Politicians or Mother Nature?

The Australian stock market loved the China rate cut news. It rallied more than 1% yesterday. But funnily enough, the iron ore market wasn’t too impressed. In Asian trade yesterday, it managed a nonchalant yawn, with the price up by just 0.2% to $70.42/tonne.

The strength in the market yesterday was all about resources. BHP and Rio both bounced more than 3%, and iron ore bellwether stock, Fortescue, jumped by more than 10%. You don’t get those types of moves on ‘fundamental’ news though, folks.

It’s a result of short covering, as those who made negative bets get spooked out of their positions and have to buy back stock. This creates strong short term demand for shares, followed by…not much at all.

For that reason you shouldn’t expect the rally to last.

Meanwhile just as the iron ore price weighs on the economy and reduces national income growth, the afr.com tells us that the big four banks are set to raise $134 billion from ‘wholesale’ markets this year, the highest level since 2010. This was back when the government guarantee made lending to banks a sure thing, so funding costs were very low.

Now that global central banks (and in particular the Bank of Japan, as discussed last week) have their liquidity taps running hard, borrowing costs for the banks are again attractive.

It’s a pretty sweet deal for the banks. They can borrow at very low wholesale rates and use it to replace higher cost funding. That enables them to either lower their home loan rates to entice more borrowers or keep the additional margin for their shareholders.

The last thing Australia needs right now is lower interest rates. All that will do is encourage greater activity in housing speculation, which does nothing for the nations’ productivity growth. Productivity is, after all, the holy grail of long term economic growth.

What we need is structural reform — tough but fair policies that will hurt in the short term but bring about lasting benefits. Instead, we have Tony Abbott running the place…

Bill Bonner has a long running refrain which goes something like ‘you don’t get what you want in life, you get what you deserve’. I don’t entirely agree with the saying. Some people experience things in life that they don’t deserve at all….victims of abuse (especially children) and cancer sufferers come to mind.

In short, life can be a real prick and sometimes it just comes down to luck…the randomness of events…being in the right or wrong place at the right or wrong time.

But I take Bill’s point. You make your own luck. You reap what you sow…etc., etc. In our case…or in the case of most Western democracies, we have certainly reaped a poor harvest. The calibre of leaders that we have is abysmal.

It is no wonder that the west is slowly sinking in a quagmire of debt. It’s no wonder that the canny bankers have the politicians in their pockets in order to protect their profits. They are rent-seekers of the highest order.

Meanwhile, the elites make sure there is plenty of bread and circuses for the people. Middle Class welfare, upper class welfare, inflating asset prices to speculate on, sports (in Australia, it’s footy, followed by horse racing, soccer, cricket, and back to footy) inane ‘reality’ TV shows…it just goes on and on.

Here’s a good example of how everything worthwhile is politicised these days — climate change. This is a topic I rarely, if ever, comment on because it raises the passions of people a little too much for rational, sensible conversation.

I’m not saying that’s a bad thing. It’s just that I don’t have the information to have a sensible discussion on it. There is so much information out there (most of it compromised) that’s it’s hard to know what to believe.

My guess is that there is something to the climate change argument. I just don’t think politicians should be the ones to do something about it. Let me explain…

The last time the climate change movement gathered significant momentum in Australia was in 2007. That was before the crash. It seems to me that when society reaches a perceived state of affluence or wellbeing it gives politicians the green light to take on grandiose projects like ‘climate change’.

That is, (in their eyes) they’ve delivered the voters material wealth and so they think about what else they can deliver on that will keep them in power. ‘Climate change’, they say…it’s a real vote winner.

Until it isn’t. When the GFC hit, the whole climate change momentum slowed right down. Parliament twice voted down Kevin Rudd’s emissions trading scheme in 2009. He eventually got the boot. Julia Gillard put in a carbon tax in 2011 after saying she wouldn’t. She got the boot.

The problem was that there were other things to worry about. ‘The planet can wait for another day’, the pollies (and voters) said. ‘If I don’t get on top of these new problems now I won’t be around to fix anything.’

Now, here we are seven years later and climate change is big news again. And stock markets (at least in the US, which is a barometer for these things) are at record highs. Coincidence?

You may think that’s an overly cynical attitude. Maybe it is. But when it comes to politicians, you need a very large dose of cynicism to cope.

So what should we do about it? Well, the answer — or my answer at least — goes back to the heart of economics.

Nature is amazingly resilient. It’s been evolving and adapting for billions of years. We’re a part of nature, so we should be able to manage together without killing each other, right?

My solution would be to turn the markets over to their natural forces and allow things to self-regulate. Specifically, interest rates. Allow the rate of interest globally to settle naturally (based on the needs of savers and investors) and you’ll get a global economy acting much more in harmony with the real needs of its inhabitants.

Because we HAVEN’T had that over the past 30 years or so. Via the manipulation of interest rates, we’ve had the largest collective build-up of debt in history. Debt is simply future consumption brought forward. This massive build-up of debt brings consumption from the future to the present day, putting huge pressure on the earth’s natural resources and ability to regulate our activity.

I don’t want to tell anyone what to think. But if you’re a proponent of action on climate change, who do you think has the best chance of bringing a bit of balance back into the world — politicians or Mother Nature?

I’d be interested to know what you think. If you can keep the comments brief and civil, let me know at letters@dailyreckoning.com

I’ll come back to the issue on Thursday.

Until then…

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