–Damn you S&P ratings agency!
–Just when the Greeks and the Eurocrats had agreed on a plan to destroy Greek sovereignty and put the Greek people in thrall to bankers, the ratings agency has messed things up. S&P said the convoluted arrangement that would allow bond holders to roll-over Greek debt into some new monster hybrid security would amount to a “selective default”.
–This reminds us of a scene in the JJ Abrams Star Trek movie where a young James Tiberius Kirk races a red 1966 Corvette Stingray to the edge of a cliff and jumps out right before it goes over the edge. Greece – indeed the whole common currency project in Europe – is headed toward a cliff. The bankers and the politicians aren’t trying to turn the car or tap the brakes. They’re trying to jump out.
–Incidentally, Kirk’s deliberate destruction of such a beautiful machine is almost inexcusable. If it weren’t an example of his unconquerable spirit of enterprise and exploration, we’d deplore him for it. The ’66 Stingray is fifth in our book of all-time great muscles cars behind the 1966 Chevy Impala, the 1969 Z28 Chevy Camaro, the 1964 Pontiac GTO, and the 1969 Dodge Charger. More on internal combustion engines and human endeavour shortly.
Planet Destroying 1966 Corvette
–As for S&P’s warning about Greece, it’s a reminder that the Greek problem has been deferred. It hasn’t been resolved. And the Greek problem is just one part of a larger debt problem. Markets may rally with relief for a short term. But the debt problem must be reckoned with either by rescheduling, default, or inflation.
–Australia’s share market is linked with a healthy, functioning global credit market. The Aussie dollar and Aussie shares have benefited from global speculators hunting for yield and a story linked to China and commodities. A fascinating article in Monday’s Australian Financial Review showed that global speculators are now upping their bearish bets on Australia. That’s a big contrast to the last few years.
–“Shorting the Australian government is among the hottest trades in the credit markets as trading activity of credit default swaps (CDS) referencing the Commonwealth of Australia reached more than $2 billion last week,” report Jonanthan Shapiro and Paulina Duran. They add, “the volume in Australian sovereign CDS contracts has doubled from a month ago and is more than five times higher than the weekly average from January to May.”
–CDS contracts are used to hedge against default risk. But does this mean global investors are hedging against the risk of default in sovereign Australian bonds? That would be news. After all, Australia is not Greece. The public debt-to-GDP ratio may be climbing. But government debt levels here aren’t nearly as critical (as a percentage of GDP) as they are in other countries. So what gives?
–The bet on sovereign default is really a bet against the banks. The big banks own Australia’s $1 trillion mortgage book. That’s household debt. And Australia’s household debt-to-GDP ratio is among the highest in the world, thanks to absurdly high house prices and a big credit boom.
–The government is on the hook for the high household debt ratio, according to CDS traders, because if the banks suffer a decline in asset quality (good mortgages gone bad) the banks will need help from the government. In other words, the ultimate backstop for a housing crash in Australia is government backing for the banks. The government would be forced to borrow more or infuse the banks with new capital (also borrowed using Australia’s sovereign credit rating).
–All this is just speculation. But at the least, it does show you how credit events that originate in Europe can migrate their way all the way here to Australia. And in completely un-related news, there was a minor earthquake in Melbourne this morning. Low-probability, high-magnitude events are worth thinking about and preparing for.
–More shale mail to review today. If you haven’t read or watched Revolution in the Desert yet, it might help you understand what all the feedback is in response to.
Dan, I have a cattle property in Western Queensland and I can burn the gas that comes up with the water from my bores and hey the water is great to drink also the bores have not been fracked.
—Biogenic methane is commonly found in groundwater and well water. But if there’s thermogenic methane in well water, that’s the kind of methane that would have come from a deeper underground oil and gas reserve. If fracking near populated areas is releasing thermogenic methane into ground supplies, it stands guilty as charged. But it’s not. Tens of thousands of wells have been drilled and fracked over the last 50 years.
Thank you for all your good advice in the newsletter. I think I know why they are kicking the proverbial debt can down the road. Google “planet X or Nibiru”, it looks we’re in for an extinction event. Maybe after next year if a Pole shift occurs, there wouldn’t be much left standing, tidal waves of 1 km high washing over the continents as this massive mini solar system swings by in our solar system, apparently this thing comes along every 3500 years.
Fasten your seatbelts.
Cheers Jacob E.
–Extinction events cannot be hedged through financial markets. We would recommend a good bottle of Shiraz to go with your seatbelt.
–More seriously, some people think human use of fossil fuels is the very thing that will precipitate a mass extinction event. And you thought we were doom and gloom! The last three hundred years of economic history show that as technology improves and per capita incomes rise, people use energy more efficiently. People also tend to breed less the wealthier they become. The solution to worries about over-population, then, is to make people wealthier, not kill them off.
–Natural feedback loops in a system lead to self-regulation. People who have excessive belief in their own organising abilities fail to understand this. They would rather tell everyone else what to do. But the evidence clearly shows that human beings have fewer children and use energy more efficiently as the division of labour and civilisation advance.
–Now, there are many spiritual and practical reasons for lamenting the decline of birth rates and the collapse of large families. But perhaps advocates of State-enforced population control should simply observe what happens naturally when prosperity increases. Birth rates tend to decline.
–Perhaps we are a bit sensitive to the issue of enforced population controls because we are the youngest of 12 children. Under the order prescribed by the people trying to save the planet from our species, we would probably never have been born. We take that kind of personally. But there’s a more important point.
–People consume resources. That’s true. But each and every life and brain is also a new resource capable of improving the welfare of the species. Just because Einstein didn’t make horseshoes or walk behind a plow all day doesn’t mean he didn’t do productive, meaningful work with his life. You can never predict or foresee what people will make of themselves, or the world.
–And to bring it back to Captain Kirk, this is why we are so puzzled. About what? About the planet-saving impulse that views the industrial revolution and internal combustion engines and growth as unethical, immoral, and something to be ashamed of. There is no room for Captain Kirk, or the human impulse to explore, expand, and grow, if you’re convinced the species is a parasite on the planet.
–Ever since Cain killed Abel, and probably before, people have been using tools for good and bad. The tool is neither inherently good nor bad. It’s how we use it. No energy extraction method that did the planet irreparable harm would be any good. But there is no reason not to use it just because some people are opposed to fossil fuels.
–Those people who ARE opposed to fossil fuels and growth and industrialisation are being coy and deceptive about their true intentions. They envision a pastoral utopia with an all-powerful State as king. This is a very grim view of human potential. There wouldn’t be any muscle cars in this world either. Just draft horses and people who spend all day in the fields with no time to make art, music, or discoveries in the fields of medicine, science, or math.
–We ought to be more grateful to fossil fuels and internal combustion engines for allowing us to use our brains more and our muscles less. We have the luxury of time; time to figure out how to get more energy from the sun. Fossil fuels are really just stored “solar income”. We are burning up that income. Our next challenge will be to harvest the energy from the sun before it’s stored in energy dense carbons.
I love your report.
Dan Denning outlined a compelling case for shale gas to be the power source for the future. Beach Petroleum are doing their best. I’m not sure where I stand on CO2 emissions and climate change but what I do know is that if CO2 emissions can be replaced with a clean, safe power source, then everybody wins. Shale Gas produces more CO2 and so not really an answer.
Why is the Markets and Money not advocating research into Thorium based nuclear power? It is safe (it cannot be out of control unlike uranium based reactors), is 3 times more available than uranium, is cheaper to mine, produces more power than uranium, produce much less waste than uranium, waste that cannot be weaponised and has a much shorter half life… eventually producing lead. Further, a Thorium based plant is very cheap to set up and I’d happily have it in my backyard. What is not to love about a Thorium based nuclear reactor?
Dan and the Markets and Money people: What is not to love about Thorium?
–Ah! We did write about thorium last April in our first issue at the helm of the Australian Wealth Gameplan. We’ll go back, dig it up, brush it off, clean it up, and send out an update on Saturday. Stay tuned!
–Finally, happy 235th birthday America! It’s been a tough decade for our homeland. In fact we haven’t lived there in 10 years. But we still love the idea of America and find it inspiring, despite our generally cranky nature. That will probably make us unpopular with a few people too, of course. But we’ll have more to say on it tomorrow.
Markets and Money Australia