We spent yesterday in Perth presenting at the Pastoralists and Graziers Association (PGA) annual convention. It was a packed house in the morning session. They weren’t there to listen to the droning and self-serving speech of one of WA’s politicians (we’ve already forgotten who). Rather, it was Andrew Forrest commanding the crowds’ attention.
He spoke just before we did. It was an eloquent speech…well received by the crowd.
Let’s just say there was a little more space in the room when we got up to have our say. More on that shortly?
First, let’s put the recent market sell-off into a visual context. Here’s a chart of the S&P500. After surging higher on the back of ‘QE to insanity’ (or is it infinity?), the world’s largest stock market index is in the process of giving up those gains.
Could it be that money printing doesn’t really solve anything and investors are panicking at the lack of follow through buying? Is it that US stocks are highly overvalued and Wall Street has run out of robot buyers to push prices even higher? Or, is it just a regular pullback from a strong rally? After all, the index surged ahead of the 50-day moving average (blue line) and is well above the 200-day moving average (red line).
So even though we think the whole stock market thing is a rigged charade, this pullback looks run-of-the-mill so far. It’s too early to tell whether this is the beginning of something more ominous. If the index breaks decisively below the 1,400 level, it will represent what Slipstream Trader Murray Dawes refers to as a ‘false break of the highs’. Our advice if that happens? Panic.
What about the Aussie market? Well it’s really struggled to push through the 4,400 level. Back in August 2011, the ASX200 plunged through 4,400 points on the way to 3,800. Since that time, it has fought its way back to 4,400 a few times, only to turn back down. It occurred in October 2011, and March, August and September 2012.
Will it have another go soon and finally break above the market ‘ceiling’, or are we on our way back to 4,000? Murray reckons 4,300 is a pretty important region. If we break back down through there, see advice from above.
So what was going on at the PGA Conference yesterday? One of the main themes was the huge amount of red tape strangling the industry.
One speaker, a cattle farmer, told the story of his attempts to invest in an Australian based supply chain. One link in that chain is a ‘boning’ facility, a place where meat is cut up and readied for export (most of WA’s primary agriculture, grains, cattle etc, heads overseas and earns Australia valuable export dollars).
In response to his attempts to set up the facility in Australia, the bureaucrats lined up a series of hoops to jump through. In contrast, a similar application with the Singaporean government resulted in a positive response within weeks, an advantageous tax regime, and an offer of a site close to the airport.
How ironic that Singapore is largely a government run city-state! But maybe Singapore is just open and honest about it. Their bureaucrats get things done. Australia’s economy is increasingly government controlled and influenced. We just masquerade as a market based economy.
We should point out that the PGA is a group that espouses free market principles. It was instrumental in bringing about an end to the dominance of monopoly organisation AWB (Australian Wheat Board). And one of its primary aims is to bring about further deregulation of the wheat industry. So it’s no surprise that the conference contained many tales of debilitating bureaucracy and regulation.
Even Andrew Forrest chimed in with his own hoop jumping story, which involved an extensive approval process just to bring some underground water up to the farm.
Anyway, as an industry outsider we reflected on the difficulties farmers face in trying to earn a living, compared to the cosy world of the financiers. When farmers get into trouble from a bad crop or poor hedging decisions, the bank will take the farm. When a bank gets into trouble from a bad crop (contracting credit growth) or from poor lending decisions, it gets protection from the central bank and, if needed, the government.
Which just goes to show how ‘financialised’ the world has become. Financiers are important not because they are ‘doing God’s work’, as Goldman Sachs CEO Lloyd Blankfein once said, but because they have gotten so out of control that if one fell it would create a domino effect.
Why has global finance gotten out of control? Because we are at the end of the current financial systems’ lifecycle. The whole, post-1971 ‘system’ is characterised by recessions, followed by a reduction of interest rates and more credit growth, which creates economic growth. As the system evolved, recessions became shorter or non-existent as governments and central banks fought tooth and nail to avoid any sort of contraction.
As a result, this system of debt growth leading to economic growth has left most of the developed world with zero interest rates and weighed down by debt. It’s not a coincidence, it’s how the system works. Increasing debt growth pushes interest rates lower and lower so the system can survive.
And because there’s so much debt, authorities can’t afford to let the system contract. If it did, it would bring about a depression.
We made that point, in a roundabout sort of way, in our presentation yesterday. Called, Agriculture, China, and the Limits of Debt-Based Growth, we tried to explain how the debt-based global financial system was slowly but surely coming to an end.
Contrary to what we’re told, the system is not deleveraging. It’s not improving. Following the tech bubble bust in the early 2000s, the US had a mortgage bubble, fuelled by a 120% increase in mortgage debt from 2003-07.
When that bubble popped, the household sector began to de-lever, but the government sector juiced up the credit (debt) growth to offset the private sector contraction. From 2007-12, federal government debt expanded by US$6 trillion, or 117%.
It’s completely unproductive debt growth. It’s government spending in the best Keynesian tradition – to prop up consumption. But it delivers very little in the way of growth and does nothing to get the economy back on the path of sustainable growth.
The world really is hitting the limit of debt-based growth. The fact that Bernanke is trying to reinflate the housing bubble to improve employment should tell you that.
That has implications for Australia. We are a debtor nation. For decades we’ve lived beyond our means. Over the decades we’ve accumulated a net international liability position of $880 billion. The interest bill on that position means we have a chronic ‘net interest deficit’. In the June quarter it was nearly $10 billion.
That’s why we need foreign investment in this country. Irrespective of all the emotional arguments about whether we should accept it or not, the bottom line is our standard of living would collapse if Barnaby Joyce got his way and closed Australia’s doors to foreign investment.
But what will happen to Australia in a global monetary re-set? If we’re nearing the limits of debt-based growth, are we approaching round two of the global credit crisis? In round one, foreign money left Australia almost overnight.
Only China’s massive stimulus saved the day, along with our own government throwing money at the problem. But ours is a structural problem, one that relies on foreign creditors forever accepting our paper promises of eventual repayment. And it’s a problem that will rear its head after the ameliorating effects of short term stimulus wear off.
We’re approaching that point again. The charts aren’t signalling danger just yet. But keep on close eye on those levels we discussed.
for Markets and Money
From the Archives…
The Sharks Amongst the School
21-09-2012 – Greg Canavan
20-09-2012 – Greg Canavan
There’s Going To Be a Fight
19-09-2012 – Dan Denning
The World’s #1 Money Printer
18-09-2012 – Bill Bonner
The Video That Started All the Controversy
17-09-2012 – Dan Denning