A Fabulous Performance
The importance of goals cannot be overstated. Companies that consistently fail to achieve them will disappear (or get bailed out). But apparently, failure is not so bad if you are a politician. Bloomberg News reports that Eurozone countries failed fiscal goals 57% of the time.
There aren’t many people who can keep their job on that sort of performance. But Governments have these handy things called bonds to finance their failures. And people have been naive enough to buy them because they are supposed to be a risk free investment. At least the past few years of financial theory says they are. Academics from the history department would have said otherwise. But history is just stuff that has already happened…
Anyway, there is obviously quite a demand for risk free returns. Largely because regulatory requirements encourage holding safe assets. That is a polite way of saying they require it. And so Europe’s budgetary indiscretions became the bedrock of banks’ capital bases.
Now it seems the lack of discipline is coming back to bite. And not just for Governments, but also for the banks built on supposedly safe sovereign bond holdings.
The difference this time is that there is nowhere to go for a bailout. Nobody stands on the sidelines, ready to save Europe. The only two contenders for that sort of role are the US and the ECB. More on them later.
Orderly State Insolvency
Angela Merkel, the German Chancellor, has been out of the news recently. Compared to the past few weeks anyway. She used to be a shining beacon of economic logic, only to have ridiculous speculative regulations put in place by her government. But now it turns out she has been busy making provisions for the real problem Germany faces:
“Merkel, in the same speech in which she said ‘the euro is in danger’, called last week for the euro zone to develop ‘a process for an orderly state insolvency.'”
So there you have it – Merkel is back. She has quietly been working hard on a contingency plan for Europe. Only it’s less of a contingency than many believe. And she just needs the other European leaders to continue their wishful thinking for a little longer, while she puts in place the mechanism to save Germany from oblivion. Oblivion being the rest of Europe.
Ok, so maybe that is a bit romantic, but remember that it’s the Germans that are buying the gold. Enough of them know what is coming in Europe. It stands to reason that Merkel does too.
Her mistake lies in the assumption that European nations will stick to their “orderly state insolvency” rules. When it comes to agreements between European nations, the irony here need not be mentioned.
Going for Gold
Recent news from Coinupdate.com points out that it’s not just the Germans buying gold coins. The Greeks are too. At prices 40% over the spot price of gold! What this implies for the price of gold is clear. Paper prices on large exchanges can be manipulated, but real transactions are another thing entirely. And gold is all about the physical asset not its paper claim.
Marc Faber has called for a short term rally on Bloomberg TV in another one of his increasingly amusing appearances. Strangely enough, his hosts still don’t have a grasp on what Marc is all about, or why he spends most of the interview laughing.
The highlight of the 14 minute set of snapshots was when one of the hosts pointed out that the Greek bailout had “bought time” to find a solution… even if there was no solution. Marc agreed emphatically, much to the distress of his regular followers, before rounding off his sarcasm with the old alcohol analogy: The best way to forestall a hangover is to keep on drinking and drinking through the next day… until you collapse.
Marc’s metaphor was probably lost on most of the audience (again), but the TV host did pick up on the indirect insult. All he could do was give a sheepish grin. But how does the metaphor apply to the world we live in? Well, those poor old politicians find themselves in the pickle of having inherited an economic hangover. They are desperately trying to get the party started again. But every day, more and more people wake up with the headache. So now they turn to the central bankers Bernanke and Trichet to bring out the hard drugs. The printing press has never failed to get a party started, but things tend to go wrong rather quickly.
Watching markets during the week was like watching dodge ball. The only indicator that made sense was the VIX, which showed volatility remained. That in turn shows nothing else is making much sense.
Meanwhile, our technical analyst Murray Dawes continues his remarkable run of picking market moves. After a quiet period for his trading in the past months, he has gone into hyperdrive and consistently picked winning trades.
The market is a traders one, no doubt. But what of the long term?
A feedback session here at our editorial conference in the Normandy countryside of France revealed a concept worth mentioning. The session was about writing, but Bill Bonner and your editor got rather side tracked with the theme of one of the essays.
Its argument was that the potential for both China and the US to collapse simultaneously is underestimated in terms of probability and consequences. Part of this is that the situation in Europe is stealing the limelight, but consider for a moment the state of the global economy.
To say it is fragile is an understatement. At the moment, it resembles some sort of Keynesian laboratory experiment. Can governments truly turn the world economy around, or are they delaying the inevitable?
Many would say they haven’t even managed to delay the inevitable, only drawn out its effects.
Regardless, it is worth taking a moment to project the possibility of a collapse of both the US and China and what it means for the average investor. It may be unlikely, but the financial crisis was considered impossible a short while ago.
The underlying question is whether it’s worth having a plan B for such an outcome. Dan’s humpy portfolio came up in past Markets and Moneys. Maybe it’s time to revive the concept properly?
North Korea’s Dear Leader decided the S&P had rallied enough and sunk a South Korean ship to get back into the headlines. His involvement in the sinking was however only recently discovered. Much of the markets fall early in the week was attributed to the potential for the Korean situation to get out of hand.
Political risk is one of those concepts that wasn’t supposed to apply to investing in developed nations. That’s changed substantially. Even close to home.
Taking inspiration from her (former?) favourite political system, Queensland Premier Anna Bligh has decided to build three new cities in South East Queensland. Hopefully these will not remain empty as so many of those in China do. But we can assume the QLD government will be rezoning and not building the cities themselves. Still, the infrastructure boost alone must have caused excitement in the building industry.
Comrade Stephen Conroy, the Minister for Communications, is providing a prime example of how government infrastructure projects work. Or don’t work, to be precise. The NBN network is turning into another troubled policy for the government. Another $52 million are being coughed up by the government to keep the cogs turning. Small increments bring up less taxpayer outrage.
And the mining tax continues to be the topic on everyone’s lips. Its transition to the “bad policy bin” seems to be faster than most of Rudd’s other policies, but pride has kept it alive so far. One flaw is that the Treasury rate (suggested as the point from which “super profits” kick in) is in fact lower than the cost of capital for many mining companies. That causes some major issues for the financing structure of resource development.
Then there are the various traditional government blunders of using the wrong data and misusing the data. More appropriate data was compiled at RMIT by Professor Sinclair Davidson, who stated the following:
“Through ignorance or indifference, the Rudd government is attempting to introduce a tax based on an argument that is demonstrably wrong.”
Ignorance or indifference? Your call.
But despite all this, the tax may yet go ahead in some form. It seems to be assumed that the tax is a good idea. Few people understand the reasons why it isn’t. They take the view that the government won’t get it right, but they are on the right track, so let them do it.
Dan and the few economists with any credibility left argue otherwise. But losing credibility doesn’t stop many economists from pretending they know better – shortly after missing the most important economic event of their lifetime. So, they issued a statement in support of the tax.
Many subscribers remind us that we are not in fact climate change scientists, nor mining executives. Sticking to what we know supposedly gives us credibility. But what do we know? Well, central banks and currencies are a favourite topic, so surely the following story is within the Markets and Money’s realm: “Reserve Bank in link to graft and hookers”.
It’s probably best to leave the story itself for the reader, but it must be mentioned that it involves our old nemesis fiat currency and its printing.
House prices always rise…
Take a stab at how much UK house prices have fallen since 2005.
Any ideas? 10% … 20% …?
That’s in real terms. And this isn’t some stupid abstract calculation. It is in fact the only valid one. The metric is real terms. In other words, the value of the Pound has fallen dramatically as well.
Apart from the implications for UK homeowners, consider the way house prices have covertly fallen so much without much public outrage.
Measured in real terms, who knows how other asset classes have really been performing?
The US debt level has passed 13 Trillion. Newsworthy, but not a genuinely meaningful milestone. It will probably get worse.
Until next week,
Markets and Money Week in Review