Gold News

The Euro Illusion, Facebook Pop & China

What do we want? Everything! Who's going to pay for it? You!

SO LET the recriminations begin! And then the show trials! shouts Dan Denning in his Daily Reckoning Australia from Melbourne.

This whole idea of moving money from the public to the insiders – and maintaining the public's enthusiasm for getting ripped off – is in trouble. It's not just Facebook, either. China has apparently had enough of Europe's family squabble about who will pay the bill for a decade of spending decadence. Today's we look at the complex picture and explain why it must end in catastrophe.

But first the comedy. Sort of. Lawyers are queuing up to ask Morgan Stanley what it knew and when it knew it. Specifically, media reports suggest that the investment bank, one of the underwriters of the disastrous Facebook IPO, may have shared negative earnings forecasts for Facebook with investors just hours before the float.

Not just any investors, though. Certainly not mums and dads or the folks who'd be buying stock. The folks who may have been tipped off about the negative analyst report were institutional investors, the most likely sellers. This may explain why Facebook's shares fell nearly 9% again on Tuesday to close at $31. The shares are now down over 26% from the IPO price. That's a 'pop' alright, but more like a punch in the mouth than the typical easy money made in the aftermarket of an IPO.

Yes, there WAS easy money made in the IPO. But it was by the underwriters and the insiders, not the public. We're not telling you anything you don't already know. But it's probably a good reminder for all investors: for some companies, there's more money to be made mining shareholders than there is digging and drilling for actual resources.

Not all resource companies are like this, mind you. Our mate Alex Cowie came into the office this morning with good news about one of his recent recommendations. Diggers and Drillers readers probably already know what we're talking about.

What's going on in Europe is not dissimilar to the Facebook IPO. One group of people – the EU elites – is trying to take money from another group of people (investors, voters, China) without letting them know it's probably a giant rip off. But the European shell games and brinksmanship have finally taken their toll on Chinese patience.

"The debt crisis is actually much less devastating than the handling of the debt crisis," said Jin Liqun. He's the chairman of the China Investment Corporation (CIC). CIC is China's sovereign wealth fund. It controls $409.5 billion in funds. Europe's bankers and politicians want some of that money to recapitalize its banking sector and fund government deficits. They probably want all of it.

Jin is having none of it. He said that:

"Too much time has been wasted on endless bargaining on terms and conditions for piecemeal bailouts... Since the debt crisis broke out, there has never been a master plan for a resolution. There were only Plan As, never a Plan B."

And then he called down the thunder in terms the Europeans could understand...

"Frailty, thy name is leadership."

Hamlet was angry with his mother for never meeting a King she didn't want to sleep with. In Europe, everyone is...sleeping...with everyone else. This precedes the complexity catastrophe we'll discuss shortly. Everyone is screwing around in Europe, and Jin is worried that the Chinese will get screwed too.

It's not exactly subtle language. But here we are. It's a reality check for the Welfare State and crony financial capitalism. Jin says Europe needs to get on with needed reforms and stop thinking about "illusions of massive relief funds from outside the region" or relying on "the magic of street demonstrations".

That's a Chinese capitalist telling European socialists that there's no such thing as a free lunch. It's also a Chinese pragmatist, having made an allusion to a 'masterplan' criticizing fiscal-policy-by-street demonstration. Someone (else) had to say it. Modern Welfare State democracy – 'What do we want? Everything! When do we want it? Now! Who do we want to pay for it? You!' – is not compatible with balanced budgets and sound money.

That would seem to leave only two alternatives: less democracy or a return to sound money. Which one do you reckon we'll get?

Sigh. We agree.

One thing you don't have to guess about is that this ongoing debt/identity crisis is bad for Aussie stocks. They are down again today by about one percent. This decline may have more to do with China than Europe, though. Some Chinese companies are defaulting on contracts for thermal coal and iron ore, according to the Financial Times. Others have asked traders to defer delivery.

Why would that happen? Maybe because there's heaps of iron ore lying around already, according to this Reuters video. ANZ Economist Nicholas Zhu is trying to separate official Chinese statistics from reality. What he finds are empty warehouses, stockpiles of iron ore being moved from one pile to another, and idle steel mills.

Granted, this is just one picture from a very large economy. But if you were a shareholder in BHP or Rio Tinto (and who isn't, really?) it would have to worry you a little bit.

Rather than worrying, though, we're keeping our eye on the Aussie Dollar chart. The Aussie Dollar is already down over 13% from its all-time high against the USD. You'll know we're in full-blown 2008 crisis mode if the Dollar breaks through last October's level and heads to 80. Of course, we're assured this time around that Australia is a 'safe haven' and a destination for capital in flight from Europe.

We'll see about that. We've gone on record in Australian Wealth Gameplan with our view on the Dollar. What it means for investors is that things can get a lot worse a lot faster than the 'experts' imagine. We hope that doesn't happen. But hope is not a strategy.

Buying Gold...? "If there's an easier way, I've yet to find it," says one BullionVault user...

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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