Before we get stuck into today's financial world, a request: please don't store petrol in your garage. A reader took us to task for suggesting that last week in our survivalists "to own" list. It was just a list. But her point is well taken. Petrol doesn't keep well. And you may need it later to burn all your paper money and furniture to keep warm. So store it somewhere safe, if you're going to store it at all.
But perhaps all this talk of a Long Depression is premature. We've just finished revising and remaking our case for D2 (the Second Great Depression) in the latest issue of Australian Wealth Gameplan. We were all set with a fairly conventional analysis of the macro-economic scene when we decided to scratch the whole thing and re-write it from a long-term historical perspective.
Usually these attempts are either incredibly stimulating and provocative or really boring for everyone else to read. Hopefully it won't be boring. But our main point is that when you're living in the middle of one, a long depression probably doesn't feel like it. It feels like every day things might get better. But they don't, at least not for a long while.
You certainly wouldn't suggest Australia is in the middle of Long Depression based on yesterday's current account deficit figures. Boy howdy, were they good! The current account deficit went from $16.5 billion in the March quarter to just $5.6 billion in the June quarter. As a percentage of GDP, the current account deficit is now at its smallest level in about 30 years.
Go iron ore!
Go coal!
Go!
The improvement in Australia's terms of trade is what accounted for the big jump. Record prices for iron ore and coal increased what Australia got paid for exports. And import prices - what Australia pays for the things it buys from the rest of the world - did not grow as fast. Presto. Change-o. Record low current account deficit.
Naturally, a record jump in the terms of trade - 12.5% for the quarter and 24.5% for the year - is the sort of spike that would convince us export prices have peaked and the Chinese real estate crash is imminent. Based on the Economic Statement in published in July, the government is counting a record-high terms of trade to support revenues, bring down the debt, and spur mining investment (despite the MRRT).
Speaking of the government, apparently there still isn't one. You might have expected this lack of political certainty (clarity about the future rate of taxation on mining companies) to be negative for the share market. But apparently Aussie investors - and maybe their leveraged global contemporaries - are drinking from the big jug of Kool Aid Ben Bernanke and the Fed have brewed.
In fact, whether Aussie investors are reacting to the prospect of Quantitative Easing from the Fed or not, it's pretty clear that not having a government is not a negative for share prices. Long live the status quo!
But on this issue of the Fed, the relevant question is how QEII would operate. We were going to write "work," but we're certain it's going to fail inasmuch as its ultimate aim is get credit flowing again in America. The Fed is pushing households and businesses to do something they've decided they don't want to do: borrow and spend.
If the aim of QEII is to get consumer spending back up to 70% of American GDP so it can drive global growth and restore the status quo ante the Global Financial Crisis, it will fail and gold and other tangible assets will keep going up. But if the goal of QEII is to buy corporate stocks and bonds to make everyone feel richer so that they might behave with more fiscal irresponsibility, well doggone it, it might just be crazy enough to work!
By work, we mean it might create a bid for stock prices, what with everyone knowing the Fed is there to buy. In fact, it would probably be a very good time to be a seller with the Fed on the other side of the trade. Maybe that's why everyone's buying now, so they can sell to the Fed later.
Of course, there's a long way to go between speculating about QEII will manifest itself and the Fed actually buying stocks outright. But just as a journey of a thousand miles begins with a single step, so also does the destruction of a currency begin with baby moves.
And finally, about that list of things to stock up on for Long Depression, what do you reckon was at the top of most people's lists? Salt! It was followed closely by sugar, soap, silver, bullets, and booze.
We got many notes on the subject and have read them all. We're not able to reply to each one personally, but thanks for all the effort. We'll compile a master-list and make it available later this week. Meanwhile, here was one of our favourite notes:
Hi ,
On reading your list I thought it appropriate to add rifle etc to the list , particularly as you have bullets on the list. I'd also add the Bible, the Koran, and the Talmud, with appropriate iconography should someone with bigger guns happen by.
I'd also add antibiotics, condoms (you can hope while you despair).
Did I mention a phrase book with simple to pronounce invitations, "To come in into my storage unit for bouncy bouncy" ?
If none of that was of use...I'd then do the unthinkable...invest in a Managed Fund!!
Regards,
HB
Dan Denning
for The Daily Reckoning Australia
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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 Ross on 2 September 2010:
Here is something positive. http://www.economist.com/node/16892023
Remember the deleveraging event in USD?
It was all private capital investments made in foreign currency in foreign markets being sold up and given the turbo boost by margin calls on that hyper leveraged carry (based on decisions made back in the US and nothing to do with the fundamentals of the ROI on the capital deployed in that foreign country - except again where p/e's were sky high due to the asset inflation caused by that carry)
Crikey - what a mouthful!
Well the delta between all that b/s above and this ability of emerging markets to secure 2031 bonds in local currency at rates like 6% etc is what interests me.
There is opportunity there no doubt about it. We just need to mull over it and work out what it is. Both sides are affected by asset bubbles created by carry - look at the AUD flying again today - we know what QE and fiscal stimulus mean for the carry - to banksters that means lets take the money and get the hell out of the US with it where its only going to be smashed by inflation. But money invested as capital in a local currency funded by a 2031 bond? Buy 3rd world governments? Wash my mouth out!