When Banks Rob People

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–Picture a banker with a gun in his hand pointed at the economy’s head. “Bail me out, or the economy gets it!” he says. It opens up a whole new meaning for term “bank robbery.” We’ve written about the growing social tension between bankers and people in the latest issue of AWG.

–But at the moment, we seem to have a reached an impasse in world economic history. The industrial Welfare states are tired, broke, and barely summoning the energy to engage in one last orgy of mass consumerism in an off-putting celebration the birth of a 2,000 year old Jewish radical. They are doing their best, mind you (although not all that footage is from Black Friday, it captures the spirit of the absurdity pretty well).

–But then you wouldn’t blame ordinary people for doing crazy things when the people are supposed to be running the show are running the financial system into the ground.  You wouldn’t have guessed anything was permanently broken (insolvent) about European and American banks based on yesterday’s trading action. It was a big up day, and probably a good day for insiders to continue selling into a rising market.

–In fairness there WAS some encouraging news about global manufacturing. China’s purchasing managers index—a gauge of manufacturing activity—showed its seventh consecutive month of expansion. According to the Financial Times, “Global manufacturing roared ahead in November after a summer lull in activity faded away, powered by northern European countries, China and India.”

–That’s good news if you sell iron ore. Maybe that’s why consultancy Platts said overnight that it expects iron ore exporters like Brazil’s Vale and Australia’s very own Rio Tinto to raise prices on iron ore by 7% in 2011. “The new norm will be average spot prices nearer $US150 a tonne than the $US100 a tonne we saw a year ago,” says Steve Randall, the managing director of the Steel Index, which tracks iron ore and steel prices.

–But is really going to happen?

–The prevailing global model of the last 50 years has been for low-cost exporters to generate a trade surplus be selling goods into the more affluent developed world. This is the model that’s under so much stress right now. Brazil, China, and India are not yet ready, in their own opinion, to rely on domestic consumption to generate economic growth. They’d like for the U.S. dollar to remain stable so they can keep their currency just a bit cheaper and maintain export competitiveness.

–Poor old greenback, though, is a dead currency walking. And so we are where we are. The Western Welfare States are drowning in debt and face restructuring, deleveraging, and years of lower economic growth and high unemployment with gradually (or perhaps not so gradually) lower standards of living.

–No one is quite ready or willing to deal with that world though. And yesterday, stocks didn’t deal with it all. Albert Edwards of Societe Generale says the dynamic duo of emerging markets (EM) and commodities are primed for a fall, despite yesterday’s manufacturing data. He writes:

Not only is the market’s favourite EM economy seemingly set to slow rapidly, but the OECD concludes that Brazil is also officially in “slowdown”. India is even worse, being defined as in a “downturn”, as are the Asian big five in aggregate, China, India, Indonesia, Japan and Korea – link. Funny how this news just doesn’t seem to be getting much attention recently amid the runaway EM/commodity euphoria.

–Alright then, what about the future?

–David Murray has seen the future. And it has a big national piggy bank and a much lower net foreign debt for Australia. Murray is the chairman of Australia’s Future Fund, whose job it is to fund the pensions or Australia’s public servants. His interview in yesterday’s Australian Financial Review was a real eye opener.

–“Mr. Murray…has also sounded the alarm on Australia’s net foreign debt, which represents 60 per cent of gross domestic product. He said the assumption that Australia could maintain a high level of foreign borrowings because the economy was underpinned by the mining boom and demand from Asia was worrying.”

–What did he really say? “That’s a very, very risk position…The debate is all being run at a level that completely ignores this vulnerability.”

–What’s vulnerable? How about Australian housing? The AFR writes that, “If Australia’s economy were to slow, the ability to service those foreign borrowings could be affected. There is also the risk that the cost of foreign capital could rise further, which would be felt by many through higher domestic mortgage rates. Bank’s foreign borrowings have funded Australia’s housing boom.”

–The net foreign debt—mostly money borrowed by the big banks to fund the housing boom—is a far more important figure to Australia’s debt conversation that public-debt-to-GDP ratios. The government debt in Australia is small (although growing). It’s the fact that the banks borrow so much from abroad to fund asset price growth here that is worrying. But then, we’ve been down this road before.

–Finally, over the last few weeks, a select group of Daily Reckoning readers have been reaping the benefits of a new project we’ve undertaken with our friend Greg Canavan. Greg is one of Australia’s best value investors, which is another way of saying he knows how to find a quality company under any market conditions.

–This is a valuable skill for any investor to have, especially when investment markets are so uncertain. Which is why Greg is regularly in demand – in person, in print and on the airwaves – by CNBC, Sky Business, Lateline Business, Boardroom Radio, The Sydney Morning Herald, Ninemsn and The Australian, to name a few.

–The project is simple in theory: to identify some of the best-value stocks trading on the ASX today—from retail, to the banks, to the miners—and give you some great ideas about securities analysis and how to value a business that you can use in your own investing strategy, so you can make more intelligent investment decisions, today.

–Working with Greg, we’ve put all those ideas and information together in a free series of special reportsthe Sound Investments Series. You can access the latest reportand the complete series archive—by going to the Sound Investments Series and entering your e-mail details there.

–You’ll be sent instructions on how to download your reports (the latest one on how to identify quality underpriced stocks in any market was only published a few hours ago).  If you’ve already signed up for the Series, or you’re not interested don’t sweat it. We’ll back tomorrow with more reckoning from the brink of the next financial crisis, wherever it is.

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. You might want to re-look at government debt.

    While Federal Government Debt is low reletively speaking (they still owe 60b or so to the federal employees super so nothing I am personally worried about but fed employees should be) you do need to look at state debt.

    I believe QLD has $120b in debt including Govt Owned Enterprises (which they are trying to sell) or $88b if you don’t include GOE and money they have pinched from state super. I have no idea what NSW and Vic are like but I am pretty sure if you add all the states debt together and you will come up with a figure close to 40-60% of GDP at the state government level

    Reply
  2. Thanks Luke, that is a bit of a worry you have exposed to my eyes… What of the positions of other States?

    Reply
  3. A quick look at the 2010 treasury reports suggests
    QLD = $88b (After asset sales such as QR)
    NSW = $60b
    VIC = $46b
    WA = $38b

    So I am guessing if I added NT, Canberra, Tas and SA in the figure would be somewhere around $300-$350b in debts so about 30-35% of GDP in official debt

    Depending on state accounting some of the above figures (VIC definately at $20b+) also include the money owed to state super. QLD has a habit of “Investing” in GOE (Govt owned enterprises) so most of the money shows up in the state super as an asset that has been diverted from the super fund rather then as a liability, which technically while the GOE makes it payments it is an asset.

    These figures don’t include GOE which have borrowed substantial funds. To find this out you have to know what the GOEs are and look at their finance reports individually. Its the new way Gov hides debt. Start up a toll company and get the toll company to borrow $5b. The loan doesn’t turn up in govt reports that way.

    Reply
  4. Here is something you don’t see in daily trading price movements many times in a century on a soft commodity

    Wheat
    USD7.79 +0.72 +10.26%
    USD/bushell Market Close / Dec 03

    Reply
  5. Sorry mate, you shook me off with your stupid remark at the begining. Someone that willfully ignorant cant be worth reading.

    Reply

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