Why Australia isn’t so Different to Greece

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Your editor is in Australian Small-Cap Investigator mode again this morning, so we may be brief with today’s Money Morning – unless we get carried away…

“Oh stop grumbling and just hand over the money.” That’s in effect what the German government is being told to do with its taxpayer euros.

According to the Associated Press (AP):

“A 45 billion euros ($A64.45 billion) bailout package from other eurozone countries and the International Monetary Fund (IMF) should see Greece through its borrowing needs for this year. But the bailout is complicated by German grumbling, which continued on Monday, about the burden of the bailout on its own finances.”

Do you know what, if your editor was German we think we’d grumble a bit too. In fact if we were German we’d tell the Greeks to stick a Banane^ up their Kokospalme.*

We’ve long thought the Euro currency was doomed to failure. Whether the debts piled up by Greece and other Eurozone countries is enough to cause its collapse is another matter.

But one day – probably sooner rather than later – it will fail. Just like all fiat currencies are destined to collapse.

For an indication of how bad things have gotten in Greece you need look no further than current Greek interest rates and compare them to German interest rates.

First take a look at this chart from Bloomberg:

Hell-enic Bonds

 

 

The worst thing is, that yield is only as of close of business on Friday. In overnight trade the interest rate on the 2-year bond increased to over 13%. A full three percentage point increase on Friday’s rate.

Make no mistake, that’s an absolutely massive move.

And as you can also see from the chart above, the yield has more than doubled during the past month alone.

But what this shows is that if you mess around with debt and interest rates it’ll eventually bit you on the bum.

It shows you that the attempts to manipulate interest rates by central bankers are doomed to fail. Because while the Greek government should hang its head in shame for criminally burdening its citizens with debt, the central bankers are equally culpable for drugging them up on cheap money.

Let me show you an example. Below is a chart for the same 2-year Greek bonds, except it’s showing the rolling yield going back five years:

Too low for too long

 

 

And remember, this chart only goes up to last Friday. Based on the prices from overnight, the current yield would be where I’ve placed the big red blob on the chart.

Now, we won’t claim to be an expert on Greek government debt. But the reaction of the bond market tells you what the problem is.

It’s telling you that the government has over-exposed itself to debt over a long period and that investors are no longer willing to accept a yield of between 2% and 5% that they were prepared to accept for the previous four years and eight months.

Importantly, the problems in Greece aren’t something that developed overnight. The Greek government didn’t change from an Ebenezer Scrooge type miser at the beginning of this year to a Paris Hilton style spendaholic yesterday.

The markets have obviously known about the Greek debt for some time. It’s only now that the realisation has dawned on investors that there are perhaps better places to stick their money…

Hence why the Germans are “grumbling” over sending some of their hard-earned southbound to the Mediterranean.

This is the sort of event the saps in the mainstream insist could never happen in Australia or the US. They’re mistaken.

You see, as our Slipstream Trader editor Murray Dawes wrote in Money Morning yesterday:

“I really believe that you can never succeed in the markets long term if you’re not constantly aware of the effect your psychology has on your results.”

A large part of the reason why investors are fleeing Greek bonds is psychology. Sure there are some mug punters that are prepared to buy Greek debt on a 13% yield, but that yield shows you just how risky the punters believe it is.

The main role of interest rates is to provide a visible price of money, another role is to indicate the supply and demand for money, and finally it provides an indicator on the relative risk of money and other investments.

To use an example. While the Greek 2-year bond is trading at a yield of over 13%, the German 2-year bund has a yield of just 0.88%. That’s a spread of over twelve percentage points!

The interest rate is now telling investors that German debt is low risk and Greek debt is super high risk.

Of course it’s all relative. And you shouldn’t forget that the German rate has been manipulated much lower than it otherwise would be by the European Central Bank. But you get the point.

Keeping interest rates low gives the false impression that no one needs to save. Low interest rates over the previous four years gave the market and investors the false signal that there is already enough saving and therefore there’s no need save.

The low interest rates also made the incentive to save a lot less too, even if they were inclined to.

So, what do governments and individuals do? They heed the signals from the interest rates and spend. Only it turns out that the signals were false. The signals were like faulty traffic lights stuck on green in all directions.

Investors were happy to drive through them and luckily they missed the carnage. But eventually their luck ran out and they’ve run head on into a semi-trailer.

Which is what makes headlines such as this sent in by Money Morning reader Karl all the more worrying: “Lifting rates will not stem rising market.”

The article opens with, “SOMEWHERE amid the fuzzy logic that drives the Reserve Bank’s interest rate policy is the notion we have a housing price bubble and that raising interest rates will deflate it.”

Sadly, in the short term the writer Terry Ryder is probably right. For a time investors and people will ignore higher interest rates because they assume it to be a sign of a positive economy. But taking that attitude is no different to what’s happened to the Greeks.

Whichever way you look at it, it’s a manipulation of interest rates. And despite the fact that interest rates are rising you shouldn’t forget that they are being kept much lower than the free market would otherwise have set them.

Rising interest rates should mean that it’s time to stop spending and it’s time to save. However, because of the entrenched idea that rising interest rates means a positive economy, individuals have been brainwashed by the mainstream commentators into believing that higher interest rates is also a good time to borrow and spend.

But don’t forget, despite Australian interest rates being higher than the official cash rate in other economies, they are still being kept artificially low.

And because the Reserve Bank of Australia (RBA) is keeping rates low, it’s masking asset bubbles and convincing investors and individuals that more can be borrowed – especially as rates are below ‘normal.’

Just as the Greeks were convinced to borrow more when their interest rates were kept artificially low.

The five-year chart above provides a perfect example of how a bubble can only be suppressed for so long before it eventually bursts.

It may not look like a bubble bursting because the chart shows the yield going up. But just remember, the higher the yield the higher the risk. And also remember that bond prices react inversely to bond yields.

So if you were to see the price of bonds as opposed to the yield it would look something like what we’ve magically created using the expensive software package known as – hehem – Microsoft Paint:

Kerrrrunch!

 

 

You can see the bubble being artificially expanded by low interest rates, reaching a crescendo in late 2009.

But then the market reached a tipping point if you like. Investor psychology took over. It begins where one by one investors start to dislike the risk profile of a particular asset class.

Eventually one by one becomes ten by ten, then one hundred by one hundred, until the flood of investors exiting an asset is unstoppable.

You’ve seen that for yourself in the stock market.

And now you’re seeing it with Greek government bonds.

There’s no reason why this can’t and won’t happen in the UK, the US, or more troublingly in China.

And there’s absolutely no reason why it won’t happen to Australia’s asset bubbles either.

Cheers,
Kris.

^ Banana
* Coconut tree

Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here.

 

Official websites and financial e-letters Kris writes for:

(You can find a list of recent investment articles written by Kris at the bottom of this page.)

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39 Responses to “Why Australia isn’t so Different to Greece”

  1. cb

    GB – in response to your question about why fiat currencies tend to fail, the one common denominator has been excessive printing (creation) of money by the government behind the given currency.

    Creation of fiat money is essentially costless, and sooner or later, a good thing is taken too far. As the saying goes, there isn’t enough for anybody’s greed, so whether it is out of outright corruption, or out of trying to rescue an economy from a deflationary collapse, the government of the day ends up issuing too much of the currency, typically ending in a sudden loss of confidence in the currency until nobody wants to hold it any longer. Paradoxically, deflationary episodes often precede the demise of a currency, which itself tends to come in the form of hyperinflation, when nobody wants it any longer.

    I recall a very good interview with Mike Maloney on this very subject, which I thought was very informative. I will try to find it for you.

  2. cb

    GB – I think I found it. It is a three part interview, well worth a watch.
    http://www.howestreet.com/audiovideo/index.php?pl=/fbn/index.php/mediaplayer/341

  3. Nick

    SV..#24…and so the ordinary folk have to become “outlaws” just to preserve their freedom. Sorry to bring it up again, but the guns issue is exactly the same. “outlaw guns and only outlaws will have guns”. So they outlawed guns…and…more criminals than ever have them. Did they stop it? No! Just as you say, they can’t stop internet filtering also.
    However, if they pass a law that says such activity like by-passing filters on the internet is “illegal”, then all of us will be outlaws if we partake in the exercise.
    Just like when they introduced radar for speed detection, we came up with “radar detectors”..now they are “illegal”. It’s the cat and mouse game that should keep us open minded and try to be one step ahead.

  4. Nick

    GB…here is another one that shows the “punters” are still at it. What is concerning though, is that does this mean that the US is next? Are we being distracted by having our eyes on Greece & the Eurozone?

    http://www.huffingtonpost.com/2010/04/27/banks-bet-against-us-citi_n_553891.html

  5. Nick

    Fitch…I could not agree more. The sheeple of 1929 and the sheeple of 2010. This is really the only similarity that counts.

  6. Tony Clancy

    Someone said’the very decent but dumb as shit Bob Brown. “…in my view he’s not dumb at all, he’s a decent person not tied to the manic nature of covetousness. Bob Brown is a man as we all might better be for the good of each other. We have however a system called “free market” which profits from the competiton of covetousness. I’d love to become wealthy on one trade especially since the utter demolition of my small superannuation account through slovenly incompetence world wide of superannuation guardians who went to sleep, if ever awake, which play conga-chain investment strategy.

    We were utterly ripped-off by companies pretending we had certain sums accumulated when in fact all we had was a % of share market investments running on risk ..in other words superannuation is a massive deception. All talk about the ” future gains” is useless to us approaching our life’s last quarter …

    I suggested to Cplus and so should we all to all companies that profit taking and accumulation into capital safe investments should occur many times a year in particular in the latter stages of a person’s normal working life….irrespective (and actually, for the good of) the “market”. If I have $100,00 shown as my account then that should not be able to reduce. How many of these lacadasical investment companies were made to account in answers and in money for their actions?..none?

    Banks here upped the interest rates owing to the American situation..why?…Why should we pay for their purported incompetence? My reply from the government they have the right to raise interest etc. blah blah but surely not for matters of cause elsewhere than here. The media simply went brain dead.

    Goldman Sachs’ fate is no surprise to me nor was the sacrifice of JP Morgan in this holocaust. I have written extensively since day one of the housing crisis on this conspiracy and its relationship to 1994 as I recall Rothschilds “we now need a major catastrophe to accelerate the introduction of a one world Government “(sic) . Well they did it and look at the recent US presidential candidates …all Bildergberger stooges, Obama, Clintons Mr and Mrs both admitted bilderberger lluminati and all passionate supporters of that well proven money launderer Israel. ..and that’s not a cheap shot at “jews” as will be the mindless knee jerk reaction of so many because jews don’t “run” Israel. Ask some.

    From the first inkling I had no doubt the “melt down’ was a fraud to further depress the world through increased debtt and political changes. It took a couple of run ups in the 80’s ,90’s to bowl the right ball and as rightly pointe out the greeat depression was another one that needed never to have happened. I wrote to ths newsheet several times with no response. Now I see the ideas blasting through.

    There was a simple and some might think simplistic solution at the outset. Unlike the Presidency I am not a stooge of the Central bank conspiracy for world domination so I think in terms of real solutions. Say there were a million homes involved and say each one was worth US$250.000 …which might well by actually 4 houses in most cases….the government could have bought the lot (and at massive discounting done properly) but say at par for $250 billion. Instead all the world panicked throwing billions and trillions at perceived problems. Had the USA done this purchase commencing immediately the houses could have been given freely to the mortgagees even on life tenancies at worst..jobs would have been saved, lives saved, people would not be sleeping in cars and on the streets with a domino effect. Were they just given the houses for life they might well have become more productive as well. The immediate reaction of “inflation!!” is nothing but trite. Control the financial system, humans invented it not the other way around …don’t have it controlling us.

    As however that buy-up solution would have solved the problem..it was one not to be even considered it seems…..the whole idea was not some kind of financial mismanagement but was a financial conspiracy. Here we are now with Goldmans being the next cog to turn, accused of doing precisely what I said long ago at the outset.

    Will they be sacrificed to hide even murkier dealings which will slowly uncover the central bank conspiracy? or will there be a cunning move to use Goldman’s to pretend there was no conspiracy. Time will tell. Remember this however…the French revolution, the American “war of Independance” the Russian revolution and its slaughter of revenge on the Tsars was for the same reason as the American WOI…the owners of the American central banking licence were refused renewal and the Tsar refused de Rothschilds the Russian licence and his doom and that of all his family and retainers was sealed.

    Fifty or so years later the 1905 attempt failed but 1917 didn’t. The same central bank owners as in USA controlling its foreign policy controlled Russia’s, (and Britains and Australia’s and….). Now let’s think about the cold war…!…?

    Let’s think about WW1 and WW11.A study of the history of the super rich rats in USA will also expose much of their financial supporting of the german military and it is quite certain that both World wars were generated by the same central bank and its allies in USA Britain Germany (Europe) and Russia.

    I’m no advocate of Hitler other than knowing his early life history is deliberately misrepresented. Nothing can excuse the carnage and horror of what he did. or his minions did. Hitler knew the pressure was on for instigating war just as Churchill had stated so certainly back in the 1920’s and he knew whence it came.In that Hitler and Churchill were in agreement.

    That comment has nothing to do with excusing anything good bad or worse he did because from the outset of the attack on Poland grotesque bestiality from each to the other was commenced. . There is nothing good about war…except for bankers and political boundary and culture shifting. In the wise words of that little song “Hokey Pokey” …’that’s what it’s all about’

    In closing good points are raised in this column which prompted my response. I raise this one…that what is happening to the Greek Government is not one of fuzzy thinking by the central bank but of clear thinking by the central bank’s world wide
    intelligence which causes massive damage and debt before the fuzzy thinking of those in denial becomes a little clearer….as with Goldman’s (but as I said Goldman’s is a ploy of one type or another..nothing happens without it being intended to happen at Bilderberger/Illuminati/ Central bank level)

    Though, deo gratias, lessening, denial is still enormously pervasive about the New World Order ‘s immense power in formulating overnight changes to the planet and the new serfdom reasons behind its ruse of globalisation and jettisoning of public assets which has been massively accelerated since the 1990. In the meantime the smarties get richer and the poor are trampled underfoot. Voila!

  7. Tony Clancy

    Erratum: I said ” I have written extensively since day one of the housing crisis on this conspiracy and its relationship to 1994 as I recall Rothschilds “we now need a major catastrophe to accelerate the introduction of a one world Government “(sic) . ”

    I made a mistake….where I said “Rothschilds” I’d intended to write “Rockefeller” . The two are so intimate I guess I thought of de Rothschild. Apologies.

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