Who trusts a politician?

Australian politics was a disaster zone this week. Joe Hockey suggested regulating bank lending rates. That put him on the “lunatic fringe” according to a MP of his own party. Usually Hockey’s comments are quite alright, but this one is way out. The idea that governments should determine interest rates is ridiculous. Everyone knows central banks should have that job. Lunacy indeed.

Then the government realised the fine print in the Mineral Resource Rent Tax (MRRT) is a bit too vague for its liking. It didn’t deal with those pesky States’ royalties. Dan discussed it in detail on Thursday. The pre-election agreement with the big miners could be off, at least to some extent.

The possible collapse of the deal comes amid revelations Treasury is refusing to hand over legal advice that raises constitutional concerns about the planned mineral resources rent tax…. The dispute centres on whether the miners or the government are exposed to a potential multi-billion-dollar bill for increases to state mining royalties.”
Yes, the federal government could be paying state royalties!

Apparently its “obvious common sense” (not one or the other, but both) that this can’t be the case. But maybe Julia Gillard should check what laws she is writing before she goes out and says things like that. It could end up embarrassing for her.

So if the federal government isn’t footing the bill, who is? Uh oh…

Rio Tinto’s iron ore head, Sam Walsh, came out with this statement, which just about sums up how concerningly naive the miners have been in their cosying up with the government, “If you can’t trust government, who can you trust?”

More on that below.

Road to Nowhere

Markets continued their stumbling around this week. Well, in some ways, they have been doing the same for a long time. Over the past year, the ASX has gone nowhere. The year before that, the same level. Two years before that, the same level. Buy and holders must be going nuts! Meanwhile, Slipstream Traders are seeing their editor’s price theories play out in text book fashion. And they stand to profit from it.

Money is funny in Bernanke’s World

The world awaits what its most powerful resident will decide. QE or no QE? QE, in case you’ve missed it, is short for Quantitative Easing, which is a fancy way of saying money printing by the central bank. Everyone is speculating on whether the Bernanke Fed will give the market a big cash fix.

Then again, it’s probably a question of how much, not if. If bank analysts are right and the markets have priced in huge QE, you wonder where the market would go without it (down).

But hold on.

What can QE actually do? What is it trying to achieve? Let’s walk through it. The Fed has short term interest rates at zero percent. They can’t go lower, unless they go negative. Now the idea of paying people to borrow money sounds absurd (which is what having negative interest rates implies), even when the current environment of nominal rates below inflation is doing just that.

Professor Roger Garrison drew up the following description on mises.org, “At the zero rate, the Fed has put itself in the position of a first-time water skier who has the tow rope pulled up against his Adam’s apple.” If you aren’t familiar with the phenomenon, you should know it ends badly for the skier. They either fall backwards from the sudden lack of speed, or they get pulled forward for a face plant as the slack picks up again.

Prepare for Face plant


Source: Wikimedia and Adigitaldreamer

Which outcome – falling backwards or face plant – would you prefer to see? (Your editor has managed both in a single tumble.)

So if money can’t be printed in the name of lowering interest rates, it will be printed in the name of… printing. How is that supposed to get the recovery going? Is it supposed to reliquefy the debt markets? Is it supposed to devalue the US dollar to spur exports? It all seems a bit of a punt and hope strategy. No real aim.

But even without aim, there is direction. And money printing always ends in the same way: inflation. The funny thing is that Bernanke has kind of skipped over the concept of using QE to get debt markets going, walked straight past devaluation of the dollar to spur exports (which is a politically sensitive topic right now) and actually stated inflation as the goal!

Yes, by decreasing the dollar’s purchasing power, he hopes to get people to spend more. Does that make sense to you? Only if you’re a Keynesian.

They think that the problem ailing the US economy is a lack of demand. Rising prices will spur people to purchase more out of fear from having to pay more tomorrow. Sounds like a wonderful way to run an economy.

The concept struggles in a number of ways. Our favourite is the idea of “sticky wages”. Oddly enough, Keynes had to think of it in order to make his theory work, even though it argues against it just as much.

If wages are “sticky”, meaning they don’t change quickly, then inflation will be a huge burden for those stuck on incomes that don’t change quickly. Prices will rise much faster than incomes. Income earners will have less purchasing power from their income and will be able to buy less, not more. Of course, the rich will be fine with their savings to spend. The poor will struggle the most.

Flash Crash 2

You may not have heard about it, but there was another flash crash. Apparently a software glitch caused the S&P 500 ETF to trade 10% cheaper for a couple of seconds. US$ 7.9 billion in value disappeared and then reappeared when the trades were cancelled.

Yes, automated trading systems are only allowed to make a profit. When they make a loss, the trades are cancelled. Check with your broker for similar arrangements.

Musical Foreclosures

As the US foreclosure mess continues to ripple through the pond, locals have taken matters into their own hands. A Chicago Sherriff is refusing to proceed with foreclosure evictions for Bank of America, unless the bank can prove the foreclosure was proper and legal.

And after having bailed out Bank of America (BoA) in an impressive list of direct and indirect ways, the Fed is now joining a group of institutional investment firms in a lawsuit against BoA. The aim is to get BofA to purchase back dodgy securitised mortgages back that it sold to investors during America’s housing boom. The total cost of purchasing back those mortgages could sit at US$ 120 billion. But why bully BofA? Surely the other banks were as bad?

What has us bothered about all this is where the suing will end. The homeowners will sue the banks, the mortgage backed security investors will too, but is the bank the end of the line? Maybe not, because the banks outsourced much of the legal work to people like David J. Stern and his foreclosure processing business. Now David finds himself with unwanted media attention from the likes of Bloomberg, which features the Google maps image of his house in its article. The image shows his mansion and yacht, and mentions the Bugatti in the garage. Maybe the suing will end with him? This article suggests so.

In the right direction?

Labour market data from the US continues to look remarkably bad, despite being impressively fudged. US unemployment is back at 10% according to Gallup. Economist Mike Shedlock is predicting a large rise in unemployment after midterm elections in the United States in November. Basically, the data is a joke and a large number of analysts have picked up on it.

If austerity measures play out favourably in Europe (although it’s not working out so well in France at the moment), this will make things interesting in the US. It will be the Keynesians vs. the Tea Partiers with Republicans eager to not embarrass themselves. It should be good fun to see what policy comes out of that mess.

Treasury Secretary Timothy Geithner is a Pelican

Some would call him a goose. Either way, he is a complete plonker. Reuters reports that he, “vowed that the United States would not devalue the dollar for export advantage, saying no country could weaken its currency to gain economic health.

Geithner now finds himself in a combination of economic no-man’s land and a state of outright dishonesty. Firstly, who is he to tell the Fed what to do with its monetary policy? The statements have no clout whatsoever. But he still makes them as though they are definitive: “It is not going to happen in this country.” Geithner told Silicon Valley business leaders of devaluing the dollar.”

In this country? What on earth? Where will it happen then when the Fed revamps QE? And hasn’t it been happening for years now anyway?

Secondly, Geithner is now at odds with most of the people who believe in him. A weaker dollar is supposed to spur exports for a US recovery. That is what Keynesians are banking on. But here goes Geithner again:

It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive,” Geithner added. “It is not a viable, feasible strategy and we will not engage in it.”

The whole world is engaging in it! And it has caught some nations out, “Brazil’s top economic officials will not be attending meetings of Group of 20 finance ministers and central bank governors in South Korea this week…. Finance Minister Guido Mantega canceled his trip because of currency issues.” Yep, after seeing the Brazilian Real rise rapidly, Brazilian officials scrambled to put their own measures in place, realising that they haven’t printed enough money to keep up with the Fed.

Charge of the Austerians

Whoa, it seems Europe is really going for it! French President Nicola Sarkozy holds firm in France with his pension reforms, despite growing violence. The UK government has rolled out its austerity plans too, despite an all time record government deficit for September. Let’s take a closer look at Europe’s turmoil.

France has gone violent, according to media reports. Burning cars and tear gas featured. It may seem like nothing new, but the students causing the ruckus are protesting about something that won’t affect them for about 40 years! And the retirement age is only being increased by two years!

What about democracy? Don’t they care that the majority want austerity (assuming it does)? How do they justify putting the nation to a stop over something they can already exercise their vote on via the ballot box? Do we sense a crumbling of majority rule in favour of unalienable rights?

On the other side of the channel, up to 500,000 public jobs are to go. UK government “departmental spending reduced by an average of 25 percent” and defence is facing some rather odd reshufflings, including an aircraft carrier which will immediately be mothballed after being built…

But taking the cake is Spain, with its marvellous demonstration of how government subsidies end. Having provided massive incentives to build solar power installations, the Spanish government is leaving its formerly prosperous dependents high and dry in the name of austerity. More than 50,000 solar power entrepreneurs got sucked in by the government’s guaranteed above market price for electricity and now face financial ruin. “You feel cheated, we put our money in on the basis of a law,” one says. Oops.

Correcting past politician’s mistakes is something politicians rarely spend their valuable time doing. It’s usually just more laws and spending. So the question is if modern politicians have the balls Lady Thatcher did. And even then, will austerity really work?

Markets and Money, brought to you by Senator Conroy

Labor Senator Stephen Conroy has one of the most impressive sounding titles in Government. He is officially the Minister for Broadband, Communications, and the Digital Economy. On top of that massive edifice, he is building himself a monopoly on the new fibre optic network. He says that, “If passed, the laws would make NBN Co the sole fibre network operator nationally, enshrining in law that no company may build or operate a network that competes directly with NBN Co for customers.”

Henry Ergas’ article in The Australian does a brilliant job of explaining the harrowing details. It’s a must read in itself, so we won’t give you a summary.

The Longest Day 2 to be screened in black and white as well

Joining the list of those forecasting a war is Jim Rodgers: “It makes logical sense: Whenever you have a shortage of raw materials in the world, it historically has led to war.” Which raw materials?

The NY Times is unusually clued in: “China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of some of those same materials to the United States and Europe, three industry officials said on Tuesday.”

Hopefully you know what rare earths are by now, because Australia is set to profit from them. Australian Small Cap Investigator subscribers have been for months. Basically they go into most high tech items, including your colour TV.

Until next week,

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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France has gone violent, according to media reports. Burning cars and tear gas featured. It may seem like nothing new, but the students causing the ruckus are protesting about something that won’t affect them for about 40 years! And the retirement age is only being increased by two years!

Who trust the media?
Perhaps they demonstrate against something else?
Media do not exist to inform anybody.
They are regulated by the goverment – they work together.

Ned S

The Frogs were always inclined to being emotive – A nice lady once offered them some cake to eat but they chopped off her head and did their best to destroy the known world at the time? A bit of a strange aberration in the world possibly sums them up?

Expected to find the French as arrogant and self-obsessed as the media portrays them, but found them fairly relaxed… and very, _very_ relaxed during their two-hour lunch break. Our only general complaints were being showered with fast food refuse (much of it US franchised) from passing cars at high(er) speed; and occasionally finding a service we urgently needed operating for just three days a week. French bikers may be the friendliest in the world. No rider of _any_ two-wheeled machine passes unacknowledged. Play ‘Ca Plane Pour Moi’ anywhere in their vicinity and it’s Instant Party!~ :D Have long forgiven them… Read more »
Ned S

I was seated next to a French lass on a 5 hour flight from Moscow to Dubai once. That experience disinclined me to ever visit France. But who knows – Maybe she had to work in Moscow and holiday in the UAE because the French couldn’t stand her either?

Sounds like Portugal is in trouble.

The thought crossed my mind a while back dat der Hun might be better off if they weren’t burdened by such. But suspect not – They all help keep the Euro low and the exports of the one half decent economy in the region competitive.

Ned S

This doesn’t sound too flash from the perspective of a QLD push bike thief who invested the proceeds of his crimes in SE QLD property Biker? :



Interesting link, Ned. Thanks!~ “…more people are living with family and friends, because of affordability issues.” And I’m sure there’s a high percentage who believe it will crash. We get a couple of calls each week from hopefuls wanting one or the other of our vacant blocks. They see our signs… figure we’re desperate sellers… then this scenario begins… and repeats itself with new players the following week: 1.) Mum calls, _always_ asks block size; 2.) Mum is disappointed because this large block (both are) is really not large enough; 3.) Mum asks the price; 4.) Mum mentions a better… Read more »
Ned S
When I bought the house in the name of my SMSF in early 2008 I fully expected a 10% drop. But factored in a worst case scenario that was way bigger. No drams – It was always just my backup plan to provide rent from a house to top up my old age pension from the government should my hopes of self funded retirement crash ‘n burn. As I’ve said before, I’m just not that driven these days. So figure that as the government won’t let the 20% of oldies who don’t own a home or have much super starve,… Read more »
Mate, you can always come out here and crash for a spell! Lost count of the number of bikers and RTW travellers who have crashed here since ’94. (Only a third or so remember to fill out the Visitors’ Book. My cellar’s fault, I admit… .) I’ve never bought _anything_ anticipating I’d lose money on it. Conversely I have lost count of the number of things I _should_ have bought… and lost bigtime NOT buying. Recent stoush with the shoeful one was amusing. If you go back for a butchers, you’ll see two rapid responses to my comment. Guess he… Read more »

Anyone medicated, I mean? ;)

Ned S

I always factor in a downside risk before buying ‘stuff’ Biker. And ask myself if I can lie straight in bed at night thinking about it. If I recall correctly, it was Buffett who remarked If you can’t live with the thought of taking a 50% hit, then the stock market isn’t for you?

Medicated … Does self medication count or does it have to be a prescription drug? ;)


I guess one should never gamble with money one actually needs, Ned.
Haven’t ever lost a cent in my life on property.
(I’ll concede that I’m technically ‘behind’ on one vacant block at present.
But there are now only two others with the same water views, left.
There were probably 20 a year ago. Supply is shrinking… !)

Self-medication is prescribed, Ned!~ ;)

John R

We all have short memories – I still recall Paul Keating deregulating the banks so they could charge us more in interest and have variable loans all of a sudden after years of the same interest rate :)

John R

Ned – Now that there is only two blocks left it is time time raise the price of your water view block by 50% :) This will ensure that the other block sells very quickly due to the cheap price and your block is then the only one available so make them pay for it. The other alternative is to sign a contract putting $500 down subject to various weasel clauses so that on their sign is put “UNDER CONTRACT”. You then put on your sign “BE QUICK – LAST ONE AVAILABLE AT THIS PRICE” :)

Ned S

I don’t own any water view blocks John R – Perhaps you are confusing me with someone else? As a personal preference I reckon living in beach side property is over rated. The salt air makes it hard to grow plants, rusts your car etc. But accept that lots see it way different.

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