Surprise!
We got a big day of green from the US markets in their last session for the week just gone. That’s setting up the Aussie market for a good start to this week.
And thank goodness. It’s been a dog of a market for a good six months or more. But I think the market is turning in favour of the bulls.
You know what’s brought the market down this year. Ukraine. Inflation. Rate fears.
I’d argue these are well priced into the market now…and perhaps we’re due for a bounce, based off nothing else than the reality may not be as bad as originally feared. It usually isn’t.
Certainly, if you’re a Victorian, you’re now being showered with Daniel Andrews’ magic money tree.
Not only is he going to take over the state energy business, he’s going to equity finance new home buyers as well.
The Australian Financial Review reports:
‘Daniel Andrews is offering to pay a quarter of the price of home purchases with a $1.1 billion shared equity scheme in the Victorian premier’s latest intervention into the free market ahead of the November 26 state election.’
Here, laid bare, is the paucity of Australian policy-making.
There is no long-term plan here. Throwing more dollars at housing like that does nothing for affordability. A few lucky buyers get a leg up.
But it’s just treating a symptom instead of the disease. Andrews’ magic money tree is nothing more than an endless stream of debt, and he won’t be around in the top job to pay it off when the time comes.
Much will be said of Daniel Andrews’ legacy whenever he gets the flick, or retires. Most of it will be drivel.
One of the hard facts that can’t be denied is most of his ‘achievements’ are financed with staggering amounts of borrowed money. Victoria is a pauper dressed as a prince.
It may not matter today, or next week, but there will come a time when the Victorian debt has the same global appeal as British gilts do right now.
Victorian debt is simply a worthless stream of paper from a government with unsustainable finances.
You can say that about most bonds that trade around the Western world. Politically, the people won’t tolerate budget cuts even if the current spending can’t be financed from revenue.
So governments and central banks simply create the money in the same way the Bank of England is doing right now to prop up British pensions.
But paper money is not wealth. It is a claim on wealth.
Right now, British pensioners are seeing the purchasing power of the pound shredded as the pound declines and drives up imported costs. The same is true of the Japanese yen.
Energy is the perfect example.
Oil trades in US dollars. If the pound declines against the dollar, it buys less oil. It’s that simple.
The Bank of England can create billions of pounds with a keystroke. But markets aren’t stupid. They either give less oil, or demand more pounds for the same quantity of oil.
And so the British standard of living keeps going down from its former top spot.
Great Britain becomes little England, but nobody planned it that way. It’s just that for every wealth creator like Richard Branson in the UK, there’s now a 100,000 Daniel Andrewses.
Everybody has a spending plan for other people’s money. But how many create wealth now relative to what they receive in ‘free’ healthcare, subsidies, public transport, and all the rest of it? It’s no wonder James Dyson, another business titan of the UK, moved to Singapore.
There’s trillions of wealth locked up in Western bonds right now. As governments inflate their debt, those bond holders are being fleeced of real wealth in the same way the Romans clipped and debased coins.
That wealth in bonds is going to migrate away to ‘real’ assets that protect purchasing power.
One of those is likely to be oil. Green fantasies aside, oil is still power in today’s economy and a massive competitive advantage.
The pampered citizens of the West are waking up to this because it’s finally hitting them where it hurts — their hip pocket.
It was the frackers in the US that kept the cost of oil down the last decade, and most Westerners threw it back in their face on environmental grounds, while enjoying the cheap airfares and lower cost of living the frackers delivered.
Ha! That’s modern Western society for you.
Now we’re in a new era…
Saudi Arabia, for example, feels comfortable today telling the US to jack off because they’re the lowest-cost producer of the world’s most valuable commodity.
If the 2022 bear market has taught investors anything, it’s that in times of trouble, cash flow is king. All the fancy tech stocks with the big plans but no money coming in have gone to the dogs.
Those businesses producing real cash flow — real wealth — are now the desirable companies to own.
Of course, it’s possible for the price of oil to get dragged down in the short term, but that’ll be because the economy’s in recession.
For some green fanatics, that’ll be their fantasy come true — to protect Mother Earth.
Stay tuned this week for more on this from my colleague Greg Canavan. There’s a crude awakening coming indeed.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
