A Financial System Controlled by Insiders, Looking after Insiders

There’s nothing like big losses to put the skids under the market.

Earlier this week, the major banks pencilled in their mining exposure losses. This was enough to take the wind out of the market’s sails.

After hitting the 4800-point mark in mid-February, the All Ords proceeded to rally a good 8% until it hit the skids on all that red ink.

After a stellar advance in February, gold has surrendered some of these gains in March…falling back into the US$1,230/oz range.

The stronger Australian dollar indicates the market doesn’t think the RBA is going to lower rates next Tuesday. I agree.

While the higher dollar won’t be to their liking, I think the RBA is going to keep any potential rate cut on hold for the time being.

With the housing markets in Sydney and Melbourne cooling a little, the RBA won’t be keen to add fuel to the fire by starting another round of ‘housing bubble’ speculation in the media.

The US Fed Chair, Janet Yellen, gave another predictable and boring speech during the week to the Economic Club of New York. Surprise, surprise…the tone of the speech indicated there will be no real prospect of an interest rate increase in the US anytime soon.

‘One and done’ has been my view on US interest rates. Yellen had to ‘pee or get off the pot’ in December, so she gave them a piddling 0.25% hike. In her speech, Yellen raised concerns about China and the oil price potentially destabilising the so-called US economic recovery. What recovery?

Every week the US government adds US$12 billion to its debt pile in order to meet its budget obligations — they call that a recovery… It’s a scam and a sham.

Last year the US budget deficit was US$438 billion. This year the estimate is for it to blow out to US$616 billion. In a few years’ time the Congressional Budget Office has forecast the budget blowout to exceed US$1 trillion (that’s US$20 billion per week) and continue climbing.

It won’t matter a jot whether it is double-dealing Donald, or contemptible Clinton, in the Oval Office; the US is on a one-way path to an economic Armageddon.

Welfare payments, interest costs (on the existing US$18 trillion debt pile) and defence spending just keep compounding. I have no doubt the Fed will at some point take the US into negative interest rate territory. This is the only way the powers that be will contain debt-servicing costs.

But negative interest rates are destructive to capital.

As the bond king billionaire Bill Gross wrote in his latest monthly update:

The real market and the real economy await a different conclusion as losses from negative rates result in capital losses, not capital gains. Investors cannot make money when money yields nothing.

Yellen and I have very different interpretations of what recoveries entail. I would not like to be a patient under her medical care.

‘How am I doin’ Doc?’

‘Just fine. You are on the road to recovery, so long as we keep upping the daily dose of morphine.’

‘But Doc won’t that cause damage to my vital organs?’

‘That’s not my worry; I won’t be here when that happens.’

In spite of the obvious stupidity in this ‘medical treatment’, the gamblers at the Wall Street casino ignore it.

The Dow Jones Index is making another charge at the 18,000-point level. It’ll probably get there too. Such is the madness that drives financial markets these days.

Madness is not confined to Wall Street, though.

I’m as mad as hell over the state of the Australian budget and the tip-toeing around taking the hard decisions.

To add to my frustration levels, I listened to Graham Richardson on Sky News saying how Labor are relishing the budget vice the Liberals are in because of the Gillard/Rudd/Swan unfunded commitments to Gonski and the National Disability Scheme.

The previous government knew these ‘it would be nice to have if we had the money’ schemes were not financially possible, yet they put them forward as policy and raised peoples hopes and expectations. What kind of sick bastards are these people?

I know this says a lot about my political naivety, but I find it absolutely reprehensible that these so-called ‘leaders’ would take delight over wedging their political opponents for their own lust for power.

What does Rudd care anyway? He’s too busy brown nosing as many people as he needs to for his tilt at the UN’s top job. God help us, and the rest of the world too, if this self-absorbed egomaniac lands this plum position. Yet, it appears the Australian government is prepared to endorse him for the upcoming vacancy. When all is said and done, they’ll unite to keep each other on the taxpayer gravy train.

Last week a photo of Rudd surfaced, showing him smooching up to former US Treasury Secretary Hank Paulson. In 2006, Henry (Hank) Paulson left the top job at Goldman Sachs to become US Treasury Secretary. Why on Earth would you leave a job paying you tens of millions of dollars a year for one paying a few hundred thousand? A sense of duty? Now who’s being naive?

The Wall Street boys wanted one of their own on the inside. Do your time in Washington Hank…and we’ll look after you.

When the subprime loans first started to go toxic it was Hank Paulson on 28 March, 2007 who testified to the US House of Representatives, saying: ‘From the standpoint of the overall economy, my bottom line is we’re watching it closely but it [subprime problem] appears to be contained.’

Ben Bernanke said the same thing on the same day. Nothing like independent thinking from the world’s financial brains trust.

Insiders looking after insiders.

Then you think about a socialist — Christine Lagarde — occupying the role of IMF Managing Director and you begin to understand why the world is in such a mess.

The people running the show are grossly incompetent and lacking in the strength of character to do what is right. They live in their own little power bubbles, playing their power games.
The more time they spend in their bubble, the further that bubble floats away from reality.

We fund their bubble lifestyles, yet they have no real appreciation of what those who have their feet on the ground are going through to earn and hold onto a dollar.

With leaders of this calibre, is it any wonder the rest of society has adopted a ‘take what you can get’ attitude? Or that there is such tremendous pushback to any hint or suggestion of unwinding benefits?

You can’t help but get the feeling the financial system is headed for a massive reset.

You (governments and individuals) cannot live beyond your means indefinitely. You cannot manipulate asset prices indefinitely. Paying obscene bonuses for selling toxic investments is immoral and punishable by jail terms and loss of personal wealth.

Every now and then the electorate realises (only when things get so bad) it needs a leader with integrity and strength of character to right some of the wrongs.

This is what I think we are building up to — a time of turmoil that culminates in some of these bubbles going ‘pop’.

Vern Gowdie,
Editor, The Daily Reckoning

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Vern is a contributing editor to Money Morning — Australia’s biggest circulation daily financial email. (To have Money Morning delivered straight to your inbox you can subscribe for free here).

Vern has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia's Top 50 financial planners. His previous firm, Gowdie Financial Planning, was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top 5 financial planning firms in Australia.

Vern has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. In his leisure time Vern remains active with triathlons and pilates.

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