Shame about Europe's government debt bill. No government is proving great for Aussie investors...
The AUSSIE STOCK MARKET is up 2.8% since the Federal election on August 2nd, if you use the ASX/200 as your proxy, writes Dan Denning in his Daily Reckoning Australia.
This whole "not having a government thing" is working out well for investors, in short. It turns on the uncertainty of having no-one in charge is better than the certainty of having someone in charge. Maybe that will all change this week, though.
To begin with, Friday's jobs data from the US gave the market a positive lead. We're not sure this matters one little bit. True, the private sector in the US added 67,000 new jobs. But that doesn't have a lot to do with Macquarie Group's earnings, does it? Those figures were a bit of a revelation in themselves, as the banking group told the ASX that it expects first half profit to be 25% down on previous expectations.
Macquarie's new number for the half-year set to end September 30th – $360 million – is not small. But it's smaller than expected. Why? Well the obvious answer is that in a deleveraging world with more risk and uncertainty, it's hard to be a profitable investment bank and securities dealer. Mind you, Macquarie is still profitable. But corporations seem less eager to take on debt, so they don't need Macquarie to arrange the offerings. And individual investors are scaling back the volume and frequency of their share trading.
Early Monday, Mac Group's little peek behind the scenes led to an 8% fall in its shares earlier this morning. That took the steam out of a strong start. And for what it's worth, we're wondering when affairs in Europe and America are going to begin weighing on the Australian mind again.
For example, the Financial Times is reporting that Eurozone governments will try to raise about double the amount of cash in September that they did in August. Last month, Eurozone borrowing was only about €43 billion. This month, about €83 billion in new bonds on offer to anyone who will take them.
How will you know if the Eurozone debt problems are hotting up again? Watch the spread between Germany bonds and Irish, Spanish, and Portuguese bonds. In Ireland, the spread between Irish and German bonds of similar durations reached its highest level ever at 356 basis points. There is also a 24-hour strike in France to watch out for.
The French are always good for an entertaining strike. It can be mildly inconvenient if you have to take a taxi, a bus, a train, or have garbage that needs collecting. But it is a French tradition of standing in solidarity with your fellow workers, even if you don't collect garbage, drive a taxi, drive a bus, or engineer a train.
Is it serious, though? Well, it will start to be more serious when people in France, and the UK, and Italy, and Greece, and America realize that austerity measures and reduced government spending and higher taxes all add up to one simple fact: a lower standard of living. When you have to pay lots of big bills out of current and future cash flow, there's less money to save and spend.
This is why we reckon the next stage of the Sovereign Debt Crisis (originally the Global Financial Crisis) will be political and sociological as much as it is economic. But then, economics is really the study of choices people make with money. So all economics is political. It's just going to get political in an angry way in the coming months.
To the extent that angry people are nervous investors, this is probably a good world for traders and a horrible world for pensioners.
For traders in Australia, there is the added element of the new quarterly pricing system for iron ore and coking coal. There's a nifty little article on the back page of today's Financial Review about the subject. The article points out that the increased variability in underlying prices for steel-making materials introduces a new level of variability to the quarterly earnings of iron ore and coal producers.
Does it change the way you value them? We'll ask the stock Doc when he gets back from London on Wednesday. But our view is that the variability in underlying steel-making materials prices is essentially a derivative of fixed asset investment in China (residential and commercial real estate investment in China). If THAT turns out to be a bubble (like we think it is) the volatility in iron ore and coal prices is just a prelude to a 2008-like reversion to the mean.
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