Last week I gave you a primer on buying shares.  This week I’ll take you through how to sell shares.

As you might guess, the process isn’t that different.  So a lot of what we wrote last week will be repeated this week.

But before I get onto that, I’ve received a number of related questions which I’ll cover next week in a Q&A session.  So, if there’s anything you feel I haven’t covered and you have any questions, just send them to moneymorning@moneymorning.com.au and type “Questions about buying and selling shares” in the subject line.

I’ll try and answer all those questions next week.

And as a reminder, if you become a member of one of our paid advisory services – Australian Small-Cap Investigator, Diggers & Drillers, Australian Wealth Gameplan, Sound Money Sound Investments or Slipstream Trader – you’ll receive the free e-book “How to Buy and Sell Shares for Profit”.

There you’ll discover all the ins and outs of buying and selling shares in an easy-to-read format, with helpful examples.

Plus, each of these services is obligation-free so there’s no requirement to stay on as a subscriber if you find it doesn’t suit you.

Anyway, until you do that, here’s a simple explanation about selling shares once you own them.  And just to avoid confusion, I’m not talking about short-selling, that’s something completely different…

Selling Shares

So, let’s say you subscribe to Australian Small-Cap Investigator, Diggers & Drillers, Australian Wealth Gameplan, Sound Money Sound Investments or Slipstream Trader.

And let’s say you bought a share based on a recommendation a few months ago.  In that time the price has gone up, and we’ll say you’re now sitting on a $1,000 profit.  Pretty good if you only invested $2,000 to begin with.

Well, now let’s say you’ve received a sell recommendation from your advisory service.  Or maybe you’ve just decided for yourself to cash in your profit.

What do you do?

Simple.  Here’s an example of a typical sell ticket you’ll get with an online broker:

Source: CMC Markets Stockbroking

Or, it could look something like this:

Source: Comsec

First you’ll need to confirm the ASX Code.  In our example the code is XYZ.  For BHP Billiton it’s BHP, for Commonwealth Bank it’s CBA and for Foster’s it’s FGL.

All share trading sites have a search function to help you find the stock code.  But the easiest way to sell is to select the “sell” button next to the stock in the list of your holdings.

If we look at a sample portfolio on the Comsec trading site you’ll see what I mean:

Source: Comsec

Clicking on the red circle would take you straight through to a sell order ticket with the stock code pre-populated.  Although you’ll still need to manually enter the number of shares you want to sell.

This is just in case you don’t want to sell all your shares.  When a share price doubles, some punters like to take their initial stake off the table and leave the rest in the market as a “free” bet.

Others sell a quarter or a third, knowing that even if the share price halves they’ll still likely get out at no worse than break even.

Others prefer to sell the whole lot and enjoy their winnings.

But whatever strategy you choose, that’s entirely up to you.

Next, just as with buying, you need to figure out what price you want to receive.  If you’re happy receiving the current price on the market then you select “At Market” or just “Market”.  This means the trade will go through at the highest price on the bid (or buyers) side of the market.

What does bid mean?  Let me explain.  I’ll show you what’s called the market depth:

Source: CMC Markets Stockbroking

This shows you the number of buyers and sellers with limit orders in the market (I’ll explain limit orders again in a moment).

The bid side of the market just means you’ve got a bunch of people bidding to buy shares at a particular price.  So in this case, if you want to sell 1,000 shares at the market price you would accept the highest bid and receive $2.17 per share.

This would make you $2,170.

Just think of it like people bidding at an auction.  Except in this case, rather than just one seller, there’s a whole bunch of sellers.  Each vying to get the best available price for their shares.

Of course, you don’t have to sell at the market price.  An alternative to a market order is a limit order.  That simply means you want to limit the price you’re prepared to receive.  If you want to sell but you’re not prepared to receive less than $2.20 per share, you would enter a limit order to sell your shares at $2.20.

This means you’ll wait in a queue on the “sellers” or “offer” side of the market – that’s the right hand side in the market depth above.

As a limit seller your order will remain in the queue until the share price rises to your level of $2.20 or until you cancel the order.

Getting Your Money

Once the trade has been completed your broker will email a confirmation statement to you.

Now all you’ve got to do is wait for the money to arrive.  That bit should be easy.  Providing you’ve set up a direct debit, your broker will pay the money into your bank account in four days without you lifting a finger.

You may see reference to a term called “T+3”.  This simply means the trade settles three days after you sell the shares.

However, in reality, the money won’t appear in your bank account until the fourth day.  That’s because even though the trade settles on the third day, the broker still needs to transfer the money into your bank account.  That will take overnight.

As you know from last week, all regular share trades are settled T+3.  Sometimes you may come across something called deferred settlement.  But that usually only occurs with initial public offerings (IPOs) or other special situations, such as a share reconstruction.

That means rather than a T+3 settlement, the settlement date could be a fixed date in the near future.  But don’t worry about this too much as it’s an irregular occurrence.

And that’s it.  Once the money is in your bank account you can either spend your winnings on a treat, or you can use the cash to put towards your next trade.

Like last week, I hope that’s helped.

Don’t forget to drop me a line to moneymorning@moneymorning.com.au if there’s anything  else on buying and selling shares you’d like me to cover.  Just type “Questions about buying and selling shares” in the subject line, and I’ll select some of the questions and print them – along with the answers in Money Weekend next week.

Cheers.

Kris Sayce
For Money Morning Australia

Money Morning Highlights of the week:

Monday: Of course, comparing the size of the flood levy to GDP by itself isn’t relevant.  GDP is supposedly the economic output of the economy, whereas the flood levy is a cost to the economy – taxpayers.  So what you really need to do is compare GDP to the amount government steals from taxpayers.  Click here for more…

Tuesday: Gold doesn’t pay any income, of course. Which is why retirees and pensioners should hate it.  But since gold cannot go bust – and because its tight supply typically finds strong demand when cash loses value to inflation in the cost-of-living – gold in fact makes the perfect insurance for fixed-income investments like corporate or government bonds.  Click here for more…

Wednesday: The gold price kicked off this year with a fall.  It dropped from $1422 / oz, down to a low of $1318 / oz by late January.  This was a fall of just 7.3%, but still this gave all the gold bears something to rant about for a few weeks: ‘It’s the end of the gold bull market’, ‘I told you it was in a bubble’, and so on.­  Click here for more…

Thursday: In the early 1990s there was a show on UK television called the Harry Enfield Television Programme.  It was a sketch-based comedy that ran for several years.  One of the characters was called Mr. You-Don’t-Wanna-Do-It-Like-That.  Click here for more…

Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else). Click here for the most intriguing stock story of 2011. Click here for more

One of the most frequent questions I’m asked goes something like this:

“I’m a newcomer to this shares lark, how do you buy shares?”

Well, let’s answer that question here.

Now, I’ve only got limited space in Money Weekend so this week I’ll give you a crash course in buying shares.  And in the next Money Weekend I’ll give you a crash course in selling shares.

But, I should point out that if you become a member of one of our paid advisory services – Australian Small-Cap Investigator, Diggers & Drillers, Australian Wealth Gameplan, Sound Money Sound Investments or Slipstream Trader – you’ll receive the free e-book “How to Buy and Sell Shares for Profit”.

There you’ll discover all the ins and outs of buying and selling shares in an easy-to-read format, with helpful examples.

Plus, each of these services is obligation-free so there’s no requirement to stay on as a subscriber if you find it doesn’t suit you.

Anyway, until you do that, here’s a brief rundown on how the stock market game works…

Finding a Broker

The first thing you’ll need to do is find a stock broker or share broker.  They’re the same thing.  And the terms are used interchangeably.

There are many brokers to choose from.  If you go to www.asx.com.au you’ll find a list of discount and full-service brokers.

My advice is to use a discount broker.  Most – but not all – full-service brokers won’t give you the time of day unless you’ve got at least $200,000 to chuck into the market.  And if they do take you on, chances are they’ll give you no service but still charge you $80 per trade!

That’s why I suggest using a discount broker.  There are four popular ones to choose from.  At the cheap budget end you’ve got Bell Direct and CMC Markets Stockbroking.

They’ll charge you about $10-$15 per trade regardless of how many times you buy or sell shares each month.

At the less cheap end are Comsec and ETrade.  They’ll charge you $20-$30 per trade, but they offer discounts depending on how many trades you do each month.

Once you’ve made up your mind – check out their websites by clicking on the links above – fill out the forms and send them back to the broker.  Just be aware that it’ll take a few days to set up an account because they’ll most likely ask you for certified copies of identification papers (passport, drivers licence, that sort of thing).

And part of the paperwork will usually involve setting up a direct debit between your stockbroking account and your bank account.  That way the broker can take the money from your bank account when you buy shares, and pay money into your bank account when you sell shares.

Personally, I find this the easiest way of paying for trades.

After you’ve gone through those hoops, you’re ready to trade.

Buying Shares

So, let’s go through a hypothetical example.  Let’s say you subscribe to Australian Small-Cap Investigator, Diggers & Drillers, Australian Wealth Gameplan, Sound Money Sound Investments or Slipstream Trader and one of the recommendations is to buy shares in XYZ Ltd… what do you do?

Simple.  Here’s an example of a typical buy ticket you’ll get with an online broker:

Source: CMC Markets Stockbroking

Or, it could look something like this:

Source: Comsec

First you’ll need to confirm the ASX Code, in our example the code is XYZ.  For BHP Billiton it’s BHP, for Commonwealth Bank it’s CBA and for Foster’s it’s FGL.

All share trading sites have a search function to help you find the stock code.

Next you need to figure out what price you want to pay.  If you’re happy paying the current price on the market then you select “At Market” or just “Market”.  This means the trade will go through at the lowest price on the offer side of the market.

What does offer mean?  Let me explain.  I’ll show you what’s called the market depth:

Source: CMC Markets Stockbroking

This shows you the number of buyers and sellers with limit orders in the market (I’ll explain limit orders in a moment).

The offer side of the market just means you’ve got a bunch of people offering to sell their shares at a particular price.  So in this case, if you wanted to buy 1,000 shares at the market price you would accept their offer and pay $2.18 per share.

This would cost you $2,180.

An alternative to a market order is a limit order.  That simply means you want to limit the price you’re prepared to pay.  If you like the company but you’re not prepared to pay more than $2.10 per share, you would enter a limit order to buy shares at $2.10.

This means you’ll wait in a queue on the “buyers” or “bid” side of the market – that’s the left hand side in the market depth above.

As a limit buyer your order will remain in the queue until the share price drops to your level of $2.10 or until your cancel the order.

How Many Shares Do I Buy?

Now, let’s say you only wanted to invest a total of $1,000.  How do you work out how many shares to buy?  You can easily work it out using the following formula:

Dollar Amount to Invest =   Total Shares to Buy
Share Price

Or to use our example:

$1,000 = 458.72 shares

$2.18

Because you can’t buy fractions of shares you’d need to round the number up to 459, or down to 458.

This is the number you enter into the order ticket where it says quantity.

One nice feature of the Comsec trading website is that you can click on “Estimate”.  This calculates the total cost of the trade including broking fees.  This is a good way to make sure you haven’t muddled up your sums or got your decimal point in the wrong place.

If you only want to buy $1,000 worth and you end up buying $10,000 worth it could turn out to be a costly mistake!

By the way, the Australian Securities Exchange (ASX) has a minimum order size.  You can’t buy any less than $500 worth of shares in a company.

Once you’ve done all that and clicked the “trade” or “proceed” button, your order is in the market.  You’ll receive an email confirmation from your broker when the order has been completed.

On completion of the order you’ll be the proud owner of the shares… a partial owner in a publicly listed company.

Paying for Your Shares

Now all you’ve got to do is pay for the shares.  That bit should be easy.  Providing you’ve set up a direct debit, your broker will take the money from your bank account in three days without lifting a finger.

You may see reference to a term called “T+3”.  This simply means you’re required to pay for the shares three days after you buy them.  All regular share trades are settled T+3.  Sometimes you may come across something called deferred settlement.  But that usually only occurs with initial public offerings (IPOs) or other special situations – we won’t worry about that here as it’s not common.

And that’s it.  Now all you need to do is follow the news and advice from your advisory service and hopefully lock away some big gains in a matter of days, weeks or months.

If you’re new to this game, I hope that has helped.

Next week I’ll take you through the process of selling shares you own.

Cheers.

Kris Sayce
For Money Morning Australia

Monday: So, does that tell you anything about the state of the economy and the state of the retailers?  To us it does.  It tells us the economy is in much worse shape than you’re being led to believe.  But even in a bad economy you’ll still find standout performers.  Click here for more…

Tuesday: There’s something rather perverse going on in the markets right now.  Good news is good for the market.  And bad news is good for the market.  In fact it seems like bad news is better for the market than good news.  Because it means the US Federal Reserve will pump more fresh cash into the economy.  Click here for more…

Wednesday: If you don’t know, China controls about 95% of the global rare earth market… And it knows it.  In recent years the Chinese have made massive cuts to rare earth exports.  This has pushed the price of rare earths and rare earth stocks higher… and encouraged mining firms to search for these valuable minerals.  But what’s China got planned now?­  Click here for more…

Thursday: So there’s the punishment for failing to alert the markets to the collapse of the global economy.  Have another $750 billion.  And keep up the good work… by not saying anything next time either.  Let’s be honest.  That’s what the IMF cash gift is.  A payoff… hush money.  Click here for more…

Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else). Click here for the most intriguing stock story of 2011. Click here for more

“I support special levies – including most of the Howard government’s levies – because they teach a freeloading electorate the most basic economic lesson: if you want it, you have to pay for it.” – Ross Gittins, The Age

We knew there was something we were supposed to write about last week – the Flood Levy.  We can’t believe we forgot.  Perhaps it’s because we vented our anger about it during the few days we had off.

So we thank Ross Gittins for jogging our memory.

A “freeloading electorate”, Mr. Gittins says.

That would be the freeloading electorate that hands over – on average – 40% of its income to the government each year through various taxes and levies.

And considering you’ll only pay the levy if you earn over $50,000 most of those taxpayers won’t be freeloaders.  They’ll mostly be net payers of tax rather than net receivers.

But also seeing that the average Australian income is over $62,000 payers of the levy won’t just be the rich, it’ll be paid for by the below-average Australian too.

Now granted, there are plenty of freeloaders who receive more in tax credits than they make in tax payments.  But largely we’ll guess most of those ‘freeloaders’ are the very people who benefit from the redistribution of someone else’s wealth.

Which we thought the statists and progressives and Gittins were in favour of.

Of course we say hats off to anyone who can get away not paying tax.  But we’re not in favour of those same people getting their hands on others’ money due to taxes.

But that’s not the only beef we’ve got with Gittins’ statement.  He claims “if you want it, you have to pay for it.”

Only in the case of the flood levy, people are getting something without paying for it.  And those that are paying for it don’t get anything.

The Flood Levy is a terrible idea.  As are all levies and taxes.  Besides, odds are it’ll just encourage tax payers to increase their tax deductions not only for the next tax year – when the levy is in effect, but this year too… and most probably the year after the levy as well.

So while the government will get a $1.8 billion windfall, we’ll bet our bottom dollar they’ll see a drop in income tax revenue as taxpayers offset the cost of the levy.

Anyway, you know our view on taxation and government interference.  Although one Money Morning reader sent us the following message:

“The recent Queensland floods and disasters are an example of the service provided.  Given the Queensland Government’s magnificent management of the flood and cyclone disasters which has resulted in so few deaths maybe it’s time for you give some credit where credit is due.

“Compare Queensland’s responsiveness to the situation is the USA with the chaos that followed Cyclone Katrina.  According to Wikipedia ‘At least 1,836 people lost their lives in the actual hurricane and in the subsequent floods’.

“The low death toll in Queensland can be directly attributed to the preparedness of the State for such an emergency. While you have been busy pillorying the public sector they have been going about their business designing and implementing disaster management plans.”

We can’t really comment on the Queensland government’s “magnificent management” of the floods and the cyclones, because we didn’t see it firsthand.

But one thing we’re sure of is that lots of people did lots of good things during the floods without government help.  Joel Bowman’s excellent article in Money Morning – In Praise of Anarchy – a couple of weeks ago highlighted that.

When individuals are left alone they amazingly manage to take care of themselves and other people.

One of the images we recall was of a house with a sandbag barrier around it and a dozen or so people helping bail out the water that leaked through.

We’ll guess only one or two of the people in the scene owned the home.  And we’ll also guess the rest were neighbours, volunteering to help.  Perhaps even neighbours whose own homes were already flooded.

The important part of this is that the ad hoc working party didn’t need a government minister or government employee standing over them barking instructions.  The locals just got on and helped.

But can the floods in Queensland be directly compared to the floods in New Orleans?  Probably not.  Especially as parts of New Orleans are below sea level and therefore the impact of flooding was much worse when the levee banks burst.

There also seems to be the implication in the letter that the US is a free market economy and therefore the New Orleans flooding must also have operated on a free market basis.  And that’s why over 1,500 people died.

Of course this ignores the fact that the Federal Emergency Management Agency (FEMA), a government agency, was widely criticised for its poor handling of the issue.

Anyway, enough of that, back to the markets.  Two headlines caught our eye as we looked over The Age website this morning:

“Myer predicts profit fall”

“JB Hi-Fi posts record first-half”

As we write, the Myer [ASX: MYR] share price has slumped 13%.  It was only a few months ago that Myer assured the market its profits would grow between five and ten percent.

Today the company announced:

“Total sales for the six months ended 29 January 2011 were $1,733 million, down 3.54 per cent compared to the previous corresponding period.  On a like-for-like basis sales were down 5.19 per cent.”

Ouch!  But the bad news doesn’t end there.  The company states:

“Allowing for the continuation of the subdued consumer environment, we now expect the FY2011 NPAT [net profit after tax] to be up to five percent less than last year…”

Now we know why Myer CEO, Bernie Brookes was so keen to lead the fight on slugging overseas consumer purchases with GST.

Shares in rival David Jones [ASX: DJS] have hit the skids too, dropping 4% this morning.  Clearly the market figures DJs is in line to cop a hit to the bottom line too.

And the same for our pals at Harvey Norman [ASX: HVN], which has had 3% knocked off the share price early on.  That must be disappointing for the punters who bought into the recent price surge as it climbed from below $3 to hit $3.20:

Source: CMC Markets Stockbroking

This morning it’s heading back towards the low, trading at $2.96.

And it comes not long after The Reject Shop [ASX: TRS] issued a profit warning just before Christmas.  The shares fell over 25% on the back of that news… and haven’t recovered.

But moving the other way is JB Hi-Fi [ASX: JBH].  It announced a new record profit.  It announced an 8.3% increase in sales, a 15.6% increase in net profit, and a 15-cent increase to the interim dividend.

It’s shares are up over 1% this morning.

So, does that tell you anything about the state of the economy and the state of the retailers?

To us it does.  It tells us the economy is in much worse shape than you’re being led to believe.  But even in a bad economy you’ll still find standout performers – in this case JB Hi-Fi.

Although the JB Hi-Fi share price is still around 15% below its 52-week high.

Because of this, we’d say stocks that rely on discretionary spending should still be avoided.

There’s a temptation to think because the likes of Myer, David Jones and Harvey Norman are trading below their recent highs that they make for a good buying opportunity.

And maybe they do.  The trouble is, there’s a pretty big chance these big names could have further to fall.  So if you do buy a stock in this sector you’ve really got to do the research and be confident that you’re right.

But to me, discretionary stocks like retailers are risky… especially if you get it wrong.

It shouldn’t be forgotten that a big chunk of consumer spending over the past twenty years has come from home re-financing.  Borrowers using the so-called equity in their homes to make big- and small-ticket purchases.

In many cases using the home as a line of credit for everyday purchases.

In our view those days are numbered.  With house prices already falling – and falling fast in some areas – the ability or even the desire for homeowners to treat the home like a credit card is less likely.

When house prices were soaring it was easy to refinance and get a whacking great stack of cash.  But with house prices plateeeeeeeauing and even falling, home owners have less wiggle room.

If you borrow more than 80% of the home’s value then lenders mortgage insurance kicks in.  That wasn’t a problem when house prices were going up 10% or 20% a year.  Re-financers wouldn’t have gotten near the 80% mark.

But with no gains on the table, borrowers will think twice before increasing their loan as they’ll be much closer to the level when mortgage insurance is necessary.

That’s bad news for the discretionary retailers that have benefited from home equity spending.  If the numbers from Myer and others is anything to go by the outlook for retailers doesn’t look good.

And all it’ll take is another shock to hit the global economy and consumers will shut their wallets even tighter.

And the way the global economy is looking right now – overheating in Asia and ‘underheating’ in the US and Europe – that next shock may not be that far off.

Regards,

Kris Sayce
for Money Morning Australia

If you’re worried we’ve forgotten the National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the United States Federal Reserve – don’t.  We’re still on the case.

We’ve still got them in our sights… Oops!  Apparently we shouldn’t use that imagery.  Sorry… how about this then:

That’ll do it.

No harm with that image.  After all, going by mainstream logic, although it’s clearly inappropriate for individuals to have the right to self-defence with a small firearm, it’s OK for governments to threaten to destroy the lives of millions of people at the flick of a switch with something much deadlier.

No double standards there.

Anyway, if we get our gnashers into any more of the banks’ grubby secrets we’ll be sure to let you know.

But before tucking into today’s Money Morning, we couldn’t resist showing you this from the Financial Times:

“Europe’s bail-out fund is expected this week to announce the banks that will market the first Eurozone bond amid hopes that demand from the world’s biggest sovereign wealth funds and private investors will ease the continent’s crisis.

“A number of European banks are expected to underwrite the deal, billed as a test of investor sentiment at a critical time.

“Bankers say they have rarely seen such demand for debt with some of the wealthiest sovereign and private funds eager to snap up the bond designed to help fund the Irish bail-out.”

As it happens, last night the banks were named.  Those in charge for handling the bond sale are Citigroup, HSBC and Société Générale.

That would be American bank Citigroup which secretly borrowed $89 billion from the US Federal Reserve… and needed $25 billion from the US government – a stake that resulted in Uncle Sam owning 36% of the company.

That would be UK headquartered bank HSBC.  It secretly borrowed $4 billion from the US Federal Reserve.

And that would be French bank Société Générale which secretly borrowed $124 billion from the US Federal Reserve.  The same Société Générale where Jerome Kerviel racked up trading losses of €4.9 billion in 2008.

But all that aside, it’s more evidence of how messed up financial markets are.

What you’ve got are banks that made a bunch of bad investments – thanks in part to government influence.  Banks that needed a bail-out from national governments.

Those bail-outs were so huge the national governments were at risk of going bust.  The solution?  Banks that were bailed out by national governments are now underwriting an issue of government bonds that will be used to help the governments pay for the bail out of the banks!

Confused yet?  You should be… because we are.

The whole thing looks like Escher’s Waterfall:

How the bail-outs work

You can’t figure out which way is up or which way is down.  Which way the money flows?  Does it even matter?

All we know is the banking system is corrupt.  And those in government who support the system are equally corrupt – that goes for Australia’s banks and politicians too.

Meanwhile…

“Floods tipped to hit house prices”, says today’s The Age.

The mainstream press has got it spot on for once.

Of course, the mainstream still denies the existence of an Aussie housing bubble.  The floods will be a scapegoat.  We can picture their argument now: “Oh, if it wasn’t for all the flooding, Aussie house prices would be up 10% this year – that’s the normal growth rate you know.”

In fact, we speak too soon.  The Age quotes Andrew Wilson from Australian Property Monitors:

“Mr Wilson expects a recovery in Brisbane property by the end of the year, providing there’s no downturn in the economy or additional severe natural disasters.

“’We’re expecting a pick-up in the Brisbane market around about the third quarter this year,’ he said.  ‘That’s probably been postponed a little bit – but only by a quarter.’”

Ha, ha, ha… Is he kidding?  Postponed by a quarter!  It’s more likely that house price growth will be postponed for five years.  Or even ten years… perhaps longer.

According to the same article, “28,000 homes would need to be completely rebuilt, while many houses would be uninhabitable for weeks, months or even years.”

We’ve even seen some comments that suggest house prices could surge because of the floods.  That a diminished supply coupled with a new and unexpected increase in demand will force prices higher.

“It’s supply and demand” they say.  No it’s not, it’s wishful thinking.

The Queensland floods will decimate house prices.  No doubt about it.

Think about it this way.  The spruikers are always keen to point out that roughly one-third of people own their home outright.  Another third have a mortgage on their home.  The remaining third rent.

So, out of 28,000 homes, that’s just about 9,333 homes in each category.  And we’re not factoring in the homes with less damage.  So you can more than double that number.

Now let’s work through it and figure out where the boom will come from.  Remember it’s likely less than half these households will be insured for flooding.

For those that own their home outright, you’ve got between 4,500 and 9,333 people who have seen the value of their “asset” drop by a significant amount.  I mean, let’s be honest.  Who wants to buy a home or land that’s flooded – ducks… geese… fish?

If – and granted most won’t – they tried to sell the land today, they’d be lucky to get one-third the pre-flood value…

But we’ll guess most probably won’t want to sell up.  Mainly because despite the floods they probably like where they live.  And besides, they’ll get nowhere near the price they’d like if they put their property on the market.

These debt free householders will need to borrow a stack of cash to build a new home on their now empty block of land.  Most likely a much smaller home in order to keep the costs down.

Next, what about the folks with a mortgage?  These guys and gals are the ones in even big trouble.  Most likely at least 4,500 of these mortgages will be in negative equity.  That’s where the size of the loan exceeds the value of the property.

Thanks to recourse loans, even if these guys could sell, odds are they’ll still have a massive loan to pay off.  It’s not like the New Orleans floods where home owners could walk away debt free.

These folks will still have the burden of a loan.  A loan that, even if it’s refinanced, would become an unsecured loan and would involve a huge increase in the interest rate being charged.

And what would be the chances of these folks getting a new housing loan if they wanted to buy something else?  Our guess is they wouldn’t have much luck.  Besides, there’s the small matter of needing to save for a deposit as well.

Not forgetting whether they’ve still got a job.  With thousands of businesses shut down temporarily or even permanently, many could find themselves homeless and jobless too.  Try getting a loan with those credentials.

Finally, there’s the renters… ah, the much-ridiculed renters.  Those who have been scoffed at for missing out on the property boom.  Well, aside from losing their home and their possessions, the upside is that unlike those with a mortgage, renters won’t walk away with a debt hanging over them.

The same can’t be said for the landlords, who – thanks to the tax breaks – are likely to be maxed out on their investment mortgage.  But then again, isn’t property investing all about making losses?  We’re sure that’s how it works.  They must be delighted with the losses they’ll make from the floods… mugs.

Back to the renters.  Sure, they may still face issues such as not having a place to live and not having a job, but at least they won’t have to fork out monthly repayments for a loan on a house that no longer exists.

And at least they haven’t seen the value of their biggest asset drop by 40%, 50%, 60% or more overnight.  And in the case of the landlords, the income against the property drop by 100%.

But surely the floods will cause a migration of people to other parts of Queensland and the rest of Australia… maybe.  But it won’t lead to a rise in house prices.  There’s not even a guarantee it’ll lead to a rise in demand for housing.

Remember, the vast majority of these people won’t be cashed up.  Even those without a mortgage and who have cash to spend are unlikely to consider hocking themselves up to the eyeballs with a brand new mortgage…

Not after it’s taken them twenty-odd years to pay off the old one.  And not after the experience they’ve just gone through of seeing their primary asset slump in value.

Also don’t forget, many consider their home to be their retirement savings.  How often have you heard that?  “Oh, we don’t worry about superannuation or investing, our retirement fund is our house.”

Good luck with that.

The simple fact is, from a house price perspective there’s no silver lining to the floods.  The decimation of the supply won’t lead to increased demand.

In fact it’s more likely to result in prices across Queensland softening further.

Aussie house prices were already destined to fall off a cliff this year and next as the credit bubble reached breaking point.

The destruction of paper housing wealth and the burden of non-asset backed debt could be the trigger that finally sends Queensland and Australian property values tumbling.

Regards,

Kris Sayce
For Money Morning Australia

My view for the last two years on the stock market has been consistent. But I thought it would be handy to jot it down here so it’s plain for you to see.

In this week’s Money Weekend I’ll give you a brief outline of where you should have your money right now…

I’ll break it down into:

• Small-cap stocks
• Blue-chip stocks
• Cash
• Precious metals
• Property

First up, small-cap stocks… this is the most profitable and exciting sector of the market. You can make quick-fire gains – and losses – in no time at all.

So if you’re after big gains, you should definitely have small-cap stocks in your share portfolio. The simple reason is that small-cap stocks give you the big percentage gains it’s hard to make with blue-chip stocks.

Plus, you can invest just a few hundred or few thousand dollars and see that grow many times over the course of six, twelve or twenty-four months.

Of course, that doesn’t happen all the time. Small-cap stocks are risky. That means, like all shares, small-cap stocks can go down too.

You’ll usually find small-cap stocks leading the market higher. They’re the first to move as early investors look to profit from beaten down or under-valued shares. Because they can achieve such big returns, early investors tend to pile into these stocks first.

Trouble is, when markets are less certain and investors aren’t prepared to take risks, small-cap stocks are the first to fall. That’s because investors know small-cap stocks can get hit hard in a downturn and so they look to get out early, before the rush.

As you can imagine, the skill is trying to pick those rises and falls before anyone else. That’s hard. That’s why even in a bearish market, it’s important to have small-cap stocks so you can profit when the market turns higher.

Even though I’m pretty negative on the fundamentals of the market, I’m still recommending Australian Small-Cap Investigator subscribers hold certain small-cap stocks in their portfolio.

How much you invest in small-caps is up to you. But remember that even a small exposure can give you a great return.

For instance, just say you’ve got a $20,000 portfolio, you could have as little as $2,000 invested across three or four stocks. And you could make a pretty decent return if the stocks soar higher.

While on the downside, your maximum loss would be $2,000 – and that’s if all three stocks went bust… which, let’s be serious, isn’t likely.

Next, blue-chip stocks… I like to break blue-chip stocks into two areas: blue-chip growth and blue-chip income stocks.

In my view blue-chip stocks are trading stocks. The days of buy-and-hold investing are over. If you want blue-chip growth stocks in your portfolio then you should watch them like a hawk.

You should be prepared to buy-in, ride it up and then sell when it looks toppy… and then potentially buy back in again when or if the stock price falls.

That’s the same regardless of the sector. It doesn’t matter whether it’s a resources stock or an industrial stock.

Let me show you a chart of Australia’s largest company, BHP Billiton [ASX: BHP]:

Over five years the BHP share price has traded from about $25 to $45 today. That’s an 80% increase… which is pretty good. But over five years? Good, but not so good.

Now, I’m not saying that you can always buy at the bottom and sell at the top. But I am saying you should use the market price action in order to get out of the market before prices fall.

For instance, BHP is a blue-chip stock in most Australian investors’ portfolios. But how many financial advisors do you reckon told clients to sell BHP at $40 or $45 in 2008? I’ll bet there were very few.

Two years later and those investors are only just recovering the ground they lost. Instead of now locking in big profits from BHP’s latest rally – more than doubling since 2009, those investors are struggling to get back to breakeven.

The message here is, yes you should own some blue-chip growth stocks, but only as trading stock… not as long-term buy-and-hold stock.

Then there are blue-chip income stocks. Just as it’s important not to overpay for blue-chip growth stocks, it’s also important you don’t overpay for blue-chip income stocks.

Picking these stocks should be easy. And the good thing is, unless you’re in the retirement phase of your life, you don’t need to hold many dividend payers in your portfolio.

You can probably get away with five or six. You don’t need too many – I’m not a fan of the mainstream view about diversifying portfolios. Diversification is a cop out in my opinion.

It’s the financial professionals admitting they can’t be bothered doing the research to give you five really good stocks. Instead they’d rather give you ten or twelve stocks to reduce the chances of one of them being a bad apple.

If you put in the time it won’t be hard for you to find five good dividend payers. They don’t have to be Top 50 or even Top 200 stocks. You could consider adding a mid-cap dividend payer to your portfolio as well… especially if you’re looking for a higher yield.

This is the only type of stock I’d consider for buy-and-hold investing.

Next let’s look at good old cash… this is quite straightforward. You need cash. You need it to buy stuff. And, chances are, your employer will be reluctant to pay you in anything other than a cash deposit to your bank account.

I won’t go over my views on the banking system here. You can read about that in the Money Morning archives. To put it simply, the global banking system is a house of cards.

It has been saved once by taxpayer-funded government support and by interference from central bankers. There’s only so much they can do to stop the system collapsing.

However, as I say, you need to have a bank account. In fact it’s pretty hard to get by in the Australian economy without cash.

On the plus side, it should be remembered that the taxpayer guarantees bank saving up to $100,000. So, if your bank does go bust then thanks to the taxpayer (including you) you’ll get your cash back.

Of course, there’s no guarantee it’ll be worth the same when you get it back… inflation will help take care of that.

Now, if the entire Australian or global banking system collapses then you won’t need to worry about getting the cash back, because chances are it’ll be worth next to nothing… even $100,000!

This means you should hold as much cash as you need. To cover you for as much time as you believe the banking system will be safe. If you think the banking system has years left in it then you won’t worry about holding a large amount of cash.

If you think the system’s days are numbered then you’ll only want a small cash holding.

Other than that you should hold other assets. That could be trading shares, property or the subject I’ll get to next, precious metals…

Precious metals – gold and silver – are the alternative to cash. Both have been used as a currency unit for thousands of years.

In Australia’s case, right up until the late 1960s Australia’s coins still contained silver.

Regardless of what you read in the mainstream press, a non-precious-metal-backed currency is actually the exception rather than the rule.

Listen to anyone on the Sky Business Channel or CNBC. The so-called financial experts will call gold a “barbarous relic” or a failed currency. They make supporters of gold and silver out to be freaks.

Yet they fail to understand that a currency not backed by something tangible such as gold simply provides a licence for central bankers and governments to print money. That’s what leads to inflation and rising prices.

And so, as more money is printed, this should lead to higher gold and silver prices. That’s already happened as you’ve seen over the past ten years. The price of gold has increased from $400 to over $1,300 today.

That doesn’t mean the gold price will always go up. But long term, even despite the big increase in recent years, there’s still plenty to justify the price moving higher.

For instance, odds are US and European governments will need to print more bail-out dollars before this year is finished… and probably next year too.

Having gold in your portfolio is like holding an insurance policy against the devaluation of your wealth by government.

That means it makes sense to buy some. That could be anywhere from 5% of your portfolio, up to 20%. As a point of disclosure, I personally own gold and it makes up about 20% of my portfolio.

But again, you need to figure out what you’re comfortable with. You’ll soon figure that out. Start off with a small holding and then build on it. At some point you’ll stop and think, “That’ll do”. And you’ll probably be right.

Next, what about property? I continue to be very bearish on property.

The Australian property market dodged a bullet in 2008 and 2009 when house prices didn’t crash. I’ve gone on record many times to say that a housing crash will hit the Australian market.

So, if you own property or if you’re thinking of buying, here’s what to do…

If you own a home right now and you have a mortgage, you need to figure out a couple of things. First, can you afford to maintain the repayments if interest rates rise?

If you think things will be touch-and-go or if you think it would cause a lot of stress, my simple advice is this… SELL NOW!

The second thing to consider: is your home worth significantly more than when you bought it? If it is then your next choice depends on how you view your home. If you see it as a money-making opportunity then you should… SELL NOW!

But, if you just see it as a home and you’ve never seen it as a wealth builder, then you should stay where you are. The costs of buying and selling can be steep. Selling a home just for the sake of it doesn’t make a lot of sense.

But what if you don’t currently own your home? What should you do?

That’s simple too… and this may come as a surprise given my previous comments on housing. You should start doing the groundwork and research on buying property. Whether it’s for a place to live, or whether it’s just an investment.

Looking for the right property can take a lot of time and effort. If you started doing the research two years ago when most thought house prices would tumble then you’ve wasted a lot of time.

Property is severely over-priced and so buying now is a mistake. Some analysts claim the housing market is over-valued by up to 40%.

But, the indices don’t always tell the real picture. Look in any suburb and you’ll start to see houses being offered at more reasonable prices. They still aren’t cheap. And as an investor you shouldn’t buy yet. But now is definitely the time to start putting in some hard yards with your research.

By the time you’ve built up your research material over the next twelve or twenty-four months, those houses in those same suburbs will be offered at even cheaper prices.

The message is: don’t buy property yet. But add it to your watchlist…

I hope that’s given you some idea about how to play the broader market.

It’s by no means a full and personalised analysis of your financial position. But it could give you a starting point if you’ve been thinking about where you should invest your money this year.

Cheers.

Kris Sayce
For Money Morning Australia

Monday: “I am requesting that Congress act to increase the limit early this year, well before the threat of default becomes imminent.” Click here for more…

Tuesday: One that involves an individual shooting a public servant… And another that involves public servants taking private property from individuals by force. And they have the nerve to grumble when taxpayers complain about it! Click here for more…

Wednesday: “I think not owning gold is a form of insanity, it may even show unhealthy masochistic tendencies, which might need medical attention.” Click here for more…

Thursday: The way mainstream logic works, the next thing we’ll hear from them is that people dying in the floods is good because it’ll create more jobs for gravediggers! Click here for more…

Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else). Click here for the most intriguing stock story of 2011. Click here for more

Before we get to today’s Money Morning we just had to relay the exciting news about the Queensland floods.

According to today’s The Age:

“Queensland rebuilding will boost GDP”

We wondered how long it would take the mainstream press to roll out that old chestnut.

The mainstream press’s new economic heartthrob, HSBC’s Paul Bloxham said:

“By the second quarter of 2011 the economy will probably be boosted by rebuilding and replacement of household durable goods.”

Hooray! Let’s boost the economy by destroying things.

It never ceases to amaze us. The mainstream continues to take these guys seriously. Not only that, but the bureaucrats hang off every word too. Sheesh!

But anyway, we’ll leave that subject for tomorrow’s Money Weekend. Today we’ve got something else to wrap up… the continuing secret loan scandal…

Tell you what, it’s been like drawing blood from a stone… only harder.

But finally, yesterday, the National Australia Bank [ASX: NAB] and Westpac [ASX: WBC] replied – sort of – to our questions.

It’s funny how quickly you get a reply when you send an email to the chief executive officer, the chief financial offer and the legal big-cheese at the banks.

We’d waited four weeks for the media relations goons to get back to us… and nothing. Go to the top, and boy do the wheels start moving.

Again, here are the questions we sent them:

“Please can you advise on what date the bank informed APRA, RBA and ASX about NAB’s use of the Term Auction Facility (TAF) from the US Federal Reserve?

“And why this information was not made public at the time?”

The questions were fairly clear.

Here’s the reply we received from an NAB spokesperson:

“During the GFC, NAB worked to ensure its balance sheet maintained a bias towards safety during what was a difficult market. Participating in the TAF was a cost effective way to raise funds. NAB accessed the TAF through our New York operations, and was encouraged to do so by the US Reserve, as a way to encourage term liquidity moving in the market. In the context of the bank’s overall funding requirements the amount was not material. Our regulators had a clear understanding of our overall funding and liquidity position.”

Oh how we hate the term “GFC”. We’ve vowed never to use it in Money Morning unless we’re quoting someone.

We don’t know why we hate it. But it grates.

However, we weren’t entirely happy with NAB’s answer. So quick-as-a-flash we fired back another email. We asked:

“Thanks. Which regulators?”

Almost as quickly, the NAB spokesperson replied:

“As you would expect, as part of our usual course of business, we provide updates to our regulators on the state of our overall funding and liquidity position.”

Still unhappy with the answer we fired back another email:

“Which regulators… APRA, RBA or ASX?”

The reply came… not so quickly though this time:

“During the crisis, we kept our responsible prudential regulator APRA informed. However, we obviously kept regulators such as the RBA and ASIC updated on issues such as our funding and liquidity position during this time. The ASX was kept up to date, through normal processes, such as Trading Updates and half and full year results.”

Still doesn’t answer the question though does it? It’s still an ambiguous reply… it called for another email from your editor:

“But did you specifically inform APRA, the RBA and ASX about the loans from the US Federal Reserve?”

Surprisingly the spokesperson replied:

“Specifically, we kept APRA (our responsible prudential regulator) informed.”

But we still weren’t happy:

“Are you saying you informed ASX and RBA about the Fed loans?” we asked.

The obvious answer to that is no. Which was confirmed in the final reply. Playing with a straighter bat than the Aussie cricket team, NAB replied:

“The participation in TAF was not material. However, regulators were aware of our overall liquidity and funding position as required. I can’t provide any further comment on the matter.”

Goodness me, why can’t these people just answer a question right away. Don’t they know we’ve got to get on with important research for Australian Small-Cap Investigator?

As for Westpac this is the reply we received to our initial question:

“Westpac met all its regulatory obligations on this issue. There were no disclosure requirements to the ASX. This facility was available to highly rated banks.”

Oh stop it… ha, ha, ha…

Highly rated banks like Citibank, Lloyds TSB and Royal Bank of Scotland. Clowns.

Anyway, before we go on. We were interested to see what the Australian Securities Exchange (ASX) had to say on this… so we forwarded Westpac’s email to ASX CFO Ramy Aziz and our new media pals there.

I’ll let you know when we get a reply.

But at least it adds another piece to the puzzle…

We bashed back a reply to Westpac:

“What about APRA and the RBA. Did you inform them and if so when?”

To which they replied, grumpily we think:

“Kris – as I said in our response – we met all our regulatory obligations.”

So we replied:

“But did the bank tell APRA and the RBA? It’s not a difficult question to answer. To save me the trouble of finding out whether informing APRA and the RBA is part of your regulatory obligations it would be easier to just answer the question.”

So far we’ve just heard the sound of crickets… no reply just yet.

Email is great isn’t it? It takes just a few seconds to fire off a question and you’ve got written evidence in return. No fussing around with shorthand or repeating answers or being misquoted… it’s all there in black and white.

But as I say, it would be nice if the banks answered the question the first time rather than prevaricating about the bush.

So where does this leave us? Well, here’s the state of play on who knew what…

Based on what the Reserve Bank of Australia (RBA) has told us, the banks didn’t tell the RBA a thing. That seems to be confirmed by the NAB, and judging by its shiftiness, also by Westpac.

It also appears that the “stable” and “strong” banks didn’t tell the ASX about the secret loans.

Apparently $4.5 billion of loans from a foreign central bank wasn’t “material” to NAB so it didn’t tell the ASX. And Westpac has explicitly confirmed that it didn’t tell the ASX either.

At least in that respect the ASX is close to being cleared of accusations of conspiracy to conceal information. So that’s one positive to come from this sorry mess.

But it’s still no excuse for its lack of interest in the matter since the secret loans became public.

That leaves one last regulator – APRA. APRA is the official regulator of Australia’s banks. But APRA is legally prohibited from disclosing any information on the companies it regulates… ie. the banks.

The only way we’ve got of knowing whether APRA was informed is if the banks tell us.

So, remember what we wrote to you yesterday:

“Why tell APRA? Hang on. That might work. APRA is exempt from FoI enquiries. And as I mentioned before Christmas, APRA is covered by Section 56 of the APRA Act. This provides complete secrecy for any firm APRA regulates… in other words, secrecy for the banks.

“Telling APRA could be the banks ultimate fall-back position – ‘But we did disclose it, we told APRA. It’s not our fault if they can’t tell anyone.’”

Gee, and they call us a conspiracy theorist.

Turns out we were spot on. It looks like the banks didn’t tell the ASX. And they didn’t tell the RBA. Why? Because of the possibility the loans would be made public.

But telling APRA? Perfect. NAB admits it told APRA. So far Westpac hasn’t admitted it told APRA.

But if they both did so it was in full belief that Australian investors would never find out…

The plan worked perfectly. No one knew anything until those meddling libertarians in the US such as congressman Ron Paul got involved. He demanded the US Federal Reserve release full details of all banks that received emergency loans from the Fed.

At that point the cat was out of the bag. Man the battle stations, the banks must have thought. They needn’t have bothered. No one in the Australian mainstream press gives a hoot.

After all, they now look just as dumb as the RBA for falling for the spin that Australia’s banks were somehow different to other banks. Turns out they were just the same.

But it makes sense of what we read in yesterday’s Australian Financial Review:

“But Mr Laker [APRA chairman] said APRA would act as a gatekeeper to and set tough conditions for access to the RBA back-up facility.”

That’s in reference to the Basel III rules I mentioned yesterday.

In other words, everything will be kept secret from the taxpayer and the RBA. The banks will secretly approach APRA, tell it they want access to the RBA’s insurance policy and then we dare say APRA will give them a permission slip to take to the RBA.

But because all dealings with APRA are top secret you’ll never know the full details. You’ll only know what the banks want you to know.

Even more than that, what this whole affair proves is how much secrecy there is in the world of banking.

Call us a conspiracy theorist if you like – we don’t mind, our so-called conspiracy theories are more often proved right than wrong – but seriously, what else have the banks and APRA conspired to keep secret?

Think about it, if it wasn’t for the unexpected release of data from the Fed you’d still be in the dark on this.

Make no mistake, there is more to be revealed. Much more is our bet. The banking closet is doubtless stuffed full of bailouts and secret deals that the regulators and banks are fighting to keep secret from the taxpayer.

For instance, how much of the $53 billion the RBA received from the Fed flowed through to the bankrupt Aussie banks?

Will that ever be revealed? We doubt it.

Then there’s all the stuff we can’t even imagine that’s gone on.

Look, you shouldn’t be surprised by any of this. We’ve warned all along that regulations and regulators don’t protect investors.

Regulations and regulators only protect those that are regulated… in this case the banks.

It’s been a cover-up job from start to finish.

However, Money Morning reader Luke writes:

“You guys keep harping on about this secret loan but when we are talking about a company with assets of over $600 billion I don’t really care whether or not they secretly borrowed a measly $5 billion from the federal reserve.”

It’s a fair question. Is this issue really as big as we’re making out?

Yes. It is.

Let me give you an example to draw a comparison. It’s not exactly the same, but it’s close enough and should help you better relate to it.

Imagine if you’d borrowed $1,000 from your friend knowing that you had to pay it back in one month. Then imagine you’d taken that $1,000 and used it as security for a margin loan to buy $100,000 worth of shares ($99,000 margin loan and $1,000 loan from your friend).

Now imagine the stock market fell – that’s not hard to imagine! – so the value of the shares was now only worth $99,000.

Unless you can come up with $1,000 pronto the margin lender will close out your position by selling your share portfolio so you can repay your margin loan of $99,000.

But that would leave you with a problem, because your friend is expecting you to pay back the $1,000 you borrowed. How are you going to do that? None of your other friends have any money to spare…

Apart from one “friend”. This friend happens to be called the Federal Reserve. It lends you the $1,000 to tide you over for a while so you can pay your friend back, or ask him or her for an extension on the loan. If he or she agrees then you can pay your margin call and hope the shares rise again.

If he or she doesn’t agree then you can sell your stock, pay back your friend and then just owe your Federal Reserve friend the money.

As I say, it’s not exactly the same as the Fed loans to banks. But it’s close enough. And there is one similarity. And that’s with the leverage involved. And the way banks borrow other people’s money in order to leverage into assets while still having an obligation to pay its borrowings back on demand.

But as you probably know, leveraged positions are double-edged. It magnifies your returns but magnifies your losses as well. This is the position the Aussie banks were in and are in – which is no different to any other bank around the world.

If it wasn’t for the secret loans from the Fed, the Aussie banks would have been unable to roll over short-term loans. Failure to do so would have been comparable to our example of a share trader being unable to roll over the $1,000 loan from his or her friend.

That’s why NAB and Westpac needed the emergency secret loans from the US Federal Reserve.

$4.5 billion may sound like a drop in the ocean, but it wasn’t.

Apologists for the banks can bleat all they like about the loans being small-fry, but it won’t wash. Australia’s banks were staring into the proverbial abyss in 2008.

If it wasn’t for secret loans from a foreign central bank, bail outs from the Australian taxpayer, and top secret back room deals between the banks and its regulator, it’s likely all four of the major banks would have gone to the wall.

And NAB and Westpac insist that these loans were not “material” and not a “disclosure requirement to the ASX”. Give us a break.

Cheers,
Kris Sayce
For Money Morning Australia

Today’s Money Morning contains an extraordinary admission from the Reserve Bank of Australia (RBA). An admission that defies belief.

But before we crack on with that, we couldn’t pass up the chance to have a laugh at the big Aussie retailers again.

In today’s The Age Myer [ASX: MYR] CEO Bernie Brookes is quoted:

“I get quite upset when I read some of the disparaging comments about Gerry Harvey and Solomon Lew because, whatever you think of them personally, they started with nothing and have become successful.”

That’s right, so successful they’re now using their influence to force bigger costs on individual Australians. Individual Australians who are simply exercising their freedom of choice about where and how they spend their money.

Apparently these retailers are upping the ante with their advertising campaign. They clearly think they’re on a winner.

Ah well, we encourage them to do their worst… each day they campaign for taxes on imported goods, the more people become aware of the savings available from shopping online. And the more consumers will turn to online.

But the campaign isn’t doing much for the share prices of the companies involved. Warning… I suggest you hold your nose before scrolling down, because the following price charts stink.

Take the Harvey Moron [ASX: HVN] share price:

Or how about Bernie Brookes’ Myer [ASX: MYR]:

Not forgetting the supposed high-end David Jones [ASX: DJS]:

And finally, Premier Investments [ASX: PMV]. The company chaired by Solomon “He started with nothing” Lew:

There’s the real reason for the campaign. Looking for a scapegoat. The fact is they’ve given shareholders crappy returns. They’re too lame to cop it on the chin and say their retail strategy is rubbish.

They’re too mainstream to admit the economy is down the gurgler…

Or that consumers have simply spent every cent they have and every cent they’ve borrowed. The consumer has nothing left and so the retailers are just trying to shift the blame.

Unfortunately for them it won’t work. And applying a GST to overseas purchases won’t help either.

The fact is the mainstream – including retailers – need to face up to reality. That apart from the resources sector, Australia’s economy is on skid row. And the performance of the retail sector is simply proof of that.

So much for a robust economy… flaky more like.

But speaking of non-robust and flaky, much to our surprise we received a reply to our Freedom of Information (FoI) request from the Reserve Bank of Australia (RBA).

To refresh your memory, our request in full was:

“I would like to request all internal and external communications from and to the RBA regarding information received by the RBA or sent by the RBA on NAB and Westpac’s use of the US Federal Reserve’s Term Auction Facility (TAF).”

Here is the RBA’s reply in full… without edits:

“Dear Mr Sayce,

Anthony Dickman
Secretary
Reserve Bank of Australia”

And that was it.

We’d expected an official looking document. We’d even hoped to get something with bits – preferably whole paragraphs – redacted.

But we didn’t.

We just got an email.

But it’s not presentation of the information that’s important. It’s the RBA’s startling admission that has us truly amazed.

If the non-disclosure to the market of National Australia Bank’s [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve was a bombshell, then news the RBA didn’t know about these loans it is an atomic bombshell.

Which makes us wonder…

If the NAB and Westpac didn’t tell their pals at the RBA, then we assume they didn’t tell their pals at the Australian Securities Exchange (ASX) either.

That much we’d already fathomed. Because if NAB and Westpac did tell the ASX, and the ASX hadn’t passed that info onto the market then it would be guilty of a conspiracy to mislead investors.

Now, we can’t have a monopoly exchange doing anything criminal can we? Can we? Not when it’s fighting tooth and nail to keep its monopoly status… and while it’s in the middle of a takeover deal.

Even a non-legal eagle could tell you they’d be in severe hot water for not passing this news onto investors.

But if the banks didn’t tell the RBA or the ASX then are we sure they told the Australian Prudential Regulation Authority (APRA) about the loans? APRA is the banking regulator.

Think of it from the banks’ viewpoint. At the time, the US Federal Reserve was under no obligation to publish the loans data.

Everything was top secret. If it’s top secret why spill the beans yourself?

Why tell the ASX? They’ll only have to release something to the market.

Why tell the RBA? They’re covered by Freedom of Information requests. Annoying people could put in a request to find out.

Why tell APRA? Hang on. That might work. APRA is exempt from FoI enquiries. And as I mentioned before Christmas, APRA is covered by Section 56 of the APRA Act. This provides complete secrecy for any firm APRA regulates… in other words, secrecy for the banks.

So maybe there’s a chance the banks did tell APRA. But only because they knew APRA is legally prevented from disclosing any information about the banks to the public.

Telling APRA could be the banks ultimate fall-back position – “But we did disclose it, we told APRA. It’s not our fault if they can’t tell anyone.”

The only way to find out if the banks told APRA is to ask the banks. So yesterday we sent the following questions to the NAB and Westpac executive teams:

“Please can you advise on what date the bank informed APRA, RBA and ASX about NAB’s/Westpac’s use of the Term Auction Facility (TAF) from the US Federal Reserve?

“And why this information was not made public at the time?”

I’ll keep you posted on any reply we get.

But that’s not all. Notice my question to the RBA didn’t specify a time period. I wasn’t just asking what the RBA knew at the time of the loans. I wanted to know what the RBA knew since then.

And importantly, since the news became public.

But amazingly, at no point during the last month has the RBA bothered to drop NAB or Westpac a note asking them for details about the US Fed secret loans.

Even more amazingly, not one word has passed the lips or email inbox from one RBA executive to another.

At no time during the last month has Glenn Stevens, Malcolm Edey, Guy Debelle, Ric Battellino or Luci Ellis typed out something like:

“Hey guys,

“By the way, did you read in Money Morning about the loans our pals at the Fed gave NAB and Westpac? I didn’t know anything about it, did you? Just wondering, no big deal… oh, and look at this cute picture of a cat…” etc.

Can you believe it? Not a single word has been spoken or written by anyone at the Reserve Bank of Australia concerning the secret multi-billion dollar loans from a foreign central bank to two of Australia’s “strong” and “stable” banks.

Not one word… not even in passing.

We can only think the RBA subscribes to the Arthur Daley school of questioning, “Ask me no questions and I’ll tell you know lies.”

In other words, don’t dare ask the banks what they were playing at, just in case the RBA doesn’t like the answer!

Anyway, as quick as a flash we belted out another email to our new media relations pal at the RBA. We asked these three questions:

1. Is the RBA surprised that neither NAB or Westpac considered it important to inform the RBA that they were borrowing funds from a foreign central bank?
2. Is the RBA surprised that neither NAB or Westpac have contacted the RBA since the information on the loans was released by the US Federal Reserve on 3rd December?
3. Why hasn’t the RBA contacted NAB or Westpac requesting an explanation for the loans and an explanation for why the RBA wasn’t notified about the loans?

Unfortunately our new pal is on leave until 13th January… clearly even central banking people need holidays too… what with all the hard work they put in. So we’ll have to wait for an answer.

Clearly this reveals that the RBA doesn’t keep in touch with the banks. And that it isn’t informed about secret bank back room deals.

Which is worrying considering the taxpayer is about to be put on the hook for billions of dollars thanks to the new Basel III agreement. That’s the one where the RBA is effectively insuring the banks… providing a backstop for it in the event of more trouble.

You’d hope that if your tax dollars are being used to underwrite the banking system that the insurer (the RBA) would have some clue what the banks are up to. You’d want to know if the firm you’re insuring has had to get an emergency loan in order to pay the bills.

Obviously not. Not if you’re the RBA.

But anyway, seeing as the banks didn’t tell the RBA what’s going on, how could RBA governor Glenn Stevens have said this at a speech in December 2008:

“In Australia or Japan or much of east Asia or Canada, while credit conditions have become more difficult, the banks are in much stronger condition than in the United States or Europe or the United Kingdom.”

He could only say that if he didn’t know about the secret loans two of Australia’s banks had already taken out with the US Federal Reserve.

And how could he make such a comment if the RBA doesn’t know the complete ins and outs of what the banks are up to?

Or how could Malcolm Edey say this in March 2009, if the RBA is in the dark about banking activities:

“I should stress, by the way, that Australian banks have been much more prudent than their overseas counterparts, and they have remained in sound condition throughout the crisis period.”

That’s right, so sound that National Australia Bank had to secretly borrow $4.5 billion from a foreign central bank.

Or how about when Ric Battellino said this at the end of March 2009:

“Australia entered this difficult period in much better shape than many other countries. Disciplined monetary and fiscal policies in earlier years, sound regulation and a prudent approach to lending by our banks meant that the country was largely free of major problems”

Tell that to NAB with its $4.5 billion loan. Battellino continued:

“We have had more scope than others to move policies in the expansionary direction and our banks, being largely free of problem assets, are in a position to keep supplying credit to the economy.”

So “free of problem assets” that NAB needed a $4.5 billion in secret from the US Federal Reserve.

Then there was this from our favourite bubble-denying central banker, Luci Ellis. This is what she said in April 2009:

“Unlike banks in many other countries, they [Australian banks] have been able to raise additional capital where required from private investors…”

Er, not all of it. Dr. Ellis of course, wasn’t aware of the $4.5 billion NAB borrowed in secret from the US Federal Reserve.

In May 2009 Glenn Stevens told the Canadian Australian Chamber of Commerce:

“Notwithstanding the global credit crisis, Canadian and Australian banks continue to be profitable and are well capitalised by private investors – something that many advanced countries cannot claim.”

Sorry Glenn, but Australia couldn’t claim it either. Even before the secret Fed loans were revealed, it’s not true to say Australia’s banks were only capitalised by private investors. He clearly forgets the taxpayer-backed deposit and wholesale guarantees…

Not forgetting the $4.5 billion the NAB needed to borrow from a foreign central bank.

Finally, let’s see what Malcolm Edey had to say about Australia’s banks in August 2009:

“Throughout the crisis period, the Australian banking system has proven to be much more resilient than its counterparts abroad…

“It seems clear that Australian banks generally had stronger balance sheets coming into the crisis period, and less exposure to high-risk assets, than many of their international counterparts.”

So resilient that NAB needed an emergency loan of $4.5 billion.

No wonder the goons at the RBA haven’t spoken to each other about it. I mean, they must feel pretty dumb after bigging up the Australian banking system and its resilience, only to find out the banks had been cheating behind their backs.

That NAB and Westpac, two of Australia’s “resilient” banks had gone cap-in-hand to the US Federal Reserve begging for emergency loans.

Remember that Westpac was one of the first banks to get a loan from the Fed. Eagerly banging on the door to get its hands on Fed cash.

What this farce shows is that you can’t trust a single word that comes from a banker or a central banker.

The RBA dudes were spinning a yarn about strong banks while behind closed doors NAB and Westpac were begging for central bank cash.

Against the wishes of those two banks the truth is out. Australia’s banks aren’t as strong as you were told.

After all the speeches made by the RBA it couldn’t possibly admit that it knew anything about the secret loans. If our FoI request had come back with a positive result then the RBA would have been exposed as liars.

But it seems – if we believe what we’ve now been told by the RBA – that the RBA didn’t know about the secret loans then it’s clear the RBA was given the mushroom treatment… it was kept in the dark.

But, to be honest, it all seems a little too convenient.

Is it really possible the RBA didn’t know anything about the secret loans?

Can we really believe no-one at the RBA has mentioned the secret loans to any of their colleagues since the loans became public one month ago? Not one word?

We’d be interested to hear from any RBA insiders whether that’s really the case…

Don’t think this story has come to an end just yet. Our guess is there’s plenty more to be revealed. And it won’t make for good reading for those that fell for the lies about the strength of the Aussie banking system.

Cheers,
Kris Sayce
For Money Morning Australia

Time is up for the Reserve Bank of Australia (RBA).

You may recall we lodged a Freedom of Information (FoI) request with the RBA in December last year.

From 6th December the central bank had thirty days to respond to our application. Today is the thirtieth day. We’ll see if we get a reply.

All we’re after is a copy of emails going to and coming from the RBA concerning the National Australia Bank’s [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve.

So far we’ve either been ignored or told it’s all top secret and can’t be discussed.

The Australian Prudential Regulation Authority (APRA) told us it can’t discuss anything to do with any of the organisations it regulates!

The Australian Securities Exchange (ASX) says that it can’t disclose whether it did or didn’t know anything. Even ASX chief financial officer Ramy Aziz didn’t sway from the company line, “Corporate Relations have already advised you that ASX is aware of the issues you raised but that it does not discuss specific supervisory matters.”

And media and legal representatives from the NAB and Westpac have just ignored our questions.

Undeterred, we’ve lobbed another email at them today.

But based on the ‘Out of Office’ replies we’ve got back it seems the banks aren’t open for business again for another one or two weeks.

Of course not all the Aussie banking bail outs were secret:

“NAB in line for $1bn US cash”

The Australian newspaper reported it in September 2008. Although, as much as we can guess, this $1 billion isn’t part of the $4.5 billion NAB borrowed from the Fed.

We don’t have the time to dig further. But from memory, this $1 billion would have been part of the original Troubled Asset Relief Program (TARP).

That was where banks tried to offload a bunch of crappy subprime mortgages to the US government… at par value of course… we couldn’t have the banks taking a loss on this rubbish could we.

But the interesting part is a quote from an NAB spokesman:

“We’ll take advantage of any opportunities there are, but we couldn’t give any guidance to anyone about it at the moment.”

It’s clear NAB was aware that this was information of which the market should be made aware.

Yet only a few months later the NAB drew on $4.5 billion of loans from the US Federal Reserve. Something it forgot to tell the market about. Perhaps NAB took the view that it “couldn’t give any guidance to anyone about it.”

Very convenient.

Anyway, I’ll keep you updated on this. It’s too much of a bombshell to let the banks off the hook. Besides, the mainstream press have still not bothered to look into it, so we’ll have to do their work for them.

On another note we see the lazy Aussie retailers have launched a media campaign. They were clearly influenced by the success of the miners’ campaign against the Resources Super Profits Tax (RSPT).

Except they forgot one very important thing…

The impact on the individual of the RSPT was all rather distant. Although many – not your editor – thought the idea of taxing mining companies was a good idea, the tax money raised wouldn’t benefit the individual benefit directly.

The cash would go to the government rather than going to the pocket of the individual.

But in the case of the retailers, a tax on imported purchases isn’t distant. Buyers quite rightly see the big retailers’ attack as a direct grab at their wallets.

If the RSPT had gone ahead, yeah sure, consumers would have seen an impact. But they wouldn’t have seen the charge appear on a statement anywhere. It would have been an invisible charge – the kind governments tend to like.

But a tax on purchases from overseas, that’s a whole different ballgame. Consumers would see it. They’d see the separate charge at the point they have to pay. Such as when collecting the item from the Post Office or from a courier.

Although it’s fair to point out that the GST is now widely accepted and suffered. Even though you see the tax you’re paying as you make each purchase.

All that said, even though we’re happy to call the big retailers lazy bludgers, we accept it’s not all their fault.

As usual, the crooks in Canberra should shoulder most of the blame.

What the retailers should do is mount a campaign against import duties. They should lobby the government to have import duties removed. There aren’t many who would argue with that.

Apart from the manufacturers that remain. Duty cuts would most likely kill off completely the manufacturing sector. But tough.

The government has imposed duties to protect manufacturers but then it imposes other red tape and legislation to penalise them. When it comes down to it, even trade protectionism through duties isn’t enough to stop the sector going bust.

And the idea that the retailers are concerned about protecting Australian manufacturing jobs is just nonsense. How much of what is stocked on the shelves in Myer, David Jones or Harvey Norman is manufactured in Australia anyway?

Not much. Because of government meddling.

A couple of years ago we retold a story to Money Morning readers about a challenge we set the Sayce kids. The challenge was for them to look at the items in their bedrooms and find out where they were manufactured.

OK, that doesn’t sound like much fun. But it came about because the younger Sayce kid had noticed that everything we bought had a “Made in China” sticker on it.

As it turns out, they couldn’t find a single object in their bedrooms that didn’t have a “Made in China” sticker. Not one thing.

The fact is, if Australia had a diversified economy, an economy that didn’t rely on the import of manufactured consumer goods then those goods wouldn’t be charged import duties.

Think about it. What does this country have in abundance? Yes, that’s right, natural resources. It has all the resources to manufacture things. But, because of government meddling, red-tape and taxation, Australia can’t compete on the manufacture of goods.

Australia has to export raw materials and then import finished goods.

For a good analysis of how government, not online retailers, are killing Australia’s economy check out Shae Smith’s recent article: “How Government Hidden Taxes are Killing Retailers”.

Look, don’t get me wrong, we’re not saying that every economy should be self-sufficient. The beauty of trade and markets is different economies specialise in different industries. That’s called comparative advantage.

In simple terms it’s the big picture equivalent of the division of labour. Just as it’s more efficient for you to concentrate working at one job and paying someone else to make your clothes and provide your food and build your car, so it’s more efficient for some economies to concentrate on particular industries.

For instance it takes Ford or Holden only a few days to make a car. Because that’s their speciality. They’ve invested in the capital and are able to produce thousands of cars every day.

In contrast, think how long it would take you to build a car from scratch. If your DIY skills are anything like your editor’s then it would take a very, very long time. So we don’t bother. Instead we pay Holden and Hyundai to make a car for us.

The problem is government intervention and manipulation distorts the economy. It pushes the economy to the extremes.

In Australia we’ve got the beginning – natural resources – and the end – the service sector. But not much in between.

Why? Because the in between jobs tend to be the jobs that are low-skilled or no-skilled. They tend to be dirty, mundane and… heavily unionised.

Why has union membership dropped over the last forty years? Because the unions have succeeded in driving unionised businesses bust or overseas.

These are the jobs that suffer from minimum wage restrictions. These are the jobs that suffer from unnecessary so-called up-skilling of the workforce. These are the jobs that get shifted offshore as trade unions and governments enforce so much red tape they become inefficient and unable to compete with overseas manufacturers.

OK, fair enough, who wouldn’t rather work in a nice clean retail store instead of a noisy and smelly factory?

But if that’s the choice the government makes, to penalise manufacturing and reward the service sector, it can hardly complain when factories close down and move overseas.

The government has made a choice. It has decided which industries will win and which will lose. It’s forgoing a diversified economy and instead championing an economy that operates at either end of the spectrum.

But likewise, having benefited from government intervention, those in the service sector, especially the retailers, can hardly complain that they are now losing out.

Ultimately, as with any problem in an economy, the fault lies with government. But that still doesn’t excuse the lazy big retailers and their attempts to lobby government asking for even more favours.

What this affair proves is that the free market is the true friend of the individual. And that government is the enemy.

Despite all the lobbying by businesses, the meddling by unions and the red tap imposed by government, the free market has been able to burst through and provide help to the individual – in this case by providing cheaper goods from online retailers.

Goods that are more expensive under the government manipulated economy.

That’s a fact, and it’s plain to see. Just check out price differences charged here to those overseas.

But in typical statist and fascist fashion, vested interests in business don’t like it. They don’t like the individual having freedom of choice. They prefer individuals to be corralled into having a limited choice – that of the vested interests.

If the big retailers have their way and are able to force the government’s hand, the losers will be the individual. And if individuals lose it means the entire Australian economy will lose.

Remember that it’s the government that has destroyed and is destroying the Australian economy.

It most certainly isn’t being destroyed because of individuals exercising their freedom of choice to buy items from overseas.

Cheers,
Kris Sayce
For Money Morning Australia

The S&P/ASX200 added a tiny 6 points, finishing to 4,778.40.

The Dow Jones Industrial Average was higher by 26 points, ending the day at 11,559.49.

Revised third quarter gross domestic product (GDP) data released overnight in the U.S. shows the economy grew 2.6%, up from 2.5%. The figure has disappointed many economists, as unless America ‘grows’ at a faster rate, unemployment will remain near 10%.

The FTSE added 31 points, closing just shy of the 6,000 level at 5,983.49.

The Nikkei was down 24 points to 10,346.48.

The price of spot gold in Australian dollars is $1,385.91, while in US dollars it’s $1,384.80. The price of silver in Australian dollars is $29.23 and in US dollars it’s $29.21.

Copper, which has gained 4.2% over the past three trading sessions, maintained its current high price overnight. The metal is up over 48% since the start of July.

Helping to push the metal higher have been the rumors that JP Morgan has been stock piling copper followed by the Force Majeure event at the Collahuasi copper mine. However the supply concerns may be pushed aside this week as inventory data shows that stockpiles are up this week by 1,225 tonnes to 363,950, the highest level since November this year.

Copper is currently USD$4.26 a pound (AUD$4.26) Nickel is USD$10.90/lb (AUD$10.91) and Tin is USD$11.91/lb (AUD$10.92).

The Aussie dollar versus US dollar is AUDUSD 0.9986 and against the Japanese Yen it’s AUDJPY 83.44

Lower crude inventory and the cold snap gripping the Northern Hemisphere kept crude oil prices above USD$90 a barrel overnight. Stockpiles fell 5.3 million barrels for the week. The past three weeks decline has left America with 19 million barrels, which is about one day worth of oil for the States.

Crude Oil closed at USD$90.60.

For the biggest movers on the market yesterday click here…

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

Shae.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

52-Week Highs and Lows

Number of companies reaching a 52 week high previous day: 71
Number of companies reaching a 52 week low previous day: 15

Before I get stuck in to today’s Money Morning a quick note on our publishing schedule over the holidays…

This week will continue as normal… as you’d expect. Next week, from 27th December until 31st December each day you’ll get something a bit different.

The editors of the five subscription based newsletters we publish have been asked five questions. Each day next week you’ll get to see what those questions are and how the editors’ answered them.

I probably won’t publish anything on Saturday 1st January and Monday 3rd January. So hopefully you’ll be able to survive without us for a couple of days!

Oh, and assistant editor Shae Smith leaves Money Morning this weekend to head off on maternity leave for a few months. With any luck she’ll be back mid-next year.

And finally, more stonewalling from the chaps at the Australian Securities Exchange (ASX). As you’ll recall, we’ve wanted to know why the ASX hasn’t asked National Australia Bank [ASX: NAB] or Westpac [ASX: WBC] for an explanation on the lack of disclosure about the secret US Federal Reserve loans.

Seeing as its public relations team is now ignoring your editor, we thought we’d send an email to CEO Robert Elstone, CFO Ramy Aziz, and some other bloke called Eric Mayne – we’re not sure what he does.

In typical robot style we received the following response from Ramy Aziz:

“Corporate Relations have already advised you that ASX is aware of the issues you raised but it does not discuss specific supervisory matters.”

We half expected the email to continue with, “Danger Will Robinson, danger!”

But it didn’t.

So, after all our efforts, to date we’re no nearer getting an answer than we were three weeks ago. All we’ve got left to look forward to is the freedom of information request to the RBA.

Anyway, we’ll keep plugging away. If the ASX, RBA and APRA think we’ve been annoying so far, they’ve got no idea how annoying we can be… unless they subscribe to Money Morning of course, then they’d have a pretty good idea.

On with today’s Money Annoying…

The Emperor is Dead… May He Remain So

“Great man… blah, blah… a wonderful servant… yawn, yawn… a gift to the nation… blab, blab… let’s make him Emperor… Oh, he already was… let’s make him a Saint instead. Hurrah!”

Yesterday treasury secretary Ken Henry announced his retirement. He’s to be replaced by another career bureaucratic drone… whose name we’ve already forgotten.

Cue the snivelling tributes:

“I consider myself very fortunate to have been treasurer during his tenure as secretary,” said Wayne Swan.

Swan went further. According to The Age:

“Treasurer Wayne Swan said Dr Henry’s performance during the global financial crisis and his central role in tax reform had made him arguably the finest Australian public servant since HC ”Nugget” Coombs.”

Oh, there’s a fine man to be compared to, and “finest Australian public servant…” [Shudder!]. But more on Coombs later…

Our old pal, Prime Minister Julia Gillard said of Emperor Henry:

“More generally, Dr Henry has made a major contribution to the well-being of Australians and the prosperity of the nation during his more than 25 years at Treasury, during 10 of which he has been secretary.

“He has become one of the greatest of all Treasury secretaries.”

The front page of today’s Australian Financial Review (AFR) captions a photo of the Emperor with the comment:

“Ken Henry, who is stepping down, was said to be frustrated his resources tax was so little understood.”

Ah diddums… vay didunt wike your resources tax, poor thing.

I could go on… no I couldn’t. Is there anything more sickening than public servants patting themselves on the back? Yes, there’s the private sector patting public servants on the back.

We labelled Ken Henry as the Emperor due to his extraordinary power. His power to influence and control government was second to only the fabled ‘Nugget’ Coombs… in our view that’s nothing to be proud of.

Evidence of his power and the power of the bloke to take his place is seen in the brown-nosing from the vested interests who are keen to maintain their favour with the public service.

But quite how the King of Bureaucrats managed to make a “contribution to the well-being of Australians and the prosperity of the nation” is unclear.

I mean, let’s take a look at the man’s major achievements.

The kind folks at Wikipedia have served everything on a plate for us. And spared us a whole bunch of work. Here’s Emperor Ken’s top three top [ahem] achievements:

• Bank deposit guarantee scheme
• Stimulus package
• Resource Super Profits Tax

What a guy. What a performance. What a…

That’s his roll of honour. His major achievements have been to recommend the government forcibly take money from one group of people and give it to another group of people.

Wow, they should bottle that kind of entrepreneurialism, it’s priceless.

But as far as we’re concerned there’s no difference to the violent behaviour of forcibly stealing an individual’s income through taxes, than the violent behaviour of these ticket inspectors caught on tape.

Both are violently manhandling the public to demand payment. In fact, now we think of it, Henry and his gang are worse than the ticket inspectors. At least you’ve got the choice of whether to use a train or not.

If you use a train, buy a ticket. Even though through tax theft you’ve already paid for your ticket anyway. But never mind.

With government the philosophy is, give us your money now and we’ll claim we’re providing you with something in return… whether you want it or not… and whether the government is providing it or not.

Imagine the attitude towards taxation if tax officials knocked people over on the street to swipe the cash in their wallet. Our guess is most would find that behaviour unacceptable. Yet because the tax office swipes the money before it even gets to your wallet, the majority of the population sheepishly accepts it.

They even praise it. And only a public servant – only ever a receiver of tax, never a payer of tax – could ever have said:

“Taxes are what we pay for civilised society.”

The quote is from Oliver Wendell Holmes, Jr., US Supreme Court Justice.

We couldn’t disagree more. There’s nothing civilised about theft. Theft is theft whether it’s done by a private individual or by a coercive government.

Taxation is just an excuse to fund a government. Because without taxation there would be no government. Or certainly not the massively grotesque centralised government’s plaguing the world today:

“The power of taxing people and their property is essential to the very existence of government.” – James Madison, 4th US President.

But back to Henry. We were amused by the comment that he’s “the finest Australian public servant since HC ‘Nugget’ Coombs”.

In the world of the public service that’s undoubtedly an honour. To the rest of the population it should be seen as a dirty insult.

Who is or was HC ‘Nugget’ Coombs?

He was the first governor of the Reserve Bank of Australia (RBA). But he’s dead now.

He claim to fame is that he appears to be the mould for later generations of megalomaniacal, power-crazed public servants.

If this is a man to idolise for his achievements you may as well idolise Jack the Ripper for his services to the sharp knife industry, and Bernie Madoff for his services to the finance industry.

But read Coombs’ obituary and you’re left with an impression of a brave saintly man. A man who only thought about doing well for Australia:

“As a young rural teacher from Teachers Training College he began his university studies by correspondence…

“In 1934 Nugget was awarded a doctorate at the London School of Economics for his thesis on central banking, The Dominions’ Exchanges…

“The student [Coombs] who used to dine with Keynes on the other side of Piccadilly from Green Park now regularly met the Keynesian economists from the Commonwealth Bank and the Bank of New South Wales in Repin’s coffee shops…

“During and after the War Nugget was engaged in the Keynesian Crusade… It involved various organisations and places – FAO, GATT, IMF and World Bank…

“In Australia Nugget arranged many meetings for Whitlam with Torres Strait Islanders and Aborigines… He drafted the words with which Whitlam ceremoniously poured some soil into Vincent Lingiari’s hands.

“He argued passionately for the welfare of Aborigines and for their right to be different…”

He also had a “splendid art collection [which] was exhibited at the Reserve Bank in Martin Place in 1992.”

An art collection funded by the tax payer. How else would Saint Nugget have paid for his art collection if it wasn’t for the taxes paid by private individuals? Taxes that paid Saint Nugget’s wages.

The original ‘Champagne Socialist’ perhaps.

The danger of characters like Coombs is they wrap themselves in the image of being do-gooders for society. That all they want to do is help people. Help the poor. Help indigenous Australians… oh, and tax the rich.

While at the same time feathering their nest at the expense of the taxpayer.

So while Coombs does sound like a noble man. And while you could be forgiven for thinking he was a saintly man. The reality is that Coombs was no different to any other power-crazed public sector servant.

That is the belief that they and government knows best. That they and government know best how to spend your income.

The end result is that the problems the public servant laments are problems actually caused by the government’s interference.

For instance, in Coombs’ book The Return of Scarcity he writes:

“Tax concessions to upper and corporate incomes are often reflected in conspicuous extravagance or in bidding up the price of existing properties, rather than in higher levels of productive investment.”

We wouldn’t argue with that. The Australian obsession of investing in ever-increasing house prices is an example of unproductive investment.

But what Nugget ignored was that its government which creates tax breaks. Tax breaks provide a reward to one group of people at the expense of another group. Tax breaks and incentives which encourage unproductive investment and discourage productive investment.

You only have to look at the lop-sided shape of the Australian economy to see that – a burgeoning resources and services sector… and, well, that’s about it.

A banking sector which relies on the resources sector in order to increase credit. A consumer which relies on the banks and the resources sector in order to borrow money to feed the services sector. And a services sector which relies on the consumer and the banks and the resources sector in order to sell its services and goods.

In a tax-free economy, there are no taxes and there are no tax breaks. You earn your money and shock-horror, you get to keep it. And save it and spend it as you see fit.

But that’s not the way central planners like things. They like to meddle. They like to plan an economy. Such as Coombs’ solution for Australia.

If you read The Return of Scarcity you can see the birth of compulsory superannuation, and the origin of the Resource Super Profits Tax. For the latter we no doubt have the source of Emperor Henry’s thoughts on taxing resources.

Coombs wrote in 1990:

“[A] special capital asset replacement royalty or resources tax on the export of exhaustible resources should be imposed, and the proceeds allocated to a special fund for investment in sustainable enterprises. A rebate of this royalty or tax could be granted for payments by the corporation concerned into a trust fund under its own control, for investment in Australia for sustainable production, or grants to an approved institution for the conduct of scientific and technological research.”

The interventionist may think that sounds reasonable. After all, shouldn’t businesses be encouraged to re-invest in Australia?

Again, the problem is that the interference of government makes it difficult for businesses to invest and re-invest in Australia. Because again it relies on businesses investing in the industries the government approves of – mostly in clean service industries.

Those it approves of will be granted a tax break. Those it doesn’t will be punished by not having a tax break.

Besides, governments much prefer having control over the cash themselves. Hence why over 40 cents of every dollar earned in Australia goes to government.

But as you’d expect with any interventionist they reveal their ultimate goal. Coombs also wrote:

“Where necessary re-establish, the public ownership of the natural resources of the continent, its minerals, forests, seas, soils, vegetation and wildlife;

“Vest title in these resources in an authority independent of corporate and political control;

“Empower that authority to grant licences for the use of these resources only on terms which will ensure their conservations, regeneration and sustainable development…”

Nugget must have worn a huge pair of rose-tinted glasses to think that an economy can function with the state ownership of property. Do we really need to list the economies where that’s been tried and failed? Thought not.

And the very idea that an “independent” authority could be free of corporate and political control, while at the same time having the monopoly power to grant licences to corporations is childlike thinking at its best… or worst.

Any authority which is created by government is by its nature influenced by it. Just as any authority set up to regulate the private sector will always be influenced by the most powerful corporations it regulates.

Our dealings with the RBA, ASX and APRA over the non-disclosure by NAB and Westpac are perfect examples of this.

The arm-in-arm actions taken by the government and the RBA during the global financial meltdown is more proof of the influence government has over a supposedly independent body.

The interventionist and central planner are the enemies of freedom. And if HC ‘Nugget’ Coombs is the finest example of an Australian public servant, then he’s also the finest example of the coercive government interference with freedom.

But when it comes down to it, ‘Nugget’ Coombs only has himself to blame for what he saw as the unfair distribution of wealth.

As governor of the Reserve Bank of Australia (RBA) Coombs laid the groundwork for all the central bankers that followed. A central banking system that has resulted in the gradual devaluation of money.

A central banking system that has created the inequalities in wealth that Coombs complains about.

A central banking system that has helped politicise money by allowing governments to borrow at will in the name of the taxpayer, and a central banking system that abetted the government by allowing the taxpayer to be placed on the hook for trillions of dollars of bank liabilities.

It’s fair to say that in our opinion neither Emperor Henry nor Saint Nugget are people to be praised. They are central planners who should be despised.

Regards,

Kris Sayce
For Money Morning Australia