Markets and Money Day Special Edition

*** Commercial property goes on the dole…All Ords Hit Five Year Low…RBA to save the day…and more

*** Wages of sin…Mommas should now be urging their babies to go into other lines of work – politics, maybe…

*** Everyone wants to offload the risks of the financial sector onto the taxpayer…practically the first thing we hear from the Obama administration is worrying…

*** Property development in Europe is a disaster…the best of the web…and more!


From Dan Denning in Melbourne:

–Fire up the barbecue, but make sure you don’t burn the commercial property market! No matter what you call it-Australia Day to some, Invasion Day to others — today commemorates the landing of the First Fleet in Australia in 1788. Maybe that’s the same day that Australia’s love affair with property began.

–The hot subject today is commercial property. With the lines of global credit available to Australia being cut one at a time, asset values in sectors that have taken that credit for granted over the last twenty years are under pressure. In to this inevitability of falling asset values during a credit deflation steps Australia’s intrepid Prime Minister.

–The Rudd government announced on Saturday plans for a fund that would make loans available to commercial property owners unable to roll over-loans in the international lending market. The Australian reports that, “Mr. Rudd said he would pump $2 billion of public money into a credit fund accessible by owners of commercial property such as shopping centres and office buildings if they lost access to foreign loans.”

–“With up to $75 billion in offshore loans due to be rolled over in the next two years,” the article continues, “Mr. Rudd said a third of the 150,000 jobs in the commercial property sector would be at risk if he failed to act to preserve stability and maintain property values.”


–It’s not really fair to hold a man accountable for what he hasn’t said. We don’t know exactly what the PM said. But if he’s acting to “maintain property values” he may be acting in vain. Not that it won’t be popular!

–“ACCI acting chief executive Greg Evans backed Mr. Rudd’s move to deliver stability and confidence to the commercial property sector by moving to maintain property values. A reduction in property values would hammer confidence and have implications for the entire economy, not just the finance and property sectors, he said.”

–Yes. All of that is true. When asset values fall (property or shares) it does cause everyone to lose confidence. But you wonder why it doesn’t also cause everyone to reexamine some basic assumptions. One of those assumptions, for example, is that households and businesses will always have access to a cheap line of credit to subsidise their balance sheet.

–But in a Credit Depression you have to rely more on cash-flow and less on borrowing. This means reigning in your spending habits, living beneath your means, and doing a different kind of calculation for the return on your investments. That is, if you need to roll a big pile of loans over every few years to keep your projects going, well then maybe your projects aren’t going to survive long in this new financial world.

–That could be bad news for more than just commercial property owners in Australia. According to a Merrill Lynch study cited by Bloomberg, “Overseas banks accounted for more than half the A$285 billion in syndicated loans issued to Australian businesses since 2006.” If the government and the big four banks go in halfsies to replace that total, it would be a $142 billion in new government loans or government guarantees.

–Now we’re starting to talk real money. But is it just throwing good money after bad borrowing and lending?

–Credit makes a lot of things possible. In fact, if you look around at the world we have, you start to wonder how much of it we’d have without the huge increase in credit of the last thirty years. This is not to say that the quality of life would go down in a world with less credit. But easy credit has clearly made an expansion in commercial real estate and residential housing possible.

–The contraction in credit is going to take some of that expansion with it, not least in the form of falling asset values. What can any government realistically do to try and prop up unsustainable economic activity?

–Meanwhile, in the share market, investors took a beating on Friday. The knowledge that Japan, Korea, and China are all reducing their appetite for Aussie resources in the face of a recession was good for about a four percent decline on the All Ordinaries.

–Friday’s action takes the share market below the November lows, puts us nearly 50% down from the November 2007 highs, and adds up to an $850 billion reduction in the total market capitalisation of Aussie market. It is hard to see how share prices are going to rally on earnings results later in February.

–In fact, all this bad news is prompting economists to speculate that the Reserve Bank will cut Aussie rates by a full percent when it meets in early February. Maybe it will. Maybe it won’t. If it does, or if investors expect it to, look for the Aussie dollar to head lower this week.

–Lots of reader mail came in on Peak Oil last week. We promise a response tomorrow! Until then.


Over to Bill Bonner in London, England:

People working in the financial sector got paid better than any other professional class…

…which didn’t seem so bad, says Floyd Norris in the New York Times, when they appeared to be the smartest people on the planet.

But now that we’ve discovered that they were the world’s biggest dumbbells the high salaries add insult to injury.

In the Bubble Epoque, every mamma wanted her baby to grow up and be an investment banker. Because that’s where the money was. Now…the money ain’t there no more.

The banks are broke. And the people who work in the financial sector are taking big pay cuts. First, their bonuses – which depend on the profitability of the industry – are cut automatically. Then, their salaries will come down too.

Financial sector salaries rise with the credit cycle, says a study done by the National Bureau of Economic Research.

“Wages in finance were excessively high around 1930 and from the mid-1990s until 2006,” says the report.

When animal spirits run high, in other words, the financial industry is able to make a buck. When they run low, earnings and wages in the sector fall. And when earnings in the financial industry go down, so do the economies that depend on them.

It was not a coincidence that New York City went broke in the ’70s, says the report. Speculators were few, credit was low, and the financial industry was in a slump. Coming soon: lower property prices in Manhattan and London.

Mommas should now be urging their babies to go into other lines of work – politics, maybe. The whole financial sector is busted. And if the financial sector is broke, the rest of the economy can’t function – at least, that’s the argument. So, the politicians and economists are desperately looking for solutions. What solution do they find? Shift more power and money to…surprise…politicians! The bankers may be broke, but the politicians act as though money is no problem. “How much do you need,” they ask?

“Don’t insure the banks – nationalize,” writes James Saft in the International Herald Tribune. He believes nationalization – complete government takeover – is the cheapest and most efficient way to bring the banks back to life.

Just a few months ago, ‘nationalization’ was practically a dirty word. No one – except a brain-dead Bolshevik – would have thought it desirable for a government bureaucracy to manage capitalism’s money. Now, few people can think of anything better.

The idea is typically simple-minded. When the bankers saw high earnings and no risk, the last thing they wanted was interference. Like gangsters, they would fight to keep rivals from muscling into their territory. But now, the wages of sin are going down…and the risks seem too high. They’re facing bankruptcy and they’re discouraged.

Everyone wants to offload the risks of the financial sector onto the taxpayer.

But wait…how can capitalism work without capitalists running its most important industry? And of course, there’s the additional cost. In private hands, the financial sector allocates capital and takes risks. The bankers make mistakes…but are least their intentions are pure; they are motivated by greed. In the fat hands of the government, on the other hand, decisions will be more political – they will be made to appease pressure groups, to favor trendy causes, to pay-off supporters or punish opponents. From an economic standpoint, these will slow down real growth…and cause strange misallocations of capital and financial distortions. Instead of being driven by naked, honest greed, in other words…the economy will be whipped forward by corruption, favoritism, and hidden political agendas.

Here at Markets and Money, however, we are squarely against nationalizing the banks. Not that we think bureaucrats won’t do as good a job; how could they do worse? We just don’t think they’ll be as much fun to watch.

*** “Obama says renminbi ‘manipulated'” says the headline in the Financial Times.

Practically the first thing we hear from the Obama administration is worrying. The world is at the beginning of a major downturn. The last thing it needs is a Mr. Smoot in the White House.

*** “It’s a disaster,” said a friend last night. Our friend is a major property developer in Europe.

“You don’t develop large projects with pocket money,” he explained. “You need deep pockets. So you turn to the big banks. But now, not even Warren Buffett could get a loan for a development project. I spend my entire day arguing with bankers. They’ve promised lines of credit. They’ve made commitments. They were backing these projects. And now, they’re pulling out. They use any excuse they can to get out of their obligations…forcing many development projects into bankruptcy.

“In one project, we actually improved the plans…so the houses were finished at lower cost…and were a better product. But the bank cancelled our financing because they said we had changed the plans without approval.

“In France, right now, there is actually a shortage of housing. That’s why, house prices in France aren’t falling the way they are in the rest of the world. There aren’t enough houses to go around.

“Even so, we had to stop projects all over the country…because we can’t get the money to complete them.

“And we had one project in the South of France where we had about 100 units left to sell…all completed. So, I told buyers that I would give them a check for 40,000 euros if they’d buy one of these apartments…selling for about 300,000 euros. It was a great deal. And people knew it was a great deal. In about a week I had 50 signed contracts. But of those 50, guess how many were able to complete? Guess how many were able to get the financing they needed to buy the apartments? Three…just three. The rest lost their deposits.

“It’s a nightmare…I wish I had retired six months ago.”

*** Mad Magazine has come out with what we believe will be the final word on the Obama plan to restart the economy. Its cover has a picture of a fellow who looks like a cross between Obama and its trademark mischief-maker, Alfred E. Neuman. He’s holding a campaign sticker: “Yes We Can’t,” it says.

*** And here’s something strange. We don’t know where else this might be going on…but a newspaper in Paris is taking articles off the Internet and putting them on paper. “A selection of the best of the Web,” says the cover, which comes out every Friday and sells for 1.5 euros.

We were alerted to this new phenomenon in the publishing world by an alert Dear Reader who found one of our articles from Markets and Money:

“The Strange Plan to Restart the Economy on Planet Obama…”

Keep reading for today’s guest essay…


Markets and Money PRESENTS: Today, when you get a check marked “insufficient funds,” you don’t know whether it is you or the bank that is out of money. And so, the authorities on both sides of the Atlantic rush to make their deposits, before the banks close forever. If it were up to us, none of them would get bailouts. Not because it would be the best thing to do for the economy; we just like to see grown bankers cry. It is good for them; we will explain why. Read on…


by Bill Bonner

Bankers are idiots, sometimes

As a professional class, bankers are thought to be as immoral as Russian pimps and as incompetent as Renaissance electricians. Thanks to them, the banking system is in trouble. Thanks to the failure of the banking sector, the American and UK economies are in trouble. And thanks to the failure of the Anglo-American economy, the whole world is in trouble.

Everyone is on the bankers’ case. In France, even Jerome Kerviel is criticizing his bosses at Societe Generale for not preventing him from taking “crazy risks.” Meanwhile, in Britain, Sir Fred Goodwin, recently esteemed head of the Royal Bank of Scotland, is now said to be the “world’s worst banker,” according to the Times. Trevor Kavanagh, writing in the SUN, says he is “criminally incompetent.” His purchase of ABN Amro is said to be the “worst acquisition in history.” In the new world, meanwhile, ISI group figures that the top four US banks alone have $1.2 trillion in bad assets. The total market value of those four banks is only about half of that amount. The banks are ‘effectively insolvent,’ says Nouriel Roubini. So, the feds have taken them into their care, if not yet into their custody.

But the bankers are ingrates. They borrow, but they don’t lend. They take but they don’t give. They party ’til the wee hours…and then, when the bill is served, they play dead.

The New York Times reports: “At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.

“Make more loans?” Are you kidding, Mr. Hope seemed to say: “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector….”

Bankers don’t make loans in the hopes of getting ‘good citizenship’ awards. They lend money when they think they can make a buck. The remarkable thing is that they’re so bad at it. They lent recklessly when there was little hope of getting their money back. Now, with the widest spreads in history – the difference between their cost of money and their return on it – it’s easier to rob a bank than get a loan from one. There are two explanations for this anomaly – both of them wrong.

The first is that bankers are wicked. A report in the Daily Express, for example, tells us that RBS “bosses spend 50k pounds on champagne banquet” celebrating Burns Night on Friday, before announcing a 45 billion pound loss on Monday morning. Over in the United States, the Wall Street Journal gave out word on Tuesday that much of the $140 million donated to fund the biggest inauguration in history came from banks that had received bailouts.

But wait, say the bankers’ defenders; they’re not evil, they’re just incredibly stupid. Evil bankers might have sold sub-prime debt to widows and orphans, but they never would have kept it in their own accounts. At the end of 2007, for example, the aforementioned Sir Fred Goodwin had shares of RBS worth nearly 6 million pounds; now his pile will barely buy a mid-size apartment in a bad section of London.

We do not reject the ‘bankers are stupid’ hypothesis completely; we simply add an important nuance: they are not stupid permanently; they are – like the rest of us – only stupid episodically.

Among the queerest financial stories of the last week was the proposal to create a ‘bad bank.’ It hardly seemed necessary. There were already dozens of them. The idea is to transfer all the sins of the bubble era to the ‘bad bank’ – funded with public money. Then, the bad bank will be crucified so that the rest of us can have life, and have it more abundantly. We first saw the idea floated in the pages of the New York Times last week. Now, it has made its way to the Financial Times in London, gaining favor as the measure of sin increases. The SUN says British taxpayers are on the hook for as much as 2 trillion pounds. In America, the bankers face $3.5 trillion in losses, says Mr. Roubini.

But if the ‘bad bank’ idea could work, why not create a super baaaddd bank? We could use it to get rid of all our mistakes. Writers could unload their bad novels. Businessmen could sweep their errors under its broad carpet. What the heck, let people get out of bad marriages without penalty; the super baaaddd bank could pay the alimony and divorce costs.

The hitch with the bad bank idea is so obvious even a banker could spot it. If the cost of mistakes is reduced, people might make more of them. Like the rest of us, bankers are neither good nor bad, but subject to influence. Unlike metallurgy or particle physics, banking does not have a rising learning curve. It’s not science. Instead, it’s more like love and gambling…with a circular learning pattern. They learn…and then they forget. They get carried away in the boom upswing; then they get whacked when it turns down.

So let them have a good beating. It will give them of a lesson that will last a lifetime…and give the next generation a solid banking sector.

Enjoy your weekend,

Bill Bonner

Markets and Money

Editor’s Note: Bill Bonner is the founder and editor of Markets and Money. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, Markets and Money is published in 7 countries with a worldwide readership of almost 1 million people.

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8 Comments on "Markets and Money Day Special Edition"

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Patterns of the past for the future “We are entering an era where it is now politically acceptable to avoid recessions and higher unemployment by doing the exact things that created these economic problems to begin with” (Kenneth J. Gerbino, Coconuts and Gold,, January 26, 2009). To see how this latest new era is likely to play out, comments from a research paper form the foundation of a template to view the future: “It is common to associate the origins of the Great Stagflation of the 1970s with the two major oil price increases of 1973/74 and 1979/80. This… Read more »
Paul Tredgett

WoW watcher7, you covered a lot of ground there!
And the point was……..?

James Dale Davidson & William Rees-Mogg wrote in their book “The Great Reckoning”, at the end of the introduction chapter that: “… from what we understand of economic history, it would be startling if we were able to accurately gauge details of time and place in advance of the actual event. Our claims are more modest. We simply believe that it is possible to anticipate events rather than merely react to them. Lessons to this effect have been driven home since the earliest days of human interaction. “The book of Genesis tells the story of Joseph. By listening to Joseph’s… Read more »

Paul…Don’t ask him any more questions…Please mate no more encouragement

Paul Tredgett



my sympathies, i too had a computer which spat out such gobbledegook
– turns out it was a religious virus, had to re-format my hard drive.

So I’m a brain dead bolshie now am I Bill? I thought that was your Argentinian mate? Or was he the crony capitalist? Nationalisation was and is inevitable, I go with Andrew Mellon but liquidation has to be practical. The good bank-bad bank rouse is just another desperate fling to save as many of your crony mates as you can for as long as you can and they will totally over estimate what could be called good assets (meaning just more bail out after bail out). Any nationalised banks must be refloated quicker than. Underwater borrowers should be directly subsidised… Read more »

Oops I’ve been told that I implied they were your banking mates, not so.

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