Bear Market

A Political System That Knows Nothing

October 31, 2013 by · Leave a Comment 

The Daily Reckoning

Clive Palmer will be our local MP by the time you read this. He won by 53 votes and it took one of the longest recounts in recent political history to find that out. We’re leaving the Sunshine Coast for Melbourne on Monday.

There’s nothing worse than a businessman turned politician. Palmer already has to pay tax. Now he’s giving the political system his time as well. What a waste of valuable resources.

Dan Denning reckons you’re best off ignoring the political system as much as you can without getting into trouble. But the political system tends to get the economy into trouble.

The blog Buzzfeed put together a nice little example of this; the British housing market. A bunch of politicians decided they didn’t like urban sprawl, so here’s what happened.

In 1947, the Attlee government introduced the Town and Country Planning Act, which made it illegal to build anything without planning permission.’

Margaret Thatcher’s government stopped councils from building new houses themselves and she made it easier for people to get mortgages. But she didn’t make it much easier for private developers to build new houses on green fields. So all of the new borrowed money just pushed prices up and up.

The same planning laws which stop us from building new houses on fields also stop us building taller buildings in central London.

Put all this together and you get a terrible result. Today, the British housing market is a shambles. Home ownership is at a 25 year low, houses are still ridiculously expensive despite a drop, and mortgage debt is out of control. Instead of solving a problem, politicians simply indebted their entire nation to banks or landlords – take your pick.

In China, the government has pulled off the opposite problem, reports Forbes:

Over the last two years of traveling constantly in China, I can say that I have not seen a single city, town, or hamlet without massive empty housing stock. A colleague, on two trips crossing about 1,500 kilometers overland, said that he was not out of sight of empty buildings even once.‘ 

In short, government involvement in the economy makes a complete mess of things. You end up with oversupply or undersupply.

The same applies to all goods and services. But houses in the UK and China have a special bearing for you. Australia is facing both problems at once. First of all, our property market is ridiculously expensive for the same reasons as in the UK. Supply is restricted:

chart of Australian dwelling construction rate
click to enlarge

Worse still, it’s our resources that went into building all those empty houses in China. At some point, the Chinese will figure out they don’t need more empty buildings. And then who’ll buy Rio and BHP’s dirt?

If the housing bubble pops and China’s construction boom slows, Australia could be in for a serious economic crisis

At least Clive Palmer’s entry into parliament will be amusing. He might ask some awkward questions. There’s plenty to wonder about, after all. Joe Hockey reckons the ‘age of entitlement is over‘. Has a treasurer ever resigned so soon after being elected?

You know a system is in trouble when its leaders point to their own ignorance as an excuse for the failure of their policies. Yesterday we mentioned the NSA phone-tapping the Pope-mobile and German Chancellor Merkel. Half of Europe thinks one is evil and the other half thinks the other is evil. The Americans got confused and tapped both their phones for ‘financial system safety‘ reasons, according to Reuters. Obama denies knowing about it, while his minions claim to have briefed him.

But there are a long list of scandals that government officials around the world claim to know nothing about. They range from failed economic policy, failed military policy, failed law enforcement policy, failed immigration policy, and lots more. The RBA’s Securrency bribes are a local example.

A scathing audit of America’s TARP bailout program is the latest scandal to come from the US. It pointed out that the idea that the government made profits on its various bailout programs is rubbish. The first bailout was simply bailed out by another bailout later on.

Each time another scandal breaks, whoever is in charge goes into Sergeant Schultz mode:’I know nothing. Nothing!’

Sergeant Schultz is a TV character from the show Hogan’s Heroes. He is the guard at a German POW camp which is run by the POWs. Not that Commandant Klink knows it is.

Schultz regularly discovers the POW’s ruses. But is then fooled into thinking he should’ve discovered them so long ago that it is no longer in his interest to discover them as it would expose his previous incompetence. And so he says ‘I know nothing‘ and trundles away exasperated with his failings.

The problem with this mentality is that the ruse continues on. The amount of crashed British airmen, deserting German generals and sexy uncovered French spies that used the camp Luft-Stalag 13 to hide, sabotage and escape would’ve won the Allies the war themselves if they had been real.

For political leaders, Sergeant Schultz’s style of incompetence is costing them the war too. At the moment, the NSA has the headlines. But the failed central planning of the Sergeant Schultzes at the Federal Reserve is going to end badly too. And that means bad news for your investments.

So what is it the economists at the Fed have done? They’ve painted themselves into a corner. Instead of curing the patient, money printing has left him addicted. QE turned out to be heroin instead of a pain killer. Without it, financial markets behave like a drug addict without drugs. With it, they only experience a temporary high and the dosage keeps having to increase. They’re heading for an overdose.

When it happens, politicians will claim they had nothing to do with it. They will say ‘I know nothing’. And so, one by one, everybody in a position of power will realise they really do know nothing.


Nick Hubble+
for The Daily Reckoning Australia

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How Investors Are Flying Blind into a Debt Storm

October 31, 2013 by · Leave a Comment 

The Daily Reckoning

Stocks sold off a little yesterday, after hitting all-time highs on Tuesday.

Investors must feel confident; sentiment is overwhelmingly bullish. Investors don’t think the Fed will taper any time soon.

They’re right about that. The betting is that tapering will not occur before mid-summer or fall of next year. Our guess is that it won’t happen then either…

But who knows? We’re ready for anything…  Boom? Bust? Bubble? Anything is possible.

This financial world that we live in is completely new. There are very few data points from history that help us understand it. And those there are tend to be incomplete and inconclusive.

The feds changed the money system 40 years ago. Thenceforth, we’ve been in a brave new financial world. From a gold-backed monetary system pre-1971, managed by nobody, they switched to a system based on paper money, managed by people with Ph.Ds. The idea was that rather than be stuck with a fixed quantity of money, economists could figure out how much money was needed and provide it as necessary.

This was not the first time the authorities had tried. Several times in history, nations found paper money a convenient way to pay their bills, typically when they were at war and had run out of real money.

But this was the first major episode — in peacetime — when the whole world’s financial systems had come to depend on a paper money controlled by a single nation, the United States of America.

Gresham’s Law tells us that ‘bad money chases out good money’. This means that if people have a choice between holding debased or deteriorating money (paper) or holding real money that is not losing value (gold), they will choose to hold the good money and pass along the bad stuff.

In effect, that’s what happened. The good money (gold) disappeared. The bad currency (dollars) became what everyone recognised as ‘money’. Central banks, too, generally decided that the prudent thing to do was to hold some gold…as well as US dollars.

And now that the developing countries are becoming more prosperous, not surprisingly, their central banks too are accumulating gold.

Dollars are not the same as real money. They are really short-term debt instruments – Federal Reserve Notes. The US government tells us to use them as ‘legal tender for all debts, public and private’. But it makes no guarantee of their value. They are really the opposite of money. Instead, they are debt instruments of immediate maturity.

Real money has value. It does not depend on the issuer to do anything more. Once a debt is paid in real money, the transaction is finished. Over. Completed. Not so with US dollars. They are debt. And debt depends on the debtor. If he defaults, his paper promises can become worthless…including his dollar bills.

As dollars replaced gold, the capitalist system became a strange and grotesque amalgamation of market-based transactions, but with less and less real capital. Real money was replaced with debt. Gradually, debt spilled over and saturated all sectors.

Households, business, finance — everyone became drenched in debt…from the recent college graduate with his student debt, to the young family with its mortgage and credit card debt…to the retirees, depending on the unfunded liabilities of the Social Security and Medicare systems.

And when this tsunami of debt threatened to drown millions in the deleveraging crisis of 2008–2009, the powers-that-be rushed to the scene with aid. But what help could they give? More debt!

There was no way they could afford to let so many debt-soaked institutions sink. They made it clear they would give the economy as much new liquidity as it needed.

And now…even the faint suggestion that they might be getting tired of pumping so vigorously — $85 billion a month — staggers the market for stocks.

But where does all this new liquidity go? No one knows. Some say it disappears, because the banks are unwilling to lend.

Others say it never comes into existence at all. And others maintain that it is preparing another tidal wave to wash over the markets; they expect to see stocks, houses…everything that can float…rise up to unheard of levels.

One way or another, it may be that Mr Market is preparing some real excitement. It will be fun to watch…from a distance.

Bill Bonner
for The Daily Reckoning Australia

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Barrick Gold temporarily suspends $8.5bn Pascua-Lama mine construction

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October top stories: BHP’s Gemco expansion, Rio Tinto opens Kestrel mine

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Antapaccay Copper Mine

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The Antapaccay copper mine is located in the Yauri district of Espinar Province, southern Peru, at 4,100 metres above sea level.

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Deals this week: Killara Resources, Algold Resources, West Kirkland Mining and more

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ABN Amro commodity outlook 2014: Gold bearish Oil Corn Wheat Soybean weak

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