bernanke to agree with Hank Paulson that ‘something should be done’ … :D

    http://whatreallyhappened.com/content/550-billion-dollar-bank-run-collapse-entire-world-economy-24-hours

    Reply
  35. Oh Dear Farmer Pete … It must feel like it has been three years that I have been a thorn in the side of your Property Bubble? .. But I can assure you my earliest post on the topic is Oct 2009 …. Get your little buddy Dogman .. Parkwoods Prince of Property to check & if you can show a single post prior to Oct 2009 … I will remain silent!!! … Boof Head you got it wrong again … improve the ventilation in that farm shed of yours!!!

    As for the rest of your dribble … 1.) We will not sell a property, at any price, while a tenant, even a negligent tenant, has a lease; 2.) We set a price on a sale… and we stick to it. If it does not sell, we put the price up, over time…..

    Well all I can say is not even a Bangkok Hooker would swallow that !!!

    Not Fooled By property Spruikers Hype
    January 23, 2011
    Reply
  36. BTW … Farmer Peter …. The West Weekend page #14 reports P-E-R-T-H is the Mortgage Default Capital of Australia,

    Tick Tick Tick ……………………….BANG!!!!

    Not Fooled By property Spruikers Hype
    January 23, 2011
    Reply
  37. Comment by Stillgotshoeson on 22 January 2011:

    Biker, are you in Melbourne looking at apartments?

    The answer is No … Our Farmer Pete dare not leave WA for fear of property imploding without him blowing SMOKE up peoples AR$E$

    Not Fooled By property Spruikers Hype
    January 23, 2011
    Reply
  38. I remember that day well Ned, it looked like a stick ’em up job to me. just a rehersal for the world currency act.
    came across this DRA contrarian blog today, not bad for my type. not for the Hayekians though. his angle is that fiat currency gov’t cannot default by definition, and that printing money in a depressionary environment doesnt cause inflation. sounds too good to be true, so it probably is.what do I know?
    http://bilbo.economicoutlook.net/blog/

    Reply
  39. Sorry to learn that you have difficulty negotiating with the love of your life in Bangkok, N Fool Punter of Mindarie. As usual your posts contribute nothing about your ‘knowledge’ of WA realty.

    Your technique is limited to: 1.) trolling for every tiny scrap of innuendo about property, the banks, China, etc; 2.) Posting and reposting that ‘news’, continually, with consecutive blocks of print; 3.) posting one example of a punter who lost money in Perth; 4.) generalising that loss across the whole property scene; 5.) stereotyping landlords to reflect your own predictable (impoverished, unethical) behaviour.

    It does not concern me one iota that you don’t believe my post reporting our recent successful sale. I cannot recall believing a single statement you’ve made in the many hundreds of extremely repetitive posts you’ve made.

    Since it annoys you to read of our success, I’ll continue to post each sale we make… providing the percentage made annually… . :D

    Reply

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