GM goes, Rio snubs, and the PM shrugs ("technically")

You gotta admire how bad the rhetoric coming out of Canberra is getting these days. We were told in the led up to the last election by the now Prime Minister, that he was an “economic conservative” (18 months later we have over $314 billion in projected debt).

In the recent budget we were told that the Government will go into a “temporary deficit”. Translated, “temporary” works out to be until at least 2021. Twelve years of spiralling deficits is not temporary.

Now Australia is “technically” not in recession. Technically New South Wales should have won the State of Origin on Wednesday.... Enough of the rhetoric. Actions speak louder than words. And there will be political consequences for ignoring sustainable economics. It’s not just in Australia, expect more political and social disconnect with politicians and the voting constituents in the next few years. For now we get to watch the UK Government tear each other to shreads.

Also in an eventful week:

- General Motors enters Chapter 11 bankruptcy

Well another "officially" it happened moment... but lets be realistic. GM isn't being liquidated - just restructured. Yes, it should have been restructured years ago, but despite the leftist media - its failure to not reinvent itself to produce "green" cars instead of "gas guzzlers" had nothing to do with GM's downfall. GM's balance sheet was choking with unfunded liabilities (indeed it is just a mirror of the greater problems facing the US Government). As I stated (in my first post this year), between 1993 and 2007 GM spent much more paying pensions and retiree health care ($103 bn)than it did in dividends ($13 bn) to its shareholders! The company should have went under years ago. Economics 101 - your balance sheet must be sustainable. Unions once again kicked themselves in the foot - pension/health care plans which were agreed upon as early as the 1950s have come back to bite their children's, children. The Western World must learn to stop over-consuming (on debt) and demanding higher and higher wages (source of inflation). Perhaps with a more stable monetary system, union demands would be reigned in (wishful thinking?)

Now that GM is in Chapter 11, its plan is to cut its liabilities... 150,000 current and future employees will get a cut to their pensions, health benefits and life insurance. That's right - the new majority owner, the US Government will continue to bail GM out. It's only thrown hundreds of billions at the car industry for decades - why stop now?

Restructuring GM will not bring it back to its former glory. The world economy will determine its future. Like GM, the US Economy has been trading insolvent - its liabilities are completely unsustainable (over US$65 trillion). China and India have growing automotive industries, which are innovative, competitive and forward-looking. There is an oversupply of auto makers (Australia alone has around 60 different brands of vehicles to choose from!), and the free market will force mass consolidation in the coming decades, much like what has occured in aerospace and defence in the last couple of decades.


- BHP and RIO announce Pilbra Joint Venture

Great news for Australia, bad news for China and steel mills. BHP is the master at striking great deals, and this looks to be another one. Iron ore prices should be higher now that the producers can maintain their bargaining power over their customers. Bad luck China, expect them to buy some smaller producers. Odds are Murchison Metals (MMX.ax) will be taken very shortly, perhaps Andrew Forrest will sell down more of FMG if China puts a few billion down to expand it’s production in a significant way.

- Australia avoids official recession (for now)

The buzz word for the world economy right now is “green shoots” – economic recovery is in site! Markets do not move in straight lines. The duration and magnitude of economic recessions vary greatly and do not move in straight lines. We are still on par with the 1929 crash (see chart 2 and 3 from this previous post). The fundamental problems of the broken world monetary system remain. The United States is still insolvent. As Kenneth Rogoff discussed on Thursday (Australian Financial Review),

“global trade and current account imbalances needed to be reined in to reduce the chance of a severe financial crisis. The US and China are not solely responsible for these imbalances, but their relationship is certainly at the centre of it”

“The US consumer, whose gluttony helped fuel growth throughout the world for more than a decade, seems finally set to go on a diet. In addition to tighter credit, falling home prices and high unemployment will continue to put a crimp on US consumer spending.”

These two paragraphs sum up the situation quite nicely. The monetary system is broken, the China-US trade imbalance is broken. The musical chairs
has stopped, and for now Australia is lucky to have

Property Researcher slams Rudd Bank

As discussed briefly on my blog, the Commonwealth Government is seeking to proceed with its Australian Business Investment Partnership (ABIP), a $30 billion financing fund (in conjunction with the Big 4 banks) to help the commercial property market stay up right. In other words, an anti asset-deflation device. Rudd thinks he can take on the free market and win.

This is some of what DTZ Research stated in the Australian Financial Review on 1 June 2009:

“the government’s ability to improve market fundamentals is limited”

“it has the potential to affect the feasibility of development projects”

Further “Ruddbank could distort market forces that would eventually cause the property market to recover in any case.”

DTZ warned that providing “funds via ABIP to restart projects that have stalled has the potential to not only flood a failing market, but prolong its recovery.”

Further, (DTZ) argued that falling values were a natural market mechanism for dealing with an oversupplied market and declining demand.

Lastly, “Intervention by providing a funding solution, and not addressing the core problem, can only lead to further issues.”

Two programs worth watching:

Million Dollar Traders – SBS 7:30pm Tuesdays

Eight ordinary people are given a million dollars, a fortnight of intensive training and two months to run their own hedge fund.



The Ascent of Money – ABC 8:30pm Thursdays

Harvard professor Niall Ferguson examines the long history of money, credit, and banking. In it he predicts a financial crisis as a result of the world economy and in particular the United States using too much credit.



Charting exercise - short term resistance/support

The following is a short-term (5 day) chart analysis I drew up during the week on SLR – Silver Lake Resources. The analysis shows how resistance/support lines (as well as candlesticks) can give a good insight into the short-term direction of some stocks.

Chart 1: SLR 5-day

Cheers,
Scott