The simplest kind of stimulus governments the world over could provide is to cut withholding taxes. Let people keep more of their money from each pay check. People will then do what they have to do. That is, they’ll either use the cash to pay down debts, save it, or spend it. Meanwhile, governments can borrow and spend all they’d like on “shovel ready” projects.
This will never happen, of course. Automatic withholding taxes are a key source of government revenue at a time, the world over, where liabilities are rising fast. But it would be a lot more efficient than having Canberra, Washington, or London sprinkle out the money on projects that may or may not enrich politicians and their donors.
That is part of the big picture. In the littler picture, news came out yesterday that Chinese GDP growth may not reach the eight percent target set by the old men in Beijing. It will, perhaps, be just six percent growth this year.
Six percent GDP growth-if the number can be taken at face value-is no small feat during a worldwide recession. But China’s policy makers have said in the past that in order to meet employment objectives (you need factory work for the millions moving off the farms) the economy has to grow at eight percent.
How will rising unemployment and closing factories affect China’s political stability? Hmm. We have no idea. But we do know that according to yesterday’s data, China’s exports fell for the second consecutive month. They were down 2.2% in November and another 2.8% in December. It’s the worst export performance since 1999.
More ominously for Aussie investors who would like to find the bottom in mining shares, China’s imports fell 21.3%. As China imports a great deal of raw materials, this is not good news for the Aussie share market. In fact, the market was down nearly two percent intra-day, before finding the courage to close just in the red for the day.
Today, though, some of the world’s biggest miners announced cost cutting measures. Rio Tinto is suspending underground work at its copper and gold project at Northparkes in New South Wales. It’s also shelving plans for auto-mated trains at its iron ore operations in the Pilbara.
Mining shares are down at the open today. But behind the scenes, it looks like Chinese companies are using the commodity price crash as a chance to secure long-term off-take deals with Aussie companies. “Emerging West Australian iron ore producers are facing renewed Chinese interest in long-term off take agreements before an expected drop in contract prices,” reports Sarah-Jane Tasker in the Australian this week. “Hartleys resource analyst Andrew Muir said Chinese steel mills were still looking for long-term off take agreements, but he warned that companies would now be more selective.”
This is what Diggers and Drillers editor Al Robinson calls the “Pebbles” phenomenon. While BHP and Rio were engaged in a soap-opera like love/hate fest over conquering the resource world, Chinese banks and steel mills have been diligently sifting through the wreckage of the resource market for projects they want to finance, own, or invest in.
For example, Dow Jones Newswires reports that Gindalbie Metals has received conditional approval of a $1.8 billion loan for its iron ore project at Karara. Gindalbie is also funding the project by selling equity to Chinese outfit AnSteel.
So you see, business is still getting done. Let’s not forget this. Someday, this crisis is gonna end. All the things we’ve discussed here in the Markets and Money will have come to pass (perhaps not exactly as we’ve forecast) and the world will get on the business of life, replacing one financial growth model with something less leveraged and more oriented to the growing places of the world. But just when that it is and whether or not it will be good for investors in Aussie resource juniors this year is unclear.
What is clear? Ben Bernanke is terrified. “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Bernanke told fellow terrified people yesterday at the London School of Economics. “More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets.”
Here we are, 525 basis points lower on short term U.S. interest rates, a doubling of the Fed balance sheet to US$2 trillion and growing, and US$750 billion into a TARP that can’t cover the rotting corpse of the financial system, and Bernanke told the world yesterday that the basic problem-bank balance sheets impaired by assets they can neither value nor sell-is no closer to being solved.
That seems like bad news.
Bernanke went on to explain the various policy tool kits at the Fed’s disposal. You can break it down into three big hammers: lending directly to financial institutions, providing liquidity to key credit markets, and the direct purchase of assets. The Fed has already begun purchasing assets like mortgage-backed securities. But in theory, there is no limit to what kind of assets it may choose to buy and add to the balance sheet. It could even buy gold mines if it wanted.
“You don’t really think it’s the government’s plan to make people poorer do you,” one of our sceptical friends asked last night over a cold beer on a scorching Fitzroy Street in St. Kilda. “If they did that, you’d have social chaos. Revolution even. This isn’t Batman. Bernanke isn’t the Joker. He doesn’t want to watch the world burn. He’s just trying to start a little inflationary camp fire to fight deflation in financial assets.”
“Should I get marshmallows?”
“Be serious. You write to people every day and predict things that…well if they were true, would truly be disastrous. The only reason it’s not so monotonous reading the same thing every day is that it’s often scary in some new way you’ve managed to think up. Don’t you feel bad for all your fear mongering?”
“No. Do you realise how few people the Markets and Money reaches? And on any given day, I have no idea who’s choosing to tune in. So we have smash our way through the garbage in the paper to let people know that things are happening in the world that have real consequences. There’s a lot at stake. I don’t feel bad for trying to highlight that. Plus, daloob.”
“Look, the answer is no. Bernanke is not trying to burn the world down. Maybe there are some people in government who are happy with that outcome, though. More than you’d like to think. It leaves them stronger and more powerful and the rest of us weaker. I don’t know. Disorder is one way of keeping people busy and weak. But no, I don’t think Ben Bernanke goes to bed at night plotting ways to turn the world’s savers into serfs. But I do think that the destruction of paper wealth is going to be the end result in America and other places. This is how fiat money ends. And fiat money is what we have.”
“You say that all the time. But you’re going to pay for my beer with fiat money.”
“Well, I always pay for your beer. And you never listen. Money is not wealth. Money is a commodity, a simple means of exchange. Paper money that is not backed by something real is not real wealth. It’s not capital. It’s just paper. And once people lose confidence in it, it’s gone baby gone.”
“What happens next?”
“Argentina. Weimar Germany. Zimbabwe. Take your pick. Us Americans and Briton and you Aussies as well, like to think it can’t happen to us because…well because we have a high opinion of ourselves and the world’s most powerful military. But the bills just keep piling up. It’s a lousy way to live and a lousy thing to do to your kids. And it just doesn’t last forever.”
“Unlike your daily reckoning.”
At that point, your editor left and returned to his home office to find this plan of action from a fellow reader. We liked it so much-and it’s roughly what we have been steering toward for the last few months, that we reproduce it for your benefit. We’re tentatively calling it the Emergency Private Pension Plan.
“I just want to boil things down a bit – the DR can be a bit long winded (But it’s free so who cares!) What we really want to know though is how we can retire in luxury within 2-3 years or less – perhaps you could develop the following for us a bit:
1. Now: We are basically in a recession with a tendency for deflation
2. Now: Governments are reflating / printing money to reverse the recession and deflation
3. Now: Governments are reducing interest rates to unprecedented lows – to reflate
4. Within 6 month: When inflation starts to rocket, so do interest rates
5. Within 12 months: When/if the recession “ends” we then get even more amplified inflation there being heaps of cash about
6. Within 18 months: To pay off the massive debts, taxes rocket but production also remains stunted so economies tend into a long slow recession with continuing high inflation again
So from this we conclude what we should do:
1. Now to four months: Expect a choppy Bear Market rally: great for leveraged traders and high dividend quality blue chips: double your money.
2. Four to six months: Swap into gold, puts/shorting and fixed interest securities: double your money in 6 months
3. Up to Twelve months: Swap into rebounding property but keep the gold: double your money again
4. Before 18 months: Cash in again and go into recession/ inflation resistant assets such as staples, telecoms etc, but probably retain 25% of the gold: double your money again over 2 years.
So after multiplying your initial cash by a factor of 16: cash-in, open a gold current account and go and live in luxury in Thailand (Where there’s no capital gains tax!)
What do you reckon?
–We’ll drink to that.
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