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EYE-BALL’s Herman on: The 2012 Overture – A Crappy New Year – Part III

March 26, 2012
Herman O'Hermitage
Title:
The 2012 Overture – A Crappy New Year – Part III.
By: Herman O’Hermitage
See previous post:  Democrazy Part XIII –

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Herman O'HermitageFrom the post on September 13, 2011, I predicted this nervousness about Chinese demand for resources. I went further saying there is a housing bubble developing in mainland China. That threat to Australia is immense. The clearance factor in auctions locally is hovering in the 50%’s maybe 55 to 57%. Median Prices are taking a toll.

In the aftermath of the Qld State election our political scene is in turmoil. Today there are new calls for another Kevin Rudd challenge to Julia Gillard. The ALP is on the nose, and no one really wants a Liberal Government lead by Tony Abbott, but the only other hope is Malcolm Turnbull. The Liberals will win the next election, and the longer the electorate is frustrated, the crueller the annihilation of the Federal ALP when given a chance.

The Katter Australia Party is not a great white hope in any shape or fashion.

Internationally we are about to see Presidential elections in France, and then government in Greece and the US primaries continue. America wants a miracle but there is nothing in sight. Obama is weak, but there is no real viable alternative.

The bigger war scenario is being employed in Iran and North Korea. The logic has it that G W Bush failed to understand that threatened wars are more effective than actual wars. G F Bush was defeated on similar logics. His 2 week war with Iraq did not really achieve anything. Cost but no actual outcome. The legacy of Iraq stage 2 and Afghanistan is so immense.

Rick Santorum has emerged in the Republican primaries since my article on January 30, and Gringrich and Ron Paul have faltered. Santorum is trailing Romney by 2 to 1 in the delegates, but the party is yet to unite. Uniting fast and moving on to Obama is critical.

Marine Le Pen in France is a smoking bomb. The incumbent Sarkozy is not popular either. Their election system is critical. No individual will win 50% at the first election. This could occur with 3 elections, 4 contestants, reduced to 3 contestants reduced to 2 contestants. Marine Le Pen is advocating France departing the European Union, and more importantly closing their borders.

In Greece what is much more important than their political landscape is the bailout you have when you are not having a bailout. It underlies so much of what is occurring as governments around the world de leverage. Harry Markowicz and others won a Nobel prize for their work on the Capital Asset Pricing Model. It is fundamental to all investment analysis. It is; all returns are a part of risk free plus a risk return. It therefore follows by regressing (back testing) any industry or company result in this light you determine a specific investment beta. It also follows right now that the AUD has a low beta (risk premium) attached to it. Beta’s are not in this case constant. They can be shifted lower or higher. Does any government or anyone in government understand this?

The trouble is as World governments are downgraded from AAA to non-investment grade, THEN WHAT IS RISK FREE??????? How can you have confidence in any stock price when risk free is even more nebulous? Could possibly oil or gold become the new risk free? Your Corporate can work harder to lower their beta, but not be ultimately rewarded. Uncertainty flows from risk free!!!!

The Dow has now recovered to over 13000 pts. Therefore the ASX is testing the recent resistance levels trying to break out to the top-side. At some stage the USA government will need to stop spending therefore allowing non-government demand to take up the slack. Where will this demand come from? Particularly as welfare will be reduced. It must come from higher taxes on those with the highest incomes. It has not yet started, and the Grand Old Party, the republicans will simply never do it. Could Obama do it?

Dick Smith wants to go much further. If population was constant, then GDP (GNP) must be constant. We all profit from inflation, we all profit from population explosion. Naturally he overlooks technology, which is strange given his antecedents. Technology fuels GDP growth as well as population growth.

The overwhelming issue is that government de leveraging will be long, slow and extremely painful. Corporate sector is so healthy. At times that is only because of government bailouts.

Only by way of example the $275million promised to GMH to keep them operating in Australia, props up component supply and a whole vertical contagion. What is the alternative? Australia becomes a vehicle importer from lower wage countries. David Ricardo says yes, that is increasing the efficiency frontier, driving prices (supply) lower. But for Australia we are simply reduced to mining and farming. A primary producer, so how do we support our higher wage structure and standard of living? The argument collapses on itself. That is Socratic. That is free trade. It too collapses on itself.

The 1812 overture saw the collapse of free markets when Napoleon failed. Similar happened last century after the Great War. That is what is definitely coming. It is part of the problem started when America started to need to impose their democracy on other lesser developed countries. You might term it self-determination v free trade.

In history this super cycle is so evident. Free Markets become very attractive and collapse upon themselves.

Robert Gottliebson said something very profound on ABC Insiders a fortnight ago. As 2008 GFC had no consequence on Wall St, it is bound to happen again. The movie “Margin Call” really does highlight this. The pariah character played by Jeremy Irons will keep preying upon our system to the disadvantage of the greater good. He lists the great crashes of all time. He claims they are inevitable, and so someone needs to do good out of it, it is only money!

Later Today, Campbell Newman will be sworn in as Qld Premier. On Wednesday the real work will start on trying to de leverage Qld. It will be interesting to watch. In NSW after one year of change of government, it really does appear to be switching deckchairs on the Titanic. In the employment market in NSW old timers in Macquarie St are being replaced by part timers, at twice the price. Will they be 2 times or three times as productive?

I wish Campbell Newman well. The same goes for the government of NSW, and many. many others. Our Federal Government is addicted to growth of commodity exports, and a high AUD. There are issues out there we should be focused on.

Our Federal deficit keeps creeping up, and is easily sold to foreigners because of our good credit standing, and high currency. 80% of Australia’s government debt is in foreign ownership. The Federal ALP needs new taxes like Carbon Tax and MRRT to attempt to keep this foreign debt under control. What might occur if they contract spending?

Bloody Socrates!

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Herman …

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  1. March 26, 2012 at 10:45 am

    Welcome Back Herman …

    You tackle many subjecs in this post that make it difficult to analyise in a straight line – you jump from Europe to the USA and Australia and make a good case to point out the folly of how Democra(z)y is in play all over the world.

    You bring the Gillard/Rudd debate to the discussion along with the QLD and NSW ALP routs – perhaps when you talk about the high A$ – these political earthquakes might be enough for the world to say ‘lets bail’ out of Australia and take profits. I don’t 100% agree with all the ‘beta’ risk theory – particular with the A$.

    The cycle of things you point out is a part of the A$ rise … but it is strange that Swan and his team of idiots at the RBA may have no say about the impending ‘sell-off’ of the A$ – it will be on the back of the political uncertainty and attached China slowdown that will spook investors.

    A great post Herman …

    EYE-BALL.

  2. David the Pragmatist
    March 26, 2012 at 4:31 pm

    Whats wrong with the impending sell off- you make it sound like its a negative.
    The only negative is that the moronic Swan and his out of date friends at the RBA may try and protect it! Ah for some real inflation! Its a shame that the RBA are so besotted with it that they do not realise the dangers of deflation are much greater to our economy.
    I found the philosopy of Hermann interesting, what else can you say about so many Socratic quotes. Before we too drink the poison I think his point about free trade is very interesting and raises something about the inequality of the currency markets. It seems to me that Free Trade is guarded as something pure that we should all obtain, but realistically you cannot have free trade if the currency markets are just as immensley manipulated in the mode of the impure.

    There has been an economic miracle that has taken place, specifically in the US economy where you can have so much debt and print so much money and yet have no inflation. This has been caused by the fact that the European market has found itself on the same path.
    Hence the devaluation of the economies but no inflation and a respectable exchange rate.

    Now socrates was a smart man, so much so that he had Plato write everything down for him.
    But when he came to dealing with governments, he too failed and drank the Hemloch (at the request of the Government), Plato decided he would learn from that, Descartes 6000 years later thought about dualism and decided that if you “think” you must exist.
    Now we are getting to the crux of things if we eliminate the non thinkers, think how much better the world will be.!!

    My statement to you “a plagarism” is “I think therefore I am”. Why not the rest of these bastards as well?

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