Nero, Bonaparte and Hitler Walk Into an Economic Union

The latest news out of Europe is that British Prime Minister Churchill Cameron refused to surrender sovereignty to the rest of the EU. Those on the continent have tied themselves to the Euro like tree huggers saving the forest. The Brits, according to politician Nigel Farage, are sitting in a lifeboat, watching the Titanic go by. He also mentions the lifeboat will probably get swamped by the bow wave of the Europeans as they head towards the iceberg.

Yes, the hilarity continues.

Meanwhile, in the wake kicked up as Europe continues its doomed collision course, the Australian stock market has been making investors sea sick. Shares have been toing and froing on the back of Europe’s political mischief every day this week.

But are you surprised by what’s happening in Europe?

That probably depends on how you think about it. Here are some ideas to help you explain the shemozzle so far … and what lays in store for us here in the land of Oz.

1. This is the end of the welfare state.

Believe it or not, the problem with socialism is that you run out of other people’s money. You might think British Prime Minister Margaret Thatcher said that. But no, she was even brighter than your editor. She said ‘The problem with socialism is that you eventually run out of other people’s money.

We added the underline in case you missed the difference. If Lady Thatcher worked at the Markets and Money Australia, we wonder how long she’d give Europe. A couple of weeks? A few months? Or do you think she’d say political solutions can and will solve the economic problems?

2. Political solutions don’t solve economic problems.

Politicians are used to overcoming hurdles by breaking promises and changing their opinions. Some stage coups. But the solutions that work in politics don’t work so well when it comes to economics.

Economic laws (like ‘socialists run out of other people’s money‘) simply hold. No matter what your opinion is of them or what policy you have to fight them. No matter the name and face at the head of your country. Economic laws get you in the end – eventually.

The most important economic law that Europe has nipping at its heels is that debt must be paid. You can’t pass on the bill to the next politician… and the next… and the next… and the next… forever.

3. Different countries are different countries.

It is not The United States of Europe. It is the European Union – the same name the Soviets chose for their fiscal and monetary union. So if the Soviet Union collapsed miserably, why did the Europeans copy the name? And why, for crying out loud, are the Eastern Europeans wanting to join? They just got out of one bungled mess, now they join a different one!

When politicians get a wind of this, they will probably try and change the name of the European Union to The United States of Europe. Again, another political solution to an economic problem. And one that suggests a civil war might be in the making. You just can’t win.

What people seem to have missed in all this talk about unity in Europe is that Europe’s history is a reason to keep nations apart, not bind them together. At least as far as their governments are concerned. Do you get your pet cat and dog to become friends by putting them in a sack and shaking it? Worse than just mixing oil and water, the European Union has seen politicians get into cahoots with each other in ways they couldn’t before. Politicians have more in common with each other than their citizens. Another level of government has seen more bureaucrats and more politicians leeching off the private sector.

4. The problem is not the Euro

Blaming Europe’s problems on the Euro is like blaming the size of your credit card bill on the Australian dollar. The currency is a constant. It’s spending versus income that’s the issue.

The entire United States of America exists just fine with the single currency. The world, when it was on the gold standard, used gold as money just fine.

The problems for Europe’s governments come from the difference between piddling tax revenue and voracious spending. That difference was financed with debt. Politicians promised a free lunch and voters ate it up. The debt grew behind the scenes. If governments had not spent money like drunken sailors, there would be fewer dependents for them to deal with.

5. The latest European solution is a sellution

There’s something you need to know about the latest European solution. It’s happened before. It’s almost identical to what was in place in 1997. In fact, this is the third time European leaders have tried to address the issues of debts and deficits in the same way. The idea was, and is again today, to put sanctions on countries that violate certain debt and deficit limits. They’re still working on the details. But like the 1997 agreement, the ‘pact’ will simply be adjusted, amended and then ignored. At best.

That means the new pact is going to fall short – at best. And that will leave investors hoping for a miracle disappointed. Not to mention what will happen to the people of Europe.

So now you have our observations about Europe’s woes. But what’s in store for the Europeans … and us here in Australia?

We are entering an increasingly politically dangerous time

Plenty of respectable forecasters reckon the world is ripe for a war. That probably seems very unlikely to you. About as unlikely as it did for the world months before World War 1. Back then, things were not as they seemed either. But there was no Markets and Money to warn you.

The warmonger index is flashing red hot. And here is a tell tale sign: governments are spruiking nationalism to sell government bonds. The Sovereign Man website reports:

In Spain, they’re actually issuing instruments called ‘Bonos Patrioticos,’ or ‘patriotic bonds’. Ad campaigns say that the bonds are “good for you, good for the future.”

In Italy, they’re rolling out the country’s sports celebrities to encourage everyone to buy Italian sovereign debt.

Using Italian soccer players to sell bonds is a declaration of war as far as many Germans are concerned. The Irish are being far more creative, but just as stereotypical:

In Ireland, they’ve issued “Prize Bonds” which carry a 0% interest rate; instead of receiving interest, bondholders are entered into a weekly lottery contest.

Yes, the Irish are back to relying on luck.

In the spirit of things, Dan Denning has framed and hung up one of his favourite posters here at the office:

Of course, an economic war is far more likely than a military one … at first. Your editor is reading a book called Currency Wars by James Rickards. It starts out with Rickards reminiscing about his involvement in the Pentagon’s first proper economics-based war games. We won’t spoil the first chapter’s kicker, but how things went down made us laugh out loud.

A point Rickards makes is that things descend from economic problems to economic tensions to military ones. And quickly. Sometimes all hell breaks loose, as in WW2. Sometimes it’s a standoff, as in the Cold War. But almost all conflicts have their roots in economic tensions.

So how should you invest here in Australia as the Old World falls into political turmoil?

You’ve got three options. The first is to own a little bit of everything and a lot of nothing. That’s defensive. The second is to be a trader.

One person who isn’t surprised or worried about the markets’ daily to and fro is Murray Dawes of Slipstream Trader fame. Murray reminds us of a theme park attendant down the road at Luna Park. The fellow stands on the rollercoaster (the part of it that moves) and applies the brakes if the carts are moving too fast. It’s an absurd sight to see someone standing up on a rollercoaster and calmly applying brakes via a giant lever while fare goers around him scream their heads off.

What does Murray have to do with that? Well, Murray is on a rollercoaster of a stock market, surrounded by screaming voices. He calmly adjusts the speed and risk of his trading to whatever he’s comfortable with.

We’re sure his subscribers are enjoying what Murray’s served up in the last few days. They were expecting things to wind down over Christmas. Instead, the market has served up a basket of trading opportunities. So far, things are going swimmingly with his last six trades all ‘in the money’. In trader speak, that’s ‘better than a poke in the eye.’ Whatever that means. You can watch Murray’s free weekly analysis of the markets here.

But the third option for you as an Australian investor is the one we really like. If the first two are defensive and aggressive, this one is just smart. You see, governments can make stock markets go up and down. They can even control interest rates. But at the end of the day, some things are just un-alterable. Even for politicians.

It’s time to invest in the Unalterables

It’s no coincidence that there’s a periodic table hanging on the wall in our office. It includes several ‘elements’ that would make great unalterable investments. You’ve heard plenty about gold (atomic number ’79’ and symbol ‘Au’). But what else is out there for the hard asset investor who only wants to invest in tangible assets that the government can’t manipulate, devalue or confiscate?

For the answers, we turn to Dr. Alex Cowie, editor of Australia’s premier resource stock advisory, Diggers and Drillers. I sat down down with him recently to ask what he thinks the best way would be for you to protect and grow your wealth with these unalterables.

Long-time DR readers know you’re a big fan of silver. And we know that’s a story you have your eye on for 2012. What other big resource trends do you see for the year ahead?

AC: Potash and tungsten are two commodities I’ve tracked since the start of the year. Potash is a fertiliser, which is very important in food production. And tungsten has military uses (like hardening the tips of bullets and missiles), amongst other applications. They are too important to their end users to be impacted by the chaos in the global market. And both have risen steadily in price this year.

Of the precious metals, palladium is one not too many are talking about that’s on my radar right now. Most of the supply comes from Russia. But its stockpiles are running low. And I’m that will trigger a price rally.

I’ll be focusing more attention next year to changing geopolitical trends. China, in particular, is starting to throw its weight around, and the US is going head to head with it. We’ve had the currency war for years, now we’ve got a trade war starting. This is a well-trodden path that leads to military brinkmanship. What we are seeing reminds me of the lead up to the cold war. What this means for Australia – and specifically the resource sector – is a question that needs to be asked.

It’s clear that you prefer smaller sized companies at the riskier end of the ASX to safe blue chips. Why is that? Wouldn’t it be best (and safer) for our readers to make money from the run-up in commodity prices just by buying BHP Billiton?

AC: Hahaha. Did you just put the word ‘safe’ in the same sentence as ‘blue chip’? Have you seen Bluescope Steel (ASX:BSL) recently?

That ‘safe blue chip’ has lost 96% in the last three years. Energy Resources of Australia (ASX:ERA) has lost 95% in just two years. APN New (ASX:APN) has lost 90%. These are big blue-chip stocks… and far from safe.

As for BHP Billiton, investing in the big mining companies is about as much fun as a root canal. Since the start of 2009, it has managed a 23% gain. Compare that to smaller iron stocks like Atlas (ASX:AGO), which has gained 270%. Or Finders Mines (ASX:FMS), which has put on 570% in the same time.

Many fund managers invest in the blue chips as they have such vast amounts of money to manage, the big stocks are the only ones large enough for them to buy into without pushing up the stock price. Often they are legally restricted to investing in the companies on the ASX200. With these stocks you can risk losing 30%, so you can have a crack at gaining 30%. Yawn.

And take Australia’s biggest gold stock, Newcrest mining (ASX:NSM). Since April, it has fallen 22%. In the same time, one of the South American gold explorers I tipped has gained 66%

There are around 800 small-cap mining stocks that are too small for the big players to touch. It’s a rich hunting ground for the everyday investor, if you have some risk tolerance and patience. The stocks that do perform can often double or triple in price. But you need to be prepared to lose 30% of your stake to see it pay off.

My job is to filter out the duds and identify the stocks that have a real shot at making money for my investors. First I’m looking for companies that are exploring for, or producing, certain types of commodities. I focus on the commodities that are set to keep rising in the next few years. The list has got a lot shorter in the last six months. The chaos in Europe, a slowdown in China, and the stagnating US economy are all making the fundamentals for many industrial commodities look a bit dodgy.

You’ve closed out with a number of winners ranging from 74% gains right up to 125%. But what about the losers? What’s your strategy for when a stock you recommend doesn’t perform as you expect?

AC: I always ask readers to decide their own sell level. Everyone has a different risk tolerance. So, say a 10% loss level is as much as you can face, then decide in advance to sell if it falls that much. Small-cap stocks can be notoriously volatile, meaning they can rise and fall wildly. If you’re used to see stocks move by 1 or 2%, it can be a bit disconcerting when the price of a small-cap stock suddenly drop 20%. But this is exactly what can happen with many of the small caps that go on to post gains of 100% or more. Particularly when a stock has a good future, the market functions to get as many people scared and selling so that others can buy their stock cheap. It’s ruthless.

I try to give stocks as much wiggle room as possible. But when a stock falls beyond an acceptable level, I email readers to let them know that it is time to take the loss, recover their capital, and move on. I don’t publish this level, because I want to encourage readers to choose their own risk level.

Why did you get told to “f*** off” by a copper mining executive?

AC: I introduced myself at a conference and he told me to “f*** off” because I’d put a sell on his company. There’s not much good that can come from a conversation that starts like that, so I ended it.

The share price of his company had fallen hard, and I decided the time had come to take the loss and move on. This hadn’t pleased our friendly mining exec. But so far this has been the right call – the stock has fallen much, much further since then.

The point is I work for my readers. Not the mining companies.

My goal is to make money for readers. And if things aren’t going to plan, then I have to take the heat and make some tough decisions. I can guarantee it’s no way to win a popularity contest, but the fact is it has saved readers from further losses time and time again.

I want to point out that I have a great deal of respect for the majority of the people in the mining sector. There are a few rogues out there I can assure you, and I give them a wide berth. Most of them, however, are passionate, smart people who love their jobs. It’s the favourite part of my job, getting on site or to conferences and meeting them.

Over the last year and a half you’ve hardly been in the office. You’ve been to countries like Botswana, Peru, Morocco, South Africa, Dominican Republic, the United States, Hong Kong… the list goes on. Not to mention just about every part of Australia. But what’s the real point in all this travel? Can’t you do all the research you need to from your desk here in Melbourne?

AC: In a word – No.

Put it this way. If you were internet dating, would you marry a person based on their internet profile alone? OK. Bad example – plenty of people do that. But you get what I mean.

Staring at a screen can only get you so far. It’s a starting point to gather all the publically available information. But I back the people behind a project as much as the project itself. I spend a lot of time meeting with management. In fact I have caught up with two different companies just this morning. I’ve had four coffees so far today – my hands are shaking.

I get on site a great deal as well. What’s not to like about wandering around a wild part of Tasmania, Utah, Peru, wherever the project may be, and talking to interesting mining people? The reason I go is get the real story. Believe me when I say it’s helped my readers dodge a lot of bullets. I sleep well at night knowing I’ve done as much as I can to make sure I haven’t missed anything.

Regular readers of the DR often hear us referring to you as “The Doc”. So let’s have it once and for all… what does the “Dr.” stand for?

AC: Early on in my life, I fulfilled a lifelong ambition of graduating as a veterinarian. That took five years of intense study at the University of Liverpool in the UK. I then worked successfully as a vet for 10 years in seven different countries including the UK, Australia, New Zealand, Kenya, Zimbabwe, Nepal and Thailand. So this is where the doctor comes from. I use it because I’ve earned it.

As an adult, my burning ambition became to work independently in the financial markets. People are always surprised when I tell the tale of my career change, but it was the best thing I ever did. The fact is that when it comes to being an analyst, I’ve found the scientific training, the ability to take on and process a huge amount of information, and the resilience I developed to graduate and then work in the vet industry, were all excellent foundations for a career in finance. Plus it prepared me for all the animals in the mining sector (joking).

As for the formal financial training, I completed the Graduate Diploma in Applied Finance and Investment, which is a post-graduate course. I did this in my spare time years ago, and can recommend the course to anyone. I’m now currently halfway through a Masters degree in Finance, which I do on the side. I like learning and intend to make it a lifelong pursuit.

But what I like about the markets is that they reward results, not training. And in that respect, I’ve found that having a methodical and scientific approach has been just as valuable in financial markets as it was at the clinic.

If you’d like to watch Alex’s free presentation and find out which six resource investment opportunities he’s most excited about for 2012, click here.

Nickolai Hubble
Markets and Money Weekend Edition

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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5 Comments on "Nero, Bonaparte and Hitler Walk Into an Economic Union"

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Philip Proust
How easy it is to persist with an ideology – the welfare state is to blame – if you choose to ignore the facts. The US is not a welfare state; however, its debt problems are far more serious than countries like Sweden and Germany, which are welfare states. The problems in the US are linked to two expensive wars, open-cheque bailouts of the financial sector, and outlandish and uncontrolled loan policies. If you are looking at a welfare state in the US and the UK it is the welfare directed at the rich: privatised profits and socialised losses; obscene… Read more »

How can you say the US is NOT a Welfare state Philip? EOFY 2010 the US Fedaral budget had allocated over 60% of their $3.45T budged to welfare related expenses. Only 32% was used for Defence and Mandatory spending like Police and courts. Whether the welfare is directed at the poor, rich or animals, it doesn’t matter. The Government taxes and spends causing massive misallocation of capital. I believe that’s the problem.


I am not suprised that countries are trying to get their own citizens to buy bonds. They have all learnt from Japan whom I believe owes about 90% of its debt to its own people. If you stiff your own people – meh – and this is what will happen. I wonder how long before the Australian government mandates that super funds have to hold a minimum amount of government bonds. It will take yet another crisis but in my view it is an absolute certainty. They will start with a modest 10% and jack it up from there…..

Philip Proust
To Sam’s post: Compared with nations such as those of Scandinavia, the US is not usually recognised as a welfare state and for good reason. Even with recent changes to welfare legislation in regard to health, the US still offers its citizens nothing like the system offered in Australia. Unemployment benefits and pension entitlements are nowhere near as generous in the US. But the point I originally made has been missed: Germany and some the recognised welfare states in northern Europe are doing far better than the US and the UK, which fit the neoliberal model much more closely. If… Read more »

The US is not deemed to be a Terrorist State either but look at all the military interventions in South America, Central America, the Middle East, Central Asia, South East Asia etc that the US has started.
Millions of lives lost! But that’s ok, at least they weren’t Americans that died, huh?

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