–If you were in charge of manipulating the world’s financial markets today, what would you do? It wouldn’t be an easy job. If my job was to preserve the status quo for just a little bit longer and prevent the dollar crisis from unleashing even more geopolitical stability and falling stock prices, I’d try and get oil prices down. Pronto!

–In just a second, I’ll show you jhow to manipulate oil prices down. It could come in handy if you’re ever asked to rig the market in favour of your elite establishment friends. But the main point I’d like to make in today’s Money Morning – which I’m writing because your normal editor Kris Sayce is away for the day – is this: the chaos in global financial markets is a sign of the endgame in the global currency war. It’s going to get a lot worse before it gets any better.

–What does that mean? I’ll get to that in a second. But you need to understand that today’s events are linked in an evolutionary chain. It’s the evolution of unsound money and its consequences on growth, society, and the world.

–The fossil record of that evolutionary chain includes John Law’s Banque Royale, the world’s first real central bank, and that hideous creature from Jekyll Island, the U.S. Federal Reserve. These institutions are responsible for unleashing inflation on the world through money printing. What follows – economically and geopolitically – is a direct result of the concept and practice of central banking, fiat money, and fractional reserves.

–That all sounds pretty wonky. So what does it have to do with where we are in markets on Friday, February 25th?

–Well, try thinking of it this way. The U.S. housing crash – itself a result of Alan Greenspan’s post tech-wreck credit bubble – exposed the global banking sector as over-leveraged and undercapitalised. The banks transmitted the problem to governments (the sovereign debt crisis) and stock markets.

–Today, it looks for all the world like governments (through central banks) are doing their best to prop up stock markets by driving down the price of oil and precious metals. The stock market is about the only instrument left that the authorities can use to make people feel richer. For Ben Bernanke and his crew of loyal Keynesians, it’s imperative that new money flows into the stock market to keep people feeling wealthy.

–After all, what else is left on the household balance sheet in the Western World? House prices in most of the Western World (Australia infamously excepted) have fallen and destroyed trillions in equity. Wages are falling in the developed world as globalisation commodities labour. It means everyday low prices for goods made from Asia. But it means hollowed out manufacturing industries in mature economies.

–So yes. The only way to keep people from brooding on all that-and their seeming powerlessness to do anything about it – is to keep stock prices high. That makes everyone feel good. And the zeitgeist of the age is that how you feel about things matters more than the underlying reality of what’s really happening.

–Trouble is, when Libyan oil production is down by 75%, people are going to start worrying that high oil prices could crash global growth. A severe oil shortage is just the sort of event to ruin everyone’s day. It would make clear the simple fact that the U.S. dollar crash is going to be a far more disruptive event than the Lehman Brother’s failure of 2008.

–But wait! How about Saudi spare capacity to the rescue!? Oil retreated overnight when the Saudis told everyone that there’s more than enough oil to go around for everyone. The Saudis say that they have more than 4.4 million barrels per day in spare production capacity. With a full-strength Libya pumping out 1.2 million barrels per day, the Saudis would appear to have everything covered.

–See? Nothing to worry about. Stocks rallied and oil and gold fell on the Saudi assurances. Or is that what really happened?

–First, do the Saudis really have the oil? U.S. diplomats privately think the Saudis have over-stated their proven oil reserves by a whopping 40%, according to Wikileaks cables published by the Guardian in early February. This wasn’t exactly news to people who’ve been following the story of Peak Oil for a while. But it might have been news to a lot of other people. Maybe there isn’t as much cheap, easy-to-produce, high-grade crude oil as we thought.

–But the oil price could have fallen overnight for an entirely different reason. The Intercontinental Exchange (ICE) raised margin requirements on crude oil trading for the second time this week. It’s expected other futures exchanges will follow suit. This is similar to action taken on other commodity contracts experiencing unusual volatility.

–Is it a transparent attempt to drive oil prices lower (and stock prices higher) by squeezing out speculators? Or is it a legitimate attempt to squeeze out destabilising speculation by oil traders? Or some of each?

–I asked Slipstream Trader Murray Dawes if he thought the ICE action was an attempt to rig the oil market by squeezing traders. Murray wrote back:

The futures markets do have the right to adjust the margin requirements when the volatility explodes outside of usual levels. A move such as the one we saw in oil markets over the last week would be enough to blow a lot of traders out of the water. I agree that it is a means to lower open positions at a time of high volatility, and thus affect the price. But the clearing house does have to make sure that market players have enough in their accounts to cover losses. If they don’t then everything comes crumbling down

–Murray is a sensible trader, whereas I am tempted to believe regulators are keen to muddle price signals. Why? High oil and energy prices tell the rest of the world there really is a dollar crisis. They tell investors and traders that Ben Bernanke’s policies are inflationary…and that inflation is already a serious and politically destabilising problem in countries vulnerable to food and fuel inflation.

–But the jury is still out on this line of analysis. So I’m going to step away from it, put some more thought into it today, and send you some bonus oil coverage this weekend. Stay tuned.

–In the meantime, keep an eye out for March 11th. Facebook groups are popping up and calling for “a day of rage” in Saudi Arabia. This, of course, is what the oil market fears most: that the currency crisis roiling the Middle East makes its way to the world’s indispensable oil producer. Don’t count on oil prices being down for long.

Dan Denning
For Money Morning Australia

Sorry for the late delivery of Money Morning today.  We had a few errands to run this morning and so we started much later than usual…

West Texas Intermediate Crude briefly joined its cousin – Brent Crude – above USD$100 last night.

It didn’t last.  Even so, WTI closed US trading above USD$96.  And Brent closed above USD$110.

Unlike other commodities, oil is rising because of supply fears.

In recent weeks other commodities rallied due to central bank money-printing.

But whereas stock prices for companies dealing in those commodities ran-up hard – we’re thinking copper, rare earths, potash and uranium stocks – Aussie oil stocks have, erm, done nothing.

In fact, if you look at a one-week chart of the S&P/ASX 200 Energy Index you’ll see what I mean:

Source: CMC Markets Stockbroking

Over the past week the global oil price has soared.  But Aussie energy stocks have gone down.

Why?  I’ll be honest. I just don’t know.

Our Slipstream Trader, technical analyst, Murray Dawes thinks it could be the result of the risk trade.

Investors are weighing up which is the better bet, oil stocks or safer assets such as cash.  At the moment cash is winning.

The more I think about it, the more I reckon Muzza is on to something.  When other commodities were rallying it was because punters saw a growing economy.  A growing economy means a bigger demand for resources, and that means more demand for rare earths, copper, uranium, etc…

So supply and demand did play a part, aside from central bank money-printing giving things a boost.

But the rallying oil price isn’t quite the same.  The oil price is higher because of the fear of a supply crunch.  Oil prices aren’t higher because they think the economy is booming.

Oil prices are up because if Libya descends into war and revolution it will have a knock-on effect to other countries in the Middle East.  And possibly Europe too.  Don’t forget Italy is one of Libya’s biggest trading partners.

And that could create a supply problem.

In other words, the potential gains from buying oil stocks are outweighed by the fear of another worldwide recession.  And if that happens, the demand for oil and the oil price would likely fall anyway.  And, the last thing you’d want to own in that case is oil stocks… or any stocks at all.

So, punters are saying they’d prefer to be in cash rather than take a punt on the oil price which could fall just as quickly as it climbed.

That kind of makes sense to us.  But then, it doesn’t explain why major US oil stocks climbed higher overnight.  We’ll keep thinking about this one and see if we can make sense of it.

But that’s for another day, today we noticed this:

“The Gillard government will sacrifice at least $100 billion over the next decade as a result of the tax compromise it negotiated with the big miners…”

So says the front page of today’s Australian Financial Review (AFR).

It never amuses us how the mainstream numpties get their elbows about ankles with that one.

A tax cut is always portrayed as a “cost” to government.

I’m sure you’ve seen it worded that way, “Income tax cut to cost government $2 billion”, or “mining tax to cost government $1 billion”, or “tax cuts to eat into government revenue”, blah, blah, blah.

Of course, that way of looking at it is complete nonsense.

Tax cuts aren’t a “cost” to the government.  Taxes are a “cost” to businesses and individuals.

Tax cuts mean less money going to the crooks in Canberra and more money staying with private enterprise and you.  Whereas taxes means more money going to the Canberra crooks and less in your pocket.

You, I and everyone else should cheer the massive profits made by the resources sector.  Because in a normal, free market economy it would provide a boost to the economy as a whole.

It would be – dare we say it – a stimulus.

But it would be a real stimulus.  Not a phony stolen stimulus.  Stolen because the government has robbed you of your hard-earned in order to line the pockets of its chosen buddies.

In this month’s Australian Small-Cap Investigator we told the story of a heroic entrepreneur.  Someone who risked their life and their capital to become a multimillionaire.

Yet their self-serving interest to become rich resulted in the biggest boost to the Australian economy the country has ever seen.

Selfishness breeds prosperity for all.  And that’s a fact.

In contrast, so-called progressive policies, the likes championed by Gillard, Rudd and Obama breed wealth for their buddies – bankers and other favourites – while everyone else is forced to pay for those policies.

Now, although the Australian economy isn’t what we could call a normal, free market economy, the pollies and mainstream goons should at least show some gratitude to the mining sector.

Simply because BHP Billiton’s [ASX: BHP] $10.5 billion half-year profit has the potential to add up to $90 billion in spending to the Australian economy.

How so?  I’ll get to that in a moment.

But before I do, I will point something out.  Just so you’re completely clear what I’m saying.

In a free market economy, BHP’s profits would filter through to the rest of the economy.  It would be a voluntary redistribution of wealth.  BHP would deposit the cash profits at a bank, or maybe buy corporate securities or buy other businesses.

Not forgetting the voluntary redistribution of wealth that comes from paying wages and suppliers for services.

So when BHP deposits the profits in a bank account the bank could lend it out to other firms or individuals.  And BHP would earn interest on the deposit.  If it bought corporate securities then it would invest the money directly in another business, again earning interest on the investment.

Or, it could just buy a company or assets outright, such as it has with the Chesapeake Energy shale assets in the US.

The important part of this is that it wouldn’t create an asset bubble because there wouldn’t be a pyramiding of newly created money.  It would be the same money.  The money BHP makes in profits would be the same money borrowed by a business in Sydney… or an individual in Adelaide.

That’s how a free banking system would work.  $10.5 billion in the door as savings, and up to $10.5 billion out the other side as borrowings.

For the duration of the loan, BHP wouldn’t have access to those funds – a bit like a term deposit.  Only, in effect it would be BHP lending the money to the bank as an intermediary and the banking lending the same money out to a borrower.

Now, you could argue that BHP has only been able to make $10.5 billion in profits thanks to central bank money creation and bank credit.  And that would be true.  No arguments from us there.  But we’ll stick with that number just to simplify the comparison with what really happens to BHP’s profits.

Anyway, of course, free banking doesn’t exist in Australia.  As you know from reading Money Morning, what we have instead is fractional reserve banking, where banks leverage up deposits to ten-times or more the deposited amount.

While still leading depositors to believe they can withdraw all their cash on demand.

So while the mainstream drones and pollies froth at the mouth because private enterprise has the temerity to seek profits, they should be grateful for the fact that private sector profits are helping to inflate the boom created by the central bankers and politicians.

The fact is, it’s not the mining companies that are the crooks.  It’s the fault of government and banks for helping create a lopsided and distorted Australian economy.

An economy that lives on bubbles.  Whether it’s mining bubbles or housing bubbles, it doesn’t matter.

Sure, the Australian government and Reserve Bank of Australia (RBA) may not be to blame for creating the mining bubble – that award goes to the US Federal Reserve, the People’s Bank of China, and the US and Chinese governments.

But the Australian government and RBA are responsible for the consequences of the bubble.  This is the housing bubble, and the uneven Australian economy.

You see, depending on how much of that $10.5 billion BHP Billiton repatriates to Australia, it could boost credit spending in the Australian economy by up to $90 billion!

And what’s more, make the economy even more uneven and stoke more asset bubbles.

Simply because the money deposited into the Australian banking system is used by the banks to create money from thin air, which it lends to borrowers.  In the case of the Commonwealth Bank [ASX: CBA], over 50% of those loans go toward propping up the housing sector.

The numbers are similar for the other banks.

So you end up with one asset bubble supporting another asset bubble.

For instance, say $1 billion of BHP’s profits ends up at the CBA.  The CBA will lend $900 million – 50% of it to home buyers.  If a home buyer buys a home from someone who is also a CBA customer then they’ll deposit that cash back in the CBA, which the bank will then use at capital to lend more money… and so the pyramiding continues.

All the time the depositors believe they have full access to their savings.  In reality if all savers tried to withdraw their savings on demand – as they are entitled to – there would be a bank run and the banks would collapse.

Simply because at any one time the banks only have around 4 cents in cash for every $1 on deposit!  Check out any of the banks’ annual reports if you don’t believe me.

Eventually, BHP’s $10.5 billion profit has resulted in a credit expansion to boost the housing bubble – and anything else bought with credit – by another $90 billion.

There’s a stimulus for you.  We’d have thought the pollies would be happy with that.

That’s how asset bubbles are formed.  And right now Australia has two of the biggest asset bubbles going.

Everything looks fine as long as it lasts.  But the housing sector is already hanging by a thread.  And based on what we’ve seen of the housing market, even BHP’s massive profits may not be enough to stop this bubble from popping and causing chaos.

That’s what happens with pyramid and Ponzi schemes.  They outgrow themselves.  They reach a critical point at which the growth is unsustainable.

So if things look bad now, when the easy money from the resources sector stops flowing through to the banks, just as one bubble boosted the other, so will the popping of the resources bubble finally kill off the housing sector…

And because of the uneven economy it’ll have big and bad consequences for the rest of the Australian economy too.

Regards,

Kris Sayce
for Money Morning Australia

There’s nothing like a bit of Middle East and North African violence to get the markets gurgling.

For the past six months the US market has straight-lined from 1,050 to 1,350 almost without taking breath.  That’s a 30% rise:

(Click to enlarge) Source: Google Finance

Central bank money-printing will do that to the stock market.

Since August, the US Federal Reserve has spent USD$431.3 billion buying US government bonds.  All of it done using freshly created electronic cash.

Why would that push stock prices higher?

A few reasons.  One is as bond holders sell bonds to the Federal Reserve some of the fresh cash is moved into the stock market where yields and capital growth are potentially higher.

Another reason is that traders and speculators are trying to pre-empt a future movement from bonds into equities.  As more money is created, traders foresee that this will filter into the economy – to improve company earnings – and will cause asset prices to rise.

Simple.

But the past week shows you that even central bank money-printing can’t stop the market from falling when investors panic.

If you look at the S&P500 volatility index (VIX) you can see investors have started to panic:

Source: Yahoo! Finance

Last night the VIX jumped 26%!

If you’re not familiar with it, to put it simply the VIX measures expected volatility in the US market.  It’s based on the price of call and put options.

You see, volatility is one of the price determinants of a call and put option.  If traders expect volatility to be higher sellers of an option will demand a bigger premium.  And if volatility is expected to be high, buyers of an option will expect to pay more because they see a greater chance of prices moving by a bigger margin.

In other words, if an options buyer believes a stock could move from $20 to $25 within the next month then they’ll pay a bigger premium for an options contract.

Whereas previously if the options buyer believed a stock would only move from $20 to $22 within the next month then they’d only be prepared to pay a lower premium – and the same goes for falling share prices.

The boffins at the Chicago Board of Options Exchange take this data, feed it into their super-computer and hey presto, out pops the VIX index.

If you don’t understand it, don’t worry.  All you need to know is the higher the index level the greater the expected market volatility.

A longer term view of the index will show you what I’m talking about.  As you can see on the chart below, the VIX index spiked above 80 in late 2008 as markets crashed:

Source: Yahoo! Finance

Today it is above 20, following the 26% move last night.

Now, it doesn’t necessarily mean the market will fall. It just means investors believe the market will be more volatile over the next thirty days.

And they’ve every reason to believe that.  Recently I wrote to you about the spread between West Texas Intermediate crude oil (the North American benchmark oil price) and the Brent crude oil price (the European benchmark oil price).

Historically WTI trades at a premium to Brent because WTI is the preferred oil for refiners.  But since the action started to kick-off in the Middle East and North Africa, Brent has taken off.

So that today Brent is trading at a USD$12 premium to WTI.  And that’s even with an 8.5% rally in the WTI contract last night!

Interestingly, crude has outperformed all other commodities.

Trading days like last night show you just what’s in the mind of investors.

In recent weeks, punters have loaded up on risky assets – small-cap stocks, base metals, and soft commodities.

They’ve mostly backed those assets because of the inflation trade – the central bank money-printing I’ve mentioned previously.

But when punters get scared… they get out.

Soft commodities, which have rallied hard, took a bath last night.  The Chicago Board of Trade (CBOT) wheat futures contract dropped 7% as it went limit-down.  Many futures contracts have a price breaker.  It means the price can’t move up (limit-up) or down (limit-down) by more than a certain amount.

In this case the wheat contract dropped by as much as the exchange would allow and therefore trading stopped.

The soybean contract took a beating too, falling over 5%, while corn was down 4%, cotton down 3.6% and rice down 3.3%.

This tells you punters have dropped off the broad inflation trade in favour of the oil supply risk trade.

And don’t forget, even though Libya only exports about 1.4 million barrels of oil per day, if this supply is cut or reduced, it will have an impact on oil prices – that’s why futures prices have jumped.

Normally, the difference between supply and demand is tiny.  Where supply is no more than a few hundred thousand barrels per day more than demand.

But take a look at the charts below to see what’s happened through 2010.

First the supply chart from the International Energy Agency (IEA):

Source: IEA

I’ve highlighted the most recent quarter and the 2010 average with a green box.

You’ll note the world supply for the last quarter was 88.2 million barrels per day.  And the average for 2010 was 87.3 million barrels per day.

Now look at the demand chart.  Again I’ve highlighted the most recent quarter and the 2010 average:

Source: IEA

The last quarter average demand was 88.9 million barrels per day and the average demand for 2010 was 87.7 million barrels per day.

If you do your sums you’ll figure out that demand exceeded supply for the first time since 2007.  In the last quarter by a whopping 700,000 barrels per day.

In other words, based on these averages, the market had to dip into reserves to keep up with demand.

And the last time demand exceeded supply we saw crude oil prices jump to nearly USD$150 a barrel.  Could we see a repeat?

Who knows, but if supply doesn’t pick up then there sure is a chance that the price could spike further, regardless of whether things hot up in North Africa and the Middle East.

And it’s the high commodity prices that create a problem for the Federal Reserve.  The more money it prints, the higher commodity prices will go.  But the higher commodity prices also increases costs for businesses and individuals.

That makes it harder for them to save.  And it makes it harder for businesses to take on more staff.  Plus it also means a greater proportion of income going towards energy costs rather than other items.

The upshot is the Federal Reserve needs to print even more money to try and prop up the economy, which… as you can guess means even higher commodity prices.

That’s how inflation harms the individual.  Because the individual is always the last to receive the inflated dollars – governments, bankers and vested interests get the cash first.  By the time individuals get their hands on the new cash, prices have already risen.

It’s why the so-called economic recovery is a sham.  Remove the monetary stimulus and the economy will fall in a heap.  Yet keeping the stimulus won’t help.

It only results in increasing further the living costs of individuals.  And increasing the costs for businesses.

Within the next few months the global economy will reach another potential turning point.  If the Fed believes its own spin about the recovery and stops printing money, the descent into a recession will soon follow.

Yet if the Fed continues to print money asset bubbles could blow out further, resulting in an even bigger recession (or even depression).

The fact is, it’s a lose-lose situation for the Fed whatever it does.

Regards,

Kris Sayce
for Money Morning Australia

Gold is up.

Silver is up.

Oil is up.

And the Middle East is up… in smoke.

“Gaddafi rumoured to have fled Libya” claims today’s The Age.

“Oil groups prepare to close down in Libya” reports the Financial Times.

“Moroccan protestors call for curbs on king’s powers and end to corruption” and “Riot police crack down in Algiers”, reveals France 24.

“Bahrain Grand Prix off after anti-government protests”, reveals the British Broadcasting Corporation.

Meanwhile in the US state of Wisconsin, Fox News reports, “Wisconsin Republicans on Sunday upped the pressure on Democrats who fled to Illinois to return home and vote on an anti-union bill, with the governor calling them obstructionists and a GOP [Grand Old Party, aka Republican] lawmaker threatening to convene without them.”

The world is going feral.

And it’s about time.

Meanwhile Australia’s resources boom keeps on going.

This morning mining titan BHP Billiton [ASX: BHP] announced:

“An off-market tender buy-back (Off-Market Buy-Back) of BHP Billiton Limited shares that will form an important part of its expanded US$10 billion capital management program.”

The total size of the buyback will be around $5 billion.

That’s roughly equal to 3% of BHP’s current market capitalisation.  Not surprisingly, in early trade this morning, BHP shares are up just over 3% to $47.29.

In addition, BHP will spend USD$4.75 billion to buy shale gas assets from US firm Chesapeake Energy Corp.

That brings total spending to a touch under USD$10 billion.  I guess you can do that if your company has just pocketed a USD$10.5 billion half-year profit.

In fact, considering how much red there is on the Aussie market this morning, it’s only the news of the buyback that’s keeping the index from being further in the red.  As I write, the S&P/ASX200 is only down 0.1%.

But the US shale gas play is interesting.  Gas has been one of the unloved commodities over the past twelve months.

While it has rebounded after hitting a low of USD$3 in 2009 and again late last year, it hasn’t put in the kind of price gains we’ve seen in the hard commodities – such as iron ore, copper, tin, etc.

Part of the reason is the gas glut in the US market.  The exploitation of unconventional gas, such as shale gas, has helped keep a lid on gas prices.

But it seems BHP isn’t the only major stock with an eye on gas.

The Financial Times reported yesterday that:

“BP [British Petroleum] is to make a $7.2bn thrust into India by taking 30 per cent stakes in vast but difficult natural gas blocks controlled by Mukesh Ambani, the country’s richest tycoon.”

It is “the biggest foreign investment in Indian energy and among the largest in any sector”.

As you may know, we took a big punt on Aussie natural gas stocks between 2008 and 2010.  In most cases the punts paid off.

LNG Ltd [ASX: LNG] was one of our best performers. We told subscribers to buy for around 35 cents and sell for around $1.20:

Source: CMC Markets Stockbroking

MEO Australia [ASX: MEO] was another ripper.  We tipped it at 15 cents mid-2009 and sold five months later at 48 cents:

Source: CMC Markets Stockbroking

It’s a sector we’ve looked at getting into again.  In fact, just a couple of months back we did tip another unconventional gas play.

And with hard commodities already having put in big gains, now could be the time to start looking at the unloved natural gas sector.

Especially as major crude oil discoveries become harder to find.

As we look at the price chart for natural gas…

Source: tradingcharts.com

…we can’t help feeling that buying in while the price is low and the sector is out of favour could pay big dividends for those brave enough to take the punt.

I’ll certainly be watching it closely this year.

Regards,

Kris Sayce
for Money Morning Australia

Another weekend, another blabfest.

G20 finance ministers met in Paris.  It seems they’ve agreed to hold another blabfest in April in some other fancy hotel in a fancy city.

Meanwhile, according to The Guardian, just 1992.5 kilometres away:

“Libya is defying international condemnation of a bloody crackdown that saw troops and mercenaries shooting unarmed demonstrators as the crisis spread to Tripoli and the death toll rose to more than 200.”

At the same time we noted:

“The [US] Senate on Tuesday voted to extend for 90 days the legal life of three post-Sept. 11 terrorism-fighting measures, including the use of roving wiretaps, that are set to expire at the end of the month.”

In the Middle East individuals are dying in the streets as they try to fight against despotic rulers.  In the West individuals are told their rights must be infringed in order to protect their freedom!

It’s a funny old world.

Not that the West will worry too much about what’s happening in Libya.  As long as the trouble stays within its borders.  As The Guardian also notes:

“Libya, once treated as a pariah, has been embraced by western countries hungry for oil and lucrative investment opportunities since Gaddafi abandoned his support for terrorism, but there has been very little easing of domestic repression.”

But, the G20 had more important things to consider.

The finance ministers and central bankers needed to figure out how to prevent the next economic nightmare.

It looks as though they’ve just about got it nailed down… if you believe this communiqué that is:

“While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.”

What?

Simply put it means the G20 is doing its darnedest to look as though it’s doing something.  To look as though it can do something.

Having blabbed on for months about developing indicators that will help signal a potential economic meltdown, it seems they’ve finally settled on the bunch of statistics they’ll use.

Trouble is, how are these supposed indicators going to work?  What will be the benchmarks?  What level of debt is good, bad and just fine?

A recent report in The Washington Times stated:

“President Obama projects that the gross federal debt will top $15 trillion this year, officially equalling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years’ time.”

We wonder where that will show up on the new G20 indicators – good, bad or just fine.

And what about American personal debt levels, which according to the US Debt Clock now stands at USD$16.2 trillion.  Although a survey by the Federal Reserve Bank of New York claims it’s really just a paltry USD$11.4 trillion.

Is that good, bad or just fine?

At the other end of the scale is Australia.  The Australian Office of Financial Management (AOFM) – the government’s money managers – states total Australian government bonds on issue are $180.5 billion.

That’s just a fraction of US debt.  So we’d have to think that’s good.  In fact it’s roughly 1% the size of US government debt.  So we’re OK.

Australia should be able to pass through the G20 financial body scanner clean as a whistle.

[Beeeeep!]

Oops!  What was that?

“Can you remove your belt, shoes and pants sir, you seem to have a personal debt problem secreted somewhere.”

Ah yes, Australian private debt.  The Reserve Bank of Australia (RBA) tells us that residential and personal debt totals $1.107 trillion…

Or, to put it another way, $49,064 per Australian citizen.  If you compare that to US personal debt levels, there’s not so much of a difference.  Personal debt per US citizen is $52,093.

So where’s that going to show up on these fancy new indicators?  Good, bad or just fine?

But back to public sector debt levels.  The following chart includes the debt levels of the four European members of the G20 – Italy, Germany, France and the UK:

Source: citizeneconomists.com

These levels are already above the maximum determined by the two-decade old Maastricht Treaty.  Exceeding the treaty is supposed to result in a fine for the EU member country.

In that case maybe they won’t worry about public sector debt levels after all.  No, much better to look at private sector debt where Germany, France and Italy appear to be much better off in comparison:

Source: Progressive-economy.ie

These are older numbers (2008).  But it shows you if Australia was on this chart, it would be on the left-hand side with the highest level of private sector debt as a proportion of GDP.

No wonder they’re waiting until April to decide how these supposed indicators will work.  And we haven’t even looked at government budget deficits and savings rates, and all the other mumbo-jumbo the G20 says will act as a warning sign to the next crisis.

As we’ve shown before, the more the policymakers claim they’re working to prevent another crisis, the greater the chances another one will occur.

It’s the meddling what does it.  The very idea that twenty nations – actually more than that when you consider the European Union representation on the G20 – can set aside their own agenda and objectively agree on independent indicators is ludicrous to start with.

I mean, let’s even play along and say that high public debt levels are a sign of a future crisis.  Can we really imagine the US, Italian, French, German and UK government’s agreeing to any level below their current levels of public debt?

Of course not.  It would be an admission of guilt.

By the same token, could we expect the Australian government to agree that personal debt above – for example – 70% of GDP is bad for an economy?  Again, of course not.  Not when it’s currently at 100% of GDP.

No, the blabbing will continue.  The pointy-headed finance ministers will strut around telling you everything is being fixed… that everything is under control.

Meanwhile, as they play with their new indicators they’re trying to hide away the two indicators that show the true state of the global economy and where it’s heading – interest rates and inflation.

Having fiddled with both of them for short-term political gain even they must realise the current financial system is broke.  But rather than admit it, they prefer to create another diversion.

They hope by the time the next crisis hits they’ll be out of office and living off a state pension.

Of course if things go really wrong, they may need to call in a favour from one of the despotic dictators they’ve helped prop-up for years.  Perhaps that’s why Western leaders have been so slow to criticise the Arab rulers.

After all, one day Obama, Gillard, Rudd and Cameron may need to give Gaddafi and his pals a call and ask him if he’s got a spare room available!

Regards,

Kris Sayce
for Money Morning Australia

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

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

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

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

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

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

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

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

Selling Shares

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

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

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

What do you do?

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

Source: CMC Markets Stockbroking

Or, it could look something like this:

Source: Comsec

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

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

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

Source: Comsec

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

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

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

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

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

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

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

Source: CMC Markets Stockbroking

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

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

This would make you $2,170.

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

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

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

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

Getting Your Money

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

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

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

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

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

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

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

Like last week, I hope that’s helped.

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

Cheers.

Kris Sayce
For Money Morning Australia

Money Morning Highlights of the week:

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

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

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

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

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

“Keep preaching doom and gloom boys.  I’m riding the S&P500 to heaven.”

That was the entire content of an email we received in the Money Morning mailbag yesterday.

It was sent by a broker or trader at a well-known Australian investment firm.

Maybe he’s taken a leaf from Goldman Sachs’ CEO, Lloyd Blankfein who told The Sunday Times in 2009 he was “doing God’s work.”

So it must be true.  Punt on the S&P500 and you get a first class ticket to Paradise.

And if the trading record at JPMorgan is anything to go by, the traders there will need to book a fleet of coaches to drive through the Pearly Gates.  Earlier this week Zerohedge.com reported:

“Of 260 trading days in 2010, the firm [JPMorgan] lost money on 8, or 3.1% [of the days]… the firm made money 96.9% of the time.  We’ll repeat that: JPM made money 96.9% of the time.”

Before you rush off to open a brokerage account with JPMorgan, just remember it doesn’t mean JPMorgan’s clients made money 96.9% of the time.

That’s just the profits the bank makes for its own trading desk and traders.  And it’s all thanks to the inflated dollars investment banks like JPMorgan receive from the US Federal Reserve and then punt into the market pushing prices higher.

So, getting back to the reader who sent us the note, you’d have thought he would have said thank you to Money Morning readers first.  After all, if it wasn’t for your taxpayer dollars bailing out the big investment firms, our broker/trader reader would probably be washing windscreens at intersections – “no thanks mate, my car’s got this amazing device called windscreen wipers”.

That said, we’re sure there must be a quicker way to get to Heaven.

Taking into account the rising Aussie dollar, the S&P500 has added just 11% since the start of last year.  That’s not too bad.  Unless you compare it to some rather more impressive results…

Such as comparing it to the average 41% gain my good pal and colleague Dr. Alex Cowie has bagged on the stocks he’s picked since then in his Diggers & Drillers service.

That’s an outperformance over the S&P500 of more than three-to-one!

Which – and it pains us to say it – is even better than the average 35% gain on the stocks we’ve picked in Australian Small-Cap Investigator over the same time.

But at least it confirms what we’ve said about the banks getting their hands on inflated dollars first.  That’s why asset prices are soaring… but we’re not sure they’ll quite make it to heaven.

The bankers most certainly won’t anyway.

But that’s not what we wanted to talk to you about today.

We were rather struck by the media release we read from satellite TV operator Austar:

“AUSTAR and NBN Co today announced they have entered into an agreement which sees NBN Co acquire AUSTAR’s 2.3 GHz and 3.4 GHz spectrum holdings, enabling NBN Co to roll out a high-speed fixed wireless service to rural and regional areas…

“Under the deal, NBN Co will acquire AUSTAR’s 2.3 GHz and 3.4 GHz spectrum licences for $120 million.  The $120 million payment comprises $58 million for the subsidiary that holds the spectrum licences, with a further $62 million for the assignment of this subsidiary’s debt.”

Is there no end to the costs being incurred by NBN Co?  $11 billion here, $120 million there.  But it was the next line that raised our curiosity:

“Mr Porter noted that the NBN Co deal differed from AUSTAR’s 2008 deal with Optus and OPEL, which included a combination of cash and various wholesale arrangements.”

So we did some digging.

Here’s what the Sydney Morning Herald had to say about a deal between Optus, Elders and Austar in 2008:

“Under the deal, the OPEL Ventures, Optus and Elders, will acquire Austar’s 2.3 gigahertz and 2.5 gigahertz spectrum licences.

“Austar will receive $65 million and enter new wholesale arrangements under the deal, which is subject to various conditions.”

In the end, the deal fell through because the OPEL regional broadband plan never happened.

But it makes you think doesn’t it.  We’re told by the NBN-lovers that one of the reasons why the NBN will cost $43 billion is because Australia is such a big country.  Therefore it makes sense that an Australian national broadband network would cost $43 billion whereas South Korea’s broadband network will be a fraction of the cost… even though speeds will be ten-times faster.

You may have seen the research conducted by The Economist, including the following chart:

Yet we’re struggling to figure out how Optus was prepared to roll out a regional broadband network at a cost of only $65 million.

After all, if the size of the country is the reason behind the huge cost, then surely the city component of the NBN should be less than the regional component.  But let’s be serious about this, Australia has no more than a dozen or so major population centres.

The cost to connect the homes in these areas to a fibre network shouldn’t cost any more than connecting homes in the UK or France or South Korea to a fibre network.

But not only that, we’re also trying to figure out why the NBN Co figures the same spectrum, the one that Optus was only prepared to pay $65 million for, is now worth nearly twice that amount – $120 million.

Could it have anything to do with the NBN Co spending taxpayer money willy-nilly?  Whereas Optus as a private company was keen to keep as much as possible of the government money it expected to receive.

We think it could.

And to make matters funnier, earlier in the week we noticed the headline: “Telstra to launch super-fast 4G network”.

According to News Ltd:

“Telstra chief executive David Thodey said the new network would typically deliver downloads between 60 and 80 megabits per second, or enough to download a song in three seconds or deliver ‘high-definition video calls.’”

Interesting.  The cost to the taxpayer?  Directly, nothing.  Indirectly, we’ll guess the $11 billion Telstra will receive from NBN Co will help nicely, and still leave it with plenty to pay for further staff redundancies!

But our guess is this is something Telstra would have done anyway, regardless of the windfall payment from NBN Co.

That’s compared to the NBN which the same article claims will deliver “minimum speeds of 100 megabits per second…”

The cost?  $43 billion.

Is it really worth $43 billion just to get an extra 20-40 megabits?  Is it worth it so you can download a song in two seconds rather than three?  Of course not.

Think about it, internet access speeds have soared over the past ten years, without any interference from the government.  Given time, private enterprise will deliver a service comparable to the speeds offered by NBN Co, but it would come without the $43 billion price tag.

When government meddles, disaster results.  Look at the MyKi debacle in Melbourne.  That’s how government tries to run a business.  And if you think the NBN will only cost $43 billion then you’re dreaming…

You can double or triple it and you’ll still come up short on what the real cost will be to the taxpayer.

But there’s no better example of government meddling leading to disaster than the collapse of Australian bookstores Borders and Angus & Robertson.

Less than two years ago, The Age reported:

“Abolishing import restrictions on books would be economic and cultural vandalism, according to John Brumby.

“The Premier, often regarded as a pro-markets [ha, ha] economic rationalist, has slammed the Productivity Commission’s call for an end to the protection of the local book industry.”

The report went on to reveal the reason behind the former Premier’s opposition to book imports:

“Mr Brumby, who says his Government’s key priority during the global recession is the protection of jobs in Victoria, is especially concerned about the future of Maryborough-based book printing company McPherson’s Printing, which employs about 300 people.”

Again, a classic example of politicians trying to pick winners and losers.  In this case the government picked the 300 people at McPherson’s to win, at the expense of thousands who will lose their jobs in book stores.

According to the ABC:

“As many as 200 Angus & Robertson and Borders bookstores could be sold off or closed with the prospect of thousands of job losses after parent company, REDgroup Retail, was placed in voluntary administration.”

As all governments do, they think they can buck the market.  They stupidly believe that a tariff or restriction on one industry will automatically result in a benefit for another industry.

Too late they learn that markets don’t work like that.  And too  latethey realise that both industries lose.

And so, thousands of people set to lose their jobs because the federal government wouldn’t allow bookshops to import cheaper copies of books.  But we’ll also guess that McPherson’s will lose out as well.

Plus Australian writers will lose out too.

Ironically, this is the group that pushed as hard as anyone to prevent cheaper books from being imported.  They feared that if consumers could buy cheaper books by foreign authors it would stop consumers buying more expensive books from local authors.

In reality, as you know, consumers just stopped going to local bookshops.  And that meant consumers didn’t see the books of local authors on the shelves anyway… and so consumers just bought cheaper books by foreign authors.

Using websites such as Amazon or Bookdepository.com.  And why wouldn’t you when the price is 50% cheaper.

So, we sympathise with the local bookshops because it’s not all their fault.  They mostly lobbied to remove the import restrictions.  The blame for their demise can be targeted at one place only – government.

It is government interference that has pushed another Australian company out of business.

Just as it is government interference that pushed most of the manufacturing sector out of business or offshore.  Book buying has been offshored just like the manufacturing of garments has been offshored.

At the rate things are going, soon enough the service industry will follow in the footsteps of the manufacturing industry and all Australia will have left is mining… which the pollies are also doing their best to tax out of existence.

As today’s Australian Financial Review notes:

“Two parliamentary independents expressed serious concerns about the government sacrificing $60 billion in its revised mining tax, while the Australian Greens called for it to be reviewed at the tax summit.”

Tax, tax, tax… is there nothing else these overpaid, glorified councillors can do?

They falsely think that China has no choice but to buy Australia’s resources, but it does have a choice.  Not only that but mining companies have a choice as well.  If they don’t expect to reap sufficient profit to offset the huge risks of mining then Aussie miners will go elsewhere – to Africa, Asia or South America.

Because they’ve got resources too.

Not satisfied with destroying every other industry, the government is on the verge of killing the goose that is laying lots of golden eggs.

Regards,

Kris Sayce
for Money Morning Australia

Despite prices rising 338%, global gold demand in 2010 was like the decade-long bull run hadn’t got started…

WESTERN SAVERS hoping to defend their standard of living as global incomes converge take note.

Ten, even five years ago, precious-metals analysts thought rising incomes in Asia would see gold substituted for financial services or consumer goods. But China’s private demand has more than doubled as a proportion of gross household savings. Based on the World Gold Council’s latest data – issued today in the market-development and research group’s new Gold Demand Trends report – India’s private consumption jumped in 2010 to a new all-time record of more than 963 tonnes.

That’s equal to 2.65% of GDP on the IMF estimate. On BullionVault‘s analysis, it equated to more than 11.5% of India’s gross household savings.

Yes, the data are subject to revision, of course. They can only ever be an estimate, too.

But for Western savers hoping to defend their standard of living, it’s plain commonsense to buy a little of what Asian households are using to store ever more of their fast-growing wealth.

Looking at today’s Gold Demand Trends report, you can forget about central banks (net gold buyers in 2010 though they were, as a group, for the first time in two decades). Don’t dwell on “safe-haven” Western demand either (other than to note how new ETF demand and “unallocated” trading in the wholesale, off-exchange market both slipped 45% from 2009′s record highs, while coin and bar demand surged worldwide). Indian and Chinese private households are the knock-out story from 2010′s data. The Indian figures in particular beggar belief.

The world’s two most populous nations, its fastest-growing major economies, and numbers one and two for physical gold buying, both India and China set new records for private gold demand by value and volume in full-year 2010. On our reading of the new World Gold Council data, per capita consumption also set fresh records in the top two demand countries.

Rising inflation and sub-zero real rates of interest are setting the pace, just as they did during gold’s developed-world bull market of the 1970s. Productivity and real wages are rising, however, in sharp contrast to the economic path the rich West took four decades ago. So Asia’s deep love of gold – and ever-deepening pockets – suggest a different path, perhaps, from the post-bubble slump which gold prices suffered amid the record-high interest rates paid to cash savers to defeat Western inflation at the start of the ’80s.

Developed-world gold investment rose amid the financial crisis starting 2007, even as world jewelry demand sank. Emerging Asia tempered and even reversed its buying as global GDP turned down, with private consumers in India – a net importer every year since the Great Depression (the world’s No.1 consumer has got virtually no domestic mine output) – actually becoming net exporters of gold in the first quarter of 2009.

The economic rebound, so much more pronounced in emerging Asia than the rich West, has seen those trends switch over. Because even with the Eurozone deficit crises driving a jump in physical demand for gold bars and coin (particularly in Germany), net demand for new units of gold ETF shares actually slipped 45% from 2009′s record. So too did “unallocated” trading in London’s wholesale market.

You’ve got to go a long way to over-state the strength of physical gold demand in 2010. The Dollar price rose 26%, but total global demand still grew 9% by volume, hitting its highest tonnage since the long bear market of the 1980s and ’90s hit rock-bottom in 2000.

Gold then averaged $279 per ounce, rather than 2010′s average of $1224. Yet in tonnage terms, global physical demand – led by emerging Asia’s big giants – was like the bull run hadn’t even got started.

Adrian Ash

For Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com

In the early 1990s there was a show on UK television called the Harry Enfield Television Programme.

It was a sketch-based comedy that ran for several years.

One of the characters was called Mr. You-Don’t-Wanna-Do-It-Like-That.

On seeing his daughter and son-in-law doing a spot of DIY the old giffer would barge in and say, “You don’t want to do it like that, you want to do it like this.  You don’t want to paint it purple, you want to paint it blue, etc…” – or variations on the same theme.

It was funny at the time, and for all we know it still is.

We were reminded of the character after reading a transcript of US Federal Reserve chairman, Ben Bernanke’s interview with the Financial Crisis Inquiry Commission (FCIC).

The FCIC was set up by the US Congress to supposedly figure out why the 2008 global meltdown happened and what can be done to prevent it happening again.

Recorded interviews and transcripts were released by the FCIC last week.  Well, most of them anyway.

Late last week Bloomberg News reported:

“The Financial Crisis Inquiry Commission… won’t publicly release its full 2009 interview with Federal Reserve Chairman Ben S. Bernanke… The interview is among records being transferred to the National Archives that will be made public in five years.”

It didn’t take long for the FCIC to back down and change its mind.  A transcript of Bernanke’s November 2009 interview with the FCIC has now been made public.

On reading it, it comes across as the biggest attempt at creating a diversion since the D-Day landings nearly seventy years ago.

Let me show you with some examples lifted directly from the transcript:

“One general area you’re going to want to look at is the macroeconomic context…”

“The third explanation, which I’m sure you’ll investigate…”

“Some have argued – and I’m sure you’ll look at it…”

“So that’s the general topic of macroeconomic context, which I’m sure you’ll want to look at.”

“I’m sure you’ll look in detail at housing finance…”

“I’m sure you’ll want to look at the credit-rating agencies.”

“You know, was the Basel framework adequate?  I’m sure you’ll look at that.”

“And finally, under the heading of regulation, ‘too big to fail,’ you’re going to look at that, I’m sure, in great deal.”

“I think the issue of the shadow banking system is very important… and I think you need to think about that.”

“So those are some things you might otherwise perhaps miss.”

“I think you’ll obviously have to look at both the risk management in the private sector and the supervision regulation of the government regulators.  So I don’t think – I’m sure you’ll have to look at those things as well.  But I wanted to point out a few things from a perspective that you may or may not have otherwise looked at.”

Gosh, what a helpful chap Dr. Bernanke is: “Look over there, look in that direction, but whatever you do, don’t look at the Federal Reserve!”

Clearly chairman of the commission Angelides had just about had enough of Dr. Evil’s advice.  By the time we get to page 19 of the transcript:

“All right, I think what we’d like to do is go around and pose questions to you for the time you’re here.”

It would be nice if the FCIC had released a recording of the interview.  We’d like to hear whether Angelides put any emphasis on “you” in the quote above.  In other words, “We’re asking the questions Doc, you provide the answers.”

But at least Bernanke does go on to say, “I fully admit that I did not forecast this crisis.”

Yet this is the man the markets now have full faith in getting the global economy rolling again… rolling into a ditch if you ask us.

However, it’s not long before Dr. Evil is back throwing smoke bombs and creating diversions:

“So that’s something you ought to look into.”

“So I welcome your – you know, your attempts to unravel this.”

And of course, as someone who admits to not forecasting the meltdown, he’s keen to make sure the commission doesn’t believe that anyone did forecast the meltdown:

“But I think notwithstanding the claims of one or two people out there who are now sort of living on the fact that they, quote, anticipated in the crisis, I would still say that the interaction of these things, the ‘perfect storm’ aspect was so complicated and large, that I was certainly not aware, for what it’s worth… but I was not aware of anybody who had any kind of comprehensive warning.”

Really?  Clearly he’s never come across the Austrian School of economics.  Economists such as Ludwig von Mises, Murray Rothbard and others have banged on about it for about 100 years.  Ever since central banking took hold in Western economies.

Which is a bit odd, because we’re pretty certain Representative Ron Paul has mentioned the Austrians once or twice over the years, when Bernanke has appeared before Congress.

But perhaps the most stunning aspect of the transcript is that it’s not until page 73 that the commissioners bring up the question of the Fed’s interest rate policy.

As I’ve written many times, the rate of interest is the most important signal in any economy.  Simply because it’s so versatile and useful… it represents the price of money, it signals the demand and supply for money, and it acts as a risk indicator to investors.

The rate of interest tells the market how much money is.  The rate of interest lets investors know whether the market wants more money or less money.  And it also tells investors how risky an investment is in comparison to another investment.

Clever huh?

Trouble is, when you’ve got central banks pulling levers and pushing buttons, and artificially changing the interest rate on a whim, the market becomes distorted.

The Fed lowers interest rates and so people don’t save, they borrow instead.  Now, it could be argued that’s fine to begin with.  The problem comes when the rate is fixed too low – or too high – for too long a period.

In a free market for interest rates, the rate of interest would adjust automatically.  It may only stay at a particular level for a few hours or a few days.  It most certainly wouldn’t only move up or down on the first Tuesday of each month – that’s when the Reserve Bank of Australia (RBA) meets and changes interest rates.

In a free market for interest rates, the interest rate would constantly adjust to take into account the demand and supply of money.

So given the importance of interest rates in an economy, and given that Dr. Bernanke is in charge of the body that sets interest rates in the United States, you’d think the FCIC would devote much of the interview to… interest rates.

But no.  Banks and derivatives was their game.  It seems Bernanke’s diversionary tactics paid off.

It wasn’t until page 73 that Commissioner Holtz-Eakin asked:

“I want to ask the flip side of John’s question on the actions that could have been taken and just to toss you the softball to sort of just address this narrative…”

A softball!  What about a hardball?

For goodness sake, this far into the interview and he only throws the Fed chairman a softball.  Anyway, the commish continues:

“…that it was the Fed/Treasury policy and these actions that made this worse.  And I think you know this story: Rates too low for too long, creating a housing bubble, failure for supervision oversights, standards on mortgage origination… and then the things explode.”

After blathering about and the commissioners cracking jokes about softballs and balls of wax(!) Dr. Evil replied:

“I think the Fed – the Fed made some mistakes… I don’t think that our interest-rate policy was a big source of the problem, both because I don’t think it was obviously the wrong policy…”

And then he goes back to the diversions again… lack of regulation… lack of supervision, and so on.

In fact, early in the interview Bernanke states:

“So I guess my own view is that if the system had been adequately stable, had strong enough supervision… it could have dealt with this problem or other problems without collapsing.”

Those comments pretty much say it all.  And it confirms everything we already knew.  That not only are the central banks directly responsible for the current financial crisis, but they are directly responsible for its continuation and descent into the next one.

Dr. Bernanke couldn’t be more wrong if he tried.  Sure, derivatives and subprime mortgages and excessive risk all played a part, but they weren’t the cause, they were the effect.

The cause of banks creating and pyramiding risk is down to the central banks.  It’s their game of manipulating interest rates and creating and supporting a fiat money system that’s to blame.

If central banks didn’t exist and if governments didn’t manipulate markets for their own ends, the kind of massive global economic disruptions that are now taking place wouldn’t happen.

In a free market, excessive risk taking and attempts at manipulation would be identified much earlier, and not by regulators either, but by consumers and market participants instead.

As long as central banks exist you’ll continue to see massive imbalances in the market.  You’ll see excessive risk taking, and constant periods of boom and bust.

The proof is there for you to see.  And it’s all within living memory.  A massive boom from the early 1980s to 1987 followed by a bust.  Then another boom until 2001… followed by a bust.

The boom started again in 2003 and bust in 2007/2008.  Early 2009 saw the beginning of the next boom… that’s where we are now.  No prizes for guessing what will happen next.

And don’t expect the central bankers to warn you about when it will happen… because they’re the ones pulling the levers and causing it.
Regards,

Kris Sayce
for Money Morning Australia

The gold price kicked off this year with a fall.

It dropped from $1422 / oz, down to a low of $1318 / oz by late January.

This was a fall of just 7.3%, but still this gave all the gold bears something to rant about for a few weeks: ‘It’s the end of the gold bull market’, ‘I told you it was in a bubble’, and so on.

We’ve heard it all before, and we can be sure to hear it all again.

But the fall they were all getting so excited about was really just another tiny dip on the way up.  

Take a look at the top right hand side of the two-year gold chart below.

That little pull-back was what all the fuss was about…..

Gold price continues its steady march upwards

Source: Goldprice.com

More to the point, you can see that the gold price has already bounced since then! It is on its way up already, climbing 4% in the last few weeks. It didn’t take long.

Media reports also focused on the amount of gold being withdrawn from the gold ETF (GOLD). This is the world’s largest gold exchange traded fund (ETF), and apparently holds around 40 million ounces of gold for investors.

But when these investors cashed in on a few million ounces of gold last month, the media were citing it as evidence of the coming end of the gold market’s epic run.

But again, take a step back. This few million ounces was but a fraction of the amount of gold on their books. And moreover, this drop is no worse than ones we have seen in the last few years.

Recent withdrawals from the GOLD ETF barely even register in the big picture

Source: Credit Suisse

Most reporters would have you believe that the GOLD ETF is the only part of the gold market that you need to look at.

But it is just a small part of the puzzle.

CHINA is soon to be the world’s largest gold market.

With four gold recommendations in Diggers and Drillers (which are up 85% on average), it is what’s  been happening in China’s gold market that makes me sleep well at night.

This has always been the main reason I am bullish on gold: the potential demand from the hundreds of millions of newly wealthy, Chinese middle classes.

Not to mention the fact that the Chinese government are doing all they can to promote gold ownership. With a long cultural history of personal gold ownership, this is not a hard sell.

Gold demand in China has now gone ballistic.

It imported 6.7 million ounces in just the first ten months of last year! Compare that to 1.4 million ounces in the full twelve months of 2009.

It’s not just gold either.

Last year China imported 120 million ounces of silver. The year before that it was just 30 million ounces of silver. A 300% increase!

It’s good to know this as another two of the Diggers and Drillers tips are silver plays.  These are up 42% on average, with the most recent one just getting going now.  (You can get my latest research, and take a test drive of my service by clicking here )

Last week I managed to get my hands on some current data for Shanghai gold trading volumes. This is a market that has pretty much started from scratch just a few years ago, but is already now going at full tilt.

It’s hungrily vacuuming up any gold that US investors are silly enough to liberate.

Shanghai Gold Exchange volumes climbing last six years

Source: ANZ commodity research

There are many days where 30million ounces have changed hands, and the 12 month rolling average is now closing in on 20 million ounces daily. This is one busy market.

So with this kind of growing demand from China, it really is hard to see the gold price falling very far, for very long, in the foreseeable future!

The fact is that for all the media coverage of gold, only a fraction of global investment assets are tied up in gold and gold stocks. It’s just a fraction-of-a-fraction of the investible universe.

The thin bar on the bottom right of the chart below is what we are talking about.

Gold is still a small fish in a big pond, for now anyway…
Source: Barrick

Maybe this is the real reason why so few commentators understand the gold market. Because so few are genuinely involved with it!

There are many willing to venture an opinion, but few who really know the gold market. Check out Sprott Asset Management’s commentary to hear it from some of the best.

The good news is that until gold becomes main-stream, there is still a huge opportunity there. When the media start saying gold is good, that’s when I’ll be thinking about selling out!

For the foreseeable future though, in the words of another one of the world’s best gold commentators Marc Faber

‘The risk is really not to own any precious metals at all’.

Regards,

Dr.Alex Cowie
for Money Morning Australia