Dr. Doom's Warning for Aussie Investors
Wednesday, 26 October 2011 – Melbourne, Australia
By Kris Sayce - Dr. Doom's Warning for Aussie Investors
- Grand Dames, European Debt and the Red Hot Chilli Peppers
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In today's Money Morning: A Chinese hard landing is a "distant scenario"... Dr. Doom sounds the warning bell for China... Not that much gold under the bed... China's savings backed by - speculative debt... Ooh, la, la...
Dr. Doom's Warning for Aussie Investors
You may have noticed we have a habit of banging on about something until we've bled it dry. We know we should try and mix things up... give you more variety... but, well, that's just the way we are.
When we get our teeth into a subject, it's hard to let go.
Yesterday we noticed this story from Bloomberg News:
"China, the world's second-biggest economy, is heading towards a soft landing, speakers at the Bloomberg Link China Conference in Hong Kong said.
"A hard landing is a 'distant scenario,' Liu Li-Gang, head of Greater China economics at Australia and New Zealand Banking Group Ltd., said at the forum today. China's consumption is 'very strong' as wages jump, backing economic expansion, said John Tang, China strategist at UBS AG."
Funny that. Speakers at a "China Conference" claiming the Chinese economy won't crash.
But that's fine. Just as we don't expect too many speakers at the Sydney Gold Symposium to say we should sell gold because it isn't worth anything.
[Ed note: If you haven't registered for the Sydney Gold Symposium on 14/15 November, you can register by clicking here...]
While our view is gold will go higher, we'll still be sceptical if someone claims gold will reach $40,000 by the end of next year...
It's Only True Until It's Not True
In the same way we were sceptical when Royal Bank of Scotland and Goldman Sachs analysts told the Australian Financial Review in January that the Aussie S&P/ASX 200 index would be higher than 5,600 points by the end of the year.
Today the index is around 4,200 points. It needs to gain 33.3% between now and 31 December to reach that target.
That's why it always pays to listen, but do some of your own homework on the subject as well.
After all, saying China will keep growing because it's still growing is like saying a balloon won't pop because it's still expanding! Both statements are only true until they're no longer true.
But now we've got a new ally. Dr. Nouriel Roubini has joined the China "hard landing" crowd. Dr. Roubini is one of the few economists who correctly predicted the global financial meltdown in 2008.
And now he says Australia will be in trouble if (or in our opinion, when) the Chinese economy crashes. According to the Australian, Dr. Roubini said:
"If China has a hard landing, for a period of time that's going to hurt growth and reduce commodity prices until China recovers and until the rest of the world recovers."
Of course, just because Dr. Roubini says it, it doesn't mean it's true. But it adds weight to the argument that China can't avoid a big economic downturn... and if that happens, Australia will suffer.
But what of the idea that China has a whole bunch of savings to draw from?
Gold Under the Bed
Money Morning reader, Peter sent us a note a couple of days ago. He wrote:
"Chinese save a significant portion of their salary, and now they are allowed to buy gold and silver, a considerable amount of wealth is literally going under the bed and not into bank accounts."
It's true the Chinese are buying gold. Our old pal, Diggers & Drillers editor, Dr. Alex Cowie has written to his subscribers about it. But it's still a tiny proportion of saving.
Let's put it in perspective. China's official gold reserves are 1,054 tonnes. At today's gold price it's valued at USD$57.6 billion. By contrast, China holds USD$1.1 trillion of U.S. Treasury bonds...
In other words, China's official holding of U.S. paper assets is more than 20 times larger than its gold assets.
Also, let's not forget that for every dollar saved in a Chinese bank account, thanks to fractional reserve banking, there are many more dollars issued in loans on the other side of the ledger.
And if Satyajit Das, author of Extreme Money: Masters of the Universe and the Cult of Risk is right, China's savings may not be as secure as most think. Asked by a Bloomberg News reporter, "How can a land as large as China run such a surplus?" Das replied:
"It's unsustainable. That's the lesson we should have learned from 2007. We instead shovelled everything under the carpet, and it's going to come back to haunt us. China's going to have to write off its $3 trillion.
"...Why wouldn't they [the Chinese] suddenly turn around and say, well, we lent you $3 trillion and you're not going to pay us back. So we've written it off and we won't buy any more U.S. Treasuries until the U.S. reforms its fiscal position."
Will anything that extreme happen? It seems unlikely. But then again, according to the U.S. Treasury, China's holding of U.S. Treasuries was the same in August 2011 as it was one year before... USD$1.137 trillion.
China's Savings Backed by Speculative Debt
Of course, China hasn't had to buy Treasuries this past 12 months... because the U.S. Federal Reserve has been in the market as the biggest buyer of government bonds.
So let's not get too excited about China's savings. Most savings in the modern banking system aren't backed by anything other than someone else's debt.
If the savings really were "under the bed" in gold bars then we'd happily accept China's savings could cushion it from an economic downturn.
But it's not. China is no stranger to debt. Its banks have used debt to fuel land, construction and commodities speculations. None of those are safe bets.
Put simply, while Chinese savers may think their savings are held safely in a bank, in reality they're putting their cash into what are little more than highly leveraged and speculative hedge funds.
And as you've learnt before - as recently as 2008 - there's no way such risky investments will result in a happy ending.
Cheers.
Kris.
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Grand Dames, European Debt and the Red Hot Chilli Peppers
By Dr Alex Cowie, Editor, Diggers & Drillers
I'm writing this letter to you from the road in France.
After months of headlines focused on Europe's demise, it is good to get over here and have a look at what's really going on in Europe from street level.
Frankly, you'd never know anything was wrong. The shops in Paris were busy, nothing was reduced in price, and service was just as snooty as it has always been. Grand French dames were walking down the street with enough pearls to pay off the Greek debt. Everyone was so dolled up that when I saw my reflection in the mirror I thought I was looking at a homeless person.
We also went to see the Red Hot Chilli Peppers concert while we were in Paris. Even though they are pushing 50 and tour with their kids these days, the band put on a hell of a show. And despite the ridiculous price of the tickets, the place was still packed to the rafters.
La Economie?
It seemed fine from what I could see.
But so much hangs on the resolution from the meetings taking place. The markets have essentially been treading water most of the week in anticipation of some 'big bazooka' solution.
According to ANZ Commodity Research:
"Risk appetite for commodities has sharply improved... [but last night] commodities ended the session mixed, as sentiment-driven buying on hopes that the European package can stabilise non-core Eurozone sovereigns ran out of steam. Markets remain nervous ahead of tonight's EU summit, with negative European headlines and downbeat US releases driving a negative market tone in a risk-off session...
"Markets were initially buoyed by news that German policymakers had supposedly agreed to vote on a joint motion for the EFSF tomorrow, and that it would likely pass. However, a subsequent headline about tomorrow's EcoFin meeting being cancelled (meeting of the EU's finance ministers) was then misinterpreted as a cancellation of tomorrow's entire debt summit, illustrating just how fragile market sentiment is."
Indeed, commodities were up 3.72% since Friday at last night's close.
But as investors got twitchy last night we saw a couple of big moves in gold and silver...
Gold and Silver jump to 1-month highs...
This probably signals investors are moving back into gold and silver as a safe haven asset and hedge against a currency collapse, just in case the leaders of the European Union fail to come up with a plan to contain the European debt crisis. Or worse, stuff it up.
There isn't much firm news from these meetings to go on yet. We'll have to wait and find out what that resolution will be tomorrow morning...
Until then, I'll continue to watch the market (and mining and resources stocks) with interest... But things are more than ever still in the hands of a few European politicians. And it's worth waiting to see what we're up against before making any big moves.
Dr. Alex Cowie
Editor, Diggers & Drillers
P.S. Despite the current climate, I'm convinced you can still track down profitable small-cap resource companies in this market. In fact, I'm REALLY bullish about three current picks I found using a unique method I devised especially for Diggers & Drillers. I've honed this technique over the last couple of years to help identify the best diggers and drillers on the ASX for my readers.
To find out what it is and how it could help you track down profitable small-cap mining stocks (before the rest of the market finds out), click here...
Related Articles
Why Chinese Monetary Planning Means More Volatility for You
Australia: The World's Investing Casino
Why China's Hidden Debt is Bad News for Aussie Stocks
The Great Indian Coal Rush
The Other Side of Short Selling
From the Archives...
If Demand is High, Why has the Price Dropped?
2011-10-21 - Kris Sayce
China's Hard Landing is Certain
2011-10-20 - Kris Sayce
Money is Worth Nothing and Ships are Free
2011-10-19 - Kris Sayce
The Gold Bubble and China
2011-10-18 - Dr. Alex Cowie
Why You Wouldn't be a Millionaire if Investing Was Easy
2011-10-17 - Kris Sayce
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"Are Our Banks Safe?"
It's a question we've been getting a lot recently from our readers.
Greg Canavan has been researching this very issue.
His answer is "NO".
Find out why in this brand new Investment Warning.
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