You Snooze, You’ll Lose

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–Sometimes you have to wonder if the giant rally in stocks since 2009 has all been engineered by insiders in the financial world to boost stock prices so they can sell into a rally…and then head for the hills with their diesel generations, tinned food, and stash of gold. Financial historians might describe the last few years as a world-wide asset pump and dump scheme led by the Fed (the pumper) and designed to benefit the financial industry (the dumpers).

–It’s a thought.

–The big news yesterday was what didn’t happen: China did not raise interest rates (although bank reserve requirements were raised late last week). Inflation in food prices has scared the Chinese monetary authorities/price fixers. In response, they’ve announced possible wage and price controls, which have worked so well everywhere else money supply and credit creation has run amok, from Latin America to Africa.

–China’s inflation problems stems from its dollar-peg and the creation of massive amounts of domestic credit (another $1 this year on top of $1 trillion last year). Since the developing world-and China in particular-are generating most of the global growth (while Europe and America struggle) investors were worried last week that China’s efforts to cool domestic inflation would slow everyone down.

–When China sneezes, everyone else shivers. Maybe that’s the new 21st century normal. So come on China! Do your part for the planet and keep those factories belching out gewgaws and knick knacks! It’s your solemn duty to the global system of debt-based consumption. Don’t shirk it.

–With no rate rise coming this week, Shanghai stocks zoomed up nearly 3% yesterday. Gold, palladium, silver, and oil were all up. Even U.S. bonds reversed themselves. Ten-year yields fell yesterday and prices recovered a bit. Good times are here again, for a few days.

–The chart below-with special seasonal colours-shows that the All Ords beat Shanghai’s rally to the punch by rallying first. December has been good to the Aussie market so far. And since July the All Ords (green line) and The Shanghai Composite (red line) have tracked each other fairly closely. Shanghai is fixing to cross its 50-day moving average. That would be technically bullish.

shanghai.png

–Yesterday’s big Aussie winners were the Big Four banks. That tells you pretty much everything you need to know about what the big banking reforms will do: they’ll lower funding costs for the big four and produce big profit margins. It’s an even bigger bonus that ultimate liability for paying off depositors in a calamity can be fobbed off on the government via the Financial Claims Scheme.

–The financialisation of Australian life continues.

–You’d think investors would be a bit more worried, given how unsettled affairs are in every other part of the planet. And even here. The mining tax isn’t done and dusted yet. A China credit bubble crash would be bearish for the big miners (which make up a large part of the ASX/200 in a market-cap weighted index). And the banks have had to offer up their depositors as collateral to secure funding in preparation/anticipation of another global liquidity crunch. Yet the chart below tells you no one is losing any sleep over any of this.

Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz
vix_chart.gif
Source: www.asx.com

–The ASX began publishing the VIX locally in the last few months, although it back-filled the data to 2008. In complicated terms, the VIX is a weighted average of implied volatility on widely traded options contracts. When premiums are large on options contracts, it tells you that investors are willing to pay more for insurance against an unexpected outcome (a big rise or fall in stock prices).

–It’s kind of an interesting question whether VIX is a leading or lagging indicator. When it rises, fear rises with it. Investors are uncertain of what investment outcomes to expect in the near future. Uncertainty and the possibility of losing money produces fear.

–But is fear a reliable indicator that stocks are over-priced? Is it a self-fulfilling emotion? Or are investors fearful when they should be brave and bored when they should be fearful? A low reading on the VIX usually tells you that people are not particularly worried about anything in the future interrupting a very pleasant present.

–This is when you should be most worried; when no one is especially worried. That’s a one sided trade in favour of the lazy people.

–Lazy, comfortable, complacent investors never see it coming. They don’t see it coming because they aren’t looking. They are too busy eating hot dogs and guzzling beer. To be fair, sometimes the blood-curdling, portfolio destroying event hits you from straight out of the blue like a cricket bat. With the VIX approaching a 52-week low, we’d be looking into the deep blue and watching for cricket bats to the head. We’d also be reluctant to be long over long weekends or the Christmas break.

–By the way, a very good Chanticleer article in the weekend Australian Financial Review made the mistake of calling a China credit bubble a Black Swan. Why is that a mistake? As Nassim Taleb points out in The Black Swan, banking accidents are not a mystery at all and therefore not Black Swans, which by definition, are not events you can model for.

–By contrast, you can be pretty certain that when a bank levers up and relies on an expanding balance sheet for growth, it’s going to blow up eventually. For a bank to make more money, it has to take more risks. Profitable banks are risk-taking banks. And extremely profitable banks are usually the by-product of enormous leverage and even bigger risk-taking/speculation/bad lending/greed/theft/deception.

–Maybe instead of finding ways for Australia’s banks to secure more funding so they can put more Australians deep into housing debt which they’ll never repay, the regulators could have a discussion about how to return banking to a boring, low-risk, business that serves the interest of depositors. And then the centre of gravity could be refocused on productive enterprise, rather than money shuffling.

–This might prevent the banking sector from creating massive bubbles in the economy, hi-jacking public policy so the interest of financiers are put ahead of savers, and the general despondent financialisation of modern life that means perpetual debt for all of us as we chase house prices that are growing many times faster than incomes…until they crash.

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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59 Comments on "You Snooze, You’ll Lose"

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Luke
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Hi Dan I am wondering about covered bonds. If a bank collapse what exactly happens to the people who have assets in the covered bonds. I know the investors get a claim on it but do mortgage holders have their houses sold out from under them? Do they loose all their equity. What other assets could be used by covered bonds? Savings, Term Deposits, Managed Funds, Super. There does not seem to be a lot of information about this out there. There is lots on how good it is for banks and investors but it is mainly rethoric about how… Read more »
Lehman Sisters
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It must be the mum and dad investors pushing up stock prices because directors have been bailing out of the stockmarket ‘en-masse’ over the past few months.

Ned S
Guest

If you’re talking Oz stocks LS, our Superannuation system ensures that money pit keeps getting well fed.

Ross
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I must say I agree with the following. http://www.market-ticker.org/akcs-www?post=174941 Hard money does have a poor record, especially when viewed in terms of inflation, and you can speculate on the net worth of the two flies crawling up the wall as much as betting on who will win the race. What you speculate with in terms of leverage and collateral will also remain open no matter a gold standard, so there is only a pretend hard money base with the gold standard anyway. Don’t want to promote Denninger too far, he is Jeckyl and Hyde. If he opens his mouth on… Read more »
Biker Pete
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I see a great deal of editing has occurred overnight, Ned.

Y’know you’re hitting the target when so many points are filtered off the record, mate!

Chances are you’ve also copped a lot of little nasties in your system.
So much for Prozak’s Free Speech comment. Cheers, Ned!~ :D

Biker Pete
Guest

Another demonstration of your God-like power(s) Keeng of the Trolls?
Erase any legitimate response to your ludicrous divine claims?
Wipe what you can’t answer? Typical. :D

Ned S
Guest

Dare say the techies got a few laughs out of it all though Biker – I know I did! :D

Biker Pete
Guest

Yes, at the end of the day (or night) it’s fun rattlin’ a few cages, mate.
Good to see you’re still online.

Noted that port special. Thanks! :)

Ned S
Guest
“Good to see you’re still online” – At the end of the day commonsense prevailed obviously – Though anyone who is still suggesting that you and I are the same person obviously doesn’t have much sense of any kind! They don’t like Biker because he’s a bit bullish maybe? They don’t like Ned because despite the fact he’s a bit bearish, he’s perfectly happy to accept Biker’s right to be a bit bullish maybe? – And remains interested in why. With Biker also remaining happy to accept the fact that Ned’s a bit bearish. Which is a way more important… Read more »
Biker Pete
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Going to repost this one, though, retaliating for the very nasty worm downloaded on us last night.

http://www.perthnow.com.au/business/news/construction-slowdown-to-pause-rate-rise/comments-e6frg2qu-1225960148535

It’s this kind of no-comeback which illuminates the bigger picture…

Biker Pete
Guest
admin
Guest

“They don’t like Biker because he’s a bit bullish maybe? They don’t like Ned because despite the fact he’s a bit bearish”

Perhaps a private chat room is in order. You two generate half of the comments on this board and are rarely discussing anything related to the content.

Chris in IT
Guest
“Going to repost this one, though, retaliating for the very nasty worm downloaded on us last night.” Mate, hate to say it but if you have a hardware firewall(built in to adsl and cable routers), then it’s pretty certain the cause of the virus is on your side of the firewall. (I’ve been in datacentre side of IT for 19 years btw…so I’m not full of it :) ) A worm can only enter your network if you have firewall ports open and listening sockets with an exploitable vulnerability. Since you don’t sound technical enough to open your own firewall… Read more »
Biker Pete
Guest
Yes, thanks for that, Chris. You’re right, that ‘vial’ infestation probably came in through my port (glass)! :D Explains why a dozen posts, where he got _hammered_ were deleted, too. My guess is that his boss told him not to ship so close to the nest and, for damage control, reduced corporate embarrassment by deleting his rants. This loon is sociopathic. Here’s one day of his stuff. Now multiply it by thirty per day… http://www.perthnow.com.au/business/a-tale-of-two-booms-as-city-blooms/comments-e6frg2ru-1225970115985 It’s his _business_ to create anxiety and undermine WA home owners’ confidence. His cut-and-paste is primitive. You can see that for yourself. He just spits… Read more »
Ned S
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admin: “Perhaps a private chat room is in order. You two generate half of the comments on this board and are rarely discussing anything related to the content.” Last 20 articles (dated back to 7 Dec) have a total of 33 comments against them. (An average of less than 2 comments per article.) Never more than three comments per article with 7 articles (ie over one third) having no comment against them – Except one article where Biker made 6 comments and I made 6 – Only a few of which were relevant to the article; BUT, with the ones… Read more »
Biker Pete
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“You two generate half of the comments on this board…”

Note to Admin. Feel free to continue the massive deletion of the other evening. It’s your board. I’ll continue to comment on the reason for deletion. And, as demonstrated here…

http://www.perthnow.com.au/business/a-tale-of-two-booms-as-city-blooms/comments-e6frg2ru-1225970115985

…your Melbourne mate utterly and completely dominates our WA discussion sites. Time you reeled the little pr*ck in.

Not Fooled By property Spruikers Hype
Guest
Not Fooled By property Spruikers Hype

@ Admin … you are right Ned & Biker spoil this site with irrelevant chatted & frankly do you want to encourage this type of tone? …. Time you reeled the little pr*ck in…… clearly the intent is to offend?
Discourages serious comments that would be of interest

Not Fooled By Property Spruikers Hype
Guest
Not Fooled By Property Spruikers Hype
@ Chris It … No I have got that covered …. Interesting why someone on one site calls himself Travs & on another site Biker Pete …. Perth folk got bored of Biker Pete a few years ago then up pops Round The World Traveller (RTW) & now Travs of WA …. Biker Pete throw back to the Leatherman in Village People no doubt ….. FYI …. a 7% interest rate today is E_Q_U_A_L to a 22.5% Rate in 1990 ……The 1990 Median house price was $100K with a 20% deposit & a loan of $80K payments @17% interest over… Read more »
Ned S
Guest
@Not Fooled By property Spruikers Hype: “clearly the intent is to offend?” – And with “Ned, you are a piece of work” the intent ISN’T to offend??? Ha ha! Would love to stay and chat (not!) … But your repeated comments are presumably just going to be cut and paste repetition from what others say. So no point even reading them now that I’ve been told that’s your game. And I’m heading off to pick up some building materials for my Dad anyway – At 78 he’s still doing ‘unproductive’ things pertaining to housing construction. Gee, if only he’d learned… Read more »
Chris in IT
Guest
“@ Admin … you are right Ned & Biker spoil this site with irrelevant chatted & frankly do you want to encourage this type of tone?” I am the admin btw. I was just rev’ing up Pete and Ned for giving be a bit of stick last week. Even guys? (Oh, and no, I’m not the admin HERE specifically :) ) But you mate, after reading your posts on perthnow sound heretical. I agree with about half of what you say, but you miss the mark on the bigger issues relating to home ownership: – Dramatically higher leverage. – Inexperienced… Read more »
Chris in IT
Guest

Oh, for the record, I having nothing to do with any posts that are missing.

BTW, If you want to be the admin, just change your name in the comment. I’m happy to share the title ;) LOL…

Ned S
Guest

Chris: “I am the admin btw. I was just rev’ing up Pete and Ned for giving be a bit of stick last week. Even guys?” – Sweet by me! :D – Though I don’t actually recall giving you any stick??? Anyway, a sense of humour is a handy thing to have to have regardless!

Geez, we had some ugly rain on the north side of Brissy when I was picking up those building materials. No hail where I was but I sure reckon someone has copped some. A great excuse for Suncorp to increase insurance premiums on everything again I guess.

Chris in IT
Guest

You are probably right… I only recalled Pete. I didn’t even bother to check it. All in good jest though. Though, a few months ago I really do recall seeing only three names on the sidebar on the front page, you two, and shoes…

We just got a a whopper too. Look here:
http://www.bom.gov.au/products/IDR713.loop.shtml#skip

For a good read on gold market manipulation here:

http://www.usagold.com/goldtrail/archives/another1.html

It also touches on the beginning of the Chinese buying era mention in the article.

Ned S
Guest

Chris: “if you want people to get out of RE, I would suggest pushing Physical PM’s as a better alternative” – That’s a pretty important point.

While I’m not at all keen on acquiring more Oz housing at current prices, I’ve also got cash. With my existing housing simply being my “hard asset” investment in lieu of any particular and special amount of faith in PMs as a “hard asset” investment class over housing at current prices on both.

Chris in IT
Guest
Houses as hard assets to me are ‘ok’. People can understand them, and you can almost always rent it out, which is pretty important once you reach retirement. It’s is a depreciating asset however that need a constant income stream to remain viable. For me, the reason I don’t see it as attractive is that the quanta starts around 2-300k. That’s a petty steep buy in if you are against long term leverage (I’m happy to use 20:1 in spot fx for a few minutes at a time, or for a few days if I see a good arb to… Read more »
Ned S
Guest
Unless one really figures they’ve spotted some especially great investment (in any asset class), leverage/debt sounds to me like a damn good thing to be avoiding right now. Though if one had a REAL secure job and was very much convinced by the high inflation arguments, they might still see it differently. But as I don’t have a job at all, that’s not a consideration for me. As to the high inflation arguments, I lean that way personally – Though without the knowledge or understanding to make a strong case either way myself. Stevens of the RBA is on record… Read more »
Biker Pete
Guest
Riding north all day. Some interesing posts. Don’t recall giving you any real shtick last week, Chris in IT. Are you, as rick e suggested, Charles Nenner? I thought it unlikely after following up that suggestion. What’s in a name? I listed a _dozen_ used by Not Fool, the other night. He needs that kind of support, as sometimes he’ll post six long comments to no response whatsoever. My post listing these pseudonyms was quickly deleted along with at least another dozen comments. As a RTW Biker, I’ve used RTW Traveller, Traveller and Travs on PerthNow; and Biker Pete, Biker… Read more »
Stillgotshoeson
Guest
Comment by Ned S on 16 December 2010: As to the high inflation arguments, I lean that way personally – Though without the knowledge or understanding to make a strong case either way myself. We all have the same data available to us Ned and we still have different views on what is in store for us… Inflation or deflation or hyperinflastion or all 3 at different times and different orders.. I think we are/or very well near tipping point one way or the other.. I still expect inflation to be the former, the volume of money being printed in… Read more »
Chris in IT
Guest
“as rick e suggested, Charles Nenner?” No. I’ve actually been here since about 2005’ish, but didn’t post until early this year. I exited the ASX forever whilst reading DR in 2007. Been reading LATOC since 2005 as well. Right now I’m reading up on the history of monetary theory and solutions to practical banking over in the FOFOA archives. Yes, I really am ‘Chris’ and really am in IT. I really am over on the Permiculture forums, and really do believe we’re heading in to a system reset, which will probably affect us heavily in AU. For me, this is… Read more »
Chris in IT
Guest
Oh, and I’m in the hyper camp. I however suspect that this is not Weimar but rather a digital hyperinflation we’ll see. Once inflation gets too high there won’t be enough circulating currency to even buy things… tha’ts when we get a reset as people barter and stop using the currency. A reset stat I read about on ZH was that the derivatives market is now valued at over a quadrillion dollars. Quadrillion is a word I’ve never written before! So that’s a thousand Trillion. That could probably buy every physical object on the planet a hundred times over. I… Read more »
Biker Pete
Guest
Interesting perceptions, Chris. If you’re right, those of us who can generate everything we ‘need’ are already ‘reset’. That’s always been an integral goal for us… . The events you predict are fairly dire. Thinking over that full ‘scarenario’ (forgive me, I suspect you’re actually genuine!) it eclipses anything we’ve seen so far. Possibly comparable to WW2 or total nuclear war, in fact. My optimism is of a quite negative kind. I suspect governments will interfere to the nth degree to prevent the very (unpreventable?) scenario you envisage, in which _only_ gold (and productive property) is actually worth anything. It’s… Read more »
Chris in IT
Guest
I’m glad your eyes are open. I’m not terribly concerned about a financial collapse, to me, it’s easy to plan for. You know what really worries me? Go and have a look at LATOC (Offline right now, so here is the google cache: http://webcache.googleusercontent.com/search?q=cache:4C5i9lCKGvAJ:www.lifeaftertheoilcrash.net/+life+after+the+oil+crash&cd=1&hl=en&ct=clnk&gl=au I’ve been tracking this problem for 6 years now. In the past few years the problem as really started picking up steam. The US Army openly says they are preparing for it. The DOE still has its head in the sand. It’s being discussed in UK parliament. OPEC, after denying it for the last decade, last… Read more »
Biker Pete
Guest
Interesting link, Chris. I’ve given it to my son who is moving from cold Quebec to almost Mediterranean western Canada in February. He is looking at small holdings in the Okanagan. In many respects we’re on the same page. You arrived well after my discussions on the Tesla. So far I’ve bought forty solar panels. Sixteen more on order. We’ve influenced the sale of well over a hundred more. Grain of sand in the global perspective. Biking further north, I’m seeing fuel prices approaching their past high levels. Much more of that to come. “In the US, the average piece… Read more »
Chris in IT
Guest
I fully support the Tesla and Solar panels, and as a techie and lover of ‘New Scientist’, slashdot and long term believer in science, so good work. I’m saddened to discover that the problem cannot be solved by technical advancements (Barring a Dues Ex Machina in the historical sense, like cold fusion, etc.) Of course, that doesn’t stop the early adopters picking up the good stuff whilst it’s available, but there is simply not enough rare earth elements to go around to service all current PV technologies. The absolute best reference I ever found on the problem is here: http://www.feasta.org/documents/risk_resilience/Tipping_Point.pdf… Read more »
Lachlan
Guest

Crumbs Chris that IS very gloomy stuff. But thanks for the post which may help us all out.

rick e
Guest

I love all you guys and gals

Lachlan
Guest

What about all the natural gas we’re ruining wheat fields and other farm land for? There’s oodles of that stuff. Probably why everyones in such a hurry to dig it up. Meanwhile, deliberately wreck the world economy to curtail oil consumption. Phew, glad I worked all that out….guess i’ll take off my tin foil hat and come out of my bunker now.

First Home Buyer
Guest

Hey Everybody (Ned, Biker Pete, Pete, Lachlan, Stillgotshoeson et al)

If anybody has a mailing list of people where they send interesting articles to, I’d love to be on it. Or if you have a blog or something I can read, let me know – I’m just trying to get off the training wheels. I read ZH but don’t understand some of the financial jargon there not having had a background in financial literacy. (Getting sick of reading Mainstream Media.)

Email is undergraduate@gmail.com

Stillgotshoeson
Guest

Comment by “First Home Buyer” on 18 December 2010:

You are about to log in to the site “gmail.com” with the user name “undergraduate”, but the website does not require authentication.
This may be an attempt to trick you…

Ned S
Guest
G’day FHB – I read Nadeem Walayat on Market Oracle regularly. Definitely not mainstream. Neither bull nor bear as such. He’s a Brit so handy for that perspective and the European one as well as the US. (You’ll find all sorts on Market Oracle. With some of it is just being too extreme for me.) For the US perspective, you could do worse than balancing out the thoughts of Bill Fleckenstein and Jim Jubak on US MSN IMO. (Jubak is mainstream; Fleck is not. But both certainly seem knowledgeable.) Greg Atkinson on Shareswatch is also a good read on Oz… Read more »
Steve
Guest

How is the housing oversupply going over there in Perth Biker?

Ned S
Guest

Merry Xmas to you and yours if we don’t happen to chat beforehand Steve!

Ned

Steve
Guest

Thats very kind of u Ned

Biker
Guest

Steve: “How is the housing oversupply going over there in Perth Biker?”

Same as Sydney, Steven. Houses and units are all down 40%, just as Keen predicted, son. You can make a killing, now interest rates are at zero… and with employment at over ten percent. Your time has finally come.

Guess you must be spoiled for choice with all that oversupplied prime realty being given away? Buy _two_ for the price of one… .

Biker Pete
Guest

Why, Steven, you’ve given me the Big Minus One! I’m surprised and shocked.
I gave you five gold stars, because your question was genuine and well-meant.
;)

Chris in IT
Guest
“What about all the natural gas we’re ruining wheat fields and other farm land for? There’s oodles of that stuff.” Based on EROI, gas is a poor substitute for oil. Low energy density, high cost technical processes to extract, transport and utilise (car conversion, gas station upgrades), etc. Oh, yes, WE have lots of it, which is why we export it. The US is running really low on usable gas as well. Make no mistake, if the price triple, aussies won’t be getting it at the same price. Right now gas is a touch cheaper than petrol to fuel vehicles.… Read more »
Lachlan
Guest
Good posts Chris. My tin foil hat and bunkers ref was just me having fun at my own expense however rather than yours. For some time I’ve been of the opinion that the US will blow up their dollar and hyperinflate. The alternatives would be (a)they print money, recapitalise and create a new system. God knows how that would be possible. (b) for the existing heirarchy to give up the reins and for the corporate/banker government to collapse leaving a gov spending dependent economy in smoking ruins and people generally fending for themselves….. Of course nobody wants to hear that… Read more »
Chris in IT
Guest
“diesel” Perhaps of interest. I read an post somewhere that cracked crude releases larger quantities of diesel over normal petroleum. IN the US this is a problem as they use something called ‘Heating Oil’ which is just government subsidised diesel. They use a lot during winter. Here in OZ, we have a greater supply, so apart from the new demand coming from Euro imports we may have better stock of diesel than petroleum. Of course, if you just make sure you end up near a train line you’ll be in better shape ;). “for the existing heirarchy to give up… Read more »
Lachlan
Guest
Are we being prepared? From Cancun…… “In one paper Professor Kevin Anderson, Director of the Tyndall Centre for Climate Change Research, said the only way to reduce global emissions enough, while allowing the poor nations to continue to grow, is to halt economic growth in the rich world over the next twenty years. Prof Anderson admitted it “would not be easy” to persuade people to reduce their consumption of goods He said politicians should consider a rationing system similar to the one introduced during the last “time of crisis” in the 1930s and 40s. This could mean a limit on… Read more »
Don
Guest

Steve Keen’s latest blog post makes for interesting reading. At least he has admitted that he got things wrong – to a point :)

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