Man vs. Universe

–Well this should be interesting. The Germans have brought the stock market rally to an abrupt halt with their Teutonic realism. “Dreams that everything will be resolved and dealt with by next Monday cannot be fulfilled,” says Angela Merkel’s spokesman Steffen Seibert. The S&P 500 fell by 1.94%. Crude oil was down 1.53% and copper down 2.02%.

–You wouldn’t want to play poker with the Germans, would you? Are they bluffing and trying to force European bondholders into taking larger haircuts on their Greek bonds? Or do the Germans really have their serious face on? Are they telling everyone else in Europe there will be no easy inflationary way out of this debt trap?

–The forbidding news out of Berlin has prevented the S&P 500 from breaking out to new highs. But you can see that there are a lot of traders just itching for an even more powerful fourth quarter rally in “risk” assets. This matters for Australia because “risk” assets include commodities, Aussie stocks, and the Aussie dollar.

–For example, Bloomberg reports hedge funds are piling in on the growth/commodities story.

“Speculators boosted their wagers on higher commodity prices for the first time in five weeks as increasing confidence that the global economy will avoid another recession spurred the biggest rally of the year.”

–Speculators and confidence: the stuff that new highs are made of?

–The story reveals that:

“Money managers boosted combined net-long positions across 18 U.S. futures and options by 0.2 percent to 656,691 contracts in the week ended Oct. 11, Commodity Futures Trading Commission data show.”

–What’s the trade here then? How about: short the dollar and long commodities? See the chart below.

The CRB and the USD: ships passing in the night

$CRB chart
Click here to enlarge

–The dollar index is the blue line. The CRB commodities index is the black line. The weaker the US dollar, the more dollars it takes to buy stuff. You can see that once the fourth quarter began, the CRB rallied and the dollar fell. The question is: why?

–Well…why not?! A market isn’t a market if people don’t have different ideas about what things are going to be worth in the future. But yes…this has the feel of a self-fulfilling (self-deluded) rally. Stocks and commodities are rallying because traders say they must and are putting their money where their mouth is.

–The Germans have more spine than the speculators. And at heart, the speculators are just looking to make a buck. Our guess is the speculators will throw in with the dollar against the Euro, and you’ll see the US dollar/Treasury bond rally while everything else falls. But we’ll see soon enough.

–In the meantime, let’s get back to the disordered universe we all live in. Yesterday we tried to make the point that trying to redesign an economic system based on ideas like fairness, social justice, and equality is bound to fail. Those may be admirable concepts. But you can’t remake the universe in your own image. It just won’t work. You’d better quit while you’re ahead…and go home and take a shower.

–The economy is a complex adaptive system, like an ecosystem, and perhaps like the cosmos itself. As Lee Smolin writes in The Life of the Cosmos

“A great deal of the order and regularity we find in the physical world might have arisen just as the beauty of the living world came to be: through a process of self- organisation, by means of which the world has evolved over time to be intricately structured.”

–It is hard for busy-body social scientists and engineers and economists to imagine that given a few simple rules, an economy might self-organise and a complex system emerge. It’s hard to believe because the result is that millions of people (nearly 7 billion now) act without knowledge of each other’s intentions and without instructions. But they still somehow manage to produce a diverse economic order that offers vocations, employment, incomes and a huge variety of goods and services…without anyone being in charge of it.

–The fact that the universe, like the economy, is a changing, dynamic, evolving thing is bound to deeply unsettle some people. Some people prefer eternal truths, unchangeable laws, and the certainty of a highly regulated order in life. These people are usually scared of the future, highly controlling, and naturally gravitate toward politics. Their natural instinct will be to fight back…against the universe.

–So get ready for the war to preserve the cosmos…or the war to preserve the old order. In one camp IS the old order, the oligarchs and plutocrats of Europe and America who want the next 100 years to be like the last 100 years. And on the other side is…everyone else.

–The situation is evolving and unstable. Only psychopaths and criminals like a revolution. They will be agitating for one. But our guess is that the Occupy Wall Street movement will be pushed, from the margin, into an act of violence that terrifies what’s left of the middle class. They will crave for order and demand that someone bring it to them.

–By the way, has anyone seen David Petraeus lately?

–Next, let’s clear up this mess about pensioners. We fear a miscommunication about the word “pensioner”. We got some angry mail last week accusing us of bashing pensioners. But the confusion is a result of a language difference.

–In Australia, a pensioner is an older person who receives a small government stipend. We weren’t referring to those pensioners. We were referring to public sector employees who’ve used collective bargaining to negotiate taxpayer-funded, defined benefit pensions. These pensioners are now the key players in the decline of the Welfare State. To the aged pensioners who patiently read the DR, no offence intended. You weren’t our target.

–Reader mail?

Dear Dan

I don’t know if you’ve been selective with the published comments on Wednesday, but I can clearly see you have a deeper understanding of pretty well everything than that of some of the wobbly minded readers (and “ex” subscribers . . . how does an ex-subscriber continue reading, and then write in????) And how could your comments about “industrial action” be mis-construed? You must find the tall-poppy syndrome amusing, being “hard on the battlers” is the last thing you could be guilty of, but, there you have the generally Australian attitude that just doesn’t get the point.

Keep doing exactly as you are, you’re insights are accurate, and a pleasure to read.


–Thanks Tony. We’ll keep battling!

Hi Dan

The problem with using inflation to lower real wages is that it makes you uncompetitive internationally. Bringing back the gold standard would probably fix that but how to realign the mismatch? I guess lopping zeros of the ‘stronger’ currencies would be a start

Also, Defined benefits pensions and super should be banned, they are practically guaranteed to be a giant Ponzi scheme. I wish I’d known this back in 1978 when I started work because I’d have taken a plodding public service job then and be living off the serfs now. Some of the funniest people I know did that but they still complain about greedy business owners who don’t help out the ‘Battlers” until you suggest they may be taking more than their share that is



–One for Bill…

Dear Bill,

Your comments in 12/10 DR regarding cutting wages in half…I totally agree.

The dole, the Wokcover, and the Youth Allowance are silently but surely robbing people of their self esteem by blocking the normal instinct of enterprise. Not to mention what it is doing to society in general.

The labour market needs to able to float where how much people get paid or even if they get paid is left to market forces.

You’re a bloody legend for your candour.

Keep up the good work!

Best wishes

Paul W. (China)

–And finally, how to thrive during a fire sale economy…

Dear Nick and Dan,

I clearly remember the day when Paul Keating announced on the evening news of “the Recession we had to have.”

It was true then and it is very true now.

I was employed as a petroleum chemist working on the oil rigs in the Timor Sea. One of my colleagues, a petroleum engineer told me he borrowed $150K to play the stock market in January 1990. In 1991 he was wiped out, he lost his house, job and wife, I was unemployed for 2 years but I totally agreed with Paul Keating with “the recession we had to have.” My parents always told my brothers and I to “save, save, save and if you have to borrow money, borrow as little as possible and pay it off as quickly as possible”.

My time unemployed was very productive. I bought industrial land very cheaply and built warehouses. In May 1992, I bought kilos of silver and gold because they were so cheap. I was going to weekly “fire sale” auctions of companies that went bust, buying chemical equipment for my new business I started in 1991/2. It was a great time for buying assets at scrap value. And now, we are at that time again…finally….the recession we should have had back in 2000/2001 is here to now or 2012. I am cashed up and ready to go (to buy assets, houses, plant and equipment and businesses).

I pity the suckers who bought with borrowed money their assets (house or business) at the peak of the market but that is how capitalism and the free market works. Any boom built on rising asset prices financed by increased borrowing has to end. When asset prices rise above their intrinsic value, it is very probable that a reassessment will be made and they will stop rising. The point at which this occurs, there is a “rush for the exits”, as everyone wants to sell before prices fall. And fall they will, no amount of stimulus spending will hold back the tide and after 20 years, it is going to be a KING tide.

Steve of Adelaide.

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.

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The ESFS, if an insufficiently capitalised off balance sheet vehicle, will be a raiders play; if fully capitalised it will require far deeper private haircuts. It looks like the former because the EU has announced no naked CDS positions to be introduced already in an attempt (sure to be forlorn) to keep those US/UK banksters at bay. The German instinct, whenever a large haircut meets a dodgy balance sheet of an “innen kreis” asset, is to take state equity. That has usually applied only in home circles despite Adenauer. The Cosmos thing is a terrific line of thought to be… Read more »
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