A Tale of Mining Woe

A glooming peace this morning with it brings;

The sun, for sorrow, will not show his head:

Go hence, to have more talk of these sad things;

Some shall be pardon’d, and some punished:

For never was a story of more woe

Than this of Juliet and her Romeo.

Romeo and Juliet, Act V, Scene III

At last. The liberation of the American Main Street has begun. If, by liberation, you mean further bonds of perpetual debt.

But first, the tale of woe between BHP and Rio Tinto. After 18 months, BHP got tired of waiting for its cold-footed would-be bride and left the altar for a drink. Rio is left in wings of the church, wondering if there are any single, cashed-up guests. It would be a shame for all those flowers to go to waste.

Rio seeks a new partner, and quickly, as Alan Kohler put it in today’s Business Spectator. “Single mining company, 103 years young, seeks genuine life partner for romantic strategic off-sites, walks on the beach and candle-lit board meetings (to reduce carbon footprint). Ideal partner is someone who will love me for who I am, although if you want to change me – well, that’s okay too. But you will have to accept my neurotic family of bankers, including the weekly Sunday roast.”

“I have an unfortunate condition known as DLC Bipolar Syndrome and as well as chronic indigestion from swallowing too much aluminium last year. However, a small amount of nursing aside, I will be a desperately loyal spouse. Happy to learn Mandarin.”

By the way, yesterday we sent out a note mistakenly saying it was the Eureka Report’s first birthday. The Eureka Report has been around, like the DR, for over three years now. It’s Business Spectator that’s celebrating its first birthday this month. Congratulations to the whole lot there. You can learn more about the Eureka Report here.

For Rio, tomorrow is another day, starting today. The company still gas all that rich red Pilbara soil, the same way Scarlett O’Hara had the rich red Georgia soil of Tara. But the stock? That was in the red too, falling nearly 40% in European trading. What’s ahead for the company? We asked Diggers and Drillers editor Al Robinson for his take.

“Rio could easily fall $20 today after BHP canned its takeover bid. But that’s not what investors should take from this. It’s a sign of the times. The mining industry has come to the point where everyone is putting the blinders on. Diggers are focusing on making their own businesses as good as they can. Even the biggest players of all – BHP and Rio.”

“To be honest,” the Bard of Bendigo continued, “a few miners won’t have as much business as they did in the last four years. But some still have great businesses. And right now, that’s fantastic – because so much of the sector is priced like the resource business won’t even exist next year. It’s just a matter of picking good businesses priced like bad businesses.”

“If you’re a punter, the junior market will be one sure-fire place to find underpriced businesses in 2009. But right now, I’m scrounging through the energy sector. And there are some major, blue-chip bargains out there.”

Meanwhile, over in America, Henry Paulson rummaged through his suit pockets last night and found an extra $800 billion for American households. Sort of.

The Fed and the Treasury will use $600 billion to buy troubled mortgage-backed securities from government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. They hope this will “unlock” the market for mortgage finance.

“As the economy is turning down, it is very important that lending be available to consumers,” Paulson told reporters. “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed proclaimed in a statement.

“Oh please housing bubble. Please reflate. We beg you.”

Paulson also announced a new program called the Term Asset-Backed Securities Loan Facility or TALF for short. It’s designed to, “increase credit availability and support economic activity by facilitating renewed issuance of consumer and small-business ABS at more normal interest-rate spreads.”

In other words, the Feds are trying to revive the ABS market so consumers can take on more debt. “That’s right, just put these shackles on and give me the key.” As serious as the subject is, all we could think of when we read about this latest monstrous acronym of a program is this:

Image: //www.marketsandmoney.com.au/images/20081126a.jpg

“Are you kidding? I love securitised student loans almost as much as I love cats!”

There is a lot more going on in the U.S. credit markets. But let’s take a break today for some reader mail.

Dear DR,

What I still can’t get my head around is what the heck an individual is meant to do in the current market except, obviously, reduce discretionary spending and reduce consumer debt. Times are bad = buy gold? Recession coming = Cash is king? Fed printing money = inflation/hyperinflation on its way = Cash becomes worthless overnight? Hyperinflation = Hold assets?

Every day I read numerous reports and articles about the economy and I understand more of the mechanics of the market and how we got where we are now. I understand more of the thinking behind the actions of the world governments and central banks BUT I still have absolutely no idea what to do as an individual!


Paul A.

You’re asking all the right questions. The media and financial authorities have suddenly fallen in love with the “D” word (deflation). We believe this is so they can prepare the public for massive deficit spending. It helps justify more government borrowing.

Eventually, we believe massive deficit spending will lead to much higher global inflation. But it hasn’t so far, mainly because banks have become black holes for cash. What’s needed by the Central Bankers and elected officials is a way to get cash into the hot little hands of consumers, whom they hope will spend it. Hint, government-issued debit cards.

In the meantime, now that the FDIC in the States is explicitly guaranteeing the issuance of bank debt, we’d expect banks to demonstrate a preference for high-yield corporate debt over cash reserves at the Fed or U.S. Treasuries. This should, in theory, drive yields up on U.S. government bonds, and drive investors toward equities for an end-of-year rally. Easy as cake and Bob’s your Uncle.

But anything can happen. What should you do? You should be having a conversation with your financial advisor about your asset allocation. How much money do you want in shares? And if you’re in the position to select your own shares for your Super fund, you’ll want companies that don’t have leveraged balance sheets (banks) and can generate cash flow from tangible assets (they can make money without spending a lot more money or borrowing).

Hi guys

I enjoy your commentary regarding the current financial climate. I’m asking a simple question regarding the Federal Reserve and printing money and the possible US Dollar collapse. Does the Federal Reserve actually ‘print’ money or is this just figuratively speaking when discussing lowering of interest rates so people spend money and the “oil’ is back in the machine so to speak.

From all the commentary I can find, the Fed actually prints money. Isn’t this irresponsible? Would this then mean the US dollar debasing itself, eventually becoming not even worth the paper the note is printed on? Won’t the US crediting nations, (Japan, China and the OECD nations) start to offload US dollars and probably take on Euro’s? Would the US then start to lose its US dollar leveraging power as the key trading currency?

What options does the US have? Increase interest rates and taxes to unprecedented levels to remove the $53t debt? This will be popular choice for the new President-elect Obama and a test of his leadership prowess. Relinquish the status of the primary trading currency, would this see the dollar collapse? I can see pain in the US with both options.

How does the US pay back the $8.7t loans, when they are a consuming nation? Is it better for the world that the US is cut? Like a bad debt and the rest of the world continues? Feels like the US is pulling everyone else down.

Could the rest of the world continue without the US being the major player and use the BRIC economies? Interesting time in history. I know I asked too many questions here and your time would be limited, so if I could have an answer on the Fed printing money, will suffice.

Kind Regards,

Michael R.

Jim Rogers thinks the dollar is headed for the scrap heap of history, and favours commodities as a refuge. Marc Faber says the global economy is imploding. He likes gold. The Fed says it isn’t actually printing money yet. The graph of the adjusted monetary base, courtesy of the St. Louis Fed, suggests otherwise.

Chart: //www.marketsandmoney.com.au/images/20081126b.jpg

For the record, we doubt the U.S. has any intention of ever repaying its debts. The whole genius of a funded national debt (designed by the English under Walpole) is that the interest on sovereign bonds can be paid by levying taxes, while the principal is continually rolled over. All that’s required is a regular buyer for new bonds to replace those that mature. Out with the old, in with the new, and long live the King!

So far, mostly because of the Japanese and Chinese, there have been regular buyers for new U.S. bonds (debt). The dirty little secret of American borrowing, however, is the maturity schedule of marketable U.S. debt held by the public. That sounds like a mouthful. But it just means debt held by banks, individuals, corporations, or even foreign central banks.

When you look at that schedule, it shows you that 66% of America’s $5.2 trillion in marketable debt held by the public matures within the next four years. Obama! Once those bonds mature, the U.S. government will try to “roll them over,” or sell new bonds to the previous owners, preferably at the same low interest rate.

Chart: //www.marketsandmoney.com.au/images/20081126c.jpg

Source: United States Government Accountability Office, FINANCIAL AUDIT, Bureau of the Public Debt’s Fiscal Years 2008 and 2007 Schedules of Federal Debt, November 2008

When a nation relies on over-seas saving to fund its perpetual debt, it’s playing a dangerous game. Britain found this out the hard way in the eighteenth century. It becomes beholden to its creditors and ultra-sensitive to rising interest rates.

The Dutch were Britain’s big creditors at the time (having racked up huge surplus savings through trade and commerce.) When the Dutch began selling British government bonds because they feared rising British debt, it drove up interest rates in Britain, making it more expensive for the government to borrow for its war with the rebel colonists in America.

The world can’t just decouple from America they way you might stop answering the phone calls of an old flame. Too many people own too many dollars. But the expansion of government borrowing in America will, we believe, eventually drive up interest rates and drive down the value of the U.S. dollar at the same time.

The trouble is, there aren’t too many other currencies that have better fiscal back-stories either. The Yen and the Swiss Franc are probably the exception. And there is always gold. But how the dollar drama plays out will be one of the most pressing questions for 2009. We’ll have more on it this week. Until then…

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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7 Comments on "A Tale of Mining Woe"

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Warren Porter

Why the swiss franc? It’s ties to gold were severed in 2000.

“What’s needed by the Central Bankers and elected officials is a way to get cash into the hot little hands of consumers, whom they hope will spend it. Hint, government-issued debit cards.” Australia is way ahead of them. Christmas bonus anyone? A $10.4 billion stimulus package arriving just before Christmas, almost completely aimed at lower income households who will spend the cash like water on consumer items (read: christmas presents and lunch). That’s the general idea anyway. A little over 1 billion of this package was targeted at trying to reinflate the housing bubble with new blood, by increasing the… Read more »
Charles  Norville
Unlike the US the Aus printing press is not running hot, the US going to go into hyperinflation its dollar will be worthless. Ok the US has stuffed up lets move on. US is scooping up more world credit to feed its financial bubble, someone has to stop this, the US would drive up the cost of borrowing and then crank up its printing press – doesn’t that mean limited cuts in Aus interest rates? Aus is being run by Pubic Sector spivs, due to the inexperience of the Rudd team. Yea we are doomed and we need ideas, some… Read more »
Aeolia Farm

Where’s the money coming from? As a non-economist, I don’t understand the source of all the mega-million ‘loans’ that deficit-economy governments are taking out. Do they borrow ‘real’ money (eg from China) or do they (or others) just print it? Sorry if this is a stupid question; is there a simple answer, and what are the implications?


Theoretically the Government borrows the money from overseas.

Printed money is never ‘counted’ as such, it is provided by the RBA itself as ‘bailouts’ and creative accounting. Our government cannot print money, only the RBA can (someone correct me if I am wrong). The RBA is supposedly independent of the Government.

Aeolia Farm

Thanks Pete. So which are the countries in a position to lend such vast amounts & do we have any idea what costs might accrue?

Many nations already are dependent on middle-eastern oil and the industrial capacity of China. Won’t all these loans act to concentrate wealth/power even more in the hands of the lenders, with borrowing nations tending toward client-state subservience? A lender / borrower divide to complement 1st world / 3rd world status.

The current ‘solution’ clearly favours the few whilst disregarding on-going degradation of the environment – talk about fiddling while we burn!

Lenders: China, Japan, Russia(less likely). Hope i’m not missing any Basically the three countries above actually have quite a bit of money. Most other countries aren’t so well off, and some are quite heavily in debt to those countries (eg, US, Australia borrows a lot too – apparently our banks borrow 40% of their money from overseas). Costs are lower than in Australia. For instance, internally the Japanese interest rate has been low for ages (around 1% I think). So they can lend out to other countries cheaper. Ever considered a mortgage at 3% interest? Shame they only really lend… Read more »
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