Normally, bank robberies work the other way. An armed and masked gang walks into the bank, fires a few shotgun blasts, tells everyone to get on the floor, and asks the clerks to fill up canvas bags with the fabulous moolah. It’s simple.
That is not the way it works in modern central banking, though. Today, it’s as if Hank Paulson is pointing his “big bazooka” bailout plan at Wall Street and demanding it opens up its wallet so he can fill it with other people’s money. The Paulson Gang (or Goldman gang) is lining up for its share of the loot accordingly. But the real robbery is taking place in Washington.
Today’s theft is a lot more subtle, mostly because it’s taking place right underneath your nose. That is the trouble with the obvious. You become so used to it that you fail to find it unusual. Sadly, it is as business as usual in Washington D.C. this week.
First, the Wall Street Journal reports that the shclubbs in Washington have agreed on the “principles” of the bailout plan. The words “lawmaker” and “principle” probably don’t belong in the same sentence. But our job is to investigate the facts, not pass judgment (yet) on the protagonists in our story. So what are the facts?
Surprisingly few! The principals involved all met at the White House and walked out of the room with no real agreement. They did, however, agree to four principles which any future agreement must address. Not exactly Wilson’s 14 points. But give them time.
What are the four principles? First, a bailout plan must provide taxpayer protection. Second, it must provide oversight and transparency. Third, it has to preserve home ownership in America (though how it will or even CAN do this is anyone’s guess). And fourth, the US$700 billion lump sum sought by the U.S. Treasury will be doled out incrementally, to make sure Hank Paulson doesn’t spend it all in one place.
It doesn’t sound like much was resolved, does it? Still, stocks appear to be trading exclusively on the idea that a bailout plan will be passed by the Congress and will rescue the banking system from the edge of the abyss. The Dow was up nearly 300 points early in the day. It faltered later, but still closed up almost two percent to 11,022.
While Wall Street tries to save its own neck at taxpayer expense, the sell-off in Australian stocks is making the assets of junior miners even cheaper to the parties that are happy to acquire them at any price.
In fact you could argue, as my colleague Al Robinson has in Diggers and Drillers, that one of the prime results of the market volatility is increased merger and acquisition activity in the juniors. Share prices are down. Yet many quality mining projects clearly have the potential to lead to growing earnings for the firms behind them.
There are two possible complications to Al’s bullish scenario, though. One is commodity prices. If the equity market volatility turns into a full-fledged collapse, it’s hard to see this being too terribly bullish for commodities. A major recession in the U.S. won’t kick start commodity prices from their current doldrums.
But if the bailout plan in Washington is perceived as inflationary, but also just enough to prevent a U.S. recession, well then you may have the conditions necessary for a rebound in certain resource prices. High energy and labour costs have already pinched supply in some key markets. The spring is coiling.
The other complication is capital. With Aussie bank lending plummeting and the share market not an ideal place to raise money right now, how will small companies fund their big projects? Are there enough risk-taking investors to make it happen?
One group of investors that don’t seem to care about the credit markets or valuations (perhaps because they find them so stunningly attractive) are the Chinese. Today’s Australian reports that, “Chinese- controlled Australian Bulk Minerals has agreed to a reverse takeover of Grange Resources in a deal that secures future iron ore pellet production for China’s biggest private steelmaker, Shagang, and will lead to the listing of Tasmania’s Savage River mine and pellet plant.”
If you keep looking for the action in the big blue chips like Rio and BHP, you will probably miss the flurry of action brewing beneath the surface. And it’s definitely brewing. This brew, however, is not toxic like the mess in Washington. THAT brew could still poison us all. But we’ll have to wait and see what the Paulson Gang cooks up before we know how much lower stock prices are going to go before we can buy. Until Monday…
Markets and Money