Unusually Fed Up
--Feeling besieged by the Welfare State? Tired of rising taxes, endless browbeating by unelected bureaucrats and insipid drivel in the news papers that passes for economic thinking? You're not alone friend. You're not alone.
--A big welcome to www.economics.org.au. We learned of the project when we were up in Sydney recently. If you're interested in economics and more discussion on some of the ideas you find here in the Daily Reckoning, give the site a look. It is always encouraging to find fellow travellers on the road to financial freedom and liberty. They usually make good drinking buddies too. So have a look.
--When we have a look at markets today, well...it's depressing. Day after day we all have to put up with the fraud of serious looking men and women in suits making a complete mockery of common sense, reason, and good judgement. As exhibit A in the case against the absurdists running our money and our economy into the ground, we offer the remarks this week of Federal Reserve Chairman Ben Bernanke.
-- Bernanke spooked investors in New York when he fronted a group of empty headed Senators in Washington and told them that the future of the U.S. economy was "unusually uncertain." But in a real boon to those of us looking forward to the inflationary effects of trillions of dollars more in quantitative easing, Bernanke assured the Senators that, "We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation's productive potential in a context of price stability."
--Can this sort of nonsense really be taken seriously? Unfortunately, we have to take it seriously because it has serious investment consequences.
--But how long will it be before most people understand that the Fed, the regulators, and the monetary authorities have no credibility when it comes to: a) understanding what is going on, b) fixing it, c) confessing to their culpability in causing the misallocation of capital and the zombification of large chunks of the global banking sector and generally forcing all of us contemplate their moronic and opaque pablum?
--These people really are vandals and thieves. We are encouraged to take them seriously and cede micromanagement of the economy and public life to people who don't have an entrepreneurial bone in their body. What a big con.
--In any event, don't be fooled about the stress tests coming up. When those so-called stress tests for European banks come out late this week they are likely be just as much a whitewash of the real capital inadequacy issues as were the American stress tests. In fact, the whole exercise is perfect pretext for another round of central bank quantitative easing/outright support of asset prices.
--After all, American and European banks are stuffed full of housing-backed securities and sovereign debt. The credit boom manifested itself in many assets. Much of the fiscal and monetary policy since 2000 has been designed to keep those assets from deflating. It can't work.
--We reckon-as we wrote in the July issue of Australian Wealth Gameplan published last night-this latest and largest round of quantitative easing will come sooner than most people are expecting and be a lot less effective than some people are hoping. It's time to get ready for it now. Crank up the fan...here comes the merde.
--Meanwhile, a minor merde storm is brewing between Australian banks. Nothing sexier than watching the banks go at it over lending practices. Commonwealth Bank of Australia hard man Ralph Norris delivered a rhetorical smash to the nose of NAB's Mark Joiner. According to the Australian, Joiner said last month that some banks in Australia were making "super profits" by expanding their mortgage lending to the detriment of small business lending.
--"Kapow!" says Mr. Norris. Well, not literally. Rather, he said, "I think the real issue is that we have a bank (NAB) that has performed poorly for many years and missed out on an opportunity when the mortgage market opened up... The market [for small business lending] grew by 0.5 per cent and we grew by 9 per cent...I don't know where that rubbish is coming from, because the facts certainly don't support it."
--Never having been a banker, we are inclined to sit back and watch the slap fight. But the stakes are high. CBA's loan book is 60% in residential mortgages. Under Basel II, the bank has to hold less capital against a home loan than it does against a 'riskier' business loan. So, you could argue that expansion of the mortgage lending book, even at the expense of business lending, is a safer move for the bank and delivers bigger profits to shareholders. It also keeps the rivers of credit flowing into Australian property.
--You could argue that. But it's not the argument we would make. We would instead make a high-handed, ivory tower, abstract kind of comment that the people of a nation can't all get rich by buying and selling houses from one another. For one, it's a singularly unambitious national goal. But that's not the biggest argument against it.
--Creating a profit is hard. In some ways, it's unnatural. Profit is surplus value. Human beings improve their living standards by increasing productivity and efficiency through innovation and constant adaptation. The free market is a great mechanism for producing surplus, as long as risk taker and small businesspeople and crack pot inventors and dreamers and builders have access to capital.
--Of course the banks are under no obligation to take bad risks (unless you're talking about U.S. banks compelled to make loans to bad credit risks during the American housing boom.) But perhaps this is just one of the inevitable costs of being an island economy. Were there more competition in the financial sector, there would be big profits on offer for banks able to make good lending decisions to small business.
--In fact, we're sure the Big Four probably do quite nicely on their business loan books. But there's no doubt in our doubting mind that the banks are over-exposed to property because Australia has a collective national obsession with getting rich on property. Why NAB is choosing to stick it to CBA isn't quite clear to us. But we do agree with NAB's general point.
--As for the aforementioned impending (we believe) quantitative easing round two, how should you prepare? Well, in the fashion that you find most fit naturally. But we'd suggest that asset markets are going to cop it good and hard in the second half of this year. We're expecting a one-two combination of big falls in stock markets and then wild, irresponsible, unprecedented and unconventional attempts to reflate by central banks.
--But it's Friday. So let's all go away and think about it over the weekend and come back Monday and discuss. And by the way, thanks very much for the many, many emails we received about climate change and carbon pricing. Most were thoughtful and articulate. A few were rubbish but amusing. We'll print some of the responses next week.
--In the meantime don't forget: the people backing an emissions trading scheme the most usually have a vested interest in the exchanges that will be set up to trade said emissions. It's like a potential casino owner telling you we should all be compelled to gamble. The government's interest in the matter is self-evident: mo' money. And the bureaucrats who are backing it presumably thrive, in some small-minded and mean-spirited but satisfying way, on simply telling people what to do.
--Resist them all! And as the great thinker, champion of liberty, and emancipated American slave Frederick Douglass advised, "Agitate! Agitate! Agitate!"
Dan Denning,
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- The US Dollar is Doomed
- Geitner Plan Falls Short
- The Big Fix
- Zen and the Art of Economy Repair
- Incredible Threat
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 Jason on 23 July 2010:
As a result of working in the real estate industry, many people want to talk about this great Australian obsession. It is a topic as common as the weather, or sport, or politics. Most focus on the capital growth. Yield, or the return on the capital invested, is rarely raised. So many people state confidently that 'you can't go wrong in property' expecting whole hearted agreement. No. Not here.
You can understand how many come to this false view when the government, banks and the real estate industry generally make extra ordinary efforts to keep the whole Ponzi scheme going. What absurdities will be crafted in future is anyone's guess. Things have also been so good for so long.
Cracks are appearing. Well there have been cracks for a long time. Now where is the duct tape?
Comment by Ned S on 23 July 2010:
"Ponzi scheme" - Talk stocks/superannuation bro. Typical debt related crash 'n burn poor bugger me storey is 30% housing and 50% stocks as best I can figure out. With Oz just maybe holding up a bit better than typical given Asia remains considerably mineral hungry?
Comment by Ned S on 24 July 2010:
How can I put this so my fellow RE bearlings understand? Maybe best to just say there was a 5 to 10 year window when Oz house prices bolted - And if one snoozed through it that's life. So these days said snoozers are tenants - And presumably happy ones if they do their sums? - We're all just happy little vegemites here!
Comment by Ned S on 24 July 2010:
Inflation always wins - Yo Ho Ho! Eventually ...
Comment by bearamundi on 24 July 2010:
But Ned, some of us aren't happy living in a rear-view mirror. We are thinking about reacting to now which is more uncertain. I am basically sitting tight, as when you don't know what to do, the best thing is to do nothing. But still, you want to keep thinking ahead, it is interesting, and you just might lay that Golden egg yet, or change your perspective enough to see you already possess it. I personally like silver at the moment.
Comment by lurker on 24 July 2010:
http://en.wikipedia.org/wiki/K_Foundation_Burn_a_Million_Quid
a cure to inflation, if it catches on
Comment by Lachlan on 24 July 2010:
Me too for silver Bear. Got my gold but love silver..its the punter in me ya see.
Comment by Biker on 24 July 2010:
" So many people state confidently that 'you can't go wrong in property' expecting whole hearted agreement. No. Not here....
and
Things have also been so good for so long.... "
Hard to reconcile these two totally opposing views, Jason.
Back from a quick trip north, Ned. Was impressed with Shoes' position. Simply find a mate who has inherited property and get a sweetheart deal.
Not quite as good a ploy as Steve's stay-home-indefinitely gambit, but I've gotta face it, both financial strategies beat ours!~
Most interesting action? Do nothing. (See the bearfish comment, above.) You may recall the interesting tale related by Justine Davies who ranked in the top 20% in the recent ASX Share Market Game (Courier Mail, 12th July 2010.) Justine bought nothing, sold nothing. Beat 80% of punters in the game! Giggle!~~
So, if you want to stay _exactly_ where you are (and hope and pray for deflation, of course) you're a winner... .
Comment by Ned S on 24 July 2010:
If deflation is heading Oz's way, it has a pretty strange way of manifesting itself. And I see sparkies reckon they are worth $92.43 per hour. If I was bit younger I'd give a bit of thought to getting myself one of those advanced degrees in hooking up light switches.
http://smh.domain.com.au/real-estate-news/lure-of-booms-leaves-home-renovators-with-fewer-trades-20100723-10osm.html
Comment by Biker on 24 July 2010:
It has to mean the cost of building is going to drop, Ned. Cheap houses for all... .
Seriously, I think we'd better knock out two more before construction costs get silly!~
Comment by bearamundi on 25 July 2010:
Lachlan, are you the guy who spent something like $135,000 recently on a gold/silver position? Kudo's. Silver is not a punt but a sensible investment. Alot of people who are good with numbers are mildly autistic in my experience. So when the weird accountant at a mates workplace says silver I NOTE IT, and look for correlation. What else are you going to do? As I have already said I don't see real estate in Australia as sensible at the moment. Stocks might be okay for a punt if you don't mind losing it. That leaves precious and base metals on which to protect wealth and obtain a realistic gain. You can't take a big hit on silver so that is the one for me.
Comment by Biker on 25 July 2010:
"You can't take a big hit on silver so that is the one for me."
Droll.
Possibly well before you were born, the _classic_ silver crash occurred.
To quote from history:
"During the Hunt brothers' accumulation of the precious metal, prices of silver futures contracts and silver bullion during 1979 and 1980 rose from $11 an ounce in September 1979 to $50 an ounce in January 1980. Silver prices ultimately collapsed to below $11 an ounce two months later."
Alot of people who think 'a lot' is one word are more-than-mildly autistic IMHO.
Comment by bearamundi on 25 July 2010:
Pharoah Biker, there is a lot(come_on_Mr_Grumpy_)more upside on silver. What is your suggestion? "Build you dogs!! Build!!"
Comment by Biker on 25 July 2010:
"Alot of people who are good with numbers" tell me that in thirty years, silver has appreciated very little.... not much over 1% _flat_ per year.
Virtually any asset you can name has outperformed silver.
What is _my_ suggestion?
Well, _you_ should borrow $135K at 7% per annum and spend every cent of it on silver. In three decades you'll be a bearlionaire... .
You can't take a big hit on silver so that is the one for you.
Comment by bearamundi on 25 July 2010:
I'll take 'droll' over 'power-hungry ar*ehole' any day.
If Lachlan borrowed that money then I'd still support him. I'll take 1% pa as a minimum too, in a climate when others are losing money. You are operating outside the financial system extremely safely and protecting yourself. Upside, I think that the price of silver has been low for quite some time despite fundamentals, and you should do very well from owning it.
You can't beat the 'system'. I know that some larger companies employ Physicists in their depts. These guys ARE often mildly autistic and there is no-way on God's earth you and I would stand a chance against them. Stay out of financial markets with the bulk of your hard-earned.
Comment by Nexus on 25 July 2010:
This is not a balanced discussion about economics - it is a slight of hand and a further contribution to a grand deception. Economics lost its direction (and soul - if it ever had one) when it lost reference to a sound epistemological underpinning -'theories' like 'trickle down' and the Chicago School approach are more about wrapping up wars of social oppression and economic exploitation in dogmatic models so as to break up cohesion in society in order to increasingly concentrate vast wealth in the hands of a narrow few.
Get your history right - it was the private financial vested interests in the US that lobbied to remove financial controls and roll back legislation that had been put in place after the hard lessons of the Great Depression - so the 'stupid' market can somehow miraculously allocate scarce resources. Also the Federal Reserve is a privately owned institution not a public body.
The clowns that run the banks and other financial institutions think they are sitting pretty after be handed trillion’s dollars of tax payers money to bail them out and take over their toxic assets so they can carry on with all the attendant and obscene bonuses. The aforementioned interests think that they can lobby for savagely cut welfare, health, education, investment, etc, without consequences. They are mistaken the cupboard is bare - there is no reserve left to address any new crisis. If the financial institutions carry-on with their casino attitude as that is all they are - casino's, that add negligible value to the real economy and the to the majority of people's lives there will be another crisis sooner or later, as nothing has changed.
Comment by Biker on 25 July 2010:
"I'll take 'droll' over 'power-hungry ar*ehole' any day."
HaHa... . Now you're angry. That's not droll... that's even more amusing.
Anger won't compensate for ignorance, sad bear.
To help you better understand your claim that "...You can't take a big hit on silver" do you realise that the price of silver plummeted 58% as recently as October 2008? You argue that shares are risky, but silver crashed 3% lower than even the ASX... .
Your problem isn't that you're autistic. You're simply lost in a subject you don't understand... and too lazy to do your sums.
Your advice to Ned about 'rear view mirrors' _is_ highly amusing, however.
Stay with that kind of comment. We all need more laughs... .
Comment by Lachlan on 25 July 2010:
The 135K guy..nah thats not me Bear. Anyhow excuse the word "punt" please. I only liked gold originally. I say "punt" because I was hesitant to buy silver noting the caining it took when markets blew up a while back and the because it is used in industry. Its a thinly traded market, easily pushed around etc etc. But lately I've been purchasing silver regularly also. My concerns faded as I came to understand it better. I see silver important as money like gold nowdays but with all the constraints on supply thrown in etc etc. Noting too escalating problems Comex are having with delivery. Punting increases also when as I see it I invest in a trend in asset prices and add timelines to them. I intend to swap my PMs for a chunk of farmland while Im still young enough to work it. Manipulations in markets can remain effective longer than many people anticipate. I go along with the view also that unstable currencies turn everything into a gamble eventually. We can also add in human nature re govs. Holders of PMs have been discriminated against before. So my choice is for PMs and for many reasons but fully aware that nothing is guaranteed.
Comment by bearamundi on 25 July 2010:
Yeah, that mirror comment was a beauty. I'm always on the look-out for more 'material' so I'll keep you posted.
Not angry Biker, I think. I'll send myself up for a laugh anyday and play the clown.
I do see BP building himself up. Do you see that? Then I naturally think, why would someone feel the need to do that? Two possibilities are : power-hungry: and two, doesn't really like themselves. Just thoughts I guess, all I have is a digtal record of BP, missing the voice tone, body language etc.
I appreciate your comments re silver and probably do need to do more homework, but usually I just use other people's ability so I can look good and slack-off. It's worked so far and I consider myself better off than most people I know. I own one European apartment free and clear amongst other things.
My greatest strength is that I know I don't know a lot about anything but I nearly always can guess who does. Once I am confident in them I'll just plagarise and coast. And silver does appear attractive.
Comment by Biker on 25 July 2010:
"I'll send myself up for a laugh anyday and play the clown."
You're succeeding brilliantly, bearamundi!~
Comment by Justin on 25 July 2010:
An interesting anecdote;
In my old hometown Wollongong, given a real 'do-over' by developers in the last decade, real estate agents are now giving a weeks free rent for some of the thousands of garish new apartments.
'Which bank?' holds that mortgage paper?
Comment by Ned S on 25 July 2010:
"garish new apartments" - We're building some shockers alright. I can't help but suspect when I drive through new suburbs with their adjoining mini-macs that all look the same with false fancy porticos and no eaves, that we won't eventually ask Whatever were we thinking?
Comment by Justin on 25 July 2010:
Actually Ned, I think it's a bit more serious than "whatever were we thinking?".
These 'great deals' are just tip of the iceberg. Somebody still holds this mortgage paper at face value, will the RBA i.e. you, be the chump of last resort, again?
Comment by Stillgotshoeson on 25 July 2010:
Comment by Biker on 25 July 2010:
"You can't take a big hit on silver so that is the one for me."
Droll.
Possibly well before you were born, the _classic_ silver crash occurred.
To quote from history:
"During the Hunt brothers' accumulation of the precious metal, prices of silver futures contracts and silver bullion during 1979 and 1980 rose from $11 an ounce in September 1979 to $50 an ounce in January 1980. Silver prices ultimately collapsed to below $11 an ounce two months later."
Alot of people who think 'a lot' is one word are more-than-mildly autistic IMHO.
My view on Gold is the same.. It too can reverse direction sharply.. I believe we still have more upwards movement to see in the price of Gold in the medium term.. I have a limit in mind then I am out of Gold.. If it continues to rise after I sell out of gold I will care not one iota... Setting Buy and sell limits has served me well to date, why ruin a good formula..
@$260pw Rent for the unit I am in you can maybe understand why I don't see the ned to rush out and become a property owner...
Comment by Ned S on 25 July 2010:
"will the RBA i.e. you, be the chump of last resort, again?" - No question that cash holders and tax payers will always carry the can when things go pear shaped Justin. (If a bloke hasn't figured that out from the GFC then he's not been watching.)
As to the Oz banks, anything I'm reading indicates they are sound. And certainly comparatively; With another 103 American banks having folded in the last year if memory serves me correct.
Could a significant housing market correction (more than 15% ???) upset that apple cart? - Possibly so given the late 2008 government and RBA response. So if that looks like happening, the 'chump[s] of last resort' will be trotted out again to soften the blow. IMO.
Comment by Ned S on 25 July 2010:
"I don't see the ned to rush out and become a property owner" - A Freudian slip I'm assuming Shoes?
Comment by Lachlan on 25 July 2010:
Heres a link Bearamundi about Comex stuff. I'm notsure how this will play out but its all great drama regardless.
http://harveyorgan.blogspot.com/
Hope it works ..Im pretty good at stuffing up links
Comment by Justin on 25 July 2010:
Interesting article by Adrian Ash on the international version of DR.
The Bank of England has announced that it will soon acccept 'raw' loans (rather than securitised) as collateral for its short term credit i.e. the British Pound.
The 'old-lady' of Threadneedle St soon won't have any standards at all! She'll do 'business' with anyone!
She's sure to catch something though.
Comment by Ned S on 25 July 2010:
For better or worse (with DRA always taking the view it is for worse), investing is at least as much about what governments might do to tamper with free markets these days as about the markets themselves.
Bullion - One of the arguments as to why it has further to run is that the average ma 'n pa types haven't all rushed out to buy it yet. Tricky one though - Even if/when Big Bad Ben's QE should start to flow through into the real economy there is no guarantee it will land in the average ma 'n pa types laps to the same degree as those who are a bit wealthier. So one thought that goes through my mind is if that happens then just who might be buying what and why?
I'm not knocking bullion - And am quite content sitting on the few ounces of gold I bought in 2005. But just don't feel inclined to buy any more at current prices.
Comment by Biker on 25 July 2010:
"@$260pw Rent for the unit I am in you can maybe understand why I don't see the ned to rush out and become a property owner... "
Perfectly rational thinking, for the present.
Every time we travel to some interesting part of the world, I'm (personally) tempted to create another toehold for winter escape. My missus has pointed out that we can enjoy months-on-end in _many_ parts of the planet, at far less expense than actual _purchase_ involves.
There are all kinds of 'sweeteners' (no pun intended!) like the one Justin mentioned. I guess you first need to find an asset which gives you complete financial independence and flexibility to take advantage of the huge number of brilliant opportunities. I'd put the Mexican Riviera in that list. Who cares how you accumulate, providing it's a.) legal and b.) ethical(?) Why stay with an(y) asset class which doesn't deliver?
One caution might be that guessing is a very poor means-to-an-end, unless you're playing with money you can afford to lose. Even when you are, it's a major setback to blow a year's gains overnight. Consider, too, that 'guessing' is _never_ a strategy one should advocate to those who can be _easily_ sold the idea of sudden riches. Take this strange statement:
"So when the weird accountant at a mates workplace says silver I NOTE IT, and look for correlation. What else are you going to do?"
Well, I have this really nice _bridge_ you might be interested in owning...
Comment by rick e on 25 July 2010:
I have seen this cycle of talk when reading the DR before and at the start of the crash.
It was but not in order as such coal seam gas then rear earth then. But gold was low 750 to 800 oz so we will see gold at least go to 1100 may be then interest rates also went high before the crash so cash rate may be 5.5 to 6 not that far away. Also the oz dollar was low too and that is going back to where it was against the green back (seems that way any way). Also inflation will go up in oz dam if you do dam if you don’t meaning if there is a world double dip then 1 the world government will stimulate meaning coal and iron ore will increase. The other side for oz is if the world is in a boom then coal and iron ore is in a demand(same as above will increase cause the price to rise). So if inflation goes up so we will be in the same cycle close to 3 years ago as the Howard government lost elections. And around we go again. In that time when interest rates were high house prices slowed and levelled off. So you can see it my way or use and pick scenarios like me to change and say the opposite. Looking at what the RBA said about inflation and where we are now. So it should unfold soon!
Comment by Biker on 25 July 2010:
No question that it's all cyclical, Rick. A dear old biddy once advised me that if you live long enough, you'll see the cycle (including fashion) repeat itself at least three times.
Yes, it should unfold soon. It just keeps unfolding or 'cycling'. Common sense tells me we should be doing much more, in our usual counter-cyclical fashion. The most common mistake we've made, over the last few decades, is doing far less than we should have, while others were doing even less.
The political scene is now a critical factor. When it comes to restricting immigration, for example, who should we believe... and why?!~
Comment by Ned S on 25 July 2010:
Restricting immigration - And here was me hoping Tony Abbott might be one of those exceptionally rare Oz political dinosaurs that baulk even marginally at telling exceptionally huge porkie pies?
Comment by bearamundi on 25 July 2010:
You are mis-construing me Peter, suggest you take a _nap_.
Comment by Dan on 25 July 2010:
"The political scene is now a critical factor. When it comes to restricting immigration, for example, who should we believe... "
I don't know about anyone else but I hardly think there are any serious differences between the two parties. Labour has backed off from pretty much every idea it has come up with, and the Libs are no less coy, really. The mining tax is the biggest difference, but even that doesn't really represent an ideological difference. Neither side is going to restrict immigration because neither has made any kind of concrete statement on what they will change about immigration law to tighten entry requirements.
At least in the Soviet Union everybody knew there only was one party and if you had nothing better to do with your day, you could vote for it.
Comment by Ned S on 25 July 2010:
Too hard for me to figure out what's going to happen specifically day to day rick e - But I do reckon I have a reasonable idea now what governments are going to do as and if difficulties come along - Stimulate, print, be a bit more austure if forced to - Delay, delay, delay - Inflate, inflate, inflate ... In the West. With Asia going along for the ride and making the best of it whilst internalising demand amongst their 3 billion odd citizens over time.
Comment by Biker on 25 July 2010:
"You are mis-construing me Peter"
You're easy to 'misconstrue', son.
OK, the bridge crack was out-of-line, but I do have a vintage air guitar in mint condition, if you're interested. Which hat would you like me to wear? I can wear my weird-accountant's bowler hat, or my autistic physicist's top hat, complete with 'plagarised' mixy rabbit, if that might help convince you this guitar's an absolute steel... .
Let me guess, you're clowning again for our amusement, right?!~
(How can we tell when you're _serious,_ son?)
Comment by bearamundi on 25 July 2010:
Well, at least you are not psychopathic BP. "Respect!!'nuff said!!"
Comment by Dan on 25 July 2010:
"Stimulate, print, be a bit more austure if forced to - Delay, delay, delay - Inflate, inflate, inflate ... In the West"
Yes, Ned. It definitely makes predicting the economic future much easier!