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

Most in the electrical trade in Victoria, were jumping up and down with joy on Thursday afternoon, after the union told the boys – and possibly a few girls – that by 2014 they can expect to be earning six figure salaries.

In what’s being referred to as a ‘landmark’ decision, the new enterprise bargaining agreements (EBA) mean each year for the next four years, a sparky can expect to earn an extra 5%, capping off their base salary at $107,000 by the mid noughties.

From an individual point of view, these blokes were ecstatic. They finally feel ‘rich’ and are getting ahead of the man. But none of them probably stopped to think about the potential economic cost that this could bring.

And let’s be honest none of them probably really care about the economic cost, which is fair enough. All they see right now, is a holiday for the wife to Thailand and maybe being one step closer to taking the kids to Disneyland one day.

Now, I’m not hanging it on Australia’s tradies, I’m married to one of the best in the business if you ask me.

But quite frankly, they couldn’t give a rats backside about the potential affects to the economy. Mainly because they don’t see how it affects them. The union was fighting for them and that means they didn’t have to worry about it.

Many times in the past, Kris has written about how the minimum wage can actually destroy jobs. This wage jump for electricians is certainly no minimum wage, but it can still have devastating implications for the industry that the union hasn’t looked at – or if it has, it’s ignored.

It’s considered a landmark case because it’s one of the only industries now to have a pay rise each year that’s ahead of the official inflation figures. Which is great for them.

But it ignores that potential ongoing cost to the economy that could take years to unfold.

For one thing, it could lead to a misallocation of labour. But more importantly, while there are winners from this decision, there are losers as well.

What the union forgets – or ignores – is that the new wage structure is only good for those that are in the industry now and manage to remain in their job.

You see, artificially high labour costs will just end up pushing more contracting businesses into handing out redundancies. Plus, it could make the hiring on of an apprentice less likely in the future. Especially when that apprentice could eventually just become another highly paid employee.

And even though part of the new agreement means that any sparky automatically earns a double hourly rate once they work over 36 hours each week, companies will be encouraged to keep the labour force to a minimum on a job site.

I mean, think about it. It’s going to be a lot cheaper to pay nine blokes two hours overtime each week than pay ten guys a flat 36 hourly rate.

The outcome is that it’ll eventually lead to less people being employed.

Then you have to consider the cost of building construction in Victoria. For many years now, the state has enjoyed a construction boom. Which may all come to an end because of this new EBA.

Increased labour costs are likely to lead to other states fighting to win the big construction projects. Or, unions in other states fighting for the same pay scales, and therefore even more electricians losing their job or missing out on getting a job.

Do you think the unions have considered these effects?

If you’ve ever been to union meeting, they’ll tell you, that they’re working for you, and that business is greedy and evil and you should maximize your benefits.

Well, of course you should maximize your benefits. But when the collective benefits for a privileged group means unemployment for the not-so-privileged few, the real impact of trade unions is revealed.

Look, the problem doesn’t just affect the electrical trade. It’s all part of the widespread problem that is wage fixing and trade unions.

And that’s one of the greatest mistakes people make when it comes to set wages determined by an organisation like a union or the government.

People think they’ve been ‘protected’ and looked after.

They’re not. The only people protected are the ones lucky enough to remain in the industry. Claims that unions look after everyone are clearly incorrect. It’s just that no-one pays much attention to the people forced out of their jobs thanks to the unions.

Sometimes these organised bodies fighting for everyone’s rights think they are doing the right thing, when they just end up hurting the very people they’re supposed to be trying to protect.

Shae Smith
Assistant Editor
For Money Morning Australia

Most important story of the week…

Adrian Ash this looked at the potential of hyper inflation in the U.S. and questions why they White House advisor Alice Rivlin said “I think using quantitative easing is a perfectly legitimate thing to do. And for heaven’s sakes, it’s not as if we’re in any danger of inflation any time soon.” Click here for more…

Monday: Forget about the fancy financial chicanery that goes along with these infrastructure stocks, and think about it logically… do you really want to invest in a so-called blue-chip stock that isn’t profitable and which has to borrow billions of dollars in order to bribe investors to stay on board? Click here for more…

Tuesday: If something is overpriced the market will eventually figure it out (the market being comprised of people like you). You can’t buck the market. People try – such as the US Federal Reserve – but ultimately the market always wins out. That’s just the way markets work. Click here for more…

Wednesday: We know that Mr. Harvey is a “business great”, because Peter Switzer tells us so. But here’s some free advice for Mr. Harvey… rather than lobbying the government to increase the tax bill of Australians perhaps it would be a good idea if Harvey Norman joined in on the online shopping age. Click here for more…

Thursday: The conclusion you can draw is that government interference kick started the boom and then the appearance of easy credit and liberal lending standards gave it an extra boost. Click here for more…

Friday: The Federal Reserve has announced that it will pump another $600bn into the US economy by the end of June next year to try to boost the fragile recovery. That’s $75bn a month – much more than most analysts expected. In this free ‘QE2 Tutorial’, Kris Sayce lays out a battle-plan for Australian investors to profit as some of this keyboard-produced cash floods the ASX in 2011. Click here for more…

The huge moves in the market at the moment are sending a big warning signal to those who are willing to listen.

The threat of a new round of quantitative easing (QEII) by Federal Reserve chairman Ben Bernanke has set off a chain reaction in world markets that can only end in tears.  Emerging market economies are being placed under extreme pressure as their currencies appreciate under the weight of hot money looking for a home.

Thailand announced on Tuesday that it will impose a 15% withholding tax on interest and capital gains made by foreign investors on Thai bonds.  Export dependent economies like China, Brazil and Japan have been trying to fight back huge flows of capital chasing yield.  Brazil last week raised a tax on foreign portfolio inflows into bonds.

Korea has been rumoured to be intervening repeatedly in the currency markets and in the Philippines, government officials are saying that the rise of the peso is a matter of concern.

Australia has even had to react to the flow of money by delaying the raising of interest rates to keep the interest rate differentials between Australia and the USA to a minimum.

Global imbalances are increasing in response to the ridiculous attempts by Bernanke to reflate the system.  All he is managing to do by threatening QEII is to force investors to search for a safe haven for their money while Bernanke tries to trash the currency.

Hard assets are of course the desired destination and the huge spike in the Australian Dollar and rally in commodity markets are seeing this race accelerate.

Bernanke’s desire is to stoke lending in America and inspire investment and job growth. I assure you that printing money is going to do no such thing.

Long term interest rates in America are at generational lows already and banks are unwilling to lend and consumers and businesses are unwilling to borrow.  Lowering the 10 year bond by another half a percentage point is not going to miraculously change this situation.

Instead of inspiring more lending at home it is going to inspire capital flight out of America and into high yielding currencies as is happening right now.

What will be the outcome of commodities going through the roof?

Input costs for businesses are going to go up and disposable income for consumers is going to go down.  There is a lack of demand anyway so why would a business invest to increase production when his input costs are going up and he has no pricing power because the end demand is so weak.

Why would a consumer go out and spend when he is paying far more at the petrol pump every week because the price of oil is going through the roof?

Greenspan created the Technology bubble and the housing bubble by keeping interest rates artificially low.  At least these bubbles made people feel rich.  Bernanke is going to create a commodity bubble.  A commodity bubble will make the resource companies feel rich, but it will impoverish everyone else.  This is not the sort of bubble that Bernanke wants to create.

Who knows when this house of cards is going to come tumbling down but many are starting to talk about QEII as the largest buy the rumour/ sell the fact trade that we have seen in years.

My own view is that we are not going to make it to early November and the announcement of QEII before the markets turn and dive.

Do you think that the rest of the world is happy to allow the Fed to ruin their economies with their policies?  Do you think Ben is sitting back in his office scratching his beard and wondering what on earth he has done.

I believe the Fed is finally arrived at catch 22.  It is damned if it does and damned if it doesn’t.

The best course of action it can take is to step back from QEII and allow the markets to deflate to where they will end up going anyway.  But we all know this is not going to happen.  Instead we are going to see cracks slowly appearing all over the world and one of those cracks is going to blow wide open and take everyone else down with it.

Will it be Japan with their 200% debt to GDP ratio (caused by years of following the same inane policies that the Fed is about to embark on) or perhaps the PIIGS will start to squeal as the Euro continues to appreciate and their economies fall in a heap.  European banks could be brought to their knees by such an outcome as they are so heavily exposed to sovereign bonds of Portugal, Ireland, Italy, Greece and Spain.

There is no doubt we are in the middle of a currency war and I fear that the end result will be the end of Bretton Woods II.

Gold is flying high because the world is finally waking up to the fact that America printing money and monetising its debt is the beginning of the end.  Physical demand for gold is going through the roof as the rich hedge their bets by buying a lazy tonne of gold at a time.

Are we going to see the crash of the Dollar that was always going to be the end game for the US.  Does China stand up to America and threaten to sell their US investments if the Fed doesn’t back off from QEII.

There are so many places where the volcano can erupt.  The smoke is billowing out and telling those who will listen to pack up shop and catch the first boat off the island.  Most are standing around and saying how pretty the volcano looks while stock prices shoot all over the place and investors convince themselves that there is some easy money to be made before the music stops.

There is an old market saying that is one of my favourites and I think it sums up the current situation perfectly.  The market is currently “picking up pennies in front of steamrollers”.

It seems easy to do because the steamrollers are moving so slowly and there are lots of pennies about.  But don’t get distracted because one day the steamroller is going to roll right over the top of you!

Regards,
Murray Dawes

Editor, Slipstream Trader

Your editor writes from a bank of the Choptank River. A river which flows into the Chesapeake Bay.

We’ve just returned from a stroll along the Choptank. We saw three live deer and a signpost telling us there were bald eagles in the area. We didn’t see any bald eagles. We took the walk for two reasons. First to see some of the scenery. And second to walk off our third cheeseburger in two days.

In case you’re interested, this one is tied for second place. The winning cheeseburger so far is the one we ate at the Hilton BWI Airport Hotel on Monday evening.

If you’ve never been to the Chesapeake Bay area, it’s worth a visit. The bay is huge. Much, much bigger than Port Phillip Bay for instance.

The best way to describe it is that it’s how we imagine the shores of Sydney Harbour would look like without the houses and high rise buildings.

In fact – apologies if you’re a Sydneysider – we’d say the Choptank River and Chesepeake Bay beats Sydney harbour hands down. Especially as a place to go to relax or write.

Anyway, for the next two-and-a-half days your editor will be locked away with 47 other publishers and editors.

That’s probably not of much interest to you. But for us it’ll mean being out of touch with much of the outside world for hours on end. That’s something we’re not used to.

Your editor doesn’t have a laptop computer. We don’t have an iPad or an iPhone. And we don’t own a fancy PDA. Heck, we don’t even have a mobile phone – we gave that away about six months ago. Since then a day hasn’t gone by where we’ve thought how good it is not getting beeped at or annoyed by that particular machine.

Now all we need is for people we’re with to not pick up their phone when we’re half way through a conversation and we’ll be fine.

All this is an extremely roundabout way of saying that aside from the half hour or so that we take to type up this letter to send you using the hotel’s business centre computer, we’ve only got a vague idea of what’s going on in the world.

We’ve caught a few minutes of CNBC the last two mornings – nothing worth watching there. And we’ve glanced at the papers each day as well – only marginally more info worth reading there.

But normally, your editor is watching and reading about the markets like a hawk. Trying to work out what’s happening and why to the markets and the economy on a minute by minute basis.

Yet here we’ll be lucky to absorb more than around 45 minutes worth of info each day.

Which got us thinking – isn’t that what it’s like for most people? You know, normal people…

People who do normal jobs. People who don’t sit around all day writing to you and researching stocks.

Most people, whether in Melbourne, Brisbane, San Francisco or Baltimore just go about their business.

They tend not to worry about the economy. That’s not necessarily a good thing mind you. But I’ll explain more in a moment.

Take for instance the couple your editor sat next to on our flight from Sydney to San Francisco. They were heading off on a three-week walking tour of six US national parks. They had a connecting flight to Denver, Colorado where they’d get another connecting flight to take them to Jackson Hole, Wyoming.

We were tempted to ask them if they were aware that Federal Reserve chairman Ben Bernanke and his fellow central banking partners-in-crime had met at Jackson Hole just a few weeks earlier.

But we didn’t.

They didn’t seem the type that would care. And if that was the case, we weren’t sure that we’d know how to continue the conversation after that.

We pictured tumbleweed blowing past and the sound of crickets chirping.

So instead we continued our pleasant conversation with, “Wow! That sounds great.” And we meant it. It did sound like a great experience.

Three weeks walking around Yellowstone and Yosemite national parks, plus four others we didn’t recognise. It’s sad when you instantly recognise those two because of cartoon characters rather than because of their awesome natural beauty. But never mind.

They were travelling to somewhere for enjoyment, whereas your editor was travelling to the other side of the world to work.

Not that we’re complaining mind you. Writing to your from a bank of the Choptank River is a pretty good office space. As we glance up it’s approaching twilight and our first thought is, “I wonder if Teddy Kennedy ever came here. This is the kind of river he would have enjoyed driving a car into!”

Anyway, the couple going to the national parks didn’t seem too pre-occupied by financial things. And we weren’t in any hurry to bring the subject up with them.

But it wasn’t just them who didn’t seem to care. The people we watched football with at San Francisco airport didn’t seem all that concerned either. They were too focused on the Oakland Raiders game.

And the people drinking in the bar at the Airport hotel also seemed to have other things on their mind.

They were chapperones. Only they weren’t chapperoning a belle to a ball.

They were men and women who seemed to be aged between their mid-twenties and mid fifties. There were about twenty of them. And they were all wearing the same orange t-shirt… or rather, more correctly, they each wore a t-shirt of the same colour and design.

We got chatting to a couple of them. It turns out they were chapperoning World War II veterans who were due to visit the World War II memorial in nearby Washing DC.

They’d flown over by private charter plane from Northern Colorado. As they explained, the vets get to go on the trip for free, paid for by private donations.

The chapperones pay their own way. Each of them escorting a father, grandfather, uncle, or some other relative who – to be honest – may not have many more ticks and tocks left in their old ticker.

But the chapperones didn’t give any signs of being nervous or uneasy about the economy. The two we spoke to had jobs. They seemed comfortable in their jobs. And they seemed content with their lives.

Then again, appearances can be deceptive. Especially when you’re a visitor from abroad. Let me explain…

So far we’ve seen what we’ve seen. What we haven’t seen is what we can’t see.

We can’t see the people who have been the most affected by the economic meltdown. We can’t see them because they haven’t been where we’ve been. Simply put, who we can’t see are the unemployed.

And in the US, that’s estimated to be anywhere up to 20% of the working age population.

We’re not likely to see these people as they aren’t the type of people we’re going to see at an airport restaurant or staying at fancy hotels alongside the Chesapeake Bay.

That’s what makes the economic meltdown so dangerous.

The fact is, most people just carry on doing their own thing. And so far they’ve scraped through without much damage.

But you or they shouldn’t be fooled into thinking that means everything will be fine with the world economy.

The fact that someone doesn’t know that a train is speeding towards them from behind as you walk along the train tracks won’t make the result any less gruesome.

We read a lot about the economy. And we write a lot about it. Hopefully you have the time to read the letters I send you each week day.

That should mean you’ve got an advantage over most other people. It should mean that even though you or I don’t know when the next financial meltdown will hit, we know it will hit and therefore you’re prepared.

Unfortunately – I’m afraid to say – the same can’t be said for the nice people we’ve met so far on this trip.

I’ll try and find time to write you another note tomorrow.

Cheers.
Kris Sayce
For Money Morning Australia

Ritchie Bros. Auctioneers, the world’s largest industrial auctioneer, will sell a 2004 SBM STE160×130 closed circuit jaw/impact crushing plant along with hundreds of other equipment items and trucks during a three-day unreserved equipment auction in Dubai, UAE from September 27 – 29, 2010. The highly automated plant includes primary and secondary crushers, screens, generators, conveyors, [...]

Strategic Mining Corp. announced that it has filed the amendment (10a) to the Form 10 that includes first quarter financials on August 9, 2010. The filing of the Form 10a immediately moves the company to the OTCQB tier with current status. The company has also sent a response letter to the SEC in order to [...]

Uragold Bay Resources Inc. announce that it has signed a letter of intent with a private vendor regarding the acquisition of 100% interest in four claims located in Saint-Simon-les-Mines, Quebec. The acquired claims expand the Beauce Placer Gold property to the northeast. This will add 1,700 meters to the 550 meters of un-mined paleoplacer gold [...]

Ventana Gold Corp. announce that 63X Master Fund (“63X”), its largest shareholder, has acquired ownership and control of an additional 1.1 million common shares of Ventana through the facilities of the Toronto Stock Exchange, bringing its aggregate ownership in Ventana to 19,306,000 common shares. 63X paid cash consideration of $10.62 per share, for aggregate consideration [...]

Whats a podcast ?

A podcast is a series of digital media files (either audio or video) that are released episodically and downloaded through web syndication.

Whats a Vodcast ?

Video podcast (sometimes shortened to vodcast) is a term used for the online delivery of video on demand video clip content via Atom or RSS enclosures. The term is used to distinguish between podcasts which most commonly contain audio files and those referring to the distribution of video where the RSS feed is used as a non-linear TV channel to which consumers can subscribe using a PC, TV, set-top box, media center or mobile multimedia device. Web television series are often distributed as video podcasts.

Some  Business vodcast’s listed below