Marking the Beginning of the End

“We have begun the essential work of keeping the American dream alive,” America’s new president told the world, while signing a 1,400 page spending bill no one has read. “I don’t want to pretend that this marks the end of our economic problems. … Today does mark the beginning of the end.”

Truer words have never been spoken, certainly not by this President. Wall Street listened up…and then despaired. The Dow closed down 300 points to 7,552. Its 52-week low is 7,392. You have to figure with GM asking for another US$16 billion from the American government, this could be the quarter of lower lows and lower highs.

Speaking of highs, are the governors of America’s and Australia’s central bank smoking from the same bong as Michael Phelps? It’s a question that has to be asked after a series of perplexing statements over the last 24 hours.

First is St. Louis Fed President James Bullard. In a speech he gave in New York he said, “I think we face some risk – at this point only a risk – of sustained deflation… In some ways, our current environment parallels the Japanese experience after 1990. The Japanese banking system encountered difficulties with ‘troubled assets’ and the intermediation system broke down. That is an experience that neither we, nor the rest of the world’s economies, want to repeat.”


Let’s be clear about what Mr. Bullard is calling deflation-falling asset prices, mostly stocks and houses. He’s not suggesting that a contraction in the monetary base has led to a fall in the general price level. That’s not true because the monetary base hasn’t been contracting at all. It’s been expanding.

So what is he playing at? Well, as near as we can tell, he is trying to prepare for the great inflationary swindle that the Fed plans to unleash later this year, if at all possible. The Fed wants you to think that the liquidation of bad investments built up in the credit boom is something else entirely-deflation! And that deflation-being by definition both Japanese, depressionary, and bad-is something that should be avoided at all costs.

And we do mean ALL costs. Because the cost of avoiding what the Fed is describing as deflation is, you guessed it, Inflation. But let’s let Bullard do the selling/shilling, “To avoid the risk of deflation, it is important that the Fed provide a credible nominal anchor for the economy. One way to do so is to set quantitative targets for monetary policy, beginning with the growth rate of the monetary base.”

“This has several advantages. First and foremost, the monetary base is relatively easy to understand, fostering better communication about the thrust of monetary policy. Second, we can be fairly certain that rapid expansion of the monetary base will be sufficient to head off any incipient deflationary threat. Rapid base growth has been associated with inflation in a wide variety of times and places in economic history.”

Did you follow that? The Fed just told you and anyone who would listen what it’s going to do. And do you know who was listening? Gold. That yellow metal…it has ears like a bat. Just check out the chart below.

Aussie Gold Price up $82 in 24 hours


Yes. The Aussie gold price went up over $82 in 24 hours. It nearly doubled the move (in percentage terms) of gold in U.S. dollars-although that too was up over three percent. If you were ranking currencies right now, the metal ones (gold and silver), would be first and second, followed by the U.S. dollar, and then a whole bunch of other paper currencies.

By the way, U.S dollar strength in the face of falling U.S. markets, a massive new spending program, and huge borrowing needs for 2009 is always a bit of a head scratcher. But we reckon its relative strength only. Not absolute. And for what it’s worth, the six-month chart of the U.S. dollar index shows that the dollar is either near a short-term high against other currencies-or may actually on the verge of a bust-out move higher.

U.S. Dollar looking relatively less weak than other paper money


Why would the dollar make such a move higher? Pick a reason, any reason! But the best of them would be that serious doubts are surfacing about Europe’s banking sector. With Japan’s economy doing a convincing version of hari-kari, the Euro replaces the Yen as the most desired reserve currency that is not the dollar.

But with Europe’s banking sector facing serious losses from investments in Eastern Europe, the Euro finds itself in a tough spot. A very tough spot. The dollar may look on and laugh. But it’s the reaction of gold we’re interested in. Will it trudge doggedly higher? Or will it take flight?

And what does all this mean for Australia? Well, Australia’s banks are probably-and we say probably because we can’t say certainly, definitely, absolutely, or even maybe-better off than banks in Europe and America, at least with respect to loan losses.

European banks went hog-wild lending to emerging Eastern Europe. Now, with currencies in Eastern Europe cratering, the chances of those debts being paid off-especially during world financial meltdown-are not good. American banks-well you know the subprime/CDO story there.

So yes, the good news for Aussie banks is that the aside from the odd investment here and there (for which the banks are provisioning themselves against losses) most of the local loan book is in commercial and residential real estate. If there’s no property crash in Australia, the banks aren’t going to face huge non-performance or default problems.

However it is not entirely good news. If there’s a major break down in the European banking sector (even more major that what we already have) you have to wonder just how hard it is going to be for any Australian company in any industry to get a loan. Full stop.

Just consider it a thought experiment. Assume that your favourite share can’t borrow a single dollar for the rest of the year in the local or international credit markets. How will it fare?

Despite that harrowing thought, the local central bank seems to think Australia will manage to grow this year while everyone else shrinks. RBA Governor Malcolm Edey gave a speech yesterday and said, “There are reasons to expect that the Australian economy can continue to perform better than its international counterparts in the difficult period that lies ahead.”

Those reasons, apparently, are that the financial system is in better shape, the economy had lots of momentum prior to the failure of Lehman Brothers in September, and “substantial monetary and fiscal measures have been taken to support growth.”

Right. That should do it. Any questions?


It’s one thing to have bad judgement when you’re under the influence of a narcotic. It’s another to deceive yourself, or others, when you’re perfectly sober and lucid.

We don’t say this to be petty, mean-spirited, or simply carp about policy makers who are probably trying to do what they think is best. We’re just showing you that the blokes running the show around the world are completely lost. They are trying to fix a system that is badly broken. And you had better be prepared when whatever plan they’ve concocted fails.

Speaking of plans, we got lots of reaction to our ten-point global recovery plan yesterday. Some of it is posted for your review below. Oh, and by the way, none of what we’ve said here is meant to disparage Michael Phelps. The man is a world class athlete. He had enough discipline and dedication to train his body and his mind so he could win eight gold medals. That alone shows you how stupid many drug laws are. Now, back to the plans…

“Your plan is totally absurd, insane, crazy and ludicrous, but heaps better.”

“Step One: Immediately execute all politicians at the national and state levels across the world.
This alone would restore confidence in government and the economy would be free to correct itself.
This effect should last at least 20 years when we will need to do it all over again.”

Hi Dan,

You want a proper practical plan – give the right to create credit back to its rightful owners – the people – and eliminate the fractional reserve system that has allowed banks to create credit out of nothing and charge interest on it.

The original Commonwealth Bank of Australia was set up in 1911 to operate as the people’s bank and served as a brake on the usurious operations of the private banks which were force to face some genuine competition.

The Treasury Credit system could restore some common sense into the stupid financial system we now have.

Without making some radical changes and just stuffing around trying to tinker with the existing system will do nothing to eliminate the ongoing boom and bust cycles.

I know that is exactly what all the casino gamblers – sorry – market traders – want to retain because it feeds their hunger for profits without the need to produce anything.


Graham P.


I agree with the majority of your points in today’s DR Re: Your suggestions to save the world!!!

I like to add one (or two). In the DR dated 16th Feb you quoted Attali holding out one hope. He reckons a new global leader could emerge if one country or economy makes a great leap forward in new sources of energy.

Can someone please email Kevin Rudd and pass the above on!! That’s what he should be spending his $42m stimulus on. There is enough diversity in resources in Australia to become leaders in Wind/coal seam gas/clean coal/clean diesel (using underground Coal Gasification (UCG) and Gas to Liquids (GTL)).etc etc. And whilst we are at it why doesn’t he say to the big car companies, no cash unless it’s towards R&D (and then manufacturing) of small green cars. The government should then tax heavy SVU/4wd etc etc vehicles (recreational not commercial) so to force people into driving smaller more sustainable cars and become a world leader in battery operated cars/alternate fuel cars. Then we would have some tangible sustainable industries not just good June qtr retail results with all his handouts!!! At present it’s extremely short sighted and as usual is politically motivated (how’s the current Polls!) not what is better for the long term for Australia.

Whilst I’m ranting how about regulating petrol prices. By my very rough estimations, oil is off 75% (from $150 a barrel), the dollar is off 30%. I’m reckoning petrol should be around the $1 p/l mark maybe slightly higher. The present current average in Sydney is $1.22c. Someone is creaming it and it ain’t the average punter. By regulating the price if you saved the average punter 15c per lt x 40lts per tank at one tank per week ($6 p/w) for say 5 million cars (I’m guessing its more) you would pump $1.87 billion Aus annualised back into the economy in savings without tax breaks or hand outs (not accounting for lost taxes to the government by lower petrol prices…..conflict of interest???). I’ll get off my high horse now and bid you good day Sir!

I’m just a dumb paddy (Irishman!) but it’s not rocket science to figure this out!




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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15 Comments on "Marking the Beginning of the End"

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Dan, you still give our banks and financial sector too much credit (no pun intended). Our RE sector is doomed, and so are they.

You make a good point about companies needing credit though…and as such when investing I will not put any money into a company that is in debt or has a low cash holding.

Share distributions are going to be common…and very tough on companies this year.

Biker Pete

Wouldn’t write off our banks and real estate too quickly, Pete. The ASX has around 600 points to fall yet… and by that time you’ll be trampled by the rush to realty. We bailed at 6200, thanks to TDR… .

Unfortunately you probably need to bypass the democratic process , if any chance of implementing an effective long term solution , a cultural revolution , a russian ?/ french revolution . Then again , maybe the world / life is set to be a little crazy , as are people . Maybe times are meant to get tough , get easy and then get tough again . Maybe , like small children , you can only truly learn from their mistakes …. in which case we should have a redhot economic world running by about 2039 . Thanks for a… Read more »
Right on Dan, about the RBA & Fed. As Dr. Gary North says, the CB’s have only two tools, bullshit & inflation. I’m sure they are smoking something and watching star trek reruns. Prepare for Inflation factor nine, Mr Checkov. Bid me up Scotty. We need to go direct to a TAFL. Tar and feather lynchings. If this fails then the BFBAP, bullets for bankers and politicians.We the people could vote on who deserves a lynching or a bullet. Talk about incentivise performance for pay. We could raise money from the private sector, lotto style, to have lynchings or shooting… Read more »
Greg Atkinson
Pete,debt is not such a bad thing especially if you can get it now at these nice low interest rates. What has happened however if that many companies have supported their cash flow via borrowings with the view that eventually they will sell assets and all will be sweet. The property developers do this all the time and spend years with negative cash flows on a project in the hope they will get a big payout when the project is completed. It is no coincidence that during the good years many property developers end up on the BRW rich lists,… Read more »
Greg – I could not agree more with you about debt, cash flows, boom-time property wealth and current opportunities for anyone with a healthy balance sheet and access to finance. A case in point regarding Infrastructure firms is Flether Building here in New Zealand. Being quite a good perfomer on the NZX I had a look at them in ’07 while they hovered around NZ$12. Looking more closely it appeared that they have exhibted negative free-cash-flows for a number of years now and have been paying dividends out of ‘rolled over’ debt – pretty hard to maintain that currently. Add… Read more »
Biker Pete – rush to Real Estate? Excellent, perhaps you can get in nice and early at the top of the market then. I do not think there will be such a thing personally. Greg – personally I think the problem is “the ability to service the debt”. Any debt requires an arrangement between two parties, the debtor and the creditor. Sure this will fall apart if the debtor can no longer pay. It will ‘also’ fall apart if the creditor can no longer lend or does not wish to lend any longer. Hence my problem with the real definition… Read more »
A question from a (very) late-comer to Biker Pete. I’ve only recently stumbled upon TDR, and am suitably in shock and awe about what is to unfold. The logic is irrepressible and damned depressing. Thank the gods that I’m 100% cash (incl. super) right now. My question is: with Australian property prices at superlative highs, why do you think there will be a rush to real estate when the stock market truly bottoms somewhere around 2500? I can only see a long period of house price stagnation – at best – as the income/house price equation restores itself to long… Read more »
Biker Pete
With thirteen properties, we probably have enough, Pete. Apart from our home ten acres, the others are being nicely serviced by rising rents. It helps that interest rates have fallen by 45% recently, meaning we’re not only positively geared _before_ tax benefits, but we’re making well over double bank interest. After the next interest rate cut, we’ll lock in at a fixed rate. I figure you must think we’re noobs at property, but it has been productive for us for over thirty years now, meaning we can run offset accounts against those properties we don’t own outright. Perhaps the best… Read more »
Biker Pete
Damien, you raise some interesting points. First, I’ve been receiving TDR for nearly two years. It saved us megabux when we bailed from the ASX at 6200. We also shifted our Super ASX to cash. That move alone saved over $250K. Second: Super is now under-performing in _every_ sector, including cash. Unit prices are falling DAILY in EVERY sector. Please read that again. I’ve asked our Super fund to introduce a gold component. They’ve refused. Third: We hold cash, but only in offset accounts, where it earns 5.2% untaxed. Fourth: We are buying land and building houses, non-stop. Rents are… Read more »

Biker Pete – are you sure you are on the right website?

I can’t remember where I saw this quote, I think it was on here actually:
“Never expect the people who caused a problem to solve it.” – Albert Einstein

Let’s revisit your insight in a few years time.

Biker Pete

Well, I’ll be cashed out by 2012. Have to be, to beat CG. I don’t expect a ‘property tragic’ to comprehend, but as long as your rent’s on time, I’m not worried, Kath. :) Things must be seriously nuked on the east coast for you to be quoting Einstein! ;)

BP: Capital losses will look great on your tax return, think of how much you might get back! Ultimately though this means nothing to me and I don’t see the point in arguing about Real Estate, especially not on this website. I know far too many Real Estate “tragics” to consider having the exact same argument with yet another one. Seriously, if you read this website and still think the equation of: Past trend = Future trend then perhaps the only one truly able to give you understanding will be Mr Hindsight himself (or herself). Regardless, I don’t wish hardship… Read more »
Biker Pete
Very sweet of you, Pete. Dan and I had this same discussion about fifteen months ago. I explained at that time that there are some essential differences between realty in Australia, the UK and the US… . Your post came up on Google while I was researching RE. I don’t get the Australian version of TDR… the European/US version arrives here every morning. I am indebted to Bill for his insights, which have saved me a great deal of money. I’m also indebted to the property market, which will ensure my complete independence from the OAP forever… and the same… Read more »
Jon Bain

Jah Bless

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