Last week's right hook to markets with the Rudd Resource Rent Tax (RRRT) was followed up yesterday with a stiff left lawsuit jab to the jaw of Australian banks. "Shares in major banks including Commonwealth Bank and ANZ fell by about 1 per cent after BusinessDay reported they faced one of Australia's biggest class actions for overcharging on penalty and late fees," reports Eric Johnston in the Age.
Thus, in a matter of ten days, seven of the ASX/200's ten largest companies by weighting has had a huge cloud of uncertainty descend on their future earnings prospects. For the materials company (BHP Billiton), it's the RRRT. For the banks, the $400 million claim against them amounts to 1% of profits, according to Goldman Sachs analyst Ben Koo.
But as important as those two stories are to local stock values - and they ARE important - the biggest story going in the financial world is the possibility that Europe's common currency could literally disintegerate. Noted economist Nouriel Roubini said Europe's laggard economies need a weaker currency to spur growth and may have to abandon the project.
"I would not even rule out in the next few years one or more of these laggards of the euro zone might be forced to exit the monetary union," Roubini told Bloomberg. Jim Rogers got on the television in Singapore and said the ECB's decision to put together a $1 trillion bail out is a "nail in the coffin for the euro."
Rogers said, "This means that they've given up on the euro, they don't particularly care if they have a sound currency, you have all these countries spending money they don't have and it's now going to continue." Meanwhile the gold price nearly made U.S. $1,250 in the spot market and A$1,400 here in Australia.
The move by the ECB to essentially devalue the euro came after the huge disruption to Aussie share prices from the RRRT. You essentially had to two separate unpredictable events, one of which was bearish for precious metals stocks, the other of which was extremely bullish. How to deal with both forces?
Our view, and the view of Diggers and Drillers editor Alex Cowie, is that the ECB action is a monetary game changer. It makes inflation the single largest threat for the rest of the year. And it means the desire to hedge portfolios against depreciating paper currencies will be the single biggest driver of precious metals prices for the rest of this year.
You don't get official confirmation of the intention to devalue a major reserve currency every day. So after careful consultation with Alex, we took the unusual step of re-recommending several of his previous precious metals stocks in an intra-day alert to Diggers and Drillers readers.
By the way, this is normally something we'd avoid doing because we know not everyone gets their emails at work and can act on them in a timely matter. But we - and here I lapse into first person and say I - made the judgement that our first obligation was to tell paying readers that we concluded something very important had changed in the precious metals market and that it required action. We'll keep you posted on how things develop.
Meanwhile...here are two important questions that came in from readers recently;
Many people anticipating the inflation in fiat currencies around the world believe precious metals are an excellent hedge against this inflation. Many of those same people believe that gold mining equities are an investment class leveraged to provide greater return than holding the PMs themselves. What impact does the KRudd Tax have on this anticipated leveraged position in equities? Is this the Swan song for gold mining equities?
What happens when two uncertainties collide? It makes valuation very difficult, for one thing. And it makes it unclear what is exactly the best way to profit from an underlying trend, especially when you're not sure which trend is dominant. The underperformance of Australian gold equities relative to the gold price is perplexing. But Alex has taken a specific approach which he believes will reward Aussie investors. It involves having production assets outside the country.
Next question, and it's a long one. In fact, we won't answer it. It's another viewpoint on China. In today's essay section, we publish an essay from Greg Canavan from his Sound Money. Sound Investment report of several weeks ago.
I thought you might find this interesting - Dan Denning might anyway. Having been worried about the current state of affairs I've taken my $$ off the table in Aust stocks, particularly resources. I asked a professional friend who's been based in Shanghai for the last 10 yrs his thoughts on the bubble:
Here's my take on the China market.
1. The population is still growing. It will probably peak at around 1.5 billion in the next twenty years. Up from 1.35 billion now, so that's an extra 150 million people who will need a house and a job.
2. The economy continues to grow at around 10% a year, and a lot of that is infrastructure led - like all the new interstate highways, inter-city 'very fast' rail links, subway systems and airports. All in all, that's a lot of steel rebar ...
3. Cities here are growing, too with massive building and re-building programs that will need to house and provide work space for the people who are migrating from the country to the towns ... around 200 million in the past 10-15 years, and forecasts of another 150-200 million to follow in the next 15-20 years. That's bigger than the population of the US. That's a lot of rebar, too ...
4. On top of that, all these people are earning enough money to buy stuff: home appliances to start with, but they're dreaming of a car as well. Car sales have gone from under 100,000 in the late 90's to around 14 million this year (bigger than the US). And car ownership is still under 5% of households. That's a lot of rolled steel on top of all the rebar ...
All in all, the China boom has at least another twenty years to run before it starts to run out of steam and slows down to be a rather poorer version of Japan (static and ageing). If I were you, I'd stop worrying about a 'credit bubble' and look at the underlying dynamics and demographics. Then I'd think about buying back in to BHP, Rio Tinto, and Woodside, pronto
Heard the Australian Ambassador at lunch last week talking about the 40% Tax. He seemed to think it was fair enough, given that you can only dig the stuff up once. The country needs to get better value for its resources. Like Norway did with their North Sea Oil.
He was also talking about China and Oz getting together in joint ventures to do some of the processing in Australia before it gets sent to China. Makes sense, really: why ship iron ore and coal separately when you can ship pig iron to China. Good for the environment too, when you're only shifting half the quantity of 'dirt'.
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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.