European Failout

Let’s not forget that in all the ruckus about the mining tax in Australia, the global back story favours certain resources. Why? Well, our view is that the slow-motion disintegration of fiat money systems and the debt that backs paper money will place an even higher premium on real, tangible assets. This would be true even if these assets were necessary for the growth of emerging market nations.

A case in point is the $914 million stitch up between Riversdale Mining of Australia and Wuhan Iron of China. Overnight, the pair announced a memorandum of understanding in which Wuhan would pay for the right to receive 40% of the coking coal from Riversdale’s Zambezi coking coal project in Africa. Wuhan, which is China’s third-largest steel maker, would also get an 8% equity stake in Riversdale.

The deal requires the permission of both the Chinese government and the Mozambique government. But if it gets approval, you’ll have an Australian company finding and developing a world-class resource in Africa, financed by Chinese capital with the aim of resource security for China’s steel industry.

That’s a scenario Australian investors can profit from. We know that to be true because Diggers and Drillers editor Alex Cowie tipped Riversdale in late March. We wouldn’t normally give away what Alex is recommending to paid subscribers. But suffice it to say his recommended entry price was a fair bit lower than yesterday’s close at $11.35.

Not coincidentally, Alex has just returned to Melbourne from a short trip to Africa to view the mine sites of several other companies. He also investigated a few new prospects working on precious metals projects. And if he was able to shake off his jet lag, he told us he was headed to last night’s meeting of the Melbourne Mining Club, where the focus was on the Resource Super Profits Tax. D&D subscribers can get Alex’s full Africa update in his weekly e-mail, which goes out later today.

You wonder what they said the Mining Club about the RSPT. One of Julia Gillard’s first moves as the new Prime Minister of Australia was to suspend the government’s media campaign for the tax. The mining industry agreed to the truce and pulled its advertising, too. The new Prime Minister had promised actual negotiations and just “consultation.”

In the short-term, this just means more uncertainty for resource shares. You wouldn’t expect the PM to try and push the tax through before the election. But you wouldn’t expect her to abandon it either. Earlier in the month she told the ABC, “We still want the people who work in mining to earn good money. We want miners to earn good profits and the nation to get a fair share.”

The rhetoric of fairness, then, isn’ t going away. It just has a more attractive, likeable, and red-headed spokesman. She’ll be a tough foe for the miners, especially since she’ll enjoy a honey-moon with the public. But in substance, Julia Gillard is probably more committed to the ideology of wealth redistribution than Kevin Rudd ever was. It’s not just her hair that is red. It’s her politics too.

But that is a debate for the politicians. At the very least, Australia now has a clear choice between two people who have genuine differences of opinion about the relationship between the people and their government. In their own way, both Tony Abbott and Julia Gillard believe they have Australia’s best interests at heart. That’s what makes ALL politicians so dangerous. But in the end, you get the government you deserve. It’s an election year.

One factor that neither the miners nor the new Prime Minister may be expecting is the possibility that by the time a new government is elected and ready to roll on a revised RSPT, the world’s economy will have entered the second dip of a double dip recession. The underlying assumptions of the RSPT would vanish then, or at least be much less compelling in an economic sense (although it might actually be easier to sell to the public in hard times).

Stock markets are certainly telling us that things aren’t good. The S&P 500 fell by nearly 1.7% overnight. It’s fallen by four percent over the last four days. Sentiment is bad and valuations are not attractive.

It doesn’t mean you can’t get a rally from here. But worries about debt default in Europe just won’t go away. Credit default swaps on sovereign Greek debt blew out to all time highs in European trading overnight. That means the cost of insuring Greek government debt from default has never been higher.

That doesn’t mean Greece WILL default on its debt. But it does bring us back to the question we ended yesterday’s Reckoning with: what event could trigger the big fall in asset prices that the uber bears fear the most? Richard Russell said it could be the disintegration of the fiat currencies.

If Greece defaults, will it cause a crisis in the Euro? Will it mean the end of the Euro? This is one of those questions that is either dismissed as the absurd speculation of a kook-job, or dismissed because it is just too ugly to think about it. But think about it!

In practical terms, with Greece CDS rates over 1,000 basis points, it would cost you $1 million to insure $10million worth of five-year Greek debt from default. This is the markets way of saying that Greek debt is simply not going to be repaid, or repaid at par. This is also why you can expect regulators in Europe and the US to shut down the CDS markets in order to prevent a market price from communicating information about how bad sovereign finances are.

But they are bad. And the other indication that this is so is in precious metals prices. We mentioned earlier in the week the increased central bank holdings of gold. And to be honest, that is just the sort of news that freaks us out. A contrarian mind immediately suspects a gold correction is imminent when the bankers are buying it.

However, if the carefully managed Greek bailout turns into a “failout” the next moves in gold could be big. And they probably won’t be down. Hopefully Alex will have more ways to benefit from this when he briefs us on his Africa trip later today. We’ll let you know next week.

Were you worn out by all the politics this week? At least one reader has had enough of us and our calling out of the socialist zombies in charge of the Welfare State. One reader writes in:

Socialist zombies? Are you serious? Only socialist zombies read your crappy try and get rich quick rubbish! – For a laugh!

You don’t think any self respecting money grabbing capitalist would – do you!!!

Grow up! Your hit and miss speculations are not read by real business men… it’s nothing but a spam email with no more relevance than a tarot card reading.

Socialist zombies! It’s your parasitic money monkeys that have driven the world to the verge of destruction – wake up and smell the coffee that’s if you can get the idea of that funky smelling $ out of your nose.

There are those who can and those who write spam crap. Socialists happen to care about society not screw everyone over for a buck – You and your kind are the real zombies!

Why is it you read the Markets and Money again?

Dan Denning
for Markets and Money

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.

Leave a Reply

5 Comments on "European Failout"

Notify of
Sort by:   newest | oldest | most voted

Just a thought about Greece and the Greek banking system, which is I’m sure already in a lot of trouble.

Under the Basel III rules, they are pretty much going to force banks to take on more Government debt onto their balance sheet as part of the capital adequacy.

Interestingly if this were already in place and you were a Greek bank and your main “safe” assets were Greek Government bonds, well then you are definitely up the proverbial creek with out a paddle.


Daily Telegraph UK reporting US may increase Fed’s balance sheet to US$5 trillion. This gives some wheels to extend and pretend doesn’t it? Somebody was asking about mopping up the other day … this would be the super squeegee, but it lives as long as it has accomplices willing to play the game in the dollar bloc. Everybody knows there is no road back if they take this move but rationally eveyone also knows that even if they glance over their shoulders the worst of the worst is going to play out.

Sigh – here we go again. A socialism lover pointing the worlds troubles at the feet of the people who believe in free markets. Here’s news for that angry reader : it was interventions in the free market that led to the troubles. If interest rates weren’t artificially lowered and kept low, the credit growth would have been much less. If there wasn’t government intervention in an asset class – housing – via Fannie Mae, Freddie Mac and legislation to allow uncredit-worthy people to buy houses, then you wouldn’t have had a junk-debt fuelled real estate bubble. You can’t blame… Read more »

Mega QE comes as the bailouts get larger by necessity. The govs and banks are humans with predictable nature. They wont choose to end their privilages. They will expand until they go fully banana.


The entire GFC could be instantly cured by a gradually deflationary money policy, George Selgin has advocated since 1987. The cause of the GFC is inflation in the face of rapid productivity growth. A Goodwin simulation posted <a href=""<here shows it all in a nutshell.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to