— We arrived back in Australia on Sunday afternoon after spending three wonderful weeks travelling around Turkey. But the welcome back to Regulationville began before that, at Changi Airport in Singapore.
— On our way out of Istanbul we had a few spare lira in our pocket and so decided to get rid of them on some duty free shopping. So we bought a litre of fine, seven-year aged Havana Club Cuban rum. Mmmmm…
— We had it all worked out. Get home on Sunday evening after having little sleep during the past 24 hours. Pour a few rums to help with the jetlag and then back into work the next day.
— But it wasn’t to be. Just before we were about to board the plane from Singapore to Australia, some hawk eye spotted the duty free bag we were holding and moved to investigate. Actually, they moved to confiscate.
— Apparently, according to Australian regulations, there is some restriction on liquids, aerosols and gels. This extends to duty free products not bought at Singapore. Despite the bottle still being in a sealed bag, only sealed bags from Changi Airport suffice.
— In exchange for a bottle of one of the finest rums we’ve tasted, we received a piece of paper telling us that Singapore Airlines regretted the ‘inconvenience that you experienced during our screening for liquids, aerosols and gels’. A poor exchange indeed.
— This regulation has no merit other than to force people to do their duty free shopping at Singapore or Sydney. And it worked. I was so fired up I needed a drink and so bought another, more expensive bottle on arrival.
— Welcome back to the lucky country.
— Speaking of lucky, Foster’s Group shareholders look like finally handing over ownership of the company to a bunch of people who might know what they are doing. Over the past decade, while other international brewers were expanding, Foster’s was shrinking. Not by design of course, rather it was through poor strategy and incompetence.
— In fact it had shrunk by so much that after the disastrous wine division was finally demerged a few months ago, the new Fosters was left with lots of debt and negative balance sheet equity. But cashflows from beer and monotonous price increases, can service a lot of debt. So this capital structure is not an impediment to takeover offers.
— Foster’s is playing the standard game of knocking back the first offer saying it materially undervalues the company. This is amusing because based on Foster’s history, it has no idea about value and how to create it.
— And today’s Australian reports that SAB Miller, the company with eyes for Foster’s, is under pressure not to raise its bid. SAB’s share price has been declining in London and some shareholders are concerned about paying too much. In a post- – and probably pre- – credit crisis world, paying too much for assets will likely be an increasing shareholder concern. Now it’s up to the boards and investment bankers to listen.
— Speaking of investment bankers, no doubt they’re trying to use Woodside’s latest operational troubles and share price declines to drum up some corporate activity. BHP, with its massive cashflows is generally mooted as the buyer.
— However, one of BHP’s great strengths is its acquisition discipline. The only way this deal would make sense for BHP would be to fund it largely with debt. We’re not sure BHP would do such a thing at this point in the cycle.
— It all comes down to price and Woodside, along with Australia’s other energy majors, is not exactly cheap. Earlier in the year, when the market was getting fired up about oil prices and LNG projects, we told our Sound Money. Sound Investments readers not to join in and that prices were way too high for the risks involved.
— That proved to be the right call at the time and even now, our mate Dan Denning, who knows a thing or two about the energy market, reckons the energy blue chips are just waiting to take your money. Dan, who’s been focusing on an emerging form of energy production in his publication, Australian Wealth Gameplan, will have more to say on this next week. So stay tuned.
— FOMC minutes were released last night and no new info came to light. Ben Bernanke must be a slightly shattered man to contemplate that all his monetary stimulus is not resulting in a sustainable recovery. All we can hope is that he returns to academia and does a little digging into Austrian economics, where he might find some answers.
— That’s not going to happen though. More likely, Ben will sit back for a few months and pray that this slowdown is just a ‘soft patch’. When he realises it isn’t, probably sometime around the dreaded September/October period, he’ll go back to conducting monetary experiments. Actually, his next move will probably be a policy last employed many, many years ago. More on that tomorrow…
— Before we leave you today, here’s a thought on the Greek/euro crisis brought to you by Austrian economic thinking. As you know, bond yields in the peripheral countries are spiking. Greek 10-year bonds are nearly 17 per cent, Irish and Portuguese 10-year yields are around 11.5 per cent. Conventional thinking says these high yields reflect concerns about default.
— While that’s true, they also tell you something far more important. That is, there is very little real savings left in the banking systems of these economies. Rising market interest rates is an indication of scarce savings. Therefore, the price of money must rise to encourage saving and discourage consumption.
— When savings are plentiful, the price of money falls to encourage consumption and discourage saving. This process doesn’t occur in a market distorted by central banks and currency unions.
— It only reasserts itself when the money fiddlers lose control, as they now have…
Markets and Money, Australia