This Weekend Markets and Money begins with nincompoopery on a spectacular scale. Not content with its exposure to the Australian housing bubble from tax revenue, our government has decided to increase its investment in mortgage-backed securities another $6.6 billion in one year.
We can’t cover the story further because it’s too infuriating.
Your editor is German. At least partially. That means we can get away with calling Germans funny names like Sour Krauts.
But it also means we get grumpy when foreigners give Germans an undeserved hard time. Yes, undeserved. Like on Tuesday. Media from around the world blamed the stock market selloff on the Germans.
The Wall Street Journal was most blunt: ‘Merkel warning shakes markets.’
But if you take a moment to look at what the German Chancellor’s spokesman actually said, the Germans seem sincere, not sour.
‘Spokesman Steffen Seibert said a “package” of measures would be agreed upon at the European Union summit in Brussels this coming Sunday, but “the chancellor reminds (everyone) that the dreams that are emerging again, that on Monday everything will be resolved and everything will be over, will again not be fulfilled.’
Yes, someone stating the obvious truth in a measured, reasonable way is a big problem for stock markets these days. The Dow fell 200 points.
Of course it has been going up and down like a yoyo. And the Aussie market is like a yoyo on the end of a yoyo. Luckily for your editor, we don’t have a newsletter portfolio to look after. The other editors around the office (and their subscribers at home) can’t be enjoying the volatility much.
Except Slipstream Trader Murray Dawes and his subscribers. Our colleague over at the newsletter Money Morning pointed out that it is always easy to write about Murray’s work ‘because he keeps getting it right’ on the stock market.
Murray’s subscribers have been benefitting from just about every sizeable move in the markets since April when Murray picked the top. No wonder he has built up quite a following on YouTube with his free weekly videos.
But back to the Sour Krauts. The Germans, who are being blamed for Europe’s slow reaction to the crisis, have plenty to whinge about themselves. Like discovering the ridiculous glass palace being built for the Eurocrats in Brussels who increasingly rule Europe. The newspaper Bild is also reporting on how the French are collecting reparations this time around:
‘Berlin is unhappy about a weapons deal in which France plans to supply warships to highly indebted Greece free of charge for the first five years, and at a big discount when payment comes due. Firms and politicians in Germany say taxpayers may end up paying for part of the deal, and they want Chancellor Angela Merkel to intervene.’
History buffs will have noted the mention of ‘reparations’ before the quote. Is it inappropriate to bring out World War 2 vocabulary? Maybe. But Markets and Money readers are not the only ones who are catching on. The Finance Minster of Poland and his banker friend discussed how the Eurozone debacle may play out in a really bad case scenario:
‘We were talking about the crisis in Eurozone. He told me “You know, after all these political shocks, economic shocks, it is very rare indeed that in the next 10 years we could avoid a war”. A war ladies and gentlemen.’
When the Poles start speaking of war, you should sit up and listen.
If you think this is all claptrap and poppycock, consider what those ‘in the know’ are up to. The Stansberry & Associates Digest gave some idea on Monday:
‘Kyle Bass, a hedge-fund manager from Dallas, was one of the few financial professionals to foresee the mortgage collapse. And like John Paulson, he made a fortune on credit default swaps (CDSs) when subprime paper imploded. Bass was prominently featured in The Big Short, written by our favourite financial journalist Michael Lewis. Lewis again features Bass in his latest book, Boomerang. And according to those pages, Bass is still bearish. In fact, he’s preparing for the worst…
‘Bass owns a huge piece of property in Texas with an “arsenal of automatic weapons and sniper rifles and small explosives to equip a battalion.”
‘The following excerpt (which we borrowed from Zero Hedge) outlines another, lesser-known hedge against a deteriorating currency. An asset manager presented the idea to Bass (told from Bass’ perspective)…
“The value of the metal in a nickel is worth six point eight cents,” he said. “Did you know that?”
“I just bought a million dollars’ worth of them,” he said, and then (perhaps sensing I couldn’t do the math) added, “20 million nickels.”
“You bought 20 million nickels?”
“How do you buy 20 million nickels?”
“Actually, it’s very difficult,” he said. He then explained that he had to call his bank and talk them into ordering him 20 million nickels. The bank had finally done it, but the Federal Reserve had its own questions. “The Fed apparently called my guy at the bank,” he says. “They asked him, ‘Why do you want all these nickels?’ So he called me and asked, ‘Why do you want all these nickels?’ And I said, ‘I just like nickels.'”‘
Need we add he owns plenty of gold too. ‘But not gold futures. You need physical gold.’
Your editor has never been this worried. Hopefully nothing as bad as Kyle Bass’s worst-case scenario will happen. But the fact that you have to hope tells you a lot.
How have things managed to get so bad? We have a new theory….
Occupying Gambler’s Gulch
So far, we have been following the plot of Atlas Shrugged quite well. The famous fiction novel is about what happens when the entrepreneurs of society go on strike. One by one, the famous industrialists drop their tools and disappear. And society begins to fall apart.
The Occupy Wall Street movement has spread to main street in the last few days. Much of their rhetoric is straight out of Atlas Shrugged. Any day now, the taxpayers, inventors, entrepreneurs and industrialists will throw in the towel and disappear.
Unless they already have.
In the book, the world’s business geniuses go to a place called Galt’s Gulch, named after John Galt, the first to have spat the dummy and left productive society. But our question is, have the so-called 1% shrugged already? Were they hiding in plain sight?
Here’s the theory: The job creators, inventors and wealthy have increasingly left the real economy to the feminists, unionists, interventionists, Qantas engineers and Chinese. They have left the world of creating and entered the world of gambling. The one place where greed is still good, regulations don’t matter and politicians are beholden. It’s called Wall Street, but you can call it Gambler’s Gulch if you like.
The collectivists and bureaucrats were left to take over the industrial sector and governments. Law and order became subjective terms, making employment and production far too dangerous, expensive and strenuous. Unless you were offering bonuses so big everyone agreed not to complain.
Until now, those at Gambler’s Gulch have enjoyed themselves, forgetting about the outside world. One of Wall Street’s leaders had a private lift installed in his building so that his exposure to the common man would amount to just seconds each day.
Just as in Atlas Shrugged, the outside world began crumbling without the support and regeneration of the entrepreneurs, inventors and innovators having a good time on Wall Street.
But things have gotten too bad out there. And the government has turned out to be worse than the industrialists used to be.
Let us know what you think of this Gambler’s Gulch theory. Does it deserve a Nobel Prize in economics? The awards ceremony would certainly be more lively than the recent one.
Occupy everything (except Sweden)
Apart from the odd sign mentioning evil central banks and why we should return to the gold standard, we’re a little confused about these global ‘Occupy everything’ protests. They seem concerned about inequality. But what inequality?
Inequality of income? Of wealth? Of living standards?
Each of these lead to the opposite conclusion for the state of inequality and its change over time. For example, Sweden and Denmark are bastions of income equality. But for wealth inequality they are shocking. Denmark is third most unequal, beaten only by Zimbabwe and Namibia. Sweden comes inside the top 30% for wealth inequality.
Australia is fairly equal on both counts. We’re also the richest nation according to Credit Suisse. So much for tall poppy syndrome. And we’re well ahead on living standards. That’s why our office is full of (legal) Australian residents by choice.
So surely it’s living standards that matter in the end. Maybe not to those protesting, who are making do with tents and tarpaulins in CBDs around the world. But to the rest of us, how do the statistics of income and wealth matter relative to living standards?
Going by the amount of debt Aussies and their foreign cousins have racked up, living standards were considered far more important than income and wealth in the boom years. People were willing to have a punt with their wealth. They even accepted loss-making investments, just to boast their social standing as a property investor.
But now the age of deleveraging has begun. No longer can the poor finance a rich lifestyle with debt. Even those who borrowed via the government’s balance sheet to fund their consumption are losing out. The sovereign debt crisis in Europe has seen an end to cheap education in the UK, an end to ridiculous pensions in Greece and an end to early retirement for the French. At least, that’s where they are headed.
This is the end of the age of debt to fund living standards. It’s the beginning of the age of income to create wealth. Or pay off old debt. And that’s why the people are out on the street. They didn’t expect the change. They thought deficits and borrowing were normal. They thought it was perpetual. They believe in a free lunch – often literally.
The system has failed them. They have realised that it kept the rich rich and the poor poor.
On that note, increasing the income tax does not reduce inequality. It reduces wealth mobility. In other words, the rich will stay rich and the poor will find it difficult to become rich because their income is taxed more if they earn more. So that won’t work to reduce true inequality.
Neither will protesting generally. The remarkable contribution to inequality by protesters remaining out of work and taking time to protest instead should be recognised.
But what should the occupiers be in favour of if they seek to implement equality? Higher taxes? Less greed?
We went to Wikipedia to find out.
There you can find a table on the ‘Wealth Gini’. It’s a measure of inequality. Sadly the data is from the year 2000, but we couldn’t find any better.
Occupy Australia protesters will be pleased to know Australia scrapes into the top 10 when it comes to equality. It’s joined by a very odd combination of countries. Japan, China, Spain, Korea, Macao, Ireland, Italy, Yemen and Finland.
What do they have in common? We can’t spot any similarities.
The least equal are just as diverse. Namibia, Zimbabwe, Denmark, Switzerland, USA, Brazil, Gabon, Central African Republic , Swaziland and Guatemala.
If you exclude Denmark and Yemen from their top and bottom 10 status, perhaps corruption emerges as a key cause of wealth inequality.
Using our trusty and rusty excel skills, we plotted all the countries in the Wikipedia table by GDP per person on the Y axis and Wealth Gini on the X. Adding a trend line to the data gives the following insight: Higher GDP per capita countries have lower wealth inequality.
Maybe that’s what Communist China leader Deng Xiaoping meant when he said ‘To be rich is glorious.’