To Save the Consumer We Must First Destroy Him

Thank goodness for Wal-Mart. After Aussie stocks fell over six percent yesterday (the ASX/200) to four-year lows, Wall Street sprung into action overnight. America’s largest discount retailer reported a 10% rise in third quarter profits. It also revised down its expectations for 2008 year-end earnings. The stock was up 4.4%.

Wal-Mart’s current marketing slogan, by the way, is “Save Money. Live better.”

It was an island of good news in an ocean of panic. Large retailers in American are feeling the sting and going numb. Some are going out of business, like consumer electronics retailer Circuit City. But for a day, the Wal-Mart led-rally took stocks from nearly 300 points down in early trading to over 500 points up by the end of the day.

Will it carry over to Australia? Probably. It’s either rally, or, according to SWARM Trader editor Gabriel Andre, re-test 3,500 as the long-term support for the ASX/200. Also, the sort of news coming out of American retailers this week would be pretty ominous for Aussie retailers, you would think. If the full array of credit-crunch related side effects begins slamming into the Aussie economy (and it already is in the banking sector), consumers are going to save more and spend less.

ASIC announced the ban on short-selling of non-financial stocks will be lifted on November 19th, while the government has introduced a bill to ban naked short-selling. The ban on covered short-selling of financial stocks has been extended by ASIC to January 27th of 2009.

Have you noticed that since ASIC banned short selling over the weekend in late September, the All Ordinaries is down by nearly 24%? Take a look at the chart. We’re not making it up.

This isn’t to suggest that the ban on short-selling is solely responsible for falling Aussie stocks. There are plenty of reasons for that. But is this a case of it being necessary to crash the market in order to “save it” from unscrupulous short sellers?

Granted, naked short selling by speculators was probably a good riddance. But let’s not disparage the valuable role professional short-sellers play. Many of them analyse a company balance sheet to see what’s wrong with it. Then, they go short, based on their conclusion that the business (Enron, GM, Fannie Mae) is in big trouble.

Shorts also provide a kind of floor for the stock market. When shorts cover, they’re the only ones who step back into the market to buy at the bottom. Often times, they may decide that it really is time to buy a stock at a much lower price. But even if they aren’t buying as value investors, they ARE buying. And a short-covering rally can be just the thing to lead to a capitulation in sentiment and a reversal of the primary bearish trend.

Of course none of that will happen if you can’t short stocks. You reckon, though, that by extending the ban on financial stocks (including property trusts), ASIC is trying to prevent a wipe out in shareholder equity while asset values continue to fall. This would be the dreaded problem we mentioned yesterday, where short-sellers see a badly over-levered balance sheet and take the appropriate position short the stock.

The ban on short selling doesn’t improve an impaired balance sheet. But it does delay the market mechanism by which the share is accurately valued. It also gives insiders and existing shareholders the chance to bail out of their shares before common shareholders are wiped out in a real collapse. So it’s got that going for it.

A quick addendum to our observation about Robert Rubin’s gambit to build up a surplus in the capital account while running a current account deficit. You could argue, in Rubin’s defence, that he was accepting the facts of economic life, that Americans were going to binge, and that the only way to offset this without crashing the dollar was to create a capital account surplus.

But that would be a generous argument. As one reader suggested, Rubin helped build a system where the U.S. financial industry was global ticket clipper. It was a dollar-based hegemony in financial services, in which Wall Street generated huge fee and transaction income by the recycling of global trade surpluses and savings via U.S. stock and bond markets. Everyone had to pay a toll to stay in the game.

There’s also a philosophical problem that we think our old mentor Dr. Kurt Richebacher would have identified. Rubin’s preference for a capital account surplus seems like it’s based on the assumption that you can get wealthy collecting fees on financial transactions. But that is bad national strategy for wealth building. In fact, it is a strategy for national wealth destruction.

As Dr. Richebacher soften pointed out in his work, real economic value begins with production. If you don’t produce anything, you can’t sell anything. And if you can’t sell anything, you can’t buy anything. Consumption is also indispensable to a growing economy. But real value creation begins with production, and the Rubin model rejects that in favour of debt-based consumption.

The net result has been a disaster for Western consumers (whose whole identity, in fact, is based on consuming…we don’t call them producers). Their real wages have fallen as labour markets (especially manufacturing) have been globalised. Asset prices that were goosed up with funny money are now falling. And all that debt they took on to make up the difference between falling wages and a rising cost of living must now be repaid. In order to save (enslave) the consumer from debt (to debt), it was first necessary to destroy him.

Here’s a question. Does Henry Paulson’s ever-changing TARP now exclude the government buying distressed assets because the Treasury can’t figure out what they’re really worth? Let’s see. The banks don’t know what they’re worth. Investors don’t know what they’re worth. And now the government doesn’t know. It’s a clean sweep!

Or maybe they all know what these securities are really worth. And that’s why none of them are selling.

If you stop hearing from us here at the Old Hat Factory, it will be because we’ve made the government’s new blacklist of banned internet sites. Of course, you wouldn’t know we’re on that list (and neither would we) because no one is allowed to see what’s actually on the list. But it’s not for lack of trying.

We rang up the Australian Communications and Media Authority (ACMA) to ask which websites are currently on its blacklist.

“We can’t really say.”

“Well how does something get the list right now? Is it done manually or by some sort of automated process?”

“It’s manual right now. Someone submits a complaint about a site. We investigate it. And then if it’s deemed to be illegal, it goes on the list.”

“Who does the deeming?”

“We do.”

“Can I see the list?”


“Why not?”

“Because it’s full of illegal content. We wouldn’t want to share that so you could go have a look, now would we?”

“Under what legal authority can you prevent the public from know what’s on the blacklist?”

“I don’t really know. You’d have to ask our lawyers.”

The story of Australia’s plan to filter/censor the internet even made it to the front page of the Drudge Report this week. The key word was, “unwanted.” Communications Minister Steven Conroy said earlier this week that, “The pilot will test filtering specifically against the ACMA blacklist of internet prohibited content, which is mostly child pornography, as well as filtering of other unwanted content.”

So what is “unwanted content?” The government may know. But it’s not telling you. And apparently, it doesn’t have to.

What should you do if you’re opposed to the internet filter? Well first, there are plenty of ways around it. We can’t say what they are, because for all we know, saying so would be a crime. But a little Googling should get you there easily enough.

There are also a few websites spring up on Facebook and other places where you can voice your displeasure. Another place to start is here:

The Yanks will shut up today about Australia’s legal system and a Bill of Rights and guns. Here’ s some reader mail from the last few days:

Dear Dan Denning,

So we barbarians should adopt a Bill of Rights like the non-barbarian USA. What a wonderful example it sets to the world!!

Perhaps we should so we can load ourselves up with guns and shoot at all sorts of enemies whether real or imagined – just like Denny Crane in Boston Legal! (a great show!!) But then perhaps not – we haven’t done too badly without one. As citizens are we less secure and frightened than those of the USA? Do we have less freedom? Is our legal system more corrupt? I can’t see that it is.

I would prefer Australia to be a republic. But I suspect, like most Australians, I would fear the adoption of the USA system and the possibility of ending up with a president who is contemptuous of civil rights, invades other countries on false pretexts, claims the right to conduct illegal acts in other countries and bankrupts the nation in the interests of his cronies.

I am not anti- USA. Indeed I had long admired it. It’s just that it is getting harder to do so these days.

I think we are better off with continuing to evolve our Westminster based system of government – no need for guns! I don’t like inherited monarchies but the rule of Queen Liz isn’t too onerous compared to a George B and probably less costly. Now there is a thought!! Why not return to the Crown? Give up the rule of the gun and learn to make a decent cup of tea instead. A good cup of tea ( and perhaps a Bex and a good lie down ) would probably have a more calming effect than a gun in most situations. ( I enjoyed my trips to the USA but I couldn’t get a decent cup of tea.)

Thanks for the interesting work on finding good companies to consider for investment – as well as a good laugh!!



G’day, Dan

Your few paragraphs on Bills of Rights said more than the words. James Madison would be proud. Much appreciated.
Best regards,


“Yankee go home!”

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 Comments on "To Save the Consumer We Must First Destroy Him"

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I like the sound of your Dr. Richebacher Dan and will follow that trail or reading with thanks. What really grates me is how the rejectionists prevailed, those that said the CAD just didn’t matter because the debt was private. They didn’t have to argue or justify they just greased the banksters and the politicians wheels. A total lack of rigour in public and academic life. Speaking of which, and me being one supporting your other commentator that rejects as abhorrent the thought jurists getting anywhere near control with a bill of rights (imagine Michael Kirby on the job conjuring… Read more »
Coffee Addict

Following on from Ross’ post, it is sometimes easier to place comments (including controverial ones) on the China Daily site than on some of the Australian media sites.

Rici Smith
The simplistic investor: Well maybe in a bear market, stocks will continue to fall regardless of shortselling bans. But then maybe if shortselling had been permitted would stocks would be even more depressed than they otherwise are. Who knows? All i know is that on a simplistic viewpoint, and i am a simplistic investor (but one that was ‘smart enough’ to avoid investing in subprime rubbish, or stocks that pushed investing in toxic waste), at the end of the day banning short selling is not a bad idea. An investment in stocks should be seen as an equity investment in… Read more »
ralph hill
I can’t go out and buy fire insurance on my neighbor’s home, and collect when it burns down ? That’s illegal. Why, should I be able to collect when my neighbor’s business is on fire ? Short selling, just smacks of margin trading, and which like all speculation is doomed to fail. Good Grief! never gamble with money you can’t afford to LOOSE. “Naked short selling” is just fancy lawyer talk for the ‘big boys are stealing, again’… In fact, those short sellers ought to have to drink all that bloody awful tea and have crumpets with the Queen while… Read more »
NAB employee and shareholder
NAB employee and shareholder
In your report Walter asks the question (amongst many), Is our legal system more corrupt? Well, allow me to provide some information that may in part sway your view on this. Firstly as a reasonable newcomer to the Australian shores, I am agog at the practive of Trading Halts on the ASX. In other countries (and I site the U.K from experience), there is no such thing. Typically any material information that would affect a stock price is announced when the market is closed, and then the market is allowed to trade as normal during normal market trading hours. It… Read more »
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