All Quiet on the Fronts

Posted by Adam Gomez

All Quiet on the Fronts7.5104

It’s quiet….too quiet. Stocks in New York were mostly unchanged over night. So now what?

Well yesterday Aussie stocks were up 2.5%. The question is whether this the leading edge of a liquidity driven rally in shares…or just an old-fashioned but impressive short squeeze.

One thing to keep your eye on is the G-20 finance ministers in Busan, South Korea this weekend. They will get together and agree to do nothing urgent. The one thing they will definitely NOT be doing is raising interest rates. They are too creeped out about a sovereign debt crisis in Europe leading to another liquidity crisis, according to Bloomberg.

Of course we’re already reading some reports in the press that Europe is not Lehman and that the stock market rally is a signal that Europe’s debt woes won’t put a lid on stocks for the rest of this year. But Simon Kennedy and Shamim Adam of Bloomberg report that, “Group of 20 central bankers are delaying their withdrawal of emergency stimulus as Europe’s debt crisis shakes financial markets and threatens to hinder the global recovery.” (Mmmm….gushers of free cash to boost bank profits. Yummy).

There’s a global recovery? How did we miss this? Just for the record, we reckon it’s going to be very hard for economies in Europe, America, the UK, and Japan to put up big annual growth numbers when they are saddled with so much public debt. The servicing of this debt is going to consume a larger and larger share of tax revenues, which will struggle to grow as it is.

“China property risk worse than in US,” reports Geoff Dyer in the Financial Times. “The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank.”

Hey. That sounds familiar…

“The housing market problem in China is actually much, much more fundamental, much bigger than the housing market problem in the US and the UK before your financial crisis,” Professor Li Daokui told the FT.

By now you might be thinking we see housing bubbles everywhere we look. That might be true. You can never predict where credit will go during a credit bubble. It picks an asset class that is accessible to the public and whose boom benefits multiple groups.

This article by Fan Gang, a professor of economics in Beijing, shows that China’s credit bubble was driven by local government borrowing. Local government’s borrowed big to achieve double digit growth rates. Part of that growth came from infrastructure spending (resource bullish) and housing development.

With Europe’s troubles and America’s oil spill (yet another example of how the modern centralised State is increasingly ineffective in dealing with a crisis), the prospect of a bubble blow out in China has receded from the investment landscape. But it hasn’t gone away.

Here in Australia the big news yesterday was Xstrata’s decision to cancel jobs and spending on coal projects in Queensland. Xstrata deemed that those projects would be adversely affected by the Resource Super Profits Tax. It canned them.

Some analysts think the re-rating of mining and oil shares (for different reasons) has already made both sectors attractive. Value investor David Dreman says, “We think the proposed 40 percent Australian tax is likely to come down some…And since both Rio Tinto and BHP have gone down very significantly, we think there’s some value there.”

He continued by saying, “We also think there’s a good deal of value in some of the exploration and development companies in the United States that have been going down since this enormous BP spill…I think there’s value in some of these natural resource stocks now.” Both Kris Sayce and Alex Cowie seem to agree, although both are being cautious about managing risk right now.

And finally, some reader mail in response to the mostly constructive criticism we received last week. Have a great weekend!

Hi Dan,

Have followed your Reckonings for years now. Call it my cross to bear. Subscribed to the Reserve for my sins because I like what you write – along with that Bonner fellow.

Sure, mining can be a neat way to poison the environment and given half a chance any miner will cut corners – this is what they do in terms of risk mitigation for their costings in a) determining mine viability and risk in the first place and b) maximising profit. But the same applies to most industry – paper mills, tanneries – what have you. Weak legislation is the culprit, along with poor prosecution.

However, I am a big fan of small government and being left the hell alone to lead my life my way in peace. So it seems I am on the horns of a dilemma – I don’t trust big business enough to do the right thing but neither do I trust government to do the right thing. I think that in this we are possibly in the same boat.

There is therefore but one sad solution. And when I become the benevolent dictator and sole ruler of my country, I’d be grateful to have your services as counselor and lord high executioner for whomever I see fit to be put up against the wall and shot.

Keep up the good work. I enjoyed the essay a lot. I would not have been as polite [to critics] but since I am an alleged passive aggressive personality type I guess my views would have been more forthright. As in ‘eat s$*t and die m*&#$r f&^@#$rs!. Die!’ (ESAD for short – drop it into conversations with bankers and other people you don’t like – it’s great. Makes me laugh every time and it is Amazing with a capital A to see what happens in your favour when laughing). I call it Dictator Prep.

I digress.

So I appreciate your efforts to keep it on the level without losing the plot as I most assuredly would have done.

Warm regards

William