Plutocrats Are Having A Laugh…At You

Not much happened in markets overnight. US stocks finished higher by around 0.4% on no particular news. Still, the positive sentiment should give the ASX 200 another crack at the 6,000 point level today. But, with massive problems in iron ore starting to dawn on everyone, the 6,000 celebrations might have to wait for another pointless rate cut from Glenn and the Gang in May.

European stocks continued to melt-up on decent data out of Germany and news that Greece managed to scrape together €450 million to repay a loan to the International Monetary Fund (IMF).

Greece has another payment of €420 million due on April 14. It can probably rattle the tin one last time to ensure creditors receive full payment, but they’ll probably have to get widows and orphans to chip in.

After that, the cupboard is bare. Greece won’t be able to meet payments due in May unless it can agree to a new bailout package with its lenders…formerly known as the Troika, but now operating under some other, kinder sounding name.

Greece is a great example of how the current financial system is utterly broken, and how the plutocrats are out of control. Banks lent Greece a stupid amount of money. Yes, the Greeks happily accepted, but in a sound financial system, the onus is on the lender to lend responsibly. That’s how you ensure you get paid back and don’t blow your bank up.

Not in Greece though. Bankers flooded the country with debt on the assumption that it didn’t really matter because, being part of the Eurozone, any problems would attract a bailout.

And that is exactly what happened. The loans to Greece went bad. But instead of taking the losses, the lenders received bailout funds instead. There is a myth out there that Greece is the one receiving a bailout. It’s not. It’s Greece’s creditors who are getting their capital back.

The catch is that the bailout funds first go through Greece in return for structural reforms that put a sharp squeeze on society and cause things like 50% youth unemployment.

Structural reforms without a meaningful currency depreciation to improve trade competitiveness is a cruel policy to impose on society. Idle youth is a tragedy that can have grave ramifications far beyond the community or country it occurs in. I don’t know for sure, but I’m guessing 19 year old Gavrilo Princip didn’t have a job when he inadvertently triggered the First World War.

So loans flow into Greece, with conditions that don’t make it easy for Greece to compete and grow, and then they flow back out to the lenders who made the poor decisions in the first place. If you have money and power in this economy, you make the rules. That’s plutocracy.

Clearly, IMF head Christine Lagarde has the money and the power, and she’s pretty happy about it…

Christine Lagarde

Source: AFP

Here’s another example of the plutocrats in action.

Yesterday, I mentioned the Shell bid for BG. It turns out that BG’s recently installed boss is set to walk away with a payout of up to $62 million for a few months work if the takeover goes ahead.

$62 million! One bloke…a few months ‘work’. Who makes these rules? Certainly not anyone with a sense of decency and fairness. No, it’s a deal borne out of a sense of entitlement and contempt for the rest of society who ultimately pay the bill.

One thing the Shell/BG deal has done is get everyone excited about a possible bottom in the oil market. Maybe it is a bottom. I don’t know. But the odds of a strong bounce back from here are low.

To show you what I mean, take a look at the following chart. It shows the West Texas Intermediate oil price over the past five years. As you can see, mid way through 2014 prices fell off a cliff.

The market is now trying to find a bottom. Perhaps the sharp drop in March this year was the bottom. But as I said, even if that is the case, a strong bounce back from here is unlikely.

After such a big price decline, it’s normal to see a long ‘basing’ period. This means the price moves sideways for a long period of time ‘building a base’ from which to make the next advance.

Take gold for example. It fell sharply in late 2012, and in 2013 and it’s still building a base three years later. And gold didn’t even fall as much as oil.

Unless you see geopolitical issues severely constricting supply (and that’s always a risk) my guess is that oil prices, while volatile on a day-to-day basis, are going to be boring for quite a long time to come. So don’t make big punts on an oil price bounce back in the short term. The odds are not on your side.

If you want to have a punt, punt on the continued deterioration of iron ore prices. And reduce your exposure to the big guns like BHP and RIO. There’s just no respite for Australia’s once favourite, now not so much, red dirt.

From Bloomberg:

China’s steel and metals markets, a barometer of the world’s second-biggest economy, are “a lot worse than you think,” according to a Bloomberg Intelligence analyst who just completed a tour of the country.

What he saw: idle cranes, empty construction sites and half-finished, abandoned buildings in several cities. Conversations with executives reinforced the “gloomy” outlook.

“China’s metals demand is plummeting,” wrote Kenneth Hoffman, the metals analyst who spent a week traveling across the country, meeting with executives, traders, industry groups and analysts. “Demand is rapidly deteriorating as the government slows its infrastructure building and transforms into a consumer economy.”

The Chinese property and infrastructure boom is dead. And iron ore prices are heading back to their pre-boom slumber, somewhere in the US$30/tonne range…or maybe even lower.

As China tries to reignite activity in the housing market, it’s learning the lesson that you can’t blow a bubble in the same sector twice.

This time around, the extra liquidity is going straight to the stock market. Hong Kong stocks are on a tear, rising nearly 15% over the past month as capital seeks to arbitrage the difference between Chinese companies listed in Hong Kong and on the mainland.

The Shanghai exchange is up over 100% in the past year and now traders are moving into the Hang Seng to play catch up.

With so much central bank created money around the world, it’s just another symptom of a broken system.

Just how long can this craziness go on?


Greg Canavan+,
for Markets and Money

Join Markets and Money on Google+

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money