What is the best thing about stocks right now? That they’re stocks!
That is, the best thing equities have going for them is that they’re not bonds, commodities, money market funds, or any kind of fixed income investment. Why?
Well, investment guru and Dow Theory Editor Richard Russell reckons that stocks are getting a bid because the yield on everything else – in real terms – is negative. The price you pay for safety is to lose purchasing power day by day. That’s not saying much for safety.
But it’s hard to understand exactly what the equity and bond markets are telling us right now. So let’s take it apart one piece at a time. We think the bond market is badly miscalculating on the likelihood of inflation. But let’s deal with something more tangible first, like steel.
You can’t have steel without iron ore. And you can’t have a resource boom without an iron ore boom. Just ask the government. It’s counting on soaring prices for iron ore and coal (along with soaring volumes) to deliver an extra $6 billion windfall to Federal coffers, according to today’s Australian Financial Review. The bullish forecasts from Treasurer Wayne Swan show the government cutting its deficit next year and returning the nation’s finances to surplus by 2012-2013 when the new bill of attainder becomes the law of the land.
By the way, we know the new Mineral Resources Rent Tax (MRRT) is not technically a bill of attainder in that it does not declare the miners guilty of super profits and tax/punish them accordingly. But the spirit of the law is, at best, dubious.
It’s never a good – nor are we sure it’s even legal in Australia – to pass laws that target specific groups. And in any case, the best and fairest laws are those that establish general rules that apply to everyone equally. Equal just under law, anyone?
But back to the world hematite and magnetite. The government’s forecasts for a big tax haul are based on an improving terms of trade (where Australia gets more for what it exports and pays less for what in imports) and high iron ore and coal prices. But ye gads, what’s this? China could iron ore imports for the first time since 1998 to help curb asset price inflation?
Does it seem a little dangerous to you to base the nation’s spending priorities on projected double digit growth rates in commodities whose demand has grown arm and arm with the global credit boom? Commodities are volatile and cyclical enough as it is. But basing Australia’s Federal finances on the sustainability of China’s boom in fixed asset investment seems like…a really big punt.
By the way, if you’re scoring at home, iron prices are off 40% in the last three months, according to Stephen Wyatt on page 25 of today’s AFR. Wyatt says, “Iron ore is being hit particularly hard as demand for steel around the world and in China hits the wall…Demand in China has been hurt by tightening government policy, moves to curb exports, traders’ large steel inventories, signs of weakness in construction locally and global car sales, and waning stimulus spending and lending.”
That’s a pretty comprehensive list.
About the only thing supporting steel prices…and bond prices…and stock prices…and house prices…is the prospect of more quantitative easing. And that brings us to what the markets may or may not be telling us. It sounds to us like, “stocks are the least bad asset for what’s coming.” But what’s coming?
More quantitative easing, says U.S. interest rate analyst Jim Grant, editor of Grant’s Interest Rate Observer. Grant told Bloomberg television that when the Fed meets tomorrow, “I think the first order of business will be to try once more to print enough dollars to make something happen in the U.S. economy.”
That could take a lot of money. More than the $1.75 trillion the Fed created to support mortgage-backed and Treasury bonds. But in theory, the only real constraint to the Fed’s ability to expand its balance sheet and buy assets is political. If the United States Congress takes away the Fed’s right to manage the nation’s money, or expressions concern that in supporting asset prices the Fed is also destroying the currency, well that might slow the Fed down.
But in the meantime, the world is running out of puff. All that stimulus money has failed to generate or sustain a real lasting recovery in the real economy. It was just funny money doing busy work to keep asset prices up. What’s so surprising is that so many people still believe – as we think our new friend Rory Roberston believes based on his comments a few weeks ago – that tinkering with interest rates actually supports assets that are clearly not productive.
Come to think of it, the belief that the manipulation of interest rates is what produces long-term economic prosperity is, in fact, the extreme position. But it’s the one held by all academics and suits on Wall Street and Washington. These are the same morons and imbeciles we referred to yesterday.
By the way, we copped it a bit for taking the low road and calling the people who don’t understand that gold is money imbeciles. But they are. So we’re not going to apologise for it. Sometimes you have to call things by their right names. And the people denigrating the value of gold and silver now and telling you not to worry because the Central Bankers are in charge will have a lot to answer for when we learn that money printing can’t support asset prices forever.
That day of reckoning will come. But for now, get ready for some more inflationism (quantitative easing). Tomorrow, how do you get ahead of the curve and prepare for the next big wave? That and other mixed metaphors coming soon!
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