Exit The Dragon

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  • Dem debts…
  • China tightens lending…
  • Henry review makes big debut…

“The Greek debt’s connected to the Spain debt. The Spain debt’s connected to the Portugal debt. The Portugal debt’s connected to the, big debt. Now hear the word of the Lord!”

There’s a lot of ground to cover in today’s Daily Reckoning. The Henry Tax Review was unveiled yesterday. Depending on who you listen to is either a huge boon for super annuation, or the death knell of Australian mining investment. And finally, China has again tightened bank lending; leading to unknown consequences for the world’s hottest running economy and its satellite economy here in Australia.

But first a quick update on the Greek situation. Late last night—before Asian markets opened—Eurozone finance ministers agreed to a $158 billion (€110b) emergency loan package for Greece. In return for the loan package, which includes loans from the International Monetary Fund, the Greeks have agreed to cut public sector salaries, pensions, raise taxes, and reduce the deficit to GDP ratio from 13.6% now to 3% by 2014. The Greeks have also agreed to cap public sector debt at 140% of GDP.

There are two questions now: will the austerity measures stick in the craw of the Greek public and will the bond market settle down because it believes this puts a final end to the crisis. On the first question the jury is still out. The deal raises the retirement age from 53 to 67, raises taxes on alcohol, tobacco, and petrol by 10%, and puts a three-year wage freeze on public sector wages. None of that will be popular.

In the futures markets, traders are betting that this is not the end of the sovereign debt crisis but the beginning. Businessweek reports that, “Hedge funds and other large speculators raised net wagers on a euro drop by 25 percent to 89,013 contracts in the week ended April 27, Commodity Futures Trading Commission data shows. The euro was at $1.3316 at 8:53 a.m. in Sydney after falling to a one-year low of $1.3115 on April 28 as Standard & Poor’s lowered Greece’s debt to junk and cut Portugal and Spain.”

Of course that data preceded the bailout announced Sunday night. So maybe traders will have a change of hearts. Or maybe not. Our view is that Greece is the Bear Stearns of the sovereign debt crisis. That is, it’s a clear and obvious sign of things to come, but probably not “the big one” in terms of sovereign debt defaults.

Locally, the Henry Review was finally made public on Sunday. The two big items are an increase in compulsory super contributions from 9% to 12% by 2019-2020 and a 40% “resource super profits tax.” If you had to summarise it in a sentence you might say it increases the exposure of Australians to equities while reducing the return on those equities at the same time.

There is plenty of commentary on both issues and we don’t have much to add. It does seem strange that the government is going to decide to tax “super profits.” It has to define them first, of course. And who can define what is an “adequate” return on a project and what is an “excessive” return.

Of course the main assumption in the “resource super tax” is that the resource industry can afford it because things are so good and will continue to be good for so long. This is precisely the issue we took aim at this weekend when we published our “Exit the Dragon” report. The report questions the fundamental assumption behind the resources boom: China’s insatiable appetite for Australian commodities.

By the way, apologies if you signed up and failed to receive your copy of the report right away. We had a programming error on our end that meant the report failed to deliver as scheduled. We’ve worked all morning to iron out. But sincere apologies if you experienced a delay in getting what you paid for. As an on-line buyer of information, we know that nothing is more frustrating than paying for something and not getting it right away. So again, our apologies.

As to the report itself, well, we expected a mixed review, and that’s what we got. The argument, we hope, is valuable to you even if you don’t choose to subscribe to the Australian Wealth Gamelan (the newsletter we’ve become the full-time editor of). The argument is that China’s bubble has ALREADY begun deflating with the restrictions on credit imposed by banking authorities.

Earlier this morning Bloomberg reports that, “China’s third increase of bank reserve ratios this year left benchmark interest rates and the Yuan’s peg to the dollar unchanged, risking the need for more concerted effort to contain property prices and inflation in coming months… The latest move adds to a government crackdown on property speculation after record price increases in March and came on a holiday weekend, with Chinese markets shut today.”

Dow Jones newswires ads to the story by reporting that, “In recent weeks and months, Chinese regulators have stepped up their tightening measures on the domestic property market, including urging banks to watch their lending risks and boost their capital adequacy ratios, while also increasing mortgage and house buying requirements.”

Our basic argument is that Chinese GDP is being driven by a credit bubble that found its way into real estate speculation, forcing up demand for Aussie resources. Aussie resource prices, then, are a derivative of this China credit bubble. We think it’s prudent that Aussie investors at least consider this possibility and prepare for it. And maybe you’ll find the idea thought-provoking, even if you don’t agree, in which case…mission accomplished!

Not everyone was happy with that message, as you can see below. You’ll find our response below the letter.

Dan Dan Dan the salesmen man,

Jes*s H Christ, I’m an Aussie who lived in your neck of the woods for several years (legually)[sic] and you have really missed your mission in life.

After reading your load of dribble today (1st May) about China and how it’s going to screw Australian resources you really should be residing and preaching (oppsss I almost gave it away, but wait I’ll explain that later) somewhere close to Ardmore, Oklahoma.

This may sound strange to you Dan after what I just said, I do agree that China is an unknown quantity, but “Dan the Man Blah Blah Blah” give up the big sell with a dozen pages of dribble and the “not only but also a money back beautifully presented set of genuine hand carved Indian bone handled steak knives depicting a typical scene from Custers last stand”.

There are a lot of people who in recent times who have their life savings invested in the hope of making a better life for their family and you are just leading them up the garden path with the big sell jargon.

Wow Dan, you have really enlightened the moms and dads about the value of gold….Dan, don’t treat people like idiots even though you may think that. Go home and sort your side of the universe out….by the way, do you have a work visa for Australia or are you just one of the many who comes here with the intention of scamming on an imaginary half cocked visa. You must agree not much difference between you and a preacher from the South ah??

I dare you to print this Dan and show your colours (oppps, my laptop tells me I should spell it color, that says it all ah!!!).

James Daly

Nice to hear from you James. For the record, we’re on a 457-B Visa that expires in 35 months (if you’d like to begin an unofficial countdown). You lost us with your argument somewhere outside the outskirts of Ardmore, Oklahoma. But it sounds like you’re general complaint is a) we have a product to sell, b) the way in which we sell it, c) we’re an American.

Ideas matter. We give away ideas everyday in the Daily Reckoning. The practical ideas—how to turn this world view into an investment strategy—we sell through our newsletters. If you like the world view, you might buy the practical ideas (a newsletter). If you don’t, you don’t. What’s the problem?

Maybe it’s the style, then? We hear this all the time. But if you haven’t noticed, it’s a crowded marketplace for ideas out there. We never take anyone’s attention for granted.

We put our messages out there in the way we do so that people can’t help but read them. And besides, most of what we right about in the investment world relates to “Black Swans.” These are high-impact low probability events that would change your investment world if they came true. You may not like it, but at least if they get your attention you’ll be more aware than you otherwise would have been.

But if you never read the argument, you’ll never know or think about it, or take the time to write a long letter impugning our motives. But we’ve got a thick skin so don’t worry. We’d rather err on the side of being thought a kook and preacher/snake oil salesman than being too embarrassed about what other people think to say what we really mean.

Obviously you didn’t like the argument—or the general admonition that Aussie investors ought to be very careful about relying on the China story. Okay. More power to you. But if you’re expecting us to repent for the way in which we make our case, think again Brother! And peace be upon you.

Here’s another note about China and our “Exit the Dragon” report.

Dan

You must have read my mind about China. I currently subscribed to Diggers and Drillers and have gained helpful information from that publication. I thank you for your offer of a subscription however I am already onto my wealth preserving strategy, my rental properties go on the market tomorrow, with the proceeds I plan to buy more silver to add to my cache and take advantage of the devaluing AUD relative USD. I do feel though that this is a small
window of opportunity and that the effects of USD Quantitative Easing will start to take effect in the not too distant future with which I will switch back to real estate and hopefully lock in another emergency interest rate.

Regards

Paul O.

And another…

Dear Dan

You may well be on the money re China.

I spend a lot of time up there and have seen the massive development in the rural areas, but have also seen the great improvements in agricultural methodology.

As to increases in production, pass, who would truly know.

I am not a prolific writer like you, but it is of interest that a new fast train form Guangzhou has been downgraded just some two months after its introduction, through lack of usage. Toll roads everywhere and& not cheap.

What I see as a major problem for Australia, is the lack of respect of Australian (generally small) mining companies towards their reporting to the ASX and the ineptitude of ASIC. I have a page full of misleading information, from geothermal to gold and it is still being perpetrated.
This is becoming a disgraceful situation here with almost total contempt and abuse of our fabled 150 year old mining laws, with the Chinese looking on and being burnt. Beware the dragon.

We know there will always be people trying to sting investors, history rarely changes, but the Chinese will take great interest in the fact that four major ‘Bull’s Eyes’ have been missed by ASIC when compared to their ‘legal system’.

The legalities here are worth a look. We understand China cannot get it ‘right’ all the time, but their silent hatred for Japan is perpetual and if they say HALT and have a two or more country system for an extended period, then so be it. Have no doubts, they will expand, but your warning is very timely.

I found the Beijing and the north very busy, but housing prices stupid in Beijing, i.e. around & us 1m for small 2/3 bed units.

Enough, but keep up your excellent reports.

B Thomson

Dan Denning
for The Daily Reckoning Australia

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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9 Comments on "Exit The Dragon"

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Thomas Smith
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Dear Dan, I have received a copy of your newsletter, entitled Exit the Dragon. I specifically refer to some of the photos depicting Ghost town and empty shopping malls; (similar to those being depicted in the Metro and Wikipedia online), showing these areas in China with photos and related captions have allegedly been deemed fraudulently misrepresenting the truth. I am an Aussie and I live and have a vast business in China, (Export/Import, Manufacturing, Real Estate, and IT,)and have done so over the past 20 years but like the Chinese government officials, I am very bemused with such comments and… Read more »
Biker Pete
Guest

Jeeeeez! Wonder where the truth lies here?!~

Doubting Thomas
Guest

More and more well informed, selfless and concerned people are looking at China and starting to ask serious questions…

No harm in that Thomas, even if it ruffles your feathers as demonstrated by your RANT !

No apologies needed Dan – keep challenging the status quo. You are one of the very few souls in this country that continues to do so !

woof
Guest
Running Henry’s 40% tax up the flag pole will slow the swap of trash USD paper for our resources equity. The net forward earning revaluation being used as a counter will allow us to retain a higher level of ownership of future extractible wealth through a cycle now dominated by illusory money that makes illusory asset prices. Or expressed otherwise, if resource equity is sold on market now to foreigners, it will be lost to illusory short term gain that recycles into an Australian domestic market asset bubble, one that will be finally extinguished in a deflationary rout. Ultimately Mr… Read more »
chris
Guest

James Daly is very rude and how dare he take Jesus’s name in vain. That alone proves that he is an idiot

Steve
Guest

Steve’s quote of the day

“The Number of dwelling units approved increased this month. Adding to the already NON existent housing shortage”

http://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyCatalogue/8F919D91E9992461CA2568A9001362B8?Opendocument

Lachlan
Guest

Good to see an opposite opinion on the “Exit the Dragon” story Thomas but can you supply some links/evidence or something for people like me who have never travelled to China but want to know the truth of it. Otherwise there are sound reasons for fears over China eg the collapse of demand in western economies such as USA etc.

Biker Pete
Guest

Steve’s QOTD: “The Number of dwelling units approved increased this month. Adding to the already NON existent housing shortage”

Yes, property investors are back, Steve. The ASX is looking really shaky, Super is being cashed in… and folk my age are looking to property for long-term security.

Searched the ABS article for the section about the “…NON existent housing shortage…” Couldn’t find it. You didn’t make it up, did you?

John Ward
Guest
My concern with China is that the west has moved industries there to get cheap labour to make poor quality goods. Japan went the same way just after the war. However Dr W deming instilled the idea of quality products and continuous improvement into the japanese home grown industry leaders. The results speak for them selves. My great concern is the market for cheap and shoddy, is ultimately limited and as we are suppliers of basic materials to the chinese, we rely now on them going down the quality path. If they do not take that option and they lose… Read more »
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