–Well this should be interesting. The EU/IMF bailout of Ireland is not going off without a hitch. The UK’s Telegraph reports that Green party, which currently supports Ireland’s government, might withdraw that support and call for new elections in January. This would call into doubt the ability of the current government not only to execute a deal with the EU and the IMF but also to pursue its four-year austerity program.
–What a mess. We’ll get to how Ireland and Australia are similar in a moment. But first, please recall the words of the great philosopher of the New York Yankees, Yogi Berra. He once said, “When you come to a fork in the road, take it.”
–Today’s fork in the financial road leads down two different paths. One path is continued U.S. dollar devaluation and a strategic migration to emerging market assets (under the assumption that the BRIICS nations will eventually have to allow for currency appreciation…or face rampant food and fuel inflation). This trade favours gold, commodities, and tangible assets in general.
–But remember what happened in 2008? The Global Financial Crisis actually led to a massive rally in the U.S. dollar. Emerging markets got hammered. The “risk” trades financed with cheap greenbacks were reversed and commodities took a shellacking as well.
–Could that happen again? The boys at Knight Research think it’s going to happen again, but even bigger and badder this time around. In a recent research note, they wrote, “We believe the structural and cyclical terms of global trade have finally reached their tipping point. This will catalyse a wholesale change in sentiment and a historic repositioning of risk assets. The emerging market global growth story is over.”
–This is the fork Murray has been preparing for in the Slipstream trader. It would mean falling indexes in Australia which would of course mean falling components of those indexes. Knight Research elaborates on this fork:
The game is over. Presently, we believe that the broad-based resurgence of investor confidence in the emerging market and secular bull market in commodities will end badly; proving that the rally which commenced in Q2 2009, was in fact an “echo bubble” facilitated by massive-and unsustainable-stimuli from the Chinese Government.
We believe that the end of the Great Consumer Credit Cycle and the vast structural differences in the terms of trade between the United States, the EU, and China, have finally caught up with the secular bull thesis on Emerging Market and Commodities. Quite ironically, the Fed’s aggressive policies will likely prove to be the catalyst which breaks China’s unbridled expansion of credit and non-economic growth, ushering in a wholesale rebalancing of risk assets.
–This is not a lukewarm prediction. It would quite obviously be mega bearish for the Aussie dollar and for commodities. And thus far, there’s not much evidence to support that giant reversal is afoot that is more bearish for emerging markets than it is for the U.S. dollar. It’s a fork in the road, though. So we have to take it and see where it leads.
–There ARE a few factors supporting the “Game Over” theme. One is that Ireland’s woes are not the last of the Eurozone’s problems. There is Greece. There is Spain. And really, Ireland is not even done and dusted yet. To some extent, Euro weakness is dollar bullish and contributes to the “Game Over” theme.
–But the bigger factor is Chinese tightening, or just your basic traditional popping massive credit bubble. There are early signs of that. Last week China raised reserve requirements on banks again. And Citigroup agrees with our assessment that rising food prices in China could be bearish for metals.
–By the way, if this scenario is right, it’s going to make Ken Henry look like a fool for believing that mining is in a secular rather cyclical bull market. He’s planning on the boom to end all booms. But it could be the same old bust that comes at the end of every credit cycle. Why doesn’t Henry see that? He’s not exactly a miner is he…or a geologist…or an entrepreneur…or an investor…or an Austrian economist.
–China’s State Council is talking a big game on controlling inflation. Does it mean China is quickly shifting away from a bias toward export growth toward an inflation fighting bias? That’s the big question. If it does mean that, you can expect lower commodity prices.
–For example, three-month copper on the London Metals Exchange fell overnight. The news preceding the drop was that refined copper imports to China fell by a third last month. Comex December copper traded lower too, near $3.75/lb.
–We’re going to have Dr. Alex what he thinks about this. But we can guess. He probably loves it. He just got back from another site visit in Africa to a copper project. If you’re a Diggers and Drillers reader don’t worry. You’ve already read about this company. It’s not a new recommendation.
–Alex has done his homework on the companies he’s recommended. Weakness in the copper price invariably follows through to the shares. If you’re a secular metals bull, you believe this lowers your average purchase price on the shares most likely to benefit from rising prices. If you’re a bear, well…you’re a bear. Go dance.
–Alex, of course, has taken the other fork in the road. This fork is for those who’ve realised the end of the dollar standard in the global money system is likely to be bullish for real assets, despite your reflexive dollar rallies. Europe’s chronic and structural problems add an element of dollar support. But the long term story on this fork is to favour “real assets” over paper money.
–Which brings us back to Ireland and Australia. Irelands bank’s went all in on the Irish property market. When the bubble burst, the banks were left holding the back (a huge mortgage book). The bag was so heavy, in fact, it broke their back. So the government had to pick them up. And the bag was too big for the government to pick up too, especially given rising borrowing costs for countries at Europe’s periphery.
–Could that ever happen in Australia? Could banks with massive over-exposure to domestic property be caught out by losses and unable to borrow from overseas except at much higher rates? And could the government be forced to step in and cover the bank at the cost of its own good credit?
–Nah. That could never happen here.