Aggregated Awareness

It's the same story, different day (SSDD). That is, nothing much has been revealed overnight to cause us to change our view that you're investing in the midst of a long-term depression. Most of the positive GDP data coming out globally is backward looking. It doesn't tell you much about the future.

It is worth noting that a story in yesterday's Financial Review showed that prices for coking coal have followed iron ore and coal prices down. Record high prices for all of those key exports drove a huge increase in the terms of trade and are behind bullish projections for stock prices, government revenues, and GDP expectations.

But if Chinese demand for these steel-making ingredients falls, all those projections are pretty iffy. It all depends on if Chinese property prices are in a bubble. They are, according to Jiang Hui, the investment director at Star Rock Investment (not Rock Star investment).

According to Bloomberg, Jiang told a conference in Shanghai that, "China's property market has a very big bubble, which may last for a while...Only higher interest rates and the introduction of a property tax can bring down real-estate prices."

There are many other things that can prick a bubble. But since we've been hitting it pretty hard this week, we're going to leave those subjects alone. Instead, we've published a summary of some of the most interesting lists we got in response to our question a week ago of what to stock up on for the end of the world as you know it. You'll find the notes below.

But first, and quickly, a mate asked us why we were being so overtly political and pro Liberal in an investment e-letter. We should clarify that we're against all politicians. Someone wrote to us that, "Comparing elected political representatives to criminals is offensive." Yes, it is, to the criminals.

You have to keep your eye on politics these days since the government has rushed in to muck up the market even more than it was mucked up by the banksters. But there's no doubt, that stupidity and economic illiteracy are bi-partisan. If the Greens are basically against industrial society, then what does that make the independent Member for Kennedy, Bob Katter?

Katter has submitted a list of 20 demands/suggestions/flights of fancy/acts of lunacy to Julia Gillard and Tony Abbott. His support can be obtained (not purchased, as in Andrew Wilkie's case) in exchange for agreeing to some of his demands/suggestions/flights of fancy/acts of lunacy.

This is why Libertarians are generally not conservatives. Conservatives, some of them anyway, don't have any problem using State power to achieve their favoured ends. They're just after different favours and different ends.

In Katter's case, he's especially ticked off that Coles and Woolworth's have managed to offer Australians thousands of items they'd not be able to get at the Corner Milk shop at a reasonable price. They must be stopped!

He does have some provocative and entertaining ideas. We'll give him that. But he reminds us of the Rich Texan character on the Simpson's, also known as Senator Shady Bird Johnson. Do you see the resemblance?

More seriously, it's interesting to see how the interest of regional Australia - very real and legitimate ones which Katter represents - differ from the capital cities. Maybe a one-size-fits-all Federal government isn't going to work as Australia gets bigger. It's not exactly the Red State/Blue State divide you see in the States. Not yet anyway.

Now, what's on your list of things to stock up on because they disappear from shelves when people lose confidence in paper money? Some replies below. We've published quite a few of them. So take your time over the weekend to review!

Of utmost importance, toilet paper!!!

Also, long term outlook, off the rack magnifier reading glasses of various strengths, thread, needles, safety pins, buttons, antibacterial ointments, hydrogen peroxide, rubbing alcohol, toothpaste & brushes, vitamins & supplements, OTC pain killers as it all must fit in a small home, chose small items

Thanks for the daily reckoning! Really enjoy reading something amusing while learning

Anne

For us old fashioned book readin' stay at homes, old fashioned light bulbs, preferably bayonet mounts but screw ins if that's all and screw in fittings to replace the bayonet fittings. Serious...my local milk bar is selling them for $5 each (bloody screw ins) lots of cigarettes and vodka and proper beer. Crossbows and accessories? Quality dog food (for dog, if huntin' gets bit tough) bicycles and accessories...are getting very pricey. Old fashioned cameras, film, darkroom equipment-anything that doesn't need computers. Musical instruments. Good quality art materials and paper. And tools to fortify the joint. Now I'm getting carried away and romantic, this had better stop right here.

Enjoy ya trip like I enjoy ya newsletters.

Jill.

I have a wife and four daughters - no matter how bad things are chocolate always seems to lift the mood!! At the top of my list!! Mind you after reading your columns I don't know whether to reach for the vodka or the pain killers - or both!! I have been following you for only 6 weeks now, is it just the current climate or is the glass always half empty??

Bruce W.

[Ed. note: not always, just the last ten years or so]

Among my list are sprout seeds, quick growing & nutritional (few days), matches/lighters,

rice/pasta, tinned tomatoes/sauces.

Anonymous.

My plan.

1. Get out of debt.
2. Get liquid. Have enough ready cash for the next two years.
3. Invest in Australia's underground proven assets. (gas, coal, copper, iron ore etc).
4. Invest only in Australia where I live. Overseas exchange rates and bankruptcy of Nations do not alter the price of essential food in Australia.
5. Invest in Intellectual Property focusing on the re-design of thermal power stations.

Kind regards,

J.

Sounds like you have the survivalist bug. Some more reserved commentators call it the lifeboat scenario. After watching Tony Robbins inform people that they had best watch out for a collapse late this year and no later than early next year I have been buying extras of everything, kitting out the 4wd and pencilling in great camp sites to go to when the bank holiday starts. Do you want to be in a city when people cannot access money - ergo food and fuel? Not this little black duck.

If you consider that Australia has no more than three weeks worth of fuel reserves and four weeks' worth of food reserves I think a recovery in the near to medium term is psychopathic optimism.

Good luck.

M.

You have a good list. I would add: Heirloom seeds, matches and/or fire starters, first aid products, good boots, Swiss Army knife.

Best regards,

Charley

Lots of toilet paper, the nice soft one. Think we may be using it or selling it.

Graham

I'd add a tin opener. It might be embarrassing to die on top of a pile of tins, maybe holding an empty weapon.

V.

My wife's Polish grandmother would always buy up huge stocks of salt when she thought a depression was coming. She lived through two world wars and died at a ripe old age of 93 about 10 years ago.

Love your column,

T. Smith

-First up, I love your dailies and weeklies. Very insightful and must say I do agree with almost all posted. That said, I do find it incredibly curious that a group of smart guys like yourself (nor almost any other economists I might add), still do not mention the underlying cause of why the word is going through this GFC right now.

It's called Demographics, guys.

Wow, ever heard or studied that? The world economy pumps out around 58T per annum. Of that the US around 14-15T, the EU around 16T, China and Japan a piddly 5T. Germany rates bout 3.3T, then all of us just follow…Now assume the rest of the world is just like the US (I'm not sure, but a good bet I recon), the consumer is approximately 70% of the economy... Any problems so far?

So. If you only knew when (demographically) the big spenders were on the sidelines or spending, s**t, we would all be rich! But wait, we do! Through National and international statistics from (IMF, CIA, World Bank), we are now armed with these facts!

The big fact is that people in their late 40's to 50's scale down, with everything, from cars to Mc Mansions. The kids have left (or are leaving) home, me and you just wanna get all cuddly... And guess what? Whatever Obama or anyone says (or tries to pay for), I don't f**cking need a new SUV from Ford or whomever! All I want my little retirement condo and my 401K (or Super in AUS)...

And that is the fact. The US and EU Consumers are now not spending. NO amount of FED spending will entice the Consumer to spend on that RV or the Mc Mansion they don't need.

Please feel to comment, like the song, I'm just a guy.

I agree, no Bonds. Well, make money while you can though.

Eric

Items necessary on the basis of the experience of my grandmother, who lived through three bankruptcies during her life (1920, 1930, 1948) in Europe:

• Salt (you can trade for salt any items of your need with farmers, then farmers always need salt - salt is easy to store for several decades!) - I think, that salt is the most important of all! Salt is as important as gold!
• Gold, gold, gold - you can buy anything for gold during hard times. My grandmother told me, that during the 2nd world war a family of 4-5 persons could buy food for one day for 1g gold!
• Matches
• Saccharine
• Fats of any kind (best is palm fat)
• Additives for soap cooking (you can do it by using used fat!)
• Warm clothing (also good for trading)
• Any kind of appliance needed when you kill an animal for meet (pork, goat, chicken, etc.) - and abilities to process them
• Wheat
• Sugar (a lot of it, easy to store - use some drying material when packing - silica gel)
• Honey
• If possible let a water well be made in your yard
• Washing powder + cosmetics as soap, toothpaste, etc.
• Dried meet, fruit, preserves as marmalade, jams, - home made preserves to be preferred!
• Petroleum lamps
• Heating furnace fuelled by wood (also good for cooking)
• If you have place: living stock like chicken, swine, etc.
• Egg powder
• Chocolate
• Any kinds of nuts (vacuum-packed) - has a great nutrition value
• Red vine
• Vinegar and other spices like pepper, curry etc. (during bad times there are no spices)
• Lemon juice preserve (vitamins!) self made
• All kinds of penicillin pills
• Plant a lot of fruit trees in your garden! Make sure, that your garden can not be seen from the road!

Hope that I could be of any help.

Although you did not ask for it, but I would like to add something else from my grandmother, here a list, what you should avoid in any case:

         §   Money with any bank on a banking account!          §   Any kind of insurances          §   Any dematerialized papers, like shares, etc.

From the history of my grandmother (she is now dead): She and my grandfather have saved money during their whole life, they wanted to have a nice banking account for their retirement. They wanted to travel to several places in their old days.

But the 2nd world war came. And the banks have eventually closed, but the paper money has lost all of its purchasing power anyway. She told me, if they had bought gold for their money, they could have been well off even during the hard times and thereafter. When I was a little girl my grandmother used to tell us these stories. I am happy, that I have listened.

And do you know what? My father used to purchase gold bars during the 1960s. Unfortunately he died being 49, so he did not need it.

With best wishes,

Valéria

Hello I am writing in response to your article where you ask your readers what else should you stock up on.

I am stocking up on: sterno canned heat or ecofuel canned heat as that is the only heat source I can find that is safe to burn indoors without dying of carbon monoxide poisoning. And some of those fold up sterno stoves. You can buy them all on eBay and they ship worldwide, a lot of the sellers

Plus there is a company called sun jel that make indoor fireplaces that run of cans of fuel that is safe to burn indoors.

Plus I found on eBay these cool headlamps- they are headbands with a torch light stuck to the front of them- like miners use in mines, and I also got off eBay some cap lights whish are lights that you clip not the rim of your cap. I got some for the whole family. How else are you going to see at night when you're cooking tins of spam ham on your sterno stove?

Plus spam ham of course, you can cut it into slices and fry it on your sterno stove.

Packets of seeds that reproduce year after year

Dried mashed potato that you just have to add water to.

Maybe even a camping fridge that runs on batteries

Get the whole house converted to solar so you won't be subject to blackout or brownouts, and get a water tank for your backyard

Buy a dingo bush camping kettle so you don't need a stove to boil water but be careful not to burn the house down as they don't look too safe

Buy a 30 second tent in case you and your family need to flee

And some thick mink blankets to put over your family when the power goes off in winter, while you light the sun jel indoor fireplace.

Plus tinned food including tins of fruit cake and chocolate self saucing pudding so nobody rips each other's heads off from depression during all of this fiasco. Chocolate works well in any situation to cheer people up

Plus powdered milk so you can have a tea or coffee at any time if you don't have a fridge

Plus aero guard and rat and mouse poison as pests increase when nobody collects the rubbish in the streets for months, which I saw firsthand on a visit to Bali once

And plastic plates, cups and spoons and cutlery in case there is not much water to wash dishes. Plus lots of garbage bags.

Plus a radio that runs on batteries to hear the news on, and lots of batteries

AND- you should store it in your house- buy a shed for the backyard or even 2 sheds because who's to say that the owner of your storage facility wont steal your stuff when the going gets tough (all he has to do is cut the padlock on your storage room or open the door himself with a key) (remember- desperate people do desperate things) and b) who's to say that the owner of the storage facility is going to let you in or even be open for business when everything collapses? What if he sleeps in? What if he broke and gives up? And how are you going to get to the storage facility if the roads are blocked with rioting people? And how will you pack the stuff into your car without being mobbed by other people at the storage facility who might be starving?

As they used to say in the 1930's great depression: "If you don't hold it you don't own it" That doesn't just apply to gold and silver and cash, it applies to survival supplies as well. Good luck!!

Thanks for your great newsletter; I love it a lot

Kind Regards, from Christina

Toilet Paper, seed, generator, drinking water, bleach, rolling papers, spices. Of course whiskey and gunpowder must play a prominent role if you have anything the hoards now living off the government may well try to take from you when the merde hits the fan. ALL THIS IS BEING HASTENED BY TRAITORS IN DC WHO CONTINUE TO OVERLOAD OUR SYSTEM WITH DEBT AND MONETIZATION. If we fail to vote enough of the bastards out in November to at least create a little gridlock, we are almost surely doomed, if we are not already doomed by the actions of these Marxists.

If your predictions of doom and gloom come to pass then the things that will be in greatest demand will be comfort and succour to the devastated.

Become an expert in human relations such as helping yourself and others cope with their losses and emotional turmoil would be a good start on a personal and family survival basis.

But if it is not as bad as a total breakdown of the system and just a garden variety depression then the three essential assets of food, clothing and entertainment come into play.

A small farm might be in order but you will need all those bullets you intend to get to keep the crows (of all sizes) off the vegies as they ripen.

Maybe a soup kitchen or two wouldn't go astray. You could supply it from the vegies you grow and what's left of the government will be subsidising the place so you will at least get paid.

Maybe the US will take in the China welcome mat and you can open the clothing factories again if you can find anyone who still has the knowledge on how to make sewing machines and clothes.

Luckily Hollywood is still functioning so all you need there is a re-incarnation of likes of Bing Crosby and co along with Madison Ave who got the US out of the last depression. It was not the "Great Roosevelt" I can tell you that for free.

As far as safe assets go I should buy a chain of medical practitioners and chemists (drug stores to you) and I would own the premises too.

Pharmaceuticals will do well for a while pushing drugs and anti-depressants but as I am totally opposed to that industry in principle I would not be recommending it.

I can't see hording gold being a lot of good as apart from filling teeth it doesn't do a lot to maintain life. Unless you can use it to buy the soup kitchens, if we really hit the fan who will want it? Will it even be valued in paper currency after all? As people get hungry and desperate and dump their gold and jewellery to keep alive the price of it should crash to next to nothing.

I guess it's all a matter of degree. As the master of doom and gloom you tell me how bad it's going to get? I already admire (and envy) your skill as a wordsmith. I would love to read your assay on the subject.

Regards,

Merv.

Until next week!

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Money Morning reader Wilson sent your editor a shocking video yesterday.

So shocking we could barely believe it was true. We even thought that maybe some nerdy tech wizard had dubbed the video.

But no, it appears to be the genuine article. Here’s what shocked your editor so much, and why it’s proof that you must never trust what you hear from the mainstream…

You see, there’s an online financial video channel called RainmakeriTV. As best as we can figure out, it compiles interviews of various people – CEOs, economists, brokers, etc. – and then posts those videos on its website for people to view.

As it happens, just yesterday RainmakeriTV interviewed a chap called David Wyss. Mr. Wyss is the chief economist for [cough] respected ratings agency Standard & Poor’s.

Now, you know we’re not fans of mainstream economic talk. By now we’re used to their babble. We’ve got used to the fact that they’ve either got no idea what they’re talking about, or they’re deliberately misleading everyone with their economic analysis.

But the comment that I’m about to show you from Mr. Wyss takes mainstream economic analysis to a whole new level. Either that or he’s just admitting what others are too scared to say.

So, what was it that was so bad and so shocking that it rendered your editor speechless?

It was this…

“The big problem’s the consumer. Consumer is just scared, he doesn’t wanna spend, he’s being more cautious. As individuals I applaud that because we should be saving more money, but from the economy standpoint we’d really like to get people out there living beyond their means like normal.”

A more economically retarded view of the economy we’re yet to hear.

Of course, the switched on interviewer immediately pounced on Mr. Wyss calling him to task for making such an outrageous comment… oh, no, that’s right, she didn’t. Sorry, we forgot for a moment that we’re talking about the mainstream.

Anyway, if you don’t believe that even a mainstream economist could say such a thing, just click here and view the video for yourself. You won’t have long to wait, it’s early on in the interview…

Look, maybe we’re over-reacting here. And maybe we’re just trawling over old ground.

But you know what, someone’s got to over-react. And someone’s got to keep making the argument that mainstream economists are guilty of misleading the general public.

I mean, seriously, who in their right mind could possibly argue that it’s good for the economy if people are “living beyond their means like normal”?

The answer is it isn’t. With one exception. It’s good for the finance industry. Especially the banks.

Living beyond your means generally means that you’re spending more money than you earn. Of course, spending more than you earn isn’t really possible unless you sell assets to cover the shortfall…

Or, you borrow the money from somewhere. Like, say, from a bank.

Now, we should point out that using debt to finance purchases isn’t always bad. We don’t see anything wrong with taking out a mortgage to buy a house – providing you’re not over-extending yourself.

And we don’t see a problem with taking out a short-term loan to buy whitegoods or furniture. Why not take up Harvey Norman on their interest free deals? Just make sure you pay the whole darn thing off so you don’t get stung with a 30% interest rate.

But for an economist to suggest consumers need to go back to living beyond their means in order to help the economy is rubbish. Especially from an economist who is employed by a company that claims to be “a leader of financial market intelligence”.

Financial market ignorance we’d say.

It’s all part of the muddle-headed notion that saving is bad, because saving prevents spending. And that it’s only spending that can save the economy.

As we’ve argued many times before that just isn’t true. Saving isn’t the dead money mainstream economists claim.

Savings serve two purposes. In a non-corrupt and insolvent banking system, savings provide the capital for others to spend. Savings allow individuals to borrow that money in order to spend on current consumer items, or businesses to spend it on capital goods for future production.

In both cases there’s the expectation the borrowers will repay and the saver will earn some interest as a reward for foregoing spending.

But savings serve another purpose too. Savings are the means by which savers postpone their spending until the future. They’d prefer to have their cash plus interest in one year – for example – rather than spending the money on goods or services today.

For the businesses that have invested in anticipation of future spending, that’s great news. It means there will be consumers available to buy their goods and help them earn more profits.

If there aren’t consumers in the future then it makes it harder for the business to repay their loan and harder for them to justify the increased capital expenditure.

It’s not difficult. But that’s not how the mainstream views it. They want all spending to happen now. The more the better. The trouble is, in their eyes it’s always now.

The more spending that happens today, the bigger the profits for companies will be today and the more money they’ll make.

Of course they forget about the impact on spending in the future. If everyone’s spent their money today then there’s nothing left to spend in the future. The consumer is too busy paying the bills for past spending and doesn’t have enough left over to keep spending at the previous rate.

And neither do they have enough money to save for future consumption or investment.

That’s the position many economies worldwide are in at the moment. They’ve lived beyond their means and now they are being urged to live even further beyond their means – “like normal.”

The breaking news for the likes of Mr. Wyss and other mainstream economists and commentators is that it can’t last and it won’t last.

Sadly, we think they know that, but it’s not in their interests to tell you.

Cheers.
Kris Sayce
For Money Morning Australia

Just say ‘no’ to Chinese investment.

That’s what Dr Philippa Malmgren a previous economic advisor to George W Bush has suggested that Australians do.

In fact, she believes that Australia could lose its ‘economic bargaining power’ should we allow China to become a direct investor in our resources.

She also went on to say that China is gobbling up all these resources via investments and this could eventually enable them to control the global supply chain.

Er, this is probably exactly what China wants to do.

But let’s be honest, you can’t expect that China was investing in Australia purely for our interests? I mean can you imagine Chinese government officials sitting around saying ‘I know, let’s go give money to the Aussie’s. I’m sure they could do with some help during the GFC’.

No. Any investment into Australian mining has been a very strategic move from China, and it’s all been about the end gain for their country. Any money flowing into Australia has been about resources can they secure, rather than them just liking the weather.

You can’t say that we have gotten the raw end of the deal. Because of this investment, we have a booming mining industry and smaller mining companies that have been given access to capital that our own banks would have denied them.

The trade off? China owns a few of our rocks…

Was the money coming from anywhere else? China had the money – freshly printed I’m sure – to invest somewhere and for a few years, we were the happy recipients.

However we aren’t the only ones with the commodities China needs. According to Malmgren, China has recently made deals with Greece and Spain, which is all about securing a ‘foothold across Europe’.

Of course, all this ‘foreign investment’ from China would’ve made the credit raters over at Moody’s and Standard & Poor’s secretly jump for joy. And the International Monetary Fund (IMF) might even expect the loans to be paid back.

Don’t forget about the past investments China has made into Russian gas fields and Brazilian oil rigs.

As I said earlier, Malmgren has warned that China is acquiring all these resources as a way of controlling the global supply chain.

Or is it simply less sinister, and just a case of China knows exactly what its own country needs for survival?

It’s the economy stupid

President Obama is planning a ‘full-scale attack’ to strengthen the US economy. And in a speech full of impact one liners, he’s assured the American people that there’s ‘…no silver bullet to fix the economy’.

Whew, I can stop looking.

But, this is an election year for the US, and of course he has a solution. The US Senate is currently on a break, but Obama believes that the secret to fixing the economy lies in one of the bills yet to be approved.

The proposed legislation would see tax cuts and boost lending to small businesses. Yep, this bill would see a USD$30 billion government fund be given to small community based banks that would – or might – lend it to small businesses.

Supposedly this would then enable business to leverage themselves up to USD$300 billion in loans.

More leverage. That is just what a financially crippled nation needs.

Oh, and there’s about USD$12 billion worth of tax cuts in there for small business as well.

The bill is yet to be approved, and the Republicans don’t want to pass it. This led Obama to say ‘Holding this bill hostage is directly detrimental to our economic growth.’

The President has tried to assure the other political parties that the passing of this bill won’t add to the ballooning deficit, as it will be offset by other measures.

And finally, just ’cause it’s Friday, here’s a video for when things quite down in the office.

Peter Schiff a financial market commentator, who is often used in TV interviews as the economy ‘naysayer’, while all the ‘other’ economists sit around and love at his ’silly’ and ‘out of touch’ predictions.

The video takes a quick look back at the ‘out of touch’ predictions he made back in 2006 and 2007.

Who looks silly now?

Now let’s have a look what happened on the market’s yesterday…

The S&P/ASX 200 was up 37 points to 4,532.70. After two days of gains trading on the Aussie market is expected to be a little more subdued ahead of the jobs data and the long weekend coming for the US.

The Dow Jones Industrial Average climbed 50 points, ending at 10,320.10. The non-farm payroll data is already expected to disappoint the market tonight when it’s released. Economists are expecting a net gain over 30,000 private sector jobs and but loss of 105,000 as the last of the census employees no longer have work.

Overnight, the FTSE was only 4 points higher, to 5,371.04. The UK market was slightly nervous ahead of the non-farm payroll data coming out tonight our time.

The Nikkei closed at 9,062.84, higher by 135 points.

The price of spot gold in Australian dollars is trading at $1,374.19 while in US Dollars it is trading 1,250.29. The price of silver in Aussie dollars is $21.53 and in US Dollars it is $19.59.

The Aussie dollar versus the US dollar was USD$0.9099, and against the Japanese Yen JPY76.69.

Oil was up last night as Hurricane Earl threatens the American east coast refineries. Crude Oil closed at USD$74.92.

For the biggest movers on the market yesterday click here…

That’s all I have you this Friday, have a great weekend.

Shae.

With the market volatility and poor economic data ruling the market in the last few months, it's no surprise that many investors see this part of 2010 as a time to flee the scariness of stocks for more stable assets. But they're dead wrong...

Many industries are starting to become oversold once again, and opportunities abound for value investors in 2010. One of those industries is wireless communications...

Cellular stocks have been getting a lot of good attention of late, and it's no surprise why. The hype over the next new cell phone models - like the iPhone 4 or HTC Evo - has had consumers shelling out big bucks in both acquisition costs and high-margin data contracts. At the same time, consumers are eschewing fixed-line alternatives for their cell phones, opting to keep connected to a single number whether they're at home or in the car.

In turn, that increasing reliance on cell phones has made them significantly more common in the US over the course of the last decade - where only around one in three Americans owned cellular phones in the year 2000, the number of cellular subscribers is quickly approaching a ratio of one-to-one!

And the end isn't yet in sight... According to industry think tank IE Market Research, wireless subscribers are expected to grow another 27.5% in the next four years.

For carriers, that accelerating subscriber growth has fundamentally changed their businesses. Where the income statements of telecom giants like AT&T and Verizon were once dominated by fixed-line services, wireless customers now make up the bulk of each company's revenues. But as the cellular market becomes increasingly saturated and wireless services become further commoditized, it's likely we'll see the margins of most carriers get squeezed.

More attractive is the cellular infrastructure market - the companies that exist to build out and support the massive cellular networks that span the country. Increasing numbers of subscribers (particularly high- end, data-hungry subscribers) mean that older networks aren't keeping up with the speed and throughput requirements of US customers. To stay competitive, the carriers are forced to shell out massive amounts of cash.

How much? In 2011 infrastructure spending is expected to hit $40.3 billion, a 6.7% rise over last year. And unlike the cellular carrier business, which is dominated by mega-cap blue chips like AT&T, many of the companies that service cell carriers are small, growth-oriented firms.

A couple familiar names to small-cap investors would include Neustar (NYSE:NSR, $22.80), a wireless communications clearinghouse, and FibreTower (NASDAQ:FTWR, $3.63), which provides facilities-based backhaul services to wireless carriers. While I do think that all of the firms that operate in this business will see at least some benefits from organic cellular subscriber growth, I also believe that some are much better equipped to benefit from that growth than others...

I recently recommended shares of a fascinating small cap telecommunications firm to my Penny Stock Fortunes subscribers...and I am actively monitoring opportunities in this rapidly growing sector. Remember, even in a slow-growth economy, a few select industries will still prosper. The cellular infrastructure industry is likely to be one of them.

Sincerely,

Jonas Elmerraji
for The Daily Reckoning Australia

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Yesterday was a good day for stock market investors. Prices went up. The Dow rose 254 points, leaving us uncertain about its near-term intentions.

Of course, we're always uncertain. But sometimes we're more uncertain than others. What seems certain to us is that stocks are a bad bet.

You might find this interesting, dear reader:

Guess who was better off at this stage following the beginning of the crisis. The investor in the Great Depression? Or, the investor today?

Well, we haven't done the calculation ourselves, but we've heard from two different sources that if you take inflation and re-invested dividends into account, investors during the Great Depression were actually ahead. The difference is in the dividends. In the 1930s, companies paid substantial dividends; today, they don't.

But yesterday a report came out that told investors that manufacturing activity was picking up. After so much bad news for so long, that was all they needed. They switched back to "risk on" mode.

Back and forth...to and fro...

Mr. Market is making us wait. But for what?

We expect stocks to go down until they finally reach their rendezvous with the bottom. We saw one estimate that put the final bottom seven years into the future. But who knows? All we know is that it hasn't happened yet. And since we believe it must come sooner or later, we conclude that it must be ahead of us...because it is not behind us.

Since a lower low lies ahead, we see no reason to invest in stocks at all. The odds are against us. Besides, what's the hurry? The good companies will still be around seven years from now. And the bad companies? Well, we wouldn't want to invest in them anyway...

But where...how...are we going to make some money in the next seven years? That is a good question, dear reader. We're so glad you asked.

Do you have a good answer? Hope so, because we don't.

The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we've been watching Bernanke, Jackson Hole, and stocks - gold has been quietly creeping up...

..stocks go down; stocks go up - and gold keeps moving up...

..fiscal stimulus, monetary stimulus, quantitative easing - and gold keeps moving up...

..recovery...no recovery - gold keeps moving up...

..inflation...deflation - and gold keeps moving up...

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all.

And if we're right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more.

But here's the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you'll probably succeed. When the Bernanke Fed loses its grip - which it will - and when the public gets on board the gold bull market - which it will - gold speculators will probably make a lot of money.

We've been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative...not inherent. When we bought gold in '99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It's already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another "stimulus" effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We're happy with our gold holdings and don't really care if the price drops. Heck, we'd be happy to see the price back below $1,000; we'd buy more.

But speculating on a rising gold price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top.

And more thoughts...

Wolf, Stiglitz, Krugman - we love these guys!

They pushed the world's governments to undertake huge "stimulus" programs. Of course, the stimulus programs didn't work. They couldn't work. All they could do was to disguise the facts and delay the necessary adjustments.

But these fellows don't care about that. They are the technicians, scientists, and engineers of finance. They have measures of financial health - GDP, employment, inflation, etc. They may not be able to make anyone better off...but they can damned sure move those indicators. At least, they believe they can.

Spend enough money and you can move the GDP up. Hire enough people and you can get unemployment down. It's not that complicated.

So, the engineers went to work two years ago. You know the rest of the story. That is how we got where we are. They turned valves. They connected wires. They adjusted dials and switches. They put at risk nearly an entire year's worth of US GDP - on the idea that an economy can be controlled and managed, just as if it were a brewery.

How many cans do you want? Just work backward to figure out what inputs you need - how much grain, how much sugar, how many cans, how much electricity... It's not rocket science, for Pete's sake.

The trouble is...managing an economy is not science at all. And these guys are not scientists. They have no controlled experiments. They have no test panels nor test results. They have no peer reviews. They have no proper theories - none that can be disproven or confirmed. They just have crackpot ideas and quack treatments.

And now, Paul Krugman is on television in the US calling for another $800 billion program of boondoggles, bailouts and bumph. "Stimulus," he calls it. Claptrap is what it is.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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Labor Greens Unite!

Change climate with carbon price

Parasitic kids

Well that's a good sign. Not twelve hours after we went to press with our latest newsletter - highlighting how September is historically the market's worst month - and describing a Long Depression, stocks in New York rally by almost three percent. How is that good sign?

The Bear had everyone feeling pretty bearish about him. You can measure this in the number of put option buyers or in surveys. But this morning, we went to Google Trends to see how many people were searching for what you might describe as bearish topics like, say, economic collapse.

Click here to enlarge

You can see that thanks to the publication of two fairly high profile stories that went live late in August by Forbes and CNN, the conversation on collapse got a whole lot louder in the echo chamber that is the internet.

This more or less proves that if you wait on the mainstream press to validate your own thinking, you'll always be late. It's only safe for the papers to report on something once everyone's thinking about it, and by then it's too late to trade it.

But just to be safe, we asked our own in-house trading guru Murray Dawes what he thought. He wrote back that, "There is the possibility that the market has been 'caught short'. By that I mean that traders could be overly bearish and short the market as a whole. The good GDP data could be squeezing them out of those positions and causing a short, sharp rally."

"If this is the case," he continued, "then you will see the market fall over again soon. If we see the ASX 200 close under the Point of Control of 4,400 in the next week or so then I would be confident that this current buying was a short squeeze and I would expect to see much lower prices in the near future. But until that occurs, this surprise rally should be respected."

Murray's article, by the way, was called, "Beware the false break out." That term, "the false break out," along with "the point of control" is key to his method of trading the markets. You can find out more by reading about Slipstream Trader.

Now we have to do something that's required from time to time if you're not familiar with our business model. We don't like talking about our business model because you'd probably rather be reading about the stock market or the economy. So we'll be quick about it!

The Daily Reckoning is free. So is the other e-letter which we publish, Money Morning. In them, you read independent and provocative ideas about the share market and the world that we hope are useful and maybe even profitable. A whole back office team supports getting these e-mails out to about 100,000 people combined each day.

The Daily Reckoning and Money Morning also contain the views of our independent analysts, Kris Sayce, Alex Cowie, Murray Dawes, and Greg Canavan. All of these analysts have chosen to work with us because, like you I suspect, they value a perspective that's not compromised by any other agendas. They're free to research and write about whatever they think will make you money, or keep you from losing it.

The newsletters which all of those analysts write cost money. The subscription fee supports the whole operation, including keeping the free e-letters free. To sell subscriptions, we include advertisements. Without the advertisements - which usually feature our latest and best ideas - we find it's hard to sell subscriptions.

Of course not everybody likes advertising. Not everybody likes vegemite either. But nearly everyone likes free. Of course nothing is ever free. So the price of you receiving a free e-letter that you may occasionally find value from is that you'll see advertisements for products to which you may already subscribe or to which you have no intention of ever subscribing.

We hope it's not asking too much that even if you don't like the ads and don't want to subscribe, you recognise that we're in a business and this is how we can provide the e-letters for free. And if you recently received a note from Alex talking about a resource stock that Kris was recommending and wondered why Alex didn't' recommend it, the simplest answer is that Alex is not Kris.

That is, Alex writes about resource stocks exclusively and does he research in his own way. It starts with a lot of spreadsheets and lately has included a lot mine site visits and phone conversations with geologists. Alex is well-versed in the resource sector and its nuances.

Kris is a small-cap specialist. There are a lot of small-cap stocks in Australia. There are also a lot of resource stocks in Australia. Many of the small-cap stocks are also resource stocks. Thus, Kris will, from time to time, recommend a small-cap stock that is also a resource stock.

We've found that some readers prefer Kris. Some prefer Alex. And some value what both are doing and realise that both are doing their own thing in their own way. If that troubles you...well...it shouldn't. And if it realllly troubles you, we invite you to take up our offer and request a refund.

Finally, we see that the Greens and Labor have made a deal and that U.S. police have shot an armed man at the headquarters of the Discovery Channel in Maryland after he took people inside the building hostage. And we see that in some strange way, the events are not unrelated. Not causally, mind you, but philosophically.

Part of the big agreement yesterday announced by Labor and Green honchos was the set-up of a multi-party parliamentary committee to put a price on carbon. You can read about it here. But when you read about it, it's clear that it's a pretty undemocratic way of pretending to have a debate without having a debate. Typical, but pretty cynical. And as ever with the political class, it defers to the exalted power of "experts."

Green's Senator Christine Milne says that this very European process will, "Set up a parliamentary committee representing all the interests in the parliament committed to a certain idea and then enabling the appointment of experts to that committee. So the experts are not just to give evidence to the committee. The experts are part of the deliberations of that committee and that way you create the space in a parliament for people to talk through their own perspectives, nuance those perspectives and try to come up with a parliamentary consensus which has the support of everyone around the idea. "

Emphasis added is our own. But really, how much nuance can you have when everyone on the committee can only be on the committee if they are already committed to a certain idea? How hard is it to build consensus when you exclude everyone who might disagree from participating?

Milne continued: "You will note in the agreement the proviso for membership of the committee is that the people going onto it are committed to a carbon price. They may not all agree with the mechanism of achieving a carbon price but they all want to a carbon price and the idea is to invite everyone to it and the Coalition clearly if they were in opposition would be invited to join it on that proviso. So, it really is about grown up politics in Australia. It's about ending the all or nothing, it's about ending the accusations of back flips and sell outs and back downs and so on."

In order to end the all or nothing false choice, it was necessary to create an all or nothing committee. Everyone who's on it has to be all for a carbon price. No one who's against a carbon price can be on it. That really is an effective way to end the argument. By not having it all and excluding other points of view.

Of course the justification for this is that the people against a carbon price are really whack jobs who don't believe in global warming OR climate change. What's more, they aren't even experts. They're just people, people who believe that common sense is more valuable than credentials. They're just people. Very little people.

Milne says, "It's a process we adopted in Tasmania to a very small degree when we achieved gay law reform by bringing in experts from the university, the justice department and so on to work with the parliamentarians. This I think can resolve this issue of a carbon price. It's very important to us. We want one as soon as possible and we think this mechanism is the best way of delivering it."

In other words, the best mechanism of delivering an outcome that the public hasn't clearly endorsed is to use a non-democratic process that only includes people committed to the desired outcome. And that's democratic how?

Honestly, we have to give credit where credit was due on this one. Julia Gillard had it right. Get a phone book from each city of 10,000 people or more in Australia. Pick ten people at random from each phone book. Put them on a Climate Change Committee. Put them in a three-star hotel outside the airport in Adelaide and give them six days to debate the issue and, if they decide, come up with a law.

What could be more democratic than that? If a random jury of your peers is good enough to deliver equal justice under law in the criminal justice system - where judges and juries must deal with complex evidence and experts - why is it not good enough to for public policy too?

In fact, the more we think about it, legislative conscription may be the best way to run the country after all. Each term, a new randomly selected group of conscripts is drafted to serve in Canberra. They are paid the minimum wage. You can be sure Parliament wouldn't sit for long and that the government would generally stay out of most people's lives and wallets, affording Australians the time and money to be good parents and neighbours.

Let's have a vote! All in favour? All opposed?

But wait, what does this have to do with eco-terrorist James Lee's bizarre actions and manifesto earlier today? Well, in point one of Lee's manifesto, he seems to endorse Senator Milne's committee of experts idea. We've reproduced the whole point here so we're not selectively quoting, although the emphasis added is ours and not Lee's:

The Discovery Channel and its affiliate channels MUST have daily television programs at prime time slots based on Daniel Quinn's "My Ishmael" pages 207-212 where solutions to save the planet would be done in the same way as the Industrial Revolution was done, by people building on each other's inventive ideas. Focus must be given on how people can live WITHOUT giving birth to more filthy human children since those new additions continue pollution and are pollution. A game show format contest would be in order. Perhaps also forums of leading scientists who understand and agree with the Malthus-Darwin science and the problem of human overpopulation. Do both. Do all until something WORKS and the natural world starts improving and human civilisation building STOPS and is reversed! MAKE IT INTERESTING SO PEOPLE WATCH AND APPLY SOLUTIONS!!!!

If poor Mr. Lee had just decided to run for office in Australia, he could be earning a public wage now instead of cooling in a morgue somewhere. He certainly has the right instincts to be in politics. He believes in coercion. He believes in State control of the media. He thinks "top down" solutions imposed from above should trump individual choices. He believes in expert scientists of a certain point of view. He's against human civilisation and believes that children are filthy pollution.

Point four of his manifesto gets to the heart of his pro-planet, anti-human life message. He writes that, "Civilisation must be exposed for the filth it is. That, and all its disgusting religious-cultural roots and greed. Broadcast this message until the population of the planet is reversed and the human population goes down! This is your obligation. If you think it isn't, then get the hell off the planet! Breathe Oil! It is the moral obligation of everyone living otherwise what good are they??"

Gee. That's pretty much straight out of the tyrant's modern political play book, isn't it? Civilisation is filth? Check! Religion and culture and tradition are disgusting? Check! Human population should go down because it's a pestilence? Check! Your obliged to agree? Check! If you disagree, go to hell? Check! If you disagree, you're immoral? Check!

You get the feeling that some people just don't like humanity. You get the feeling that some people view human life as a problem to be solved. That solution is vague, but usually involves somebody else dying without being killed. You get the feeling that deep down, some people view human beings as parasites on the planet. You get the feeling some people don't feel very good about themselves but would like to take it out on the rest of us.

We also get the feeling that some people don't view human life as the Ultimate Resource, as economist Julian Simon put it. Our view is that these people are themselves very selfish. They can't imagine the world they live in coping with all the problems they perceive. So they want to destroy the world as it is and remake it into the world they want to live in, even if that world doesn't include you and me.

It's all very self-centred, moralistic, and unimaginative. And of course, Lee was plain crazy. He wrote, as this paragraph proves:

The world needs TV shows that DEVELOP solutions to the problems that humans are causing, not stupefy the people into destroying the world. Not encouraging them to breed more environmentally harmful humans. Saving the environment and the remaining species diversity of the planet is now your mindset. Nothing is more important than saving them. The Lions, Tigers, Giraffes, Elephants, Froggies, Turtles, Apes, Raccoons, Beetles, Ants, Sharks, Bears, and, of course, the Squirrels.

Of course the Squirrels!

TV will save us!

Save the froggies.

It would all be absurd and sad if there weren't real live crazy people trying to run the government who didn't' share more or less the same anti-human, anti-civilisation worldview.

Dan Denning
for The Daily Reckoning Australia

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Since I am known as something of a gold bug, a lot of people write to me about gold, but since I am a paranoid lunatic, I don’t read their letters, mostly because I now call myself Marvelous Macho Grande (MMG), figuring that an established alias could potentially come in handy when the prices of gold, silver and oil shoot higher and higher as inflation in consumer prices starts going parabolic as a result of the despicable Federal Reserve creating so, so, so much money, especially so that the despicable federal government can borrow and spend that selfsame so, so, so much money.

So, you can see how a dramatic, romantic new name like Marvelous Macho Grande (MMG) would perfectly suit a guy like me, which is a guy with a theoretical massive coming increase in wealth from investing according to The Mogambo Perfect Portfolio (TMPP), which uses the Austrian school of economics (see Mises.org) and the last few thousands of years of history as Absolutely Compelling Reasons (ACR) to invest in gold, silver and oil when the government is acting so insanely bizarre, as does ours now, blithely deficit-spending a monstrous 11% of GDP, now with a national debt nearing a heart-stopping 100% of GDP, and allowing the Federal Reserve to continue to create So Freaking Much (SFM) money that, like creating too much money always does, it creates booms and bubbles that predictably, inevitably, unstoppably, disastrously go bust, leaving you, sadly, worse off than before.

So, you can see how I am not in the mood to answer emails from people who, deep down in their hearts, are pleading, "Oh, please help me, Masterful Mogambo Guru, or Marvelous Macho Grande (MMG), or whatever in the hell your name is this week: Sadly, I have not been following your terrific advice to buy gold, silver and oil as the One True Way (OTW) to end up with a lot of money without working for it, and now I need one of your famous Secret Investment Plans (SIP) to make up for lost time, else I am reduced to being the widow of a rich Nigerian banker who needs to sneak $100 million out of Nigeria and into your country. In that case, I will give you $50 million after you give me your bank account number and $5,000 in cash to pay various fees, expenses and bribes."

Alas, I don’t have $5,000 to invest in this terrific opportunity to make a quick $50 million, as likewise there are no Secret Investment Plans (SIP), although I have spent a lifetime looking for one.

Fortunately, constantly buying gold, silver and oil is always the smart thing to do when your stupid, desperate, half-witted, corrupt, clutching-at-straws government is acting like all the other stupid, desperate, half-witted, corrupt, clutching-at-straws governments that created too much money and destroyed themselves over the last 4,500 years.

And if you don’t believe me, then maybe you will listen to the famous Richard Russell of the Dow Theory Letters, who writes, "Investors sometimes get caught up in the day to day and week to week movements in gold and silver. Don’t waste your time or energy on that, just accumulate. Standing in front of us is the greatest transfer of wealth in history. When the dust settles, those holding the gold will make the rules."

And "just accumulate" sounds so easy because it is so easy, which is why I say, as I always say until you are tired of hearing me say it, "Whee! This investing stuff is easy!"

The Mogambo Guru
for The Daily Reckoning Australia

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We’ve written for some time about what a waste of space the Federal government.

How it just sucks the life out of the private sector in order to fill the pockets of interfering and power-crazed bureaucrats.

Yet we’ve been told by all and sundry that a strong government is important, nay, crucial for the stability of both the economy and society. Without it, the argument goes, there would be anarchy in the streets.

That normally sane people would suddenly and without warning start killing people and looting shops. Motorists would begin driving on the wrong side of the road, children would instantly become illiterate, and all the old people would die because there wouldn’t be anyone to care for them.

If the result of the recent federal election has proven anything, it’s proven that the economy and civil society can continue on without the interference of jumped-up private sector failures, aka politicians.

It has proven what we’ve stated all along, that all you need is a very simple and basic set of laws that guarantee freedom, property rights and the right not to be harmed by others, and everything else will naturally take care of itself.

Sadly, we’re sure this political hiatus won’t last. Before long, one bunch of crooks and power trippers will team up with another bunch of crooks and power trippers, and voila, government is formed!

So, in anticipation, we’ll rely on a bit of Plato here. We don’t normally quote from the classics. Mainly because we’ve never read them – although after a quick browse, we’ll now put in an order with our favourite online bookshop. But we do recall some mangled quote about someone saying “democracy leads to despotism.”

Anyway, as usual, thanks to the interweb, within seconds we found what appears to be the genuine quotation from Plato’s The Republic:

“And so tyranny naturally arises out of democracy, and the most aggravated form of tyranny and slavery out of the most extreme form of liberty?”

There’s a whole bunch of other quotes from Book VIII of The Republic, worthy of publication here. But we won’t print them all, there’s too many. And besides, never having read The Republic before we’re wary of quoting anything without understanding the complete context.

But whatever the context, as standalone quotes, it’s hard to argue with the sentiment.

Here’s a couple that tickled our fancy:

“And then democracy comes into being after the poor have conquered their opponents, slaughtering some and banishing some, while to the remainder they give an equal share of freedom and power; and this is the form of government in which the magistrates are commonly elected by lot.”

And perhaps our favourite, which seems to sum up the public service perfectly:

“[F]or in the first place freedom creates rather more drones in the democratic than there were in the oligarchical State…Because in the oligarchical State they are disqualified and driven from office, and therefore they cannot train or gather strength; whereas in a democracy they are almost the entire ruling power, and while the keener sort speak and act, the rest keep buzzing about the bema and do not suffer a word to be said on the other side; hence in democracies almost everything is managed by the drones.”

Beware the elected and unelected drones! Until then, on with the rest of today’s Money Morning…

“Put the manufacturing fallacy to rest” wrote Jagdish Bhagwati in Tuesday’s Australian Financial Review (AFR). Bhagwati is a professor of economics and law at Columbia University in the United States.

We’ve read the article three or four times, but we’re struggling to understand the author’s specific point. Initially we assumed the author was claiming that manufacturing is unnecessary and that there’s no problem with an economy migrating towards a services based economy.

On second reading it seems as though he’s suggesting that the services industry can be just as innovative as the manufacturing industry. We can’t say we’ve thought about it too much. However, we will agree that the services sector can be innovative. Whether it is as innovative as manufacturers is something else.

But on reading it for a third time we think we’ve nailed his argument. It seems to be that both manufacturing and services are technologically innovative to a similar degree, just in different ways, and therefore it doesn’t matter whether an economy is manufacturing based or services based.

Bhagwati closes his argument with:

“Even if you wanted to curtail financial services, you could still focus on non-financial services. Diesel engines and turbines are not the only alternatives; many services, like professional therapy, nursing and teaching are available. The case for a shift to manufacturing remains unproved, because it cannot be proved.”

Er, really? Yes it can.

To paraphrase the case, Bhagwati suggests an economy doesn’t have to make things like engines and turbines, instead people can be therapists, nurses or teachers, and that’s just as fine.

It’s a viewpoint we’ve heard from many people. The idea that it doesn’t matter what an economy does, just as long as consumers are spending. Take today’s article in The Age:

“Investors yesterday cheered a surprise rise in household spending, after the national accounts showed consumers, as well as miners, driving a rapid return to boom conditions.”

The article goes on:

“Household spending was up 1.6 per cent, a similar pace to the rapid growth seen in 2007, before the financial crisis struck, defying predictions that higher interest rates would stifle consumers.”

But the cheering doesn’t stop:

“The chief economist at Nomura, Stephen Roberts, said some investors had feared the highly indebted and frugal consumer could be the Achilles heel of the Australian economy. But the figures showed households throwing caution to the wind, with the proportion of income saved falling to just 1.5 per cent, from 3.4 per cent.”

Hooray! Don’t worry about being “highly indebted”, throw “caution to the wind” and spend away. Yeehaw!

Clearly the author of the article, Clancy Yeates has failed to see the irony in what he/she has written.

So, is it true that it doesn’t matter whether an economy is manufacturing or services based? On the surface – which is the only place the mainstream can be bothered looking – it’s easy to argue (not that we agree with it) that it doesn’t matter.

People are employed and people are spending. What does it matter what they’re employed in. As long as the consumer is spending then that means a strong economy.

The problem is, it does matter. It matters a lot.

Let’s take Bhagwati’s examples for alternative services based careers – professional therapy, nursing and teaching. Yeah, sure, an economy could shift towards those industries. We’ll guess it’s a lot cleaner and safer than working in a factory.

But here’s the problem. Here’s why it’s important that an economy is either suitably diversified, or that the economy is able to trade its manufactures or services overseas. For instance, we’ll argue that it’s reasonably difficult to export professional therapy, nursing and teaching – with the exception of course, that foreigners come to Australia to learn.

Even if you factor that in, the export of education would be a tiny fraction compared to the amount of domestic consumption on education.

Anyway, getting back to the point. The reason it matters is to consider the following. Sure, someone could become a professional therapist or a nurse, but where will the therapist get the items needed to furnish his or her office? The therapist needs a desk, a couch, a chair, pens, carpet, notepads, etc…

Where will the nurse get the hospital bed, the stethoscope, the bed pan, the thermometer, the MRI machine, the X-Ray machine, and gawd-knows what else?

And where will the teacher get the blackboard, the whiteboard, the chalk, the desks, chairs and pens and pencils?

What about other services industries – where will the local coffee shop get the cappuccino machine from? Or the tables and chairs? Where will the local gym get their exercise equipment, the lockers and their uniforms?

It’s a nonsense argument to say that manufacturing doesn’t matter. It does. An economy needs to make things so that the services industry can provide their services. And if the economy doesn’t manufacture those products then it has to import them.

Now, importing isn’t a bad thing. It’s all part of having a comparative advantage. You do what you’re good at while allowing others to do what they’re good at.

The problem comes when an economy isn’t producing items or services that foreigners want or need. Therefore an economy falls into a consumption trap. Constantly consuming while at the same time importing the manufactures needed to satisfy the consumption. And without giving anything back in return.

Right now, Australia is falling into a consumption trap. Yet so far it has been lucky – that’s right, the good old resources sector. The resources sector that the amazingly quiet Emperor Ken Henry believes didn’t save the Australian economy from recession.

As it stands, Australia currently does have things foreigners need – resources.

You only have to look at the national accounts released yesterday to see that. And how the Australian economy has rapidly shifted over the last nine years.

It’s no surprise that the mining sector has grown over that time, while manufacturing has barely moved. In some categories, such as textiles, it has nearly halved. But in real terms, as a proportion of the overall economy, manufacturing has gone backwards.

To be replaced by an increase in the services sector: retail, accommodation, food services, transport, information media, and of course, the biggest winner, financial and insurance services.

Look, we’re not saying that the services sector is bad and the manufacturing sector is good. And we’re certainly not saying it’s unproductive, because it can be. For instance, it’s more productive for most people to buy readymade clothes in a shop than it is for them to go through the hassle of making their own clothes.

But it’s simply not correct for Bhagwati and others to claim that “a shift to manufacturing remains unproved, because it cannot be proved.”

In an economy that’s already manufacturing heavy, then that’s a reasonable point. But for one that isn’t then it’s a dangerous argument.

Especially for an economy that relies heavily on the sale of raw materials overseas. Nothing could be worse for Australia than pinning its hopes on a continuing resources boom while simultaneously legislating to destroy the manufacturing sector, and cheering the further indebtedness of the ever-consuming consumer.

Cheers.
Kris Sayce
For Money Morning Australia

Yesterday, the S&P/ASX 200 added a huge 91 points (2.08%) to close at 4,495.70. And the index has been potentially predicted to do again today, already 1% higher.

The June quarter gross domestic product (GDP) figures released yesterday and were one of the main drivers of the rally. The economy grew 1.2% for the second quarter which was higher than the 0.9% predicted by economists. Annualised, GDP growth for Australia is now 3.3%.

Overnight, the Dow Jones Industrial Average had a massive 254 point gain, closing at 10,269.47. The ISM Factory index rose to 56.3 for August, up from 55.5. Anything above 50 is considered growth.

Adding to the optimism was China’s Purchasing Managers Index (PMI) rising to 51.7, up from 51.2 in July.

‘Investor sentiment was so negative that any flicker of light was going to move sentiment with quite a roar, and that’s what we got,’ said an economist at JP Morgan Private Wealth Management.

The US market seemed to completely ignore the private sector employment data also released yesterday. The data showed that employment in the private sector fell by 10,000 jobs in August. Senior economist, Steve Biltz said that if put the manufacturing data and employment data together you’re still looking at a flat economy.

The FTSE gained 141 points, ending the day at 5,366.41. The UK market received a boost from all of the positive data, including the unexpected Australian growth. Mining stocks Rio Tinto [LON: RIO] and Xstrata [LON: XTA] both had 6.09% in their share price.

The Nikkei closed higher by 102 points, to 8,927.96. Following the lead form the US, the Nikkei is currently 1.6% higher this morning.

The price of spot gold in Australian dollars is $1,367.13, while in US dollars it’s $1,243.97. The price of silver in Australian dollars is $21.27 and in US dollars it’s $19.34.

The Aussie dollar versus US dollar is AUDUSD 0.9097 and against the Japanese Yen it’s AUDJPY 76.76.

Crude Oil closed at USD$73.91.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

Well, August washed up. It was the worst month for US stocks in almost a decade. And yesterday didn't help. The Dow couldn't manage a rally. It rose just 4 points.

The British newspaper, The Telegraph, has the story:

"It's pretty clear the US economy has hit a wall," said Barry Knapp, head of US equity strategy at Barclays Capital. "The macro picture is dominating and, right now, it's not clear what's going to get the market out of this spot."

Those fears took centre stage again during the final day of trading.

In New York, markets enjoyed some brief respite from the blizzard of weak data as reports on the US housing market and consumer confidence proved better than feared. The Conference Board's index of consumer confidence climbed to 53.5 last month from 51 in July, while the latest reading from the respected S&P/Case-Shiller index showed that home prices were up 4.2pc in June compared with a year ago.

The day's rally proved short-lived, however, after the minutes of the Federal Reserve's latest meeting returned investors to the summer's familiar themes. Fed chairman Ben Bernanke has spent the past few weeks facing increasing pressure from markets to publicly declare he will do more to fight the prospect of a second recession if the recovery stumbles further. According to the minutes, some members of the Fed's Open Market Committee saw "increased downside risks to the outlook for both growth and inflation".

That admission left the Dow up just 4.99 points at 10,014.72 for the day, while the S&P ended the day up 0.41 at 1,049.33.

As predicted on this page, both Martin Wolf and Paul Krugman are taking the low road. Not that we wouldn't take it too, were we in their position. They urged the Obama team to undertake massive programs of "stimulus." Now that the stimulus hasn't worked, they say it wasn't massive enough.

And thank God the administration at least took some of our advice, they add. Otherwise, things would be a lot worse!

In today's Financial Times, Wolf refers to a recent paper by Alan Blinder and Mark Zandi. The two use a "standard macro-economic model" to determine that without the feds' intervention the decline in GDP would have been three times worse and unemployment would have risen to over 16%. And, can you believe it, we would have had a federal deficit of $2.6 trillion.

Oh man, oh man...we're so grateful to Wolf, Krugman, Summers, Obama, Bernanke and all the other savants who protected us from such a dreadful fate.

But wait a minute, this "standard macro-economic model" sounds great and all...but we can't help but wonder. It can predict precise outcomes based on federal policy inputs, right? That is, if the feds were to do such and such...it tells us what will happen, right? And Wolf says it's "standard," so we imagine that you can get it at any Wal-Mart or filling station. So, the Obama team must have had it two years ago, right? We can't help wonder if this was the same model they used when they forecast that unemployment wouldn't go over 8% - if Congress agreed to the stimulus bill the administration proposed. Must have been a different one... Because Congress did pass the stimulus bill and unemployment rose over 9% anyway.

And it's still over 9% - almost 2 years after the stimulus effort got underway.

So, maybe this "standard macro-economic model" is full of... But let's imagine that it isn't. Let's allow our imaginations to take flight...to soar...to loose themselves from the gravity of worldly cares or practical reality. Let's imagine that these economists have a clue!

Imagine that the feds had done nothing - which was more or less standard policy for the nation from its founding in 1776 up until the middle of Herbert Hoover's term in 1930...and for all the years that preceded them...all the way back to the founding of Rome. Now, let's imagine that Blinder and Zandi are right. Without fed intervention, GDP would have sunk 12% - three times more than the actual loss...and half the loss of the Great Depression. Well, that would have been a disaster, right?

Well. Maybe not. It might have been a blessing. The point of a correction is to correct. The Blinder/Zandi study tells us that the economy had mistakes equal to 12% of GDP. Okay...well, maybe the correction overshoots. Who knows? But think of the crazy years of the Bubble Epoque...when lenders were giving unemployed people a mortgage for 110% of the inflated value of a house. Think about the Private Equity deals based on growth assumptions that were hallucinatory. Think about the hundreds of trillions' worth of derivatives based on complex formulae that were phony and silly? Think of all the decisions made on the assumption that consumer credit would continue to expand as it had from 1949 to 2007. Was one of every 8 of them too optimistic? Too ambitious? Too unrealistic? We'd be surprised if there weren't more errors...far more than 12% of GDP.

Now ask yourself...what good was done by failing to correct those mistakes? By failing to wash out the excess debt? Failing to allow insolvent banks to go broke? Failing to permit worn-out, uncompetitive businesses to die in peace?

We don't know how many mistakes there were. We don't know how far GDP SHOULD go down. And we don't know what would have happened if willing buyers and sellers had been allowed to sort themselves out in the age- old ways - by panic, default, bankruptcy, restructuring, and reconstruction.

We don't know. We'll never know. But there is no reason to think we'd be any worse off if we'd found out a year ago. A 12% drop in GDP might have been just what we needed. We could be on the road to prosperity now, rather than looking at another 5 to 15 years of stagnation, decline, and desperation.

And more thoughts...

But we have good news. Yes, dear reader, genuine, no-doubt-about-it good news.

Two bits of good news, actually.

First, the café across the street from our office serves a proper café au lait. A real one.

In Paris these days, if you ask for a "café au lait" they mark you as a foreigner. Parisians ask for a "café crème." Trouble is, the café crème doesn't have much milk in it. It tends to be a bit watery and bitter.

A proper café au lait, on the other hand, is served with a little pitcher of hot milk. Not many cafes in Paris still serve it that way - unless you ask them specifically. Fortunately, the one across the street still does it the right way.

Second, and perhaps more important, we discovered yesterday that tea- totallers die sooner than heavy drinkers. This comes as a great relief to your editor. He sat down last night with a bottle of Lussac St. Emilion to celebrate.

Here's the story from John Cloud (originally appearing in Time Magazine):

Why Do Heavy Drinkers Outlive Nondrinkers?

One of the most contentious issues in the vast literature about alcohol consumption has been the consistent finding that those who don't drink actually tend to die sooner than those who do. The standard Alcoholics Anonymous explanation for this finding is that many of those who show up as abstainers in such research are actually former hard-core drunks who had already incurred health problems associated with drinking.

But a new paper in the journal Alcoholism: Clinical and Experimental Research suggests that - for reasons that aren't entirely clear - abstaining from alcohol does actually tend to increase one's risk of dying even when you exclude former drinkers. The most shocking part? Abstainers' mortality rates are higher than those of heavy drinkers.

Moderate drinking, which is defined as one to three drinks per day, is associated with the lowest mortality rates in alcohol studies. Moderate alcohol use (especially when the beverage of choice is red wine) is thought to improve heart health, circulation and sociability, which can be important because people who are isolated don't have as many family members and friends who can notice and help treat health problems.

But why would abstaining from alcohol lead to a shorter life? It's true that those who abstain from alcohol tend to be from lower socioeconomic classes, since drinking can be expensive. And people of lower socioeconomic status have more life stressors - job and child-care worries that might not only keep them from the bottle but also cause stress-related illnesses over long periods. (They also don't get the stress-reducing benefits of a drink or two after work.)

But even after controlling for nearly all imaginable variables - socioeconomic status, level of physical activity, number of close friends, quality of social support and so on - the researchers (a six- member team led by psychologist Charles Holahan of the University of Texas at Austin) found that over a 20-year period, mortality rates were highest for those who had never been drinkers, second-highest for heavy drinkers and lowest for moderate drinkers.

The sample of those who were studied included individuals between ages 55 and 65 who had had any kind of outpatient care in the previous three years. The 1,824 participants were followed for 20 years. One drawback of the sample: a disproportionate number, 63%, were men. Just over 69% of the never-drinkers died during the 20 years, 60% of the heavy drinkers died and only 41% of moderate drinkers died.

These are remarkable statistics. Even though heavy drinking is associated with higher risk for cirrhosis and several types of cancer (particularly cancers in the mouth and esophagus), heavy drinkers are less likely to die than people who have never drunk. One important reason is that alcohol lubricates so many social interactions, and social interactions are vital for maintaining mental and physical health. As I pointed out last year, nondrinkers show greater signs of depression than those who allow themselves to join the party.

The authors of the new paper are careful to note that even if drinking is associated with longer life, it can be dangerous: it can impair your memory severely and it can lead to nonlethal falls and other mishaps (like, say, cheating on your spouse in a drunken haze) that can screw up your life. There's also the dependency issue: if you become addicted to alcohol, you may spend a long time trying to get off the bottle.

That said, the new study provides the strongest evidence yet that moderate drinking is not only fun but good for you. So make mine a double.

Bill Bonner
for The Daily Reckoning Australia

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Before we get stuck into today's financial world, a request: please don't store petrol in your garage. A reader took us to task for suggesting that last week in our survivalists "to own" list. It was just a list. But her point is well taken. Petrol doesn't keep well. And you may need it later to burn all your paper money and furniture to keep warm. So store it somewhere safe, if you're going to store it at all.

But perhaps all this talk of a Long Depression is premature. We've just finished revising and remaking our case for D2 (the Second Great Depression) in the latest issue of Australian Wealth Gameplan. We were all set with a fairly conventional analysis of the macro-economic scene when we decided to scratch the whole thing and re-write it from a long-term historical perspective.

Usually these attempts are either incredibly stimulating and provocative or really boring for everyone else to read. Hopefully it won't be boring. But our main point is that when you're living in the middle of one, a long depression probably doesn't feel like it. It feels like every day things might get better. But they don't, at least not for a long while.

You certainly wouldn't suggest Australia is in the middle of Long Depression based on yesterday's current account deficit figures. Boy howdy, were they good! The current account deficit went from $16.5 billion in the March quarter to just $5.6 billion in the June quarter. As a percentage of GDP, the current account deficit is now at its smallest level in about 30 years.

Go iron ore!

Go coal!

Go!

The improvement in Australia's terms of trade is what accounted for the big jump. Record prices for iron ore and coal increased what Australia got paid for exports. And import prices - what Australia pays for the things it buys from the rest of the world - did not grow as fast. Presto. Change-o. Record low current account deficit.

Naturally, a record jump in the terms of trade - 12.5% for the quarter and 24.5% for the year - is the sort of spike that would convince us export prices have peaked and the Chinese real estate crash is imminent. Based on the Economic Statement in published in July, the government is counting a record-high terms of trade to support revenues, bring down the debt, and spur mining investment (despite the MRRT).

Good Times are Here Forever

Source: www.budget.gov.au

Speaking of the government, apparently there still isn't one. You might have expected this lack of political certainty (clarity about the future rate of taxation on mining companies) to be negative for the share market. But apparently Aussie investors - and maybe their leveraged global contemporaries - are drinking from the big jug of Kool Aid Ben Bernanke and the Fed have brewed.

In fact, whether Aussie investors are reacting to the prospect of Quantitative Easing from the Fed or not, it's pretty clear that not having a government is not a negative for share prices. Long live the status quo!

But on this issue of the Fed, the relevant question is how QEII would operate. We were going to write "work," but we're certain it's going to fail inasmuch as its ultimate aim is get credit flowing again in America. The Fed is pushing households and businesses to do something they've decided they don't want to do: borrow and spend.

If the aim of QEII is to get consumer spending back up to 70% of American GDP so it can drive global growth and restore the status quo ante the Global Financial Crisis, it will fail and gold and other tangible assets will keep going up. But if the goal of QEII is to buy corporate stocks and bonds to make everyone feel richer so that they might behave with more fiscal irresponsibility, well doggone it, it might just be crazy enough to work!

By work, we mean it might create a bid for stock prices, what with everyone knowing the Fed is there to buy. In fact, it would probably be a very good time to be a seller with the Fed on the other side of the trade. Maybe that's why everyone's buying now, so they can sell to the Fed later.

Of course, there's a long way to go between speculating about QEII will manifest itself and the Fed actually buying stocks outright. But just as a journey of a thousand miles begins with a single step, so also does the destruction of a currency begin with baby moves.

And finally, about that list of things to stock up on for Long Depression, what do you reckon was at the top of most people's lists? Salt! It was followed closely by sugar, soap, silver, bullets, and booze.

We got many notes on the subject and have read them all. We're not able to reply to each one personally, but thanks for all the effort. We'll compile a master-list and make it available later this week. Meanwhile, here was one of our favourite notes:

Hi ,

On reading your list I thought it appropriate to add rifle etc to the list , particularly as you have bullets on the list. I'd also add the Bible, the Koran, and the Talmud, with appropriate iconography should someone with bigger guns happen by.

I'd also add antibiotics, condoms (you can hope while you despair).

Did I mention a phrase book with simple to pronounce invitations, "To come in into my storage unit for bouncy bouncy" ?

If none of that was of use...I'd then do the unthinkable...invest in a Managed Fund!!

Regards,

HB

Dan Denning
for The Daily Reckoning Australia

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Yesterday, RBA Assistant Governor Guy Debelle spoke at the “Risk Australia Conference” in Sydney.

The one-day conference, which would have cost those interested, up to USD$2,800 to attend, was held at the plush surroundings of the Hilton Hotel in Sydney.

Among the sponsors of the “Risk Australia” conference was Credit Suisse. Credit Suisse, of course, is the Swiss banking firm that rejected the offer of a Swiss government bail-out in 2008, but which happily accepted USD$8.8 billion from “a small group of major global investors”, including – according to the New York Times – “the Qatari authorities.”

Nice risk management that is!

But that’s not the first time Credit Suisse has found itself in a spot of, erm, risk trouble. In 2002 the investment bank bailed out its own insurance firm, Winterthur Insurance to the tune of Sfr4 billion – about AUD$1.5 billion at the time.

And not to mention the indirect bailouts all banks – including Credit Suisse – have received over the last couple of years thanks to the involuntary financial support by taxpayers and the voluntary support by central bankers.

Take this report from the Wall Street Journal in February 2008 as a classic example:

“The banking industry, struggling to contain the fallout from the mortgage debacle, is urgently shopping proposals to Congress and the Bush administration that could shift some of the risk for troubled loans to the federal government.

“One proposal, advanced by officials at Credit Suisse Group, would expand the scope of loans guaranteed by the Federal Housing Administration. The proposal would let the FHA guarantee mortgage refinancing by some delinquent borrowers.”

In other words, the banks would get their money whatever happens. From the borrower if the loans didn’t go bad, or from the taxpayer if they did.

Although granted, Credit Suisse has come out of it smelling only slightly less worse than the other major Swiss banking firm UBS which required a direct cash injection by the government of Sfr6 billion.

Other sponsors at the Risk Australia conference included the admirable fellows at KPMG. You know KPMG. They were the mob that took a paycheque from the Australian government to say how marvellous the Resource Super Profits Tax (RSPT) was, and then took a paycheque from the Minerals Council to say how rubbish the RSPT was.

We’re certain risk played a large part in those reports. The risk of not getting paid if they didn’t write what their paymasters were after.

And to cap it off, well, who else would sponsor a risk conference than one of the firms that was involved with aiding and abetting the global financial meltdown – the credit ratings agencies. In this instance, it’s Moody’s.

According to the blurb on the Risk Australia website:

“Moody’s Analytics helps capital markets and credit risk management professionals worldwide respond to an evolving marketplace with confidence. The company offers unique tools and best practices for measuring and managing risk through expertise and experience in credit analysis, economic research and financial risk management.”

That would be the same Moody’s that gave top ratings to the subprime mortgage debt that was packaged and sold by investment banks to investors. Thanks for the analysis, but, er, no thanks.

Considering the event and considering who was attending – “investment banks, commercial banks, hedge funds, asset managers, lawyers, consultants and regulatory bodies” – it makes sense that Mr. Debelle would title his presentation, “On Risk and Uncertainty”.

So, what do we make of Debelle’s speech? Rubbish, that’s what we make of it. In fact, if we were Debelle’s commanding officer we’d rip off his sergeant’s stripes and bust him down to private.

Oh sure, it starts off as you’d expect, fairly pedestrian. Falling into the category of stating the blinding obvious:

“Risk was mis-assessed by financial institutions, risk managers, investors and regulators. There was a false comfort taken from a misplaced belief that risk was being accurately and appropriately measured.”

In other words, all the folks sat around him, munching on muffins and slurping percolator coffee, stuffed up.

He went on, possibly making the chaps at Moody’s Analytics feel slightly uncomfortable in their seats:

“To some extent, the technology provided risk managers with a false sense of security. Risk may have been accurately measured for the particular regime that the economy and financial markets were operating in. But the risk assessment was not robust to a regime change that took the models out of their comfort zone.”

And we’re sure the co-sponsors of the event, Numerix and Sophis, were equally fidgety. According to their blurbs:

“Numerix is the leading provider of cross-asset pricing and risk solutions for derivatives and structured products… [Numerix provides] speed and accuracy in valuing and managing the most sophisticated financial instruments.”

While:

“Sophis is a leading provider of cross-asset portfolio and risk management solutions for capital markets…”

Obviously Mr. Debelle couldn’t have been referring to these two fine companies when he said, “There was a false comfort taken from a misplaced belief that risk was being accurately and appropriately measured.”

No, he must have been referring to some other risk assessors.

But there was one thing that struck us as we read through Debelle’s presentation. And that was the singular absence of any reference to interest rates. OK, that’s not entirely true, he mentions interest rates once. But only to ask whether Brazil’s high interest rates during hyperinflation should be taken into account when measuring interest rate trends in Brazil.

Right then. Thanks for that.

So aside from that one irrelevant reference, not a single mention of interest rates is made. Not one. Which is strange when you considering that interest rates are perhaps the best signal of risk in any market.

How is it possible to talk about risk without mentioning interest rates?

I mean, it would be like not mentioning the jelly when describing to someone what a trifle looks like. It’s just plainly ridiculous to miss out the main ingredient.

But of course, there’s a reason why he wouldn’t mention interest rates isn’t there? Yes, that’s right. To mention interest rates would mean dragging the role of central bankers into the discussion.

Naturally enough, if you know the institution you work for is guilty of a crime against the economy the last thing you’re going to do is mention it.

But not only does Debelle not mention interest rates but he’s decided to kick-start the slide into revising history.

His use of the term the ‘Great Moderation’ is a perfect example.

What is the ‘Great Moderation’? We didn’t know, we hadn’t recalled hearing of it before. So we got onto our trusty friend, Google and asked it to help us out. According to our other friends, the folks at Wikipedia:

“The term was coined by Harvard economist James Stock in his 2002 paper, ‘Has the Business Cycle Changed and Why?’”

And would you believe it, it was also the title of a speech by… US Federal Reserve Governor Ben S. Bernanke in 2004. A speech in which the ‘Gov’, now chairman, is happy to take the credit for the supposed ‘Great Moderation’:

“My view is that improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation. In particular, I am not convinced that the decline in macroeconomic volatility of the past two decades was primarily the result of good luck…”

But aside from the self-congratulations, the term Great Moderation is surely the biggest misnomer going around. In a nutshell, Debelle, and Bernanke before him, are arguing that the 1990s and 2000s was a period of stability and low volatility, and dare we say it, lower risk.

The argument from Debelle is that this period of stability “lulled investors and risk managers into a false sense of security. The decline in volatility led many to conclude that a new, more stable, regime had been established.”

Including Mr. Bernanke if his 2004 speech is anything to go by.

But here’s where Debelle really does get his facts muddled, he claims:

“I do not subscribe to the somewhat Austrian view that the stability and decline in volatility sowed the seeds of its own destruction.”

By implication, Debelle is making the fallacious argument that the Austrian school of economics has argued that low volatility and stability are the cause of the current economic disaster.

Look, your editor won’t claim to be a scholar of the Austrian school, although we have read the odd book or two by Mises, Rothbard, Hayek and Block. But the idea that the Austrians have blamed the meltdown on a lack of volatility and increased stability is absurd.

What’s even more absurd is the use of the term Great Moderation to describe the 1990s and 2000s. Is he serious? Has Debelle not looked at the data compiled by his own organisation, the Reserve Bank of Australia?

Has he not seen the following chart:

Credit bubble

Source: RBA

You’ve seen it. We’ve printed it several times. It shows the increase in bank lending over the last thirty-odd years, with the big ramp-up beginning… yep, you guessed it from the early 1990s, the period of the so-called Great Moderation.

Has he not figured out that the investment banks were doing all their leveraging up during this period? I mean, it wasn’t as though subprime loans suddenly appeared on bank balance sheets in September 2008.

Of course they didn’t. Subprime loans and other dodgy financial instruments have been stewing on bank balance sheets for the last thirty years. During the heyday of the Great Moderation.

If he’s not convinced I’d suggest he spends $20 and reads Liar’s Poker. That should help him figure out when the trouble started.

Come on, let’s be serious, the 1980s, 1990s and 2000s wasn’t a period of great moderation at all. It was a period of the biggest credit-inspired drunken booze up in the history of mankind.

Banks and bankers gorging and drowning themselves on cheap, central bank induced debt and implicit government guarantees.

The 1980s through to the mid 2000s was when, as the Austrian economists rightly say the problems gathered place. Without necessarily speaking for those from the Austrian school, our reading of their argument is that it was the period of excess credit, easy money and artificially low interest rates – caused by governments and central banks – that led to the collapse of the financial system in 2008.

All of which happened from the 1980s onwards.

It wasn’t the apparent low volatility that they blame. It was the chronic and criminal mismanagement of interest rates and money that caused the problems.

For Debelle to misrepresent the Austrian position is very disingenuous, bordering on misleading.

But as we say, Debelle doesn’t see that it was the credit-party of the 1990s that has caused the problems. And Debelle doesn’t admit that central banks had any role to play in the economic meltdown.

And furthermore, he doesn’t admit that the US Federal Reserve and its low interest rate policy of the early 2000s was one of the direct causes of the meltdown.

The fact is, the ones that are sowing the seeds of the next economic disaster are the central bankers and the governments. The likes of Glenn Stevens, Ric Battelino and Guy Debelle at the RBA included. The current period of artificially low interest rates are now creating another set of problems.

And just as the central bankers didn’t recognise it during the so-called Great Moderation, they have completely failed to recognise it now.

If anyone seriously thinks the current economic mess is anywhere near the end, then they’re going to be shocked when they finally realise the worst is yet to come.

Cheers.
Kris Sayce
For Money Morning Australia

Yesterday, the S&P/ASX 200 closed at 4,404.20, lower by 48 points. Retail sales grew by 0.7% for July, which was higher than the 0.4 anticipated. Patronage at restaurants at café’s was up 106% for the same month, but that could be due to the MasterChef effect.

Australia’s current account deficit was the lowest since 2002, dropping to $5.6 billion for the second quarter, much lower than the $16 billion recorded for the first quarter this year.

The Dow Jones Industrial Average closed higher by 5 points to 10,014.72, but the index is down 4.31% overall for the month of August.

Overnight, the FTSE added 23 points, ending at 5,225.22. The market jumped higher on the back of the increase in consumer confidence and slight rise in consumer spending data from America.

One senior partner at BGC Partners likened the market to a ‘headless chicken’. ‘There are plenty of reasons not to sell, like strong yields and healthy balance sheets, but there are plenty of reasons not to buy which is why people are jumping on every piece of news.’

The Nikkei lost a massive 325 points (3.55%), closing at 8,824.06. Japan reacted to the news that wages in the US had a smaller than expected increase which heighted fears that the recovery could slow and encourage an even stronger yen.

Gold enjoyed a rally overnight, gaining USD$10 per ounce.

The price of spot gold in Australian dollars is $1,397.83, while in US dollars it’s $1,247.39. The price of silver in Australian dollars is $21.59 and in US dollars it’s $19.27.

The Aussie dollar versus US dollar is AUDUSD 0.8926 and against the Japanese Yen it’s AUDJPY 75.05.

Crude Oil closed at USD$71.71.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

There is lots of ugly economic news out there, but one key bright spot is world trade. In the US, one particular industry will enjoy windfall profits from exports this year. That industry is agriculture.

In 2009, world trade took a big hit in the wake of the financial crisis. Global exports fell 12%. Governments tried to protect their home teams and a wave of tariffs and other protectionist measures followed. This was what happened during the Great Depression, too, as the Smoot-Hawley Tariff Act raised tariffs on more than 900 goods.

As a result, world trade sank by 25% during the early years of the Great Depression. But that hasn't happened this time around. In fact, the emerging economies of the world are already exporting and importing more than they were before the 2008 crisis.

In the US, a big winner is agriculture. US farmers are looking at record exports of $14 billion this year. The heat wave frying European crops (in particular Russian crops) helps that. But even before the drought, in just the first four months of the year, the US enjoyed a $4 billion trade surplus in agriculture. For years, the US has been the world's largest exporter of corn, wheat and soybeans. It is a leading exporter of many other agricultural goods.

Today, US farmers are cashing in on demand from emerging markets, particularly Asia. China has been trying to build self-sufficiency in food. But it has a long list of hurdles, chiefly a shrinking supply of arable land and water shortages. Also, the median Chinese farm is less than one acre. This hinders the economies of scale that come from big farms.

In any event, US farmers are sending more and more goods to the Far East. So perhaps it is no surprise that first US grain export depot built in 25 years is not on the rim of the Gulf of Mexico, but on the Columbus River in Washington state, about 60 miles from the Pacific Ocean. The new Port of Longview grain terminal will handle 8 million tonnes a year. (The Port of Louisiana is the still the top grain export hub in North America, although California recently passed Louisiana as the top point of departure for US cotton.)

We'll need more depots like the new Port of Longview. American infrastructure has had a hard time keeping up with surging ag exports. Outside of Seattle, for instance, 80 rail cars filled with dried peas sat for three weeks on the train tracks waiting for a ship to unload them.

It's not an isolated example. A soybean exporter in, say, Minnesota, could normally ship 40 tons of beans to Malaysia in 15-20 days. With recent bottlenecks, it took 60 days. There are plenty of stories of everything from hazelnuts to soybeans tied up in shipping bottlenecks for weeks.

The US isn't used to such export strength. As The Wall Street Journal noted, "America's trading infrastructure grew imbalanced, with a huge capacity to import goods but an attenuated capacity to export them. Loads of grain or corrugated paper leaving the US took a back seat to the DVDs and toys coming in."

That's the problem. For too long, the US economy has been all about overindulged consumers. There were too many stores selling too much junk, too many houses people couldn't afford and too much debt on all of it. This part of the economy grew to grotesque proportions, stimulated by easy credit.

But underneath it all, there is still the old world of making things. In my last issue of Capital & Crisis, I wrote about the surprising strength of American manufacturing. American agriculture is also a bright star in the US firmament and an appealing place to invest.

The future of American agriculture is very bright indeed, as a recent report from the FAO makes very clear. You can find the report, entitled "How to Feed the World in 2050," right here.

This excerpt from the report sums up the investment case:

Even if total demand for food and feed grows more slowly [over the next 40 years], just satisfying the expected food and feed demand will require a substantial increase of global food production of 70% by 2050, involving an additional quantity of nearly 1 billion tonnes of cereals and 200 million tons of meat.

In addition to the usual assortment of resource issues such as water and soil and climate change, there are some topics you wouldn't think of otherwise, such as biodiversity. Take a look at this:

The gene pool in plant and animal genetic resources and in the natural ecosystems which breeders need as options for future selection is diminishing rapidly. A dozen species of animals provide 90% of the animal protein consumed globally and just four crop species provide half of plant-based calories in the human diet.

I won't highlight too much of this report, because I'd be repeating myself. If you've read my observations for the last year or so, you know all you need to know about what's happening in the world's market for food. Still, if you need an overview, the FAO's report covers most of the issues.

Farmers with windfall profits will have more money to expand production next year. That's more money for things such as seed and tractors and fertilizers. As long as its export markets remain open, US farmers should have a great year.

As a long-term investment, Lindsay (NYSE:LNN) should benefit as farmers spend some of that money on irrigation equipment. The economics are attractive, as the machinery significantly boosts yields and makes more efficient use of water.

I also like the non-US ag plays, because high crop prices and the rising demand for food bode well for agriculture around the globe. In Canada, Viterra (TSX:VT) is a good long-term holding. It should rebound after excessive rains in Western Canada hurt grain production. In China, Migao (TSX:MGO), makes fertilizers for high-end crops such as fruits, vegetables and tobacco. It's growing capacity, and as the financials reflect the additions, it should report good earnings.

Those are just a few. There are plenty more. The business of producing food should continue be a good one.

Chris Mayer
for The Daily Reckoning Australia

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Bad day for stocks, yesterday. A bad day. Not a terrible day. Not a crash day. Just a bad day.

The Dow fell 140 points. This was baaaad...because it shows that the stock market does not really buy Bernanke's storyline.

You'll recall that when we left off last week, Ben Bernanke assured the world that while the recovery was not exactly what he had hoped for, he nevertheless had the situation in hand. He said he had the tools necessary to fix the problem and would do whatever was required.

The initial reaction was positive. The Dow rose more than 160 points on Friday. Some analysts thought the market's downward trend had been broken. But it needed follow-through on Monday. Instead, the market fell.

The fact is, there is no recovery...and no recovery is possible...and investors are beginning to realize it.

Then what is going on? A "Great Recession," say some analysts. A "depression," say others.

There is a good article in The Financial Times that helps understand what is really going on. It's by Ken Rogoff and Carmen Reinhart; you've heard of them before, dear reader. They are the ones who researched dozens of episodes of financial crisis and sovereign default throughout history.

Today, they write in the FT about what happens after a financial crisis. Well, what do you think? Do you think you get a "recovery"? Do things go back to normal? Is the recession over quickly and painlessly?

Not at all. Instead, there is rarely anything you would recognize as a "recovery." Things do not go back to normal because they weren't normal before the crisis. Crises are caused by abnormal conditions - usually too much credit, too much debt, too much spending and too much speculating. Then, when the bubble blows up, it typically takes a long time for the economy to get back on its feet.

Over the following ten years, unemployment usually stays higher than it was before the crisis.

Growth rates are usually lower.

And ten years after a blow-up in real estate house prices are still usually BELOW where they were when the crisis hit.

But what if the feds really get on the ball and try to turn things around? Then, watch out!

We read an article on dying yesterday. Here's a question for you, dear reader. Would you rather live in a recessionary economy or die in a booming one? We'll take the recession. Probably most people would. Heck, make it a depression.

There are a lot of illnesses for which there are no cures. Still, people will spend a fortune...and endure unspeakable treatments...in the hopes that they will be the one in a thousand who survives.

So too are people ready to believe that Dr. Bernanke can cure what ails the US economy. We don't think so. Because we don't think the economy is "sick." We think it is healthy...and finally correcting the mistakes of the Bubble Epoque.

Leading economists and the feds have believed, for example, that there was some problem of "liquidity" that was temporarily blocking the flow of cash and credit. They believed the problem could be solved by making more money available. That was why the Fed bought an extra $1.4 trillion of the banking sector's suspicious "assets." They wanted to make sure the banks had money to lend.

Well, now the banks have plenty of cash. Businesses too have record holdings of cash. Even households are rebuilding their cash accounts.

But who's borrowing? Who's spending? Who's buying new houses, for example? (New house sales are currently taking place at the slowest rate ever measured.)

CNN: "Credit if finally available, but no one wants it."

And more thoughts...

Why don't people borrow?

Because it's not a liquidity problem. It's a debt problem. A solvency problem. And it won't go away by making more cash and credit available. Instead, all those bad decisions, bad loans, and bad investments have to be cleaned up. And that takes time. And while the economy is de- leveraging, people are becoming more cautious...more risk-averse...more modest in their expectations.

What do Rogoff and Reinhart say about governments' efforts to fix these problems? What does history show?

They say the feds often make the situation worse.

Not only do governments typically pour bad money after good, they also disrupt the process of correction. Insolvent banks are kept alive. Big businesses that ought to go broke and be sold off are instead propped up...the lights are kept on by government subsidies, preventing new competitors from occupying the space. Consumers and investors keep waiting for the promised "recovery"...for the cure...for the fix. Instead of quickly adjusting to the new circumstances, they delay...they hesitate...they postpone unpleasant changes.

They might quickly sell a house at a loss, for example. They could then go on with their lives. But when they hear the feds tell them they have a new program in the works...or a new stimulus bill in Congress...or new action by the Fed...what are they supposed to think?

"Maybe I should wait and see if this new effort does the trick..." they say to themselves. "I'll feel like a real fool if I sell now and then the feds get a new bull market going." "Maybe I should wait before accepting a job at a lower salary; it says in the paper that the economy should recover by summer..."

The economic setbacks of the 19th century were sharp, but fairly short, affairs. The contribution of modern economics has been to stretch them out and make them worse.

*** How about China? Won't growth in China and the other BRICs lead the whole world out of its funk?

We wouldn't count on it.

First, the Chinese economy has been growing at near double-digit rates for the last ten years. It didn't stop the crisis and so far it hasn't helped the developed nations - at least the US - get out of it.

More important, China is probably getting itself into a big mess too. All we know is what we read in the paper on the subject. But what we read is that the spectacular growth China has enjoyed so far was made possible by freeing the private sector. But now the Chinese government is muscling the entrepreneurs out of the way.

"Now...it is state-run Chinese companies that are on the march," says The New York Times.

Railroads, mining, airlines, manufacturing, hotels, yogurt... The Chinese government either owns it, controls it, or invests in it.

And if you think private investors make mistakes, you should see what the government does!

A Daily Reckoning dictum: people make mistakes all the time; but if you want to make a real mess of things, you need taxpayer support.

Regards,

Bill Bonner
for The Daily Reckoning Australia

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The US markets fell 1.5% last night after rallying a similar amount the previous session. This is a clear indicator of a market in trouble.

The market rejoiced on Friday night after the US GDP figures came in at a better than expected 1.6%. The market ignored the fact that the expectations for the figure had to be ratcheted down twice from 2.5% to 1.4% recently so that they could come in under the released figure.

Looking forward, the expectations are that 3rd quarter GDP will be in the neighbourhood of 2.5%. What a joke. I would not be surprised at all to see the 3rd quarter return to negative growth and that would mean that current top down forecasts are ridiculously high.

As Mike Shedlock points out in his global economic analysis blog, at this stage of a recovery, four quarters following a bottom in GDP, growth is usually running at a 6% annualised pace. Instead the US is limping along at a 1.6% pace after 5% real GDP growth in the fourth quarter of last year and 3.7% in Q1. Join the dots and it is quite clear that the US economy is approaching stall speed.

Technically, last night's fall in the market is a clear warning signal that the previous session's strength was purely short covering and a misguided interpretation of the GDP figures.

S+P 500 daily chart

Click here to enlarge

If you have a look at this chart of the S+P 500 you can see that we are approaching the bottom of the range from the past year. The short, intermediate and long term trends are all pointing down now and we have already soaked up a lot of buying support over the past four months to keep us above this key 1010-1040 area.

You can see that the current short term trend is hugging the 10 day Moving average at the moment showing that we are in strong downtrend. A failure under this 1010-1040 area is going to see not only the capitulation of stale bulls from the past four months, but also capitulation from all of the long and wrong positions of the past year.

This will be the moment when no one can deny that the rally of the past year and a half is dead and buried and that the secular bear market that we have actually been in since 2000 is continuing. This is despite the US government and Ben Bernanke and his cohorts throwing everything including the kitchen sink at the problem.

Memories of the crash are still fresh in people's minds and it will not take much to see the panic take hold again. I would expect to see a fairly quick move towards the low 900's in the S+P 500 from here if 1010-1040 can't hold. By quick I mean within the next few months.

Friday sees the release of the Employment figures in the states and if the recent figures are anything to go by it will not show any pick up in employment which is a necessary catalyst for an improvement in the economy.

The bond market is showing signs that it thinks the US is already in another recession. The Japanese Yen is going through the roof and is showing that big investors are repatriating funds and lowering their risk exposure.

It appears that the equity market is sitting on its own as being optimistic about the future prospects of the economy. I don't think it is long until that shoe drops as well.

I would be even so bold as to say that last night price action has set the market up for another steep fall in the next day or so. Below 1040 in the S+P 500 is a danger zone and I think this time the moons are aligned for the market to retreat from the maginot line at 1040 and scurry off into the bushes.

I have been sending out warning signals to my Slipstream and Swarm subscribers and I invite you to have a look at a weekly video that I send outlining the major world markets and where I see them heading based on my technical indicators. I am very protective of my subscriber's interests and showing this information for free will not become a regular event, but I think it is ok to give you a quick look under the hood.

Click on the image below to watch the Slipstream Trader market update:

Murray Dawes
Editor, Slipstream Trader
for The Daily Reckoning Australia

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Well, the vacation is over.

We came back to the city on Saturday. On Sunday, cars rolled in all day long - piled with bicycles, beach towels, and all the paraphernalia of summer.

Walking to work, we saw a mother on a bicycle with her daughter behind her. The little girl was probably about 3 years old, still sucking her thumb. The mother had come to a stop in front of a nursery.

We read the whole story in the little girl's face. She looked as though she was about to cry. Big eyes rolled up towards her mother...still sucking her thumb. Her mother reassuring it.

She had spent the vacation with her family. But now it was time for her mother to go back to work...and the little girl to go back to the nursery. Poor little thing... More below...

And so, here we are, too, back at our own nursery...with its computer screens, desks and telephones...

Let's see, what happened this summer? Easy question. The recovery went missing.

Ben Bernanke said so last week...or almost. He noted that the economy wasn't quite as spiffy as he had hoped and that the Fed stands ready, willing, and able to provide more help.

The stock market liked the news. After falling for many days, it rallied 164 points on Friday. Gold was flat.

The New York Times reports:

THE American economy is once again tilting toward danger. Despite an aggressive regimen of treatments from the conventional to the exotic - more than $800 billion in federal spending, and trillions of dollars worth of credit from the Federal Reserve - fears of a second recession are growing, along with worries that the country may face several more years of lean prospects.

On Friday, Ben Bernanke, chairman of the Fed, speaking in the measured tones of a man whose word choices can cause billions of dollars to move, acknowledged that the economy was weaker than hoped, while promising to consider new policies to invigorate it, should conditions worsen.

Yet even as vital signs weaken - plunging home sales, a bleak job market and, on Friday, confirmation that the quarterly rate of economic growth had slowed, to 1.6 percent - a sense has taken hold that government policy makers cannot deliver meaningful intervention. That is because nearly any proposed curative could risk adding to the national debt - a political nonstarter. The situation has left American fortunes pinned to an uncertain remedy: hoping that things somehow get better.

This is where the Great Recession has taken the world's largest economy, to a Great Ambiguity over what lies ahead, and what can be done now. Economists debate the benefits of previous policy prescriptions, but in the political realm a rare consensus has emerged: The future is now so colored in red ink that running up the debt seems politically risky in the months before the Congressional elections, even in the name of creating jobs and generating economic growth. The result is that Democrats and Republicans have foresworn virtually any course that involves spending serious money.

"There are many ways in which you can see us almost surely being in a Japan-style malaise," said the Nobel-laureate economist Joseph Stiglitz, who has accused the Obama administration of underestimating the dangers weighing on the economy. "It's just really hard to see what will bring us out."

Japan's years of pain were made worse by deflation - falling prices - an affliction that assailed the United States during the Great Depression and may be gathering force again. While falling prices can be good news for people in need of cars, housing and other wares, a sustained, broad drop discourages businesses from investing and hiring. Less work and lower wages translates into less spending power, which reinforces a predilection against hiring and investing - a downward spiral.

What kind of help can the Fed give?

Well, the only kind it has left. Team Bernanke has already given the economy as much conventional, monetary medicine as he could. Rates are at zero. They've been at zero for two years. What more can you do?

The Fed has also used its unconventional tool - quantitative easing - to add $1.4 trillion to the Fed's own balance sheet. It buys bonds with money it creates - out of thin air - especially for that purpose.

We wish we could do that. When the Fed wants to buy something it just snaps its fingers. Presto! New money. Money that didn't exist before. How neat is that? You want a new car? You don't draw on savings. You don't wait until you've got enough money. You don't sit down meekly in front of the credit desk to see if you qualify for financing. You just write a check and tell the bank to cover it.

The Fed has already done quite a bit of quantitative easing. Normally, when it buys a bond with money it invented, the new money goes away automatically when the bond matures. So, the Fed has already said it would turn over its bond holdings, rather than let them mature and expire. And now Bernanke says he is ready to go further - by buying more bonds.

But the Fed is hesitating. It knows it can increase the potential money supply by buying more bonds. But it doesn't know how much good it will do. So far, the banking system is not lending...and not converting this monetary base into the kind of consumer and business loans that boost consumer prices.

The Fed knows, too, that investors may begin to worry about inflation. Bond buyers may begin to worry about a crash. At some point, these nagging worries could turn into a raging panic. But the Fed doesn't know where that point is. Neither does anyone else.

And nobody knows whether or not it is possible to transmit just a little bit of inflation - enough to avoid deflation and persuade consumers to shop - by means of quantitative easing. It might be like a runaway train. Once you've lost control...it's too late. Markets now seem to anticipate lower inflation rates. The threat of higher levels could incite investors, consumers and business to get rid of dollars. This would nudge inflation rates up...and build momentum towards even higher price hikes. Every little increase in inflation rates could intensify the desire to exit dollars and US bonds... Who knows where the train would stop?

Meanwhile, President Obama says he's not happy with the level of growth in the US economy. Which just goes to show how preposterous and absurd the whole discussion has become. Economic growth is a function of what people choose to do with their money. Sometimes they pursue growth. Sometimes they want safety. At present, they seem to prefer to play it safe. Households save. Banks stockpile cash. Businesses put expansion plans on hold and refuse to hire.

What sense does it make for an elected president to take issue with the express, legitimate and sensible desires of the people he is supposed to represent?

And more thoughts...

We watched "la rentree" from a sidewalk café, where we sat down to compose our thoughts. Families came back to town, pulled up in front of their apartment houses and unloaded children, bags, bikes, baskets, grandmothers, dogs, and surfboards. Young men came up out of the subway, still wearing shorts, flip flops and t-shirts - unwilling to give up their summer garb until they absolutely had to. Couples began gathering at bars and restaurants to tell each other where they had gone and what they had done.

"That's part of what I like about France," said Elizabeth. "It's the structure. Everybody goes on vacation. Then everybody comes back. You know what you're supposed to do and when you're supposed to do it."

"Well, you certainly don't want to do it at the same time everyone else does," we protested. "There are traffic jams 50 miles long outside Paris."

"Yes, but even that gives people a sense of shared adventure and hardship... I guess I should say, also, that I like the structure itself. Taking a month off. Spending the time reconnecting with friends and family. And you all know that that's what the time is for."

A young man came into our apartment Saturday afternoon - taller, tanner, more mature, confident and fashionable than we had ever seen him. His collar turned up...his hair brushed back...we scarcely recognized him. It was our youngest son, Edward, 16, who had been with a friend at the beach.

"Wow...what happened to you..." his father wanted to know.

"I've been sailing. Hanging out at clubs. And I met some girls..."

And then a young woman came to the door. She too was tanned...but she looked tired.

"I haven't slept in 4 days," said daughter Maria, after returning from a trip to Mykonos.

"It's completely wild there. It's not a place you would like, Dad...partly because it's all clubs, bars, and nightlife...and its 80% gays. Not that you have anything against gays...but you wouldn't fit in at all.

"I loved it...but then, I was in 'work mode.' I mean, I was surrounded by fashion photographers, designers... The beautiful people. But these are the people I work with. Agents. Actors. Producers. We went out to bars and danced all night.

"I feel sorry for some of them... Who was it who said, 'parties are a waste of time?' A lot of it seemed pointless to me. But I still had a good time. And now I need to go to sleep. I'll see you tomorrow..."

Regards,

Bill Bonner
for The Daily Reckoning Australia

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We’ll stay on the theme of Japan for today. And we may even stay on a similar subject for tomorrow after we heard this quote, “All the signs look like we’re [the US] going to follow the Japanese scenario.”

But more on that – perhaps – tomorrow.

Until then, we had to laugh. Yesterday’s Wall Street Journal wrote, “Japan’s government offered a modest stimulus package Monday and the central bank took steps aimed at curbing the rising yen…”

Steps which – oops! – resulted in the Yen rising further. As you can see from the chart below:

The mighty Yen

Source: Yahoo! Finance

To put things in perspective. To see just how, erm, successful the Japanese government and central bank have been in manipulating the Yen weaker, take a look at the longer term chart:

Yen bubble?

Source: Yahoo! Finance

During the past two years the Yen has strengthened by around 20% against the US dollar. Moving from 110 Yen to the dollar to just 85 Yen to the dollar today.

And if you look even further back the Yen has moved from over 130 Yen to the dollar just eight years ago.

As we’ve written a gazillion times before, it’s just not possible to minutely or massively manipulate the market. The market always wins and the manipulators always lose – eventually.

But barely a month goes by without the mainstream printing a story about how the Bank of Japan is going to intervene in the currency market or that the government will take measures to weaken the Yen.

Yet all the time the Yen keeps getting stronger and stronger.

And all the time we’re told that by the likes of Jesper Koll from JPMorgan Chase in today’s Australian Financial Review that “There is no magic bullet that will fight the spectre of deflation.”

It seems the mainstream may have forgotten that the reason there’s no magic bullet is because there’s no “spectre”.

As we wrote yesterday, deflation isn’t the baddie the mainstream economists and bankers would have you believe. It’s only portrayed as bad because deflation is the ultimate magic bullet that will kill off the over-leveraged and bankrupt Western system of banking.

For everyone else deflation is fine.

I mean, let’s take a look at some other numbers. Yesterday I showed you the Japanese consumer price index (CPI) that had “painfully” subjected the Japanese consumer to a 0.4% fall in prices over the last fifteen years.

In contrast Australian consumers had seen a 50% increase in prices. Seriously, which would you prefer? Come on, don’t tell me you’re happy paying 50% more for your groceries today than you did fifteen years ago…

But what about those other numbers? We’ve been told that Australia is a great and vibrant economy for having near full employment. That the unemployment rate is a miniscule 5.2%. Aren’t we good, and up yours to the United States with their 9.9% unemployment rate.

But what about our pals in Japan? You know, the economy that’s moribund, the economy that’s struggling against the “spectre of deflation”?

Erm, well, apparently, according to the Japanese Ministry of Internal Affairs and Communications, as of July 2010, the unemployment rate was a whopping… 5.2%:

Source: Ministry of Internal Affairs and Communications

Yes, it turns out that hotbed of deflation and moribundness actually has the same unemployment rate as Australia. And the chart doesn’t look that dissimilar to a chart showing the Australian unemployment rate.

Now, I’ll make the same point again. If you’d been unlucky enough to have been unemployed for the last fifteen years, or on a fixed income, which would you prefer, prices falling by 0.4%, or prices rising by 50%?

But even if you’ve been employed over that period, surely you’d prefer flat to falling prices rather than rapidly rising prices. Unless you’re a banker that is.

Look, I’ll say it again, we make no claims to be a Japanese economic expert. We’re sure there’s plenty of bad things about the Japanese economy.

But let me make one thing completely and utterly clear…

Deflation isn’t one of those bad things.

It’s bad that the government swipes the equivalent of USD$1.8 trillion in taxes from its citizens and then proceeds to spend USD$2.1 trillion.

It’s bad that government debt is 189.3% of GDP, when according to anecdotal evidence the Japanese public are rabid savers – as the stats we pointed to yesterday show, 51% of household assets are in bank accounts.

But it’s not bad that Japanese citizens have experienced steady prices over the last fifteen years.

What is bad is that the Japanese government and central bank should conspire to stab their citizens in the back by taking advantage of the good nature of savers by borrowing that money and using it to punt on the foreign exchange market – a punt which the Bank of Japan must be losing heavily on.

It’s bad that the Japanese government and central bank should thumb their noses at their citizens by attempting to devalue those savings by printing more and more money to stave off the “spectre of deflation“.

But why does deflation get such bad press? Aside from the filth and misinformation put out by the banks and their mainstream economic lackeys, the usual excuse given is along the lines of this…

“With deflation people stop buying things, therefore prices go down, companies that bought supplies now have to sell them at a loss, this causes the companies to cut costs and sack people, this causes demand to fall even further and so on and so on…”

It’s a pretty compelling reason to fear deflation isn’t it?

Only it’s not true. Let’s look again at some of those CPI numbers from Japan between 1994 and 2009:

Food prices have risen by 1.3 points.

Fresh food has decreased by 5.4 points.

Housing has increased by 4.9 points.

Fuel light and water charges are up by 8.9 points.

Furniture and household utensils have fallen by 36.6 points.

Clothes and footwear are down by 1.9 points.

Medical care is up by 11.6 points.

Transportation and communications are down by 6.1 points.

Education is up by 17.6 points.

Reading and recreation are down by 17.3 points.

Miscellaneous is up by 6.9 points.

And all up, the Japanese consumer price index has fallen by 0.5 points, or around 0.4% – in FIFTEEN YEARS!

The facts are, there are certain items – food, fuel, light, water, housing, clothing, footwear, transportation, communications, education, and medical care that most people are unlikely to stop buying.

In fact, get this, in an economy with falling prices there’s even the chance you’ll buy – shock horror – more stuff because your savings have increased in value. Do you ever go to the shops and buy less food because the prices are more expensive?

I’m sure you do. Perhaps you substitute for other items. But the point is, higher food prices won’t stop you from needing to eat. And by the same token, lower food prices won’t stop you from eating either. As I say, perhaps you’ll even eat more.

It’s a perverse argument the anti-deflationists have put around. That falling prices will lead to all sorts of economic misery. It’s just lies, plain and simple.

But what about those other industries? Industries where there is more consumer discretion. Clothing, transportation and communications would fit in that category as well, as would reading and recreation. And so would furniture and household utensils.

Will the firms that manufacture those goods or provide those services really go out of business if prices fall?

Perhaps some businesses will. Businesses go bust all the time, even in an inflationary economy. But to suggest that it would be any more so in a flat to deflationary economy is just nonsense.

Businesses operate under the assumption that they’ll make a profit – although not all will. If a business believes it is going to make a loss then it will take action to remedy that. Perhaps that will involve cutting costs such as labour. Or maybe shutting up shop and going out of business.

But ultimately, businesses make purchases and hire staff based on the belief that they’ll be able to sell goods or services for a profit.

Therefore, in a deflationary environment, businesses anticipate future price falls and take that into account when they buy wholesale or when they hire workers.

Look at those CPI numbers from Japan again. With the exception of the furniture category, all price movements have been relatively stable. Business people would no doubt have adjusted to that and forecast for it.

A lack of price inflation simply means that prices haven’t risen. It means business costs have remained static. It means that workers don’t need to get a pay rise. It means that the standard of living in Japan has remained relatively stable, whereas in inflationary countries such as Australia, the UK and the US, the standard of living has declined.

Yes, declined – higher debt, higher mortgages, and a higher cost of living. That my friend is the impact of inflation.

The notion that deflation results in prices going to zero and everyone becoming unemployed is plainly ridiculous. It’s just as ridiculous as someone arguing that house prices will fall to zero.

It won’t happen because of human action. At some point on the supply and demand curve people would believe that a certain price is worth paying, even if they believe the price could fall further.

Just as the price of plasma and LCD televisions continue to fall, people still buy them. Just as the price of computers continues to fall, people keep on buying them.

Here’s an example. Five or six years ago even an average plasma TV would set you back $5,000 – that was too much for your editor. Two years ago an average LCD TV would set you back $3,500 – again that was too much for your editor.

But four months ago, when the price of an LED LCD HD TV was going for $1,500 we decided to buy one. I’m sure if we looked in the catalogues today that same set would cost us no more than $1,000…

The point is, $1,500 was a price we were prepared to pay. But most other people we know were prepared to pay much more than that. Even though they knew and we knew the price would ultimately be much less in the future.

Do those price falls mean technology firms are losing money and going out of business? Sure, some probably are, but most aren’t. Either way, what do you care, don’t you just want the best product for the cheapest possible price?

You see, it’s the creative destruction and competition that forces prices down. If prices rise too high then it should lead to falling prices as competitors recognise the opportunity to undercut the competition while still making a profit.

Eventually wide profit margins should shrink to much narrower profit margins. Along the way, those firms with high fixed costs go bust. But that’s good. The company with lower fixed costs is able to increase market share and hire more people.

It’s only when you governments and central banks interfering that the market becomes distorted. And typically, as we all too often see in Australia, that distortion leads to price increases – technology excepted.

The way we see it, for all the talk about Japan being a basket case – and again, without being a scholar of the Japanese economy – we’re more inclined to think that the Japanese aren’t doing too badly at all.

Yes, they have to put up with an incompetent bureaucracy that’s doing its best to “free” them from deflation and “save” them with inflation, but at least Japanese savers know that the 100 Yen that’s in their bank account or under the mattress today is most likely to have the same purchasing power when they come to spend it next year or the year after…

Unless of course their government is “successful” in its fight against deflation!

Can you say the same thing about the money in your bank account? Thought not.

Cheers.
Kris Sayce
For Money Morning Australia

The S&P/ASX 200 rallied 82 points, closing at 4,452.70, however thanks to the lead in from America, the market has already opened lower this morning.

Some important economic data coming out today for the month of July is building approvals, Australia’s international investment position and retail trade data, all from the Australian Bureau of Statistics.

The Dow Jones Industrial Average was 140 points lower to 10,009.73. Consumer spending rose for the first time in four months, however there was only a slight increase in wages.

Coming out later this week is manufacturing, services and non-farm payroll data, which is expected to confirm that the US economy is slowing.

Last night was the lightest volume traded so far this year.

The UK markets were closed yesterday for the Summer bank holiday.

The Nikkei gained 158 points, closing to 9,149.26. The Bank of Japan (BoJ) met yesterday with the aim of weakening the yen. But the actions by the central bank were obviously expected by the market and yen remained strong.

Nick Bennenbroek, head of currency strategy at Wells Fargo said ‘The yen will probably stay exactly where it is now. Clearly, additional monetary policies and extra funds that the Bank of Japan added aren’t enough to see the yen weaken.’

The price of spot gold in Australian dollars is $1,386.97, while in US dollars it’s $1,237.48. The price of silver in Australian dollars is $21.36 and in US dollars it’s $19.05.

The Aussie dollar versus US dollar is AUDUSD 0.8916 and against the Japanese Yen it’s AUDJPY 75.41.

Crude Oil closed at USD$74.08.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

Another week in Australia without a new government. Not bad for a Monday. The current Prime Minister is set to meet with three so-called independent members of Parliament to discuss forming a minority government. This gives us a chance to correct an error we made awhile back.

"Every election is a sort of advance auction sale of stolen goods," wrote HL Mencken. We misattributed that quote to Mark Twain, another great American wit. But the observation seems especially apt right now.

With Australia's election not yet over, the auctioning of future stolen goods continues is on display for all to see in Canberra. The independent MPs each have their own Christmas list of things you must buy them. Paul Hogan must be gratified to know that his large late fee on unpaid taxes will go to making Australia a safer, better-governed, freer, and more prosperous country.

But really the big news since Friday is that the media are still taking Ben Bernanke seriously. The Fed Chairman gave a much-anticipated speech last week in which he assured the naive and the hopeful that the Fed would do whatever it takes to support the U.S. economy.

Here's a suggestion Mr. Bernanke: fire everyone one that works for you and then resign. That would do more to promote U.S. growth and sound money that anything else you could possibly do.

But assuming that doesn't happen, how will the Fed support an economy whose second quarter growth was revised downward last week from 2.4% to 1.6%? Buy everyone ice cream?

We're being flippant because it should be obvious to anyone with two neurons firing in the brain that you cannot support growth by adding to the stock of debt. The Fed's quantitative easing programs can fund higher government deficits. And higher government deficits can fund more "stimulus" even as households and businesses hunker down and deleverage.

Yet all that stimulus does is seem to support exports and manufacturing growth in places like Germany and China - where the cars and goods Americans by are made. The stimulus stimulates. Just not where you'd expect, like having your feet tickled but feeling it in your ear.

This is a critical issue for Australia. The chart we showed you last week clearly demonstrates that Australia's stock market tracks the U.S. That means bad U.S. earnings and a weak economy would be bearish for Aussie stocks. But what about China?

The argument is made that Australia's economic growth correlates more with Asia than America. "Our national income will soon be growing at a China-like rate, underpinning a boom investment that is already underway," writes RBS chief economist Kieran Davies in today's Australian Financial Review. "Iron ore is now our largest export, accounting for almost four per cent of the economy, while coal is not far behind at 3.5%."

The argument is that strong coal and iron ore prices - even though they may fall in the next quarter as contract prices are correlated with the spot market - support national income, which supports national investment ($112 billion in projects in the mining sector alone, according to RBS), which supports national employment, which supports national spending, which supports national taxes which support all the promises made by politicians who support themselves at your expense.

This all sounds mostly true. But it all hinges on the boom in China having nothing to do with the credit boom in America - you know...the one that's deflating and causing the world's nastiest economic hangover in seventy years.

Here's what worries us, though. What if China's great economic growth story really is just a derivative or manifestation of the world's greatest credit bubble ever? Writing about this phenomenon at Zero Hedge, Tyler Durden hits close to home:

Well, of course, China needs its resources. Soon every open mine will be a "BRIC" to be exploited by Chinese interests, which come, see, and suck the place dry as they build yet more vacant cities, ghost towns, and highways to nowhere, hoping they can sustain the illusion of the world's greatest bubble for a few more months. Which is precisely all those who are betting on a collapse of China are playing it not with China CDS, but those of Australia: for when the worm turns, Bad in Beijing, will be nothing compared to the Massacre in Melbourne.

Gulp.

So what's our solution? We don't really have one, at least in terms of correcting the errors of the boom. That happens naturally if you let it. The key is to let it and not fight it. Fighting it only makes it worse. But once it's happened, the return to normalcy is painful. There's no easy way out, like spending someone else's money.

This, by the way, is probably why so many people don't like Austrian Theory. Its main prescription is that prevention is the cure to monetary madness. With sound money, the rule of law, free trade, and low taxes, you generally promote liberty and prosperity without going into massive government debt. But once you have a credit bubble on your hands, the only way out is liquidating the bad investments, not preserving them.

It was interesting that on Friday, while the Dow first fell and then rallied, copper, coffee and corn all rose. The commodities markets see the Fed's QEII program as being inflationary. Either that, or people are starting to think about trading Federal Reserve Notes for things that are actually useful...while they still can.

Come to think of it, we like the idea. In a few weeks, we're headed back to America for some business. Earlier in the year we looked at house prices and found they were still falling, so we stayed out of the market.

This time, our plan is to hire a storage unit and fill it with the sorts of things that disappear from shelves when people begin to lose confidence in paper money. On our list: coffee, vodka, cigarettes, petrol, vitamins, over-the-counter pain killers, petrol, batteries, bullets, a hatchet, maps, a non-North Melbourne scarf, etc.

Not on our list: U.S. government bonds.

What's on your list? You can let us know with an email to dr@dailyreckoning.com.au . Investors who take the Fed at its word or who actually still believe the Fed can support the U.S. economy with asset purchases deserve what they get. You have been warned by these morons what they intend to do. Now is the time to get your wealth out of the places where it is likely to be destroyed.

All that said, it looks like U.S. bonds are becoming a kind of Noah's ark for people who believe in central banking. Everybody on board the Bernanke Boat if you believe making more credit available is the solution to a world that already has too much debt. All aboard!

Judging by vanishing U.S. bond yields, there appears to be quite a few people willing to get on the good ship Death Trap, captained by Helicopter Ben. If you're going to stay out of this trade, just keep in mind that it can run longer than it should or than you might believe is possible, which is fine with us. It gives us more time to stock up on vitamins at Wal-Mart.

Iceberg. Hindenburg. Call it what you will. Here's a note from our friend Ron Kitching on what's really going on.

Stimulations, Booms and Busts.

History shows that freedom of the individual, and the open, competitive spontaneous organizations, customs, and procedures in a free market, secure private-property system, is much more efficient than centralised consciously rational-directed systems of organising the human economic activity.

The mystery for any economy, is how people's actions are impersonally coordinated by the market. All classical liberal monetary theorists noticed, that the price system - free markets - does a remarkable job of co-ordinating people's actions, even though that coordination is not part of anyone's intent.

The market, wrote F. A. Hayek, is a spontaneous order. By spontaneous Hayek meant unplanned - the market was not designed by anyone, but evolved slowly as the result of human actions. But the market does not always work perfectly.

The main cause of market distortions is increases in the money supply by the central bank. Such increases make credit artificially cheap.

Entrepreneurs then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market.

Artificially low interest rates cause investment to be artificially high, and cause mal-investment and the boom turns into a bust. As readjustment to reality occurs many people are thrown into temporary unemployment.

Monetary theorists see the bust as a healthy and necessary readjustment. The way to avoid the busts, they argue, is to avoid the artificial booms that cause them.

The "stimulation" commended by many was and remains an artificial boom. Bernanke is getting ready for another one.

Dan Denning
for The Daily Reckoning Australia

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