Phew! That felt like a near miss, didn’t it? If Dow Theorist Richard Russell is right, you should run for the hills because the crash is coming. But we’re not going to dwell on that possibility today. It is what it is, and it’s probably a real possibility.
Instead, in today’s Markets and Money, we look at whether last night’s big recovery in U.S. shares signals a temporary bottom in the end of the world sentiment gripping markets. Also, an army of economists has boldly marched into the battle of the resource super profits tax. We examine their position and find it guffaw-able.
Finally, in light of recent criticism about our cavalier and inherently alien attitude about ownership and wealth and freedom, we examine on our own self and find it wanting too. And you are duly warned: today’s Markets and Money takes up the cause of liberty and the right to be ungoverned by even well meaning men. If that bothers you, we suggest you stop reading immediately.
Seriously. This is your last chance…
Still with us? Then to the barricades!
Both Australian and Japanese futures were up overnight. And both markets will probably be up at the close after U.S. stocks reversed an opening decline of nearly three percent on the S&P 500 to close with modest losses, or in the S&P’s case, even with a small gain. The Dow closed down by a few points but managed to hold the line above 10,000. It will live to trade another day.
There may be an elaborate explanation for the intra-day reversal. But the simple one is that the sellers have exhausted themselves and left the field of battle for the day. The shorts would be covering. And with no body in the mood to sell, the buyers would drive up prices.
Then again, we are not a trader and don’t actively trade. It’s just that in the last few days Murray Dawes has been more active than we recall seeing him ever. He’s come into the office guns blazing, barking out orders about trade recommendations to subscribers of the Swarm Trader and Slipstream Trader. This is definitely a trader’s market. And Murray is definitely loving it.
Investors, on the other hand, would be feeling nauseous. It’s a bit, so we hear, like what you feel like during or after a big night out. If you’ve had too much, the nausea washes over you in waves and crests with an technicolour yawn. Then you feel better. Until the next wave hits. Eventually, your system is purged of the toxins and poisons you paid to consume.
This seems roughly to be how the world’s financial markets are dealing with an entire financial system built on too much debt. Huge chunks of value are upchucked during these more frequent and more violent waves of nausea. Then some psychological and physiological calm returns and the system – still inherently unstable and unfit – stabilises at a new equilibrium for a while.
A trader might just say we’re going to make lower highs and lower lows from here on out, until the various variables of uncertainty are clarified. Those variables include, but are not limited to: the ultimate form and fate of the resource super profits tax here in Australia, the solvency of the European banking system and European governments, the long-term viability of Anglophone welfare states in the U.S. and the U.K., China’s real estate bubble, paper money.
No wonder everyone feels ill.
But really, all of what’s listed above fits in with the general idea of the Money Migration. Western Welfare states are going broke. Many are already broke. To paper over this, they are distorting markets with massive money printing, centralising risk on larger institutions, expanding central bank balance sheets, and intervention in the market (via, among other things, low interest rates).
This prevents the needed write-down in bad credits and keeps capital tied up in the places it was misallocated during the credit boom, which was global in nature. Hence the nature of the crisis. And meanwhile, in the Western world, as the private sector deleverages and seeks to live within its own means, the public sector gorges on debt and passes the problem on to the next election cycle.
It’s pretty hard to have a wealth-preservation strategy in a world where most governments are determined to keep spending money they don’t have and printing money that isn’t real to prop up asset prices that must fall and pay for programs that no one can really afford for the benefit of people who have no idea what’s about to happen.
But there is some good news for Australians.
The emerging markets are still emerging. That is, the developing world still has a structural bias to export led growth and over production. That’s why there’s been no decoupling from Asia to the Western world. And emerging markets will get hit just as hard as developed markets.
But structurally speaking, emerging market nations are emerging with better public sector finances than developed nations, with lower levels of government debt and fewer entitlement promises and unfunded liabilities. And economically speaking, as these emerging markets like China and India shift toward more consumption from high savings rates, there will be more growth and it won’t be correlated or dependent on mercantilist trade relationships with the U.S. and Europe.
Not that it will be a barrel of clowns. There are huge growth issues in the developing world too. And you know our view on China. But geographically speaking, Australia could benefit from the future state of play.
How? Obviously as an exporter of raw commodities. But quite possibly as an exporter of financial services, too.
No. We’re not reversing ourselves on the bank or the state of domestic household finances. Australia household debt levels are enormous by Western standards. And as we’ve said, the banking sector is massively exposed to residential real estate prices. And let’s not forget the nation remains a capital importer, and a net debtor, which is a precarious position to be in during a credit crisis.
But for investors, does the future look bright here?
Well, it certainly looks less bad than in other places. And that’s even considering the on-going prize fight between the mining industry and the government. Overnight a group of very brave economists came out swinging on the side of the government in supporting a “superior” resource tax that taxes profits and not production.
You can read the whole letter, if you dare, here. We believe that is the real deal, although could not verify it before going to print. For the purposes of today’s letter, we’ll assume it is authentic. So what to make of it?
Well, in the battle of public relations, this a pure argument from authority. You could just as well call it something like: “A letter from really smart people that is so complicated you probably don’t even understand it, which should cause you to shut up and go along with what the government says. Stupid face.”
Not that we’re anti-intellectual. But it’s pretty cheeky for a group of economists to expect credibility on an issue simply because they have a degree, especially after the collective performance of the profession in the last ten years. It’s even cheekier for the media to give the argument authority based on the fact that the people who wrote it are “economists.”
But as an argument from authority goes, it’s an impressive one. The economics profession has not enjoyed a lot of credibility in recent years, having generally missed the warning signs of a global financial crisis and then endorsing interventionist stimulus policies that have left national governments with greater debts and long-term liabilities. But authority is in the eye of the beholder, when it comes to confidence games.
You can’t keep a good interventionist economist down. Like Paul Krugman, they just keep popping up. So as much as we’d like to dismiss the claims of a group of economists on the basis that they are, after all, economists, we won’t.
It’s true, it’s hard to see how the profession has any credibility at all after blowing it so badly in the last few years. Bute know we that line of attack is no fairer than making an argument from authority. It would be making an ad hominem attack. So we’ll take the argument on its merits and attack it for what it is: goofy and misguided and it’s rotten heart: utterly unfree and coercive.
By the way, though, we do realise that there exists in certain cultures a kind of deference to arguments made from authority. Our own household was like this. And we had many a sore backside to show for our disagreement with this political arrangement.
Maybe the same is true here in Australia. Maybe people inherently trust authority because it’s authority. We get it a fair bit here at the Markets and Money. Whenever we wander outside financial or economic matters in our free e-letter which, being free, no one is obligated to pay for (or read), we are often advised to stick to what we know and leave the other stuff to the experts, whomever they are.
Fortunately, or unfortunately for you, we normally ignore those reader-imposed commandments. In the financial world, the best strategy is to distrust everyone and ask the obvious questions until your common sense is satisfied. Leaving all the decisions up to the PhDs has not worked out very well in the last few years.
Of course there is a place in life for expert opinion. If a doctor tells us our heart is going to quit because we’re drinking too much beer and not exercising enough, we listen to him. If a physicist tells us that jumping from high places without a parachute could be bad for our health, we listen to him. If Tiger Woods tells us how to correctly hit a one iron or send a saucy text message, we listen to him.
But if a group of economists tells us that a government tax delivers a public benefit, we are inclined to guffaw in their collective face.
Most of the economics profession that gets quoted in so-called respectable publications has studied the wrong textbooks over the last 50 years. They are doctors prescribing remedies based on an incorrect understanding of illness. The letter quoted today in the press is a great example. We’ll get to it in a moment.
Most mainstream textbook economists are reading from the playbook of John Maynard Keynes. They believe, and will say on command – not because there’s any evidence that it works but because it’s how you get tenured and earn grant money or get a government job – that when private demand falls because households and business de-leverage, it is the proper role of government to boost consumption and aggregate demand by increasing public spending. Amen.
As a scientific proposition, empirically speaking, there is zero evidence that this policy works. The one example trotted out is FDR’s spending boom in the Great Depression. But the evidence now suggests that it was war-time production that dragged the American economy out of depression, not morally enlightened fiscally policy.
There no evidence to suggest the big deficit spending really is better than doing nothing. But time after time, the interventionist mantra gets trotted out like the Ten Commandments in the Ark of the Covenant to incinerate anyone who doubts its gospel truth. Yet it’s just a bunch of superstition with very little basis in fact.
Economics is simply not a science in the same way that chemistry and physics are sciences. It’s probably not a science at all, to be honest. Or, if it is, it’s a pseudo science, having more in common with psychology than geology.
Complex adaptive systems like the modern marketplace do not behave mechanistically. They cannot be controlled precisely with the rods and levers of monetary and fiscal policy. To believe so is an enormous – and as we’re finding out – costly error. It’s also massively arrogant and conceited.
There’s a reason the great Austrian economist Ludwig von Mises called his great book “Human Action.” Economics is the study of human action. And human action is sometimes rational, sometimes irrational, sometimes predictable…but ultimately…very difficult to model and predict with charts.
As Nassim Taleb points out, all the most important stuff in your life probably happened or will happen in non-predictable ways. Most of the time, today is going to be like yesterday and tomorrow is going to be liked today. But the most life-changing things happen to you at times you’d have no way of predicting or preparing for. But not everyone is comfortable with this kind of un-planned spontaneity.
Please note the Austrian School of Economics was the only school of economic thought that accurately predicted the current crisis. Why? The Austrians correctly identified the influence of credit (free money to change your life) on human action. Altering the price of money alters incentives and changes individual calculations across the breadth and depth of an economy.
The Austrians pointed out that government-controlled interest rates are the real cause of the business cycle inasmuch as they lead to credit booms and inevitable busts. When the price of money is rigged, the market isn’t free. Only if you understand the “root cause” of the business cycle can you learn how to prevent bubbles from blowing up and popping later. The Austrian answer is, by the way, sound money.
But back to our merry band of resource super profits tax supporters. They tell us that:
Mining is different to other industries in that it uses and depletes natural resources. Some return on those resources should flow to the Australian public. The existing royalty system reflects the fact that it is desirable to levy a charge for access to publicly owned mineral resources, in addition to normal corporate income tax.
There is no reason to expect a net contraction in mining over the longer term as a result of replacing royalties with the proposed resource rent tax. This is because a tax on economic rent of non-renewable resources is a more efficient way of raising royalties than taxing mining production….
The RSPT will reduce the profitability of mining companies and the value of the exploration and mining rights granted to them by Australian governments on behalf of the public. The current high profitability of these companies means that this is an appropriate time for them to adjust to a more efficient and equitable system of sharing the value of those rights.
We haven’t reproduced the entire statement. Just the parts that seemed most relevant. And we’ll bet you didn’t see that last part in the papers, did you? Emphasis added there is ours.
Mining is no different than other industries in its use of natural resources. It’s just that in the chain of economic production, extraction is the first step. That makes mining incredibly capital intensive, which means the industry must be able to make long-term plans with confidence that the rule are not going to change mid-stream.
All industries use resources. All industries benefit from the extraction of those resources before they become finished goods or services. Consumers benefit the most. Why should mining be treated differently simply because it’s first in the causal chain of a raw material being turned into a value-added good?
The fact that the existing royalty system is “desirable” because it levies a charge on publicly owned mineral resources is certainly debatable. It’s obviously “desirable” to government, which must pay for what it does by taking from someone who has money. As a pragmatist, you could make the argument government has to pay for itself somehow. So we should just shut up about it and get on with the business of “paying” for the modern welfare state this way.
That doesn’t seem desirable if you want to live a free and fair society. But on to the second point…
Should we adopt a tax because it’s the most efficient way to collect the tax? Granted, that certainly lowers the cost of collecting the tax. But the most efficient way to administer medical care to terminally ill people would probably be to shoot them in the head. One bullet. One case. Same result. Faster. Very efficient.
We don’t do that, though, because other considerations enter into the decision of how a life should end. Similarly, good public policy should not be made on the basis of what’s most efficient for the tax collectors without any discussion of the wisdom of the tax itself. So what if it’s good for the government? Is it legal, fair, and good for Australians?
The last paragraph we quoted speaks for itself. These economists seem to believe that the existence of high profits in the mining industry is a moral signal for the government to take from those that have and give to those to whom it sees fit. It presumes that the value of exploration and mineral rights is equally shared by the general public and the shareholders and firms who spent their time, talent, and capital to turn an ore body into surplus value.
Free loaders. Free riders. Rent seekers with degrees. Call it what you will. But let’s be clear that the motivation of the policy is finally exposed for what it is: the moral right to take what you didn’t create through force of law.
Of course to be less ideological, the economists are not claiming to take something that’s not theirs. They are effectively saying that the fruits of prosperity from the mining industry belong to all because the resources belong to all of us. It is again the question of ownership. And since we’ve banged on about long enough today, we won’t tackle that issue just now.
But why ARE we banging on so much about it? Because we are a nosey, know-it-all, unpragmatic, ideologically driven American smart-arse? Maybe. We wouldn’t rule that out. But we do like this country a fair bit and think it deserves a proper argument over a serious issue.
And frankly, we are just tired of gradual encroachments and ignorant assaults on the rule of law and liberty. We’ve seen a lot of that everywhere, including our homeland. And we’ve come to realise that every little degradation to rule of law is an assault to the public order. And that public order is a nearly miraculous achievement of hundreds of years of legal and economic tradition that should not be trifled with in order to score electoral points. Such trifling has real costs, both to wealth and freedom.
But we’ll leave the last word to one of our economic heroes, Friedrich Hayek. In the post-script to his classic “The Constitution of Liberty,” Hayek penned a chapter called, “Why I am not a conservative.” It might even be the sort of chapter Malcolm Fraser would have read, before deciding to leave the liberal party in December of last year.
Hayek wrote that “It is not who governs but what government is entitled to do that seems to me the essential problem.” And like your editor, he was no big fan of conservatives with respect to this problem. Why? He writes:
“Conservatives are inclined to use the powers of government to prevent change or to limit its rate to whatever appeals to the more timid mind. In looking forward, they lack the faith in the spontaneous forces of adjustment which makes the liberal accept changes without apprehension…
“In general, it can probably be said that the conservative does not object to coercion or arbitrary power so long as it is used for what he regards as the right purposes. He believes that if government is in the hands of decent men, it ought not be too much restricted by rigid rules…
“Like the socialist, he [the conservative] is less concerned with the problem of how the powers of the government should be limited than with that of who wields them; and, like the socialist, he regards himself as entitled to force the value he holds on other people.”
If the apparatus of the law must be paid for in some manner, then perhaps some form of taxation is a necessary evil to civil society, although it is not an issue we have explored much. But we’ve reacted so much to the resource profits tax not because we have a soft spot in our heart for multinational miners. It’s not that.
It’s that the right of the government to force its values on you should always be resisted and questioned, no matter who’s in government. Resisting the government’s tendency to constantly expand its authority in private and public life promotes a real democracy of, for, and by the people.
The less you object, the more you’re going to get what we have: an oligarchy of financial, political, and corporate elites who govern to enrich themselves and produce the satisfying sensation of telling other people how they must live.
But then, we are crazy free-thinking libertarian from the mountains of the American west. And no one is forcing you to read this. And it’s free. So take it for what it’s worth.
for Markets and Money