“It finds that the IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak.  The banner message was one of continued optimism after more than a decade of benign economic conditions and low macroeconomic volatility.  The IMF, in its bilateral surveillance of the United States and the United Kingdom, largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth.  The belief that financial markets were fundamentally sound and that large financial institutions could weather any likely problem lessened the sense of urgency to address risks or to worry about possible severe adverse outcomes.  Surveillance also paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies.”

Those words come from the Independent Evaluation Office of the International Monetary Fund (IMF).

It’s contained in a report released a month ago titled, “IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07”.

The report also states:

“The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink… a general mindset that a major financial crisis in large advanced economies was unlikely… Weak internal governance, lack of incentives to work across units and raise contrarian views… also played an important role, while political constraints may have also had some impact.”

Well that’s hardly surprising.  We could have told them that without writing a fifty-nine page report.

But despite the IMF’s failure to foresee the economic problems, in April 2009 the G20 agreed to give it even more money… to not see the next problem.

As the British Broadcasting Corporation (BBC) reported at the time:

“To help countries with troubled economies, the resources available to the International Monetary Fund (IMF) will be tripled to $750bn.”

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 git is.  A payoff… hush money.

The last thing politicians and central bankers want is for an organisation they fund with taxpayers’ money, to point out flaws in the economy and banking system.

Because if it did, it would make it harder to justify their inflationary policies.

And it would also reveal the real solution.  The solution they don’t want anyone to know about – free banking.  Because with a free banking system, there’s no government interference, there are no central banks, and there’s no backstop or bailout for private retail banks.

Bankers would shudder at the thought.

Now, by free banking I don’t mean free bank accounts for everyone.  And I most certainly don’t mean a government operated “People’s Bank”.

That type of policy can only make the problem worse than it is.

No.  What’s needed is a competitive banking system.

A system that’s free from political and central bank manipulation.

A banking system that does little more than act as a warehouse for your savings.

One that provides financing to businesses and individuals without the need to fraudulently create money from thin air.

The only way this could happen is with less government intervention, not more.  So the chances of it happening without a major economic revolution are pretty slim.

The negative impact of government involvement in banking and the money supply is highlighted in Murray N. Rothbard’s excellent “A History of Money and Banking in the United States: The Colonial Era to World War II”.

You can buy the hardback copy on Amazon (as your editor did), or if you’ve got more sense you can click here and download it to an e-reader for nothing!

If only your editor had more sense!  But the hardback version is nice.

Anyhoo, we’ve only just started to tuck into it.  But already we’ve read a few treats that highlight the problems caused by government manipulation of the money supply.

Take this for starters.  It’s a perfect example of why even a government mandated national currency isn’t required.  As long as you’re using a currency that has real value:

“It is important to realize that gold and silver are international commodities, and that therefore, when not prohibited by government decree, foreign coins are perfectly capable of serving as standard moneys.  There is no need to have a national government monopolize the coinage, and indeed foreign gold and silver coins constituted much of the coinage in the United States until Congress outlawed the use of foreign coins in 1857.”

Article 1, Section 8 of the US Constitution even recognises foreign coins had an important part to play in the fledgling republic.  Although the framers of the Constitution undoubtedly made the mistake of giving the new Congress powers:

“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”

But even more important is the historical proof that politicians and bankers always meddle with the value of money.  And they’ll always think they can get away with it.

It’s proof that today’s politicians and central bankers are doing nothing different to the wigged and powdered gentlemen of two centuries ago.  Read the following and see if it rings any bells – apologies in advance for the long extract:

“Massachusetts was accustomed to launching plunder expeditions against the prosperous French colony of Quebec.  Generally the expeditions were successful, and would return to Boston, sell their booty, and pay off the soldiers with the proceeds.  This time, however, the expedition was beaten back decisively, and the soldiers returned to Boston in ill humor, grumbling for their pay.  Discontented soldiers are ripe for mutiny, so the Massachusetts government looked around in concern for a way to pay the soldiers.  It tried to borrow £3,000-£4,000 from Boston merchants, but evidently the Massachusetts credit rating was not the best.  Finally, Massachusetts decided in December 1690 to print £7,000 in paper notes and to use them to pay the soldiers.  Suspecting that the public would not accept irredeemable paper, the government made a twofold pledge when it issued the notes: that it would redeem them in gold or silver out of tax revenue in a few years and that absolutely no further paper notes would be issued… The issue limit disappeared in a few months, and all the bills continued unredeemed for nearly 40 years.  As early as February 1691, the Massachusetts government proclaimed that its issue had fallen ‘far short’ and so it proceeded to emit £40,000 of new money to repay all of its outstanding debt, again pledging falsely that this would be the absolute final note issue.”

There you have it.  Hopefully you’ll agree it was worth it.

The upshot is that prices soared and the paper money became almost worthless.

But, as is always the case with inflation, not everyone loses out.  Those left holding the worthless bits of paper did poorly.  But, as Rothbard notes:

“[S]ince the paper was issued to finance government expenditures and pay public debts, the government, not the public, benefited from the fiat issue.”

In other words, the government was paying its bills with paper money it was deliberately devaluing.  The government was clearing the slate with creditors, but doing so with devalued paper money.

Reading through the long quote above, you should be able to draw plenty of parallels to US Federal Reserve chairman Ben Bernanke and his money-printing programme.

The promise to redeem the paper notes is broadly the same as the Fed’s current bond buying programme.  Investors who buy bonds from the US government have the safety net of knowing the Fed is standing ready to buy $600 billion worth of bonds with freshly printed money.

The trouble is, between buying the bonds from the government and getting paper money back from the Fed – redeeming the bonds, the value of those invested dollars has diminished… thanks to the creation of new dollars.

Once governments and central bankers get into a hole of issuing more debt and more new money to pay off old debt liabilities, it’s hard to get out.

That’s why they don’t bother trying.  Instead they dig deeper, hoping if they push the problem out further into the future someone else will deal with the it.

But, as Rothbard says, the decline into an inflationary blackhole doesn’t have to take long.  In a different attempt at a fiat currency, the US Congress began issuing paper money:

“The issue of this fiat ‘Continental’ paper rapidly escalated over the next few years.  Congress issued $6 million in 1775, $19 million in 1776, $13 million in 1777, $64 million in 1778, and $125 million in 1779.”

He goes on:

“The result was, as could be expected, a rapid price inflation in terms of the paper notes… By the spring of 1781, the Continentals were virtually worthless, exchanging on the market at 168 paper dollars to one dollar in specie.  This collapse of the Continental currency gave rise to the phrase, ‘not worth a Continental.’”

So, at the beginning of the US Revolution, the money supply was just $12 million.  Six years later it was over $225 million – about 90% of it backed by nothing more than a government promise that the paper money would retain its value.

As usual, the government broke its promise.  You would have needed 168 paper Continental dollars to get one silver dollar in return.  Yet just five years before the exchange rate was one-for-one.

If you’d held on to silver dollars during that time you would have been fine.

That’s how inflationary monetary policies change the value of the dollar in your pocket.  And it’s been going on in Australia and elsewhere for at least the last forty years.

And sadly the devaluation continues today.  Perhaps at a much faster pace than before thanks to US and European money-printing.

But that’s not all, unfunded government liabilities, especially in the US – but here too – will ensure governments and central bankers need to increase the money supply by many times over the next twenty years.

Not that they’ll blatantly admit it.  They’ll do it under the disguise of supporting economic growth and financial stability.  In reality it’s all about pushing the problem out to the future while at the same time destroying your wealth.

And of course, lining the pockets of the politicians and bankers who get their hands on the newly printed money first.

But not only that, the destruction of personal wealth has the feedback effect of making individuals even more reliant on government support.  Support that no government can afford.

The moral of the story is that protection of your assets and wealth is just as important as accumulating new assets and wealth.

Because every day central bankers and governments – despite their cozy exterior, [Ed note: cue tears Julia and Tony] – are working against you to destroy your wealth while lining their own pockets…

You’ve been warned, so do something about it and protect your wealth.
Regards,

Kris Sayce
for Money Morning Australia

Just a quick Money Morning today.  We’re getting stuck into the January issue of Australian Small-Cap Investigator.

And seeing as it’s Friday, we’ll wrap up an old topic.  Rather than start a new one.

Let’s be honest.  We can’t blame the mainstream economists for claiming the Queensland floods will stimulate the economy.

I mean, they’re just spouting on what university taught them.

And what were they taught?

For a start, they’ve been told the best example of economic stimulus was… the Second World War!

I’m sure you’ve heard the muppets on TV talk about the post-war boom and how fast the economy grew.

How the pre-war world economy was dire.  What with all that Depression stuff going on.

But then, like a bolt from the blue, the Second World War came along and stimulated the world to recovery.

And boy what a boom that was.  If only we can repeat it, we’ll be laughing all the way to economic nirvana.

Let’s compare a few numbers…

So far in the Queensland floods, an estimated fifteen people have died… now compare that to around 70 million who died in World War 2.

In Queensland it’s estimated 12,000 homes have been damaged by floods.  World War 2 wiped out millions of homes.  Not to mention the thousands or hundreds of thousands of work places.

Must try harder Queensland.  There’s just not enough stimulating going on.

We touched on this silly subject last September after the Christchurch earthquake:

“Why Creative Destruction is Good, and Destructive Destruction is Bad”

In it we wrote:

“The Second World War was no more of a positive economic stimulus to America or anyone else, than is the current Iraq War or Afghanistan War or the Vietnam War or the First World War or the American Civil War.”

It seems strange to make an economically positive event out of a natural disaster.  And to then compare it to the Second World War… a non-natural disaster event.

In all our searching of the Interweb, we’re yet to find anyone say the First World War or American Civil War stimulated the economy.

That can only mean one thing.  The Second World War fits nicely into the theory about government spending and economic growth.  Whereas the other two wars don’t.  They say the Second World War is an example of economic stimulus working… but they ignore the other two.

Mainstream economists have taken one data point and used it as the basis for their entire theories.  That’s a mistake according to Sherlock Holmes.

Over the summer holidays we’ve read the adventures of the pipe-smoking and cocaine-injecting sleuth.  In the short story, A Scandal in Bohemia, Holmes tells Watson:

“It is a capital mistake to theorize before you have all the evidence.  It biases the judgment.”

I’m sure your editor has been guilty to this “capital mistake”… but we’ll ignore that! [wink].  We’ll ignore it because we like the quote anyway.

I mean, if the Second World War caused an economic boom, what about the First World War?  Did that stimulate the economy?

Our friends over at Wikipedia tell us:

“The post-World War I recession was an economic recession that hit much of the world in the aftermath of World War I… After the war ended… the global economy began to decline.  In the United States 1918-1919 saw a modest economic retreat, but the next year saw a mild recovery.  A more severe recession hit the United States in 1920 and 1921 when the global economy fell very sharply.”

Hmmm… so much for war stimulating the economy.

These war-mongering economists ignore is that public sector war spending stops the private sector growing.

War sucks resources away from the private sector.  Resources that could be used to make cars and appliances and homes.  Instead the state uses the resources to make fighter planes, tanks and bombs.

War doesn’t stimulate an economy.  In fact, after the First World War it took longer for the economy to recover than it did after the Second World War.

In other words, wars don’t stimulate the economy at all.  Rather, they sedate it.  They delay economic growth.  Which isn’t surprising… I mean, there was a war going on!

Without the wars, the economy would have recovered sooner.  Without the First World War the economy would probably have recovered by the late 1910s.  And without the Second World War the economy would probably have recovered by the early 1940s.

Of course, we can’t prove that.  But we can confidently make the claim.

And in the same way, the floods in Queensland delay economic growth too.

Business that would have happened last week and today, isn’t possible.  The local grocer can’t sell groceries because his or her shop is under ten feet of water.

The local bicycle shop can’t sell any bikes because they’ve washed away.

And the local hairdresser can’t cut anyone’s hair because, well, having a nice “do” isn’t on many people’s mind right now.  Getting to the hairdresser might be a bit tricky too.

Anyway, we checked on the Interweb to see how the Christchurch earthquake has helped stimulate the New Zealand economy.  Turns out it hasn’t.  Funny that.

According to the National Business Review: “Another recession for NZ still a strong possibility – economist”.

Of course, that’s according to a mainstream economist.  So we should take what they’ve said with a grain of salt.  Even so, these are the same mainstream economists that thought the earthquake would boost the economy… yet it hasn’t happened…

And it won’t happen.

Remember: just because an economist says something it doesn’t mean it’s true.

To test this yourself, stop and think about it logically.  If thinking about the impact of a large-scale economic event is too daunting, scale it down a bit.

If mainstream economists are right about economic destruction providing a boost to the economy, just consider how economic destruction in your own home affects you.

Imagine smashing your TV with a hammer.  Sure, it’ll provide a boost to the TV store because you’ll need to buy a TV.  But it’s a drain on your bank account because you’re drawing down on savings.

Simple eh?

Well, it’s exactly the same for the broader economy.

The fact is economies don’t grow due to mindless destruction.  They grow through Creative Destruction.

That’s where new ideas and new technologies improve lives.  Where something new provides a better alternative to something old – like computers replacing typewriters… or cars replacing the horse and cart.

But the destroying a perfectly decent road and replacing it with a similar road isn’t good for the economy.  Just as destroying a home and replacing it with an almost identical home isn’t a boost either.

Both result in a waste of resources.  Resources that could otherwise be used elsewhere.

Get the picture?  I think you do.

Just remember that if something said by the know-it-alls in the mainstream media sounds rubbish, then odds are it is.

If we’re honest, the same could be said for your editor… if you think we’re not making sense just drop us a line to the Money Morning mailbag at moneymorning@moneymorning.com.au or post a comment at the Money Morning website.

Anyway, we’ve said just about all we can on this matter.  Time to get stuck in to the January issue of Australian Small-Cap Investigator.

Regards,

Kris Sayce
For Money Morning Australia

From time to time we get emails asking, “So, what you gonna do about it then?” Or “Why don’t you write to an MP or the newspapers to let them know about it?”

Not surprisingly, we’ve received several such emails in recent days. Following on from the secret bank loans scandal…

Before I go on, don’t worry, we’re not touching the banks today. But I wanted to mention something just so you’re under no illusions about the purpose of this newsletter.

It’s important to remember that politicians won’t help you. The mainstream press won’t help you. And neither will semi-celebrity TV personalities.

Whenever a problem is identified, the knee-jerk reaction is always to expect those in a position of influence to do something about it. In reality, that’s nothing more than a comfort blanket. And when you think about it, the last thing you want is for these numbskulls to get involved.

Why? Because their solution is to encourage more government interference. More regulations. More rules. And more favours to vested interests.

No, the purpose of this newsletter isn’t to get influential people in the mainstream to do anything. Rather it’s to help you see what the real problems with the economy are.

Because when it comes down to it, you’ve got to help yourself. The nanny state government certainly won’t help you – not in the long run.

Meddling governments won’t provide for you in the future. And ineffective regulators won’t protect you from financial charlatans.

The way you should look at it is this…

It’s like you and I are on a bus. Along with fifty other people. But only you and I know the driver plans on driving the bus over a cliff.

But to avoid suspicion the driver continues to pick up and drop off passengers at bus stops along the way.

What do you do? You can try and convince other passengers what’s happening, but odds are they’ll react just as you do when a stranger talks to you on a bus – smile politely but try to ignore them.

The only solution is for you and me to get off the bus and drive a car instead. But we’ve still got to be careful. We’ve got to make sure this and all the other bus drivers don’t try to run us off the road on their way to the cliff.

What I’m trying to say is that you’ve got to take more responsibility over your investments. And don’t trust others to look after your financial interests for you.

It means that rather than trusting in the tired-old, tried and failed approach of buy-and-hold investing you’ve got to be an active investor. And it means taking with a pinch of salt the mainstream economic commentary that sings about the strength of the Australian economy.

It also means you’ve got to take appropriate steps to insure your portfolio and investments. Such as having 5%, 10% or 20% of your wealth in precious metals. Assets that will prove their worth when the global financial system collapses.

The kind of thing we unashamedly talk about in our members only newsletters. I’m sure you’ve seen the advertising reports I send you from time to time.

But regardless of whether you follow our advice or someone else’s the important thing is you understand the Australian and global economies are in a mess.

And it’s caused by government meddling and vested interests – such as bankers.

Can you really expect them to help you when it’s in their interests to keep things as they are? What it comes down to is this… only you can help yourself.

Read the papers or hear the bureaucrats and bankers and they’ll tell you the US is on the road to recovery.

They’ll tell you Europe is solving its debt problems.

And they’ll also claim Australia is a miracle economy… all thanks to China.

But none of those is true.

A perfect example of how broken the financial system is right now is contained in a letter sent by US Treasury Secretary, Timothy F. Geithner.

The letter was sent to members of the US Congress last week.

In it the Treasury Secretary writes:

“I am requesting that Congress act to increase the limit early this year, well before the threat of default becomes imminent.”

He continues:

“As you know, in February of 2010 Congress passed legislation to increase the debt limit to $14.29 trillion. As of this writing, the outstanding debt that is subject to the limit stands at $13.95 trillion, leaving approximately $335 billion of ‘headroom’ beneath the current limit.”

Mr. Geithner reminds Congress of the emergency measures the government took last year. And warns he doesn’t want to take the same action again. But even if it does, it would only be a temporary solution.

He explains:

“If we are forced to do so again, these measures could delay the date by which the limit is reached by several weeks. Once these steps have been taken, no remaining legal and prudent measures would be available to create additional headroom under the debt limit, and the United States would begin to default on its obligations.”

Does that sound like an economy in recovery?

No, I thought not. It sounds like someone desperately in over their head in debt. But rather than stopping spending, their solution is to ask for a credit limit increase.

When was the last time that worked for anyone?

Even so, today’s The Age newspaper reports:

“President Barack Obama sees a clear and encouraging trend on the economy, citing fresh reports showing private-sector job growth and lower unemployment.”

Ah, the Wealth Illusion.

We’re sure you’ve heard of the Wealth Effect. That’s where rising asset prices – shares, housing – add to the wealth of individuals. This supposedly makes individuals more confident and boosts the economy.

But the Wealth Illusion is where individuals think they’ve become richer. In reality they haven’t. Because what they forget is their debt levels have also increased.

That’s the way it is for the US economy. Even if you believe government numbers about falling unemployment, it ignores the fact that the US economy has gone backwards.

According to our pals at Google, in 2009 US gross domestic product (GDP) was USD$14.119 trillion. You can see the US GDP growth chart below:

Click here to enlarge

Now look at US debt since 1910:

Over the last twelve months the US public debt has increased by nearly 14%.

In contrast, the US economy has grown by… 2.6% when adjusted for inflation. When not adjusted for inflation it has grown by 4.6%.

In other words, it’s the equivalent of you increasing your debt by 14%, plus getting a 4.6% pay rise and then claiming that you’re on the right path to prosperity…

Although now we think of it, that’s pretty much the view most property spruikers take. They withdraw “equity” against an investment property (what this really means is increasing their debt), spend the money, increase the rent, and still claim they’re growing their wealth.

Seems to us that the US government and Australian property spruikers have been taught by the same finance teachers.

This sorry state of affairs is just like the passengers on the bus not getting it that a bus heading 100km/h towards a cliff isn’t likely to stop.

Probably because they’re too busy reading the front page of the Australian Financial Review. It tells its readers that “US jobs data disappoints but Fed is confident”.

Well that’s alright then.

If the US Federal Reserve says it then it must be true. This is a firm headed by a guy whose solution to a global debt problem is to issue more debt and print more money… print more money for goodness sake!

But the key point to note is that we’re not looking at some far-off crisis point. We’re looking at a crisis point that’s potentially less than three months away. In fact Treasury Secretary Geithner warns Congress:

“The Treasury Department now estimates that the debt limit will be reached as early as March 31, 2011, and most likely sometime between that date and May 16, 2011.”

March 31st is just eleven weeks from now.

The US government and Congress have just eleven weeks to avoid default.

The letter from Geithner – which you can read here – is from a man terrorised by fear. Fear of being the man on watch as the US economy finally collapses.

So much so that he’s invoked the “it’s not our fault” clause:

“The national debt is the total amount of money borrowed in order to fulfil the requirements imposed by past Congresses and under past presidencies, during periods when both Republicans and Democrats were in control of different branches of government. These are legal obligations, incurred under the laws of the United States. Responsibility for creating the debt is bipartisan, and responsibility for meeting the Nation’s obligations must be shared by both parties.”

That sentence perfectly outlines why economic reform can’t be achieved through democracy.

There’s no way members of Congress will let the US government default on its obligations to bondholders. Mainly because those bondholders are the government’s buddies at the investment banks and on Wall Street.

Instead, members of Congress will do what they mostly do – push the bad news out to a later date.

That’s why the US debt is at the level it is now. Years of politicians borrowing to meet the obligations those past generations of politicians were too chicken to stop.

For years they’ve known the amount of public spending is unsustainable.

And today’s Congress is no different. But rather than doing anything about it they’ll look at the consequences of debt default and say, “Ooh, that ain’t lookin’ none too good… some-un else can figure that one out.”

And so, the problem grows. And ultimately the consequences become worse.

That’s why you need to be on guard. And why you need to take some responsibility over your investments and your life.

As I wrote at the beginning of today’s letter, no-one in the mainstream is going to warn you in advance of the consequences of government meddling.

The mainstream continues to fool you into believing that government is the solution. Whereas we know that government isn’t the solution… it’s the problem.

I’m afraid that writing letters to papers, TV stations or to your MP will get short shrift. And most probably ignored. So don’t waste your time with it. Instead you need to remember that the best and only person to look after your future is you.

And the time to prepare for the consequences wrought by decades of government meddling, interference and corruption is now. The global economy may not collapse on 31st March, but if it doesn’t its still nothing to cheer about.

It’ll just mean the worst effects have been pushed further to the future. At least it’ll give you more time to prepare… but if I was you I’d start thinking about it and doing it now.

Cheers,
Kris Sayce
For Money Morning Australia

Yesterday I wrote to you about the silly headline in The Age newspaper. It was this:

“Queensland rebuilding will boost GDP”

Look, we love it when we see this kind of nonsense written. Simply because it gives us an excuse to again read Frederic Bastiat’s, “That Which is Seen, and That Which is Not Seen”.

You can click here to read it for yourself.

I won’t reprint it because you should read the entire essay. But in a nutshell, it’s economic nonsense to suggest that a flood will be beneficial to an economy.

Only an economic ignoramus would argue such a thing. Floods destroy things. Floods make no distinction between the destruction of brand new goods and goods that are due for replacement.

The last time we brought up this subject we were told it is good for the economy because money comes into Australia from insurance companies. That this money hasn’t been taken from elsewhere in the economy.

Rubbish.

To borrow from the title of Bastiat’s essay, it only considers that which is seen but not that which is not seen.

Even so KPMG chief executive Michael Andrew is quoted in The Age article:

“This will release a lot of cash from insurance company balance sheets, many of which aren’t in Australia. Many are reinsured offshore in Europe or the US, so the extent to which they have to fund loss-of-profit claims, a lot of money potentially flows into Australia.”

It’s the idea that Australia is getting a free lunch from the insurance companies.

The fact is, Mr. Andrew couldn’t be more wrong if he tried. But let’s run through the argument in more detail…

Think about it, how do insurance companies raise money? They charge premiums. Premiums paid for by Queenslanders and others.

Now, how does an insurance company pay for the claims made by policyholders? It covers the costs from its reserves but would also issue bonds to investors which it will then repay over time from insurance premiums.

Here’s the problem for the insurance company. Aside from the big payouts such as the Queensland floods, or the Christchurch earthquake, the insurance companies also need to pay out other everyday claims.

So, the insurance company will need to rebuild its cash reserves.

How will it do that?

Simple, it’ll need to increase insurance premiums.

And who pays for the insurance premiums? Individuals and businesses. In other words, money that would otherwise have been spent elsewhere or saved will be now spent on increased insurance costs.

Yes, some industries may benefit as claimants buy another item of furniture to replace the item that was destroyed. But it is at the expense of say, the clothing store where someone may have spent money but they are no longer able to do so because of the increased insurance premium.

But what about this idea that foreigners are actually funding the rebuilding as the cash flows in from overseas.

While that may be true, it ignores the attitude of those overseas investors. If a reinsurance company has to fork out more money than expected to pay for a major incident then it will naturally demand an increased return or premium before it invests more money.

That means the Australian insurance firm paying a higher rate on the bonds it issues or on the reinsurance policies. And that means passing on higher premiums to policyholders.

In economics there’s no such thing as a free lunch. If something is destroyed and needs replacing then there will be a cost to replace it. That cost will either be a direct or indirect cost.

Think about it this way. If there really wasn’t a cost, then why wouldn’t you just crash your car and write it off at every opportunity? I mean, that’s the logic Mr. Andrew is using.

The reason you don’t write your car off is because you know there will be a cost to you in the form of an increased insurance premium when you get your next car.

There is no difference between this example and the costs of the Queensland floods. To the Australian economy as a whole, and to anyone who holds any kind of insurance policy there will be a cost.

Claiming that foreigners will pay for the flood damage without any impact on Australians is just another childlike example of the Australian mainstream falsely believing that ‘Australia is different.’

One day they’ll get it through their thick skulls that Australia isn’t different. Australia has benefited from an extraordinary boom in the resources industry which has helped prop up the entire economy.

When that boom stops, the Australian economy will suffer. Only then will the mainstream numpties realize that the Australian economy is no different to anywhere else.

Kris Sayce
Editor
Money Morning

Monday: You’ve got your eye on a stock – but you’re not sure if it’s the right time to buy it… You’re holding another stock that just went up – or down – significantly… but you don’t know whether it’s time to sell… The solution to both of these dilemmas will become a lot clearer once you’ve watched this video (turn on your speakers). Click here for more…

Tuesday: No wonder Diggers & Drillers editor Dr. Alex Cowie looked jolly as he bounded into the office this morning. The “Stock Doc” has been long coal stocks since March last year. Click here for more…

Wednesday: 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… Click here for more…

Thursday: 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). 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

Good morning reader.

It’s a new year.

But, it’s the same old story.

Nothing much has changed.

We’re tempted to say nothing has changed. But that wouldn’t be true. Things, even little things change.

Even so, as we see it, the big things are just the same.

We won’t list them all here. You already know what they are. We spent the entire length of 2010 talking to you about them.

You know and I know that we shouldn’t treat the fourth of January any differently to the 31st of December.

However, investors do. And commentators do.

Changing a number at the end of the year does funny things to attitude of investors.

It’s like the proverbial spring clean.

Dusting away the cobwebs of last year and opening the doors and windows to the fresh air of this year.

The problem with this approach is that it assumes just because something is old it’s less important than something new and fresh.

For instance, if popular opinion is anything to go by, Facebook is better than Gold. Because Facebook is new and is used by billions. Whereas Gold is old and is only used by cranks and crackpots… OK, the cranks and crackpots could be applied to Facebook as well, but you get our point.

But don’t get us wrong. We like old stuff and new stuff.

We like Gold, so we own some. And we like the Apple iPad, so we bought one. See, we aren’t stuck in the past.

That’s fine, but what’s happening in the markets today?

“Wheat Rises to Five-Month High as Australia Flood, U.S. Cold Threaten Crop” reports Bloomberg News.

“As the rain comes down, coal prices rise and GDP goes on the skids” says the Sydney Morning Herald.

No wonder Diggers & Drillers editor Dr. Alex Cowie looked jolly as he bounded into the office this morning. The “Stock Doc” has been long coal stocks since March last year.

But being long coal stocks isn’t much good if the mines are flooded and the companies can’t sell the stuff. Which is why the Stock Doc had an extra spring in his step – he’s long African coal plays.

Not much danger of flooding in them there parts you’d think.

But we did laugh at the comment from our favourite rail company, QR National [ASX: QRN]. It advised the market that, “Until these highly unusual weather impacts subside, it is not possible to make a full assessment on Full Year published earnings forecast.”

Oh dear. Still, the stock is still over 10% higher than its listing price. Which is better than a poke in the eye.

But that said, even as we enjoy the fourth day of the new year, we’re still struck by the lopsided nature of the Australian economy.

How it relies on natural resources for just about everything. That without the demand for Australia’s natural resources the Australian economy would die.

We thought about that as we settled down over the holiday to watch one of the excellent 30 for 30 documentaries on sports network ESPN.

To celebrate the thirtieth anniversary of that sporting network, it commissioned thirty documentaries. Each highlighting a key sporting event or sporting drama during the past thirty years.

This one in particular was called “The Two Escobars”. As you’d expect, it retold the story of two people with the same last surname – Andres Escober, a Columbian footballer. And Pablo Escober, a Columbian drug lord.

Neither was related to each other.

To cut a long story short – the documentary went for about two hours – Forbes magazine estimated that Pablo Escobar was one of the world’s richest men in 1989. With a wealth of around USD$9 billion.

Back then, according to The Pittsburgh Press:

“The Sultan of Brunei… is still the world’s wealthiest man with an estimated fortune of $25 billion…”

King Fahd of Saudi Arabia was next with $18 billion, with the Mars Family coming in third with $12.5 billion.

Australia’s Queen, Elizabeth II was the fourth ranked billionaire with $10.9 billion. As we recall, 1989 was before her annus horribilis, which was when the whole royal thing started to go pear-shaped.

As an aside, we tittered at the following statement in the article, “British real estate tycoon Gerald Grosvenor is ninth… [with an] estimated wealth of $6.9 billion.”

We’re not sure “tycoon” is the best way to describe Gerald Grosvenor. A man more commonly known as the 6th Duke of Westminster. A man whose tycoonery extends to being in the fortunate position of inheriting vast swathes of land in central London.

It would be like describing Her Majesty as a tycoon. Or Prince Albert of Monaco as an entrepreneur.

As for the 1989 top ten, not a single mention of Bill Gates or Warren Buffet. Instead, the top ten was dominated by… Japanese real estate billionaires.

Considering how Japanese real estate has performed since then, it might be a warning to the Australian property goons about how quickly apparent wealth can vanish.

But anyway, back to our Pablo Escobar story…

Mr. Escobar made his billions selling drugs to Americans and Europeans. Whether you’re in favour of the legalisation of drugs or not is irrelevant.

The simple point is that Mr. Escobar, like many Australian mining companies, made a mint from exporting a natural resource overseas. Not that Australian mining companies export drugs mind you.

As you can imagine, even though the trade may have been illegal, it brought much wealth to Mr. Escobar and his cronies. And some of it even filtered through to the poor people of Medellin.

As the documentary explains and as our pals at Wikipedia also point out:

“Escobar was a hero to many in Medellin (especially the poor people)… he was credited with building football fields and multi-sports courts… Escobar was responsible for the construction of many churches in Medellin… [he] frequently distributed money to the poor through housing projects and other civic activities…”

Of course, Wikipedia also points out that:

“The increased murder rate was fuelled by Escobar’s giving money to poor youths as a reward for killing police officers, over 600 of whom died in this way.”

In one instance Escobar heard of 700 people who lived in a rubbish tip. Each day they’d scrounge what they could and we dare say, either eat it, wear it, or sell it.

Escobar was so distressed by this that he built a bunch of houses for these people to live in. Whether they continued to “work” at the tip is unknown.

In 1993, Escobar was dead. Shot by police while on the run.

As you can imagine, the death of Escobar and the war on the drug trade by the Colombian and US governments didn’t do much to maintain the wealth of the drug lords. Nor of the cronies who benefited from it.

In an instant, the flow of cash from overseas was slashed. And local wars broke out as the drug lords fought to keep up their revenues. With fewer drugs being exported that meant the drug lords needed to get market share in other ways – by killing their competitors!

In a nutshell, the economy of Medellin was propped up by what was largely an unsustainable export market. Many were wealthier than they were before, thanks to the export of drugs and the import of cash.

Many were able to piggy-back off that by providing services and products to those that directly benefited from the exports. But when the drug exports collapsed… there was no import of cash. With no cash coming in, there was no demand for the products and services offered by the businessmen.

In other words, these businesses relied on the export of drugs continuing.

While the comparison with Australia isn’t identical, it does show how it’s possible for one industry – resources – to provide finance for many other industries.

This is pretty much the argument we tried to make before the Christmas break. That billions of dollars of cash flowing into the Australian economy from overseas is used by banks to finance a whole bunch of other industries.

But what happens when the export of resources and import of cash slows? What is there for the Australian economy to fall back on?

The housing sector… the retail sector… the manufacturing sector…

Nope. All three, plus the rest are financed by Australia’s resources sector.

The Australian economy is just as reliant on the export of resources as the Medellin economy was reliant on the export of drugs.

The Australian government tried and failed to wage a war on the mining industry with its Resources Super Profits Tax (RSPT). But the real threat to the mining industry and the Australian economy is from overseas.

How much longer can China – and Dr. Cowie’s favourite, India keep feeding their insatiable natural resources addiction?

The Stock Doc says commodity prices “will keep rising this year on the back of a weak dollar, strong Asian demand, improving US demand, and ongoing supply problems.”

He could be right. And he could be right that “coal, copper, tin, gold and silver will be the star performers.”

Even so, our commodity crash radar is on high alert right now.

But we’re not foolish enough to bet against it just yet. For now we’ll keep one foot in the resources sector while the other foot keeps the door to the exit ajar.

Cheers,
Kris
For Money Morning Australia

Why China won’t re-evaluate the Yuan to please America.

As 2010 comes to an end we’ve had two themes banging on in the background…

Sovereign Debt and China’s undervalued Yuan.

And as 2011 rolls in it doesn’t look like either problem will be resolved anytime soon.
As central banks continue to lend and governments overspend, you can expect the sovereign debt saga to drag on well past 2011.

And the undervalued Yuan?

China may force its economic might on the world. But you can bet the Christmas Ham that America will continue to push for a Yuan level that suits them rather than the Chinese.

But the U.S. is kidding itself thinking that a higher valued Yuan will solve all of its economic problems.

So why are government officials still calling on China to let the Yuan appreciate 30%, or even 40%?

Chinese officials have let the Yuan gain 2.4% against the U.S. dollar this year. Yet, that’s still not enough for some American politicians.

There aren’t a whole lot of outspoken Chinese officials. But, there is one or two suggesting that a stronger Yuan will benefit the Chinese economy. The CEO of Lenovo – a computer manufacturer – has said a ‘…stronger Yuan will boost the purchasing power of the Chinese.’

And he’s right. But most importantly it’ll benefit the Chinese middle class too. This just happens to be the target demographic for American corporations. Those that want to sell their iPods and other lifestyle gadgets.

Letting the Yuan appreciate in a free market system could assist China to move demand from the manufacturing sector to the service sector. It may even achieve balanced economic growth.

Heck, a higher valued Yuan would mean lower import costs to China. This would help reduce its trade surplus. And it could lead to slower growth and much lower inflation.

If these are just a few of the benefits to the Chinese economy, why are officials refusing America’s request to surrender?

It could just be that China was paying attention all those years ago when Japan signed the Plaza Accord in the 1985.

What’s that?

Back in the mid eighties, America was in the middle of a recession. And there seemed to be no end in sight. You could argue it’s pretty similar to the situation they’re in now. That was when the country had a massive trade deficit with Japan. Sounds familiar doesn’t it?

The United States, requested that the other countries in the ‘G5′ nations – France, Germany, Japan and United Kingdom – sign an agreement that would weaken the U.S. dollar against those currencies.

So, why would the U.S. want to weaken its currency?

Funnily enough, the whole idea of the Plaza Accord was to pull the country out of a recession and reduce the massive trade deficit with Japan, and the other G5 nations.

China must have been paying attention. Because this is the very reason for not weakening the Yuan.

For the other three countries that took part, it worked well. The U.S. was pulled out of the recession and its trade deficit with the remaining G5 members was reduced.

You see, at the time the Plaza Accord was signed, America’s trade deficit with Japan was about USD$43 billion. And you guessed it, not only was the deficit not reduced, but it ballooned out to USD$59 billion by 1993.

But for Japan, the outcome wasn’t what everyone had hoped for. Just after the agreement was signed the Yen began to climb against the U.S. dollar.

One of the biggest problems was that of the trade deficit reduction. And the structural implications around what imports Japan could accept. Let’s just say not a whole lot of American goods met the requirements.

In a frantic attempt to weaken the Yen, the Japanese central bank lowered interest rates to offset the rising currency. Of course, these moves by the central bank weren’t the only cause. But it can be argued that these decisions added to the property bubble and what later became known as Japan’s ‘lost decade’.

There’s a chance China could be using the Plaza Accord and the outcome for Japan as an excuse to not let the Yuan appreciate. Senior economists in China have said that the ‘lost decade’ occurred because of the Bank of Japan’s own bad decisions.

Either way, it doesn’t matter.

China has seen that America will do only what it is in the best interests of America.

The good news for China is that its economy should pass America’s in about 15 years.

China can afford to take its time ensuring its own economy is looked after before any other.

And right now letting the Yuan appreciate beyond the central bank’s control is not in the best interest of Chinese officials.
Shae Smith

Assistant Editor
Money Morning

Most important story of the week…

Murray Dawes, editor of Slipstream Trader joined us this week, taking a look at what ‘Benny Boy’ Ben Bernanke, chairman of the Federal Reserve Bank has done to the bond market. Click here for more…

Monday: As we’ve pointed out several times, these funds are on the way to becoming the next plaything for financial institutions and government bureaucrats – need a new rail line built? Get the super industry to pay for it. Click here for more…

Tuesday: The fact is no bank is as robust as they could be. But that’s simply the way things are with fractional reserve banking. Fiddling around with it won’t help. Increasing reserve requirements from say, 7% to 7.5% or 8.5% won’t make a blind bit of difference. Click here for more…

Wednesday: Short-sellers could have made a killing if NAB and Westpac had fully disclosed the secret loans. In fact, non-disclosure of the loans could have resulted in many short-sellers losing a lot of money as bank share prices rallied. As investors were led to believe Australia’s banks were strong and secure. Click here for more…

Thursday: He’s basically using the virtual economy to prod the real economy back to life. But the patient is still only wiggling his toes and a spike in interest rates won’t do him any favours. Click here for more…

Friday: Click here for more…

You might be surprised to know that since 2006 copper, in notional value terms, is the second most heavily traded futures contract on the Shanghai Futures Exchange (SHFE).

You’d think copper, being such an important part of the Chinese economy moving forward, would be number one.

But it’s not.

Believe it or not, natural rubber futures contracts are the most heavily traded commodity in value.

Copper may be vital to building and establishing infrastructure, but plain old boring natural rubber is still one of the most important commodities to any economy moving forward. And as of the last few months, the natural rubber price has started to gain.

Let me explain.

Firstly, many technological advances have been made on what to do with the actual rubber. But harvesting the rubber is still a labour intensive process.

In fact, in the past 100 years since the rubber market was developed, no-one’s come up with a quicker way of harvesting rubber.

To get hold of the rubber, picture this:

You’re in Thailand, the world’s largest producer of rubber. You’re surrounded by tens of thousands of hectares of tall skinny rubber trees. Some marks or slashes are made in the bark that pierces through to the wood of the tree to “bleed” the sap from the tree. A strap is wrapped around to hold a bowl about the size of half a coconut into which the sap is drained.

Each mature rubber tree seven years or older ‘bleeds’ about half a cup of sap each day. The sap that each tree gives is actually known as latex.

It’s this latex that is turned into rubber.

The tree won’t bleed any faster. There’s no point attaching a bigger bucket to the tree. The tree will bleed a small amount of sap each day. The whole process can’t be hurried up.

Because of the world’s insatiable appetite for rubber, Thailand isn’t the only country that produces rubber.

Most Asian countries around the world with a humid environment have rubber plantations. Malaysia, India, Vietnam, China, Sri Lanka, Cambodia and even some parts of central and South America are responsible for the entire world’s rubber supply.

Last year over 8.6 million tonnes of natural rubber were produced. Yet despite most countries increasing their production of natural rubber, supply fell short of the world’s 9.7 million tonnes needed to satisfy global demand.

Annually, global production of rubber is about 8.6 million tonnes, with Thailand followed by Indonesia producing the most rubber.

And global demand is only going to get stronger.

The transport industry, or more specifically tyre manufacturing, consumes most of the natural rubber available. Over one billion tyres are produced each year.

The transport industry isn’t getting any smaller either. It’s only going to get bigger.

Think about it.

As more and more of countries like China and India develop their middle class, there’s going to be more demand for vehicles. All sorts of cars can be manufactured, but they all have one thing in common. And that’s rubber tyres.

Chinese sales of passenger cars last year grew by a massive 29%. That’s just sales; that’s not taking into account how much the vehicle manufacturing sector grew.

Not to be outdone, India’s vehicle manufacturing sector grew by 26% for 2009.

As you can see, the car industry is growing. And all those cars are going to need some rubber tyres to drive on.

But trading rubber is tricky.

What used to be as simple as tracking the price of oil has now changed. The world’s market place is different. It used to be as easy as oil goes up, rubber goes up. Now, oil is no longer the driving force behind the rubber price.

For starters, futures contracts in Tokyo and China are now highly sensitive to changes in the spot price for rubber in Thailand, where most of the production takes place.

The unusually heavy rains in Thailand have seen the spot jump to a record 141.05 baht (AUD$ 4.74) per kilogram, which then sent the May delivery futures contract on the Tokyo Commodity Exchange soaring to its own record of 400.1 Yen per kilogram (AUD$4.80, or $4,800 per tonne).

Even the SHFE had a record price for rubber earlier in the week of 35,400 Yuan (AUD$5,362.39) a tonne.

However the price didn’t sky rocket because punters were worried about the crop being destroyed. Because collecting the latex is such a labour intensive process, the heavy rains make it impossible for the rubber to be collected. Mother Nature is interfering with the market’s supply.

Then you have the other economic factors that now drive the price of rubber.

The U.S., a major producer of rubber tyres, is facing a recession. As a result of that recession there’s lower than expected automobile sales. This data alone could drive the price of rubber down. If no one can afford buy cars or heavy transport equipment, quite simply, fewer tyres will be made.

But then a quick swing could easily happen if Caterpillar [NYSE: CAT], one of the world’s most well known mining vehicle manufacturers, announces a $100 million sale of vehicles to a mine in China, Africa, or even Australia.

All those massive mining trucks will need a few rubber tyres to carry them around.

China might come out and upgrade the outlook of its passenger vehicles, which in turn would push the price of rubber higher again.

What was once a very simple and predictable commodity to trade has now become a volatile product.

Rubber has become a commodity that reacts quickly to economic news, rather than just follows what the crude oil contact did the day before.

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

The S&P/ASX 200 ended higher by 16 points to close at 4,784.

The Dow Jones Industrial Average was higher by 41 points to 11,499.25. New unemployment claims dropped for the third time in four weeks to 420,000. The good news was extended to the four week average which dropped to the lowest point since July 2008.

FedEx [NYSE: FDX] added to the good news by raising its profit forecast for 2011 financial year. The company suspects profit may be $5 – $5.30 per share, instead of the initial $4.80 – $5.25.

There was a little bit of good news for the housing market, as numbers for housing starts rose 3.9% for November, however construction permits were down.

The FTSE was weighed down by the Euro debt zone problems, losing 1 point to end the day at 5,881.12.

And finally the Nikkei, has slowed down from the past few days of gains, adding only 1 point to close at 10,311.29.

Gold was down over 1% last night.

The price of spot gold in Australian dollars is trading at $1,382.94 while in US Dollars it is trading $1,369.38. The price of silver in Aussie dollars is $29.14 and in US Dollars it is $28.85.

Copper is currently USD$4.12 a pound (AUD$4.16) Nickel is USD$11.16/lb (AUD$11.27) and Tin is USD$11.75/lb (AUD$11.87).

The Aussie dollar versus the US dollar was USD$0.9902, and against the Japanese Yen JPY 83.15.

Crude Oil was lower at USD$87.88

For the biggest movers on the market yesterday click here…

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

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: 73
Number of companies reaching a 52 week low previous day: 13