By MoneyMorning.com.au

2012 has seen an impressive list of global banking scandals.

The problem is that even as they get more outrageous, the market becomes more desensitised.

Apathy reigns.

The real bombshell this year was the LIBOR scandal.

Some of the world’s biggest banks got caught with their pants down, manipulating the LIBOR rate. If you think that sounds boring, then know that it underpins derivatives worth over $300 TRILLION. Tweaking LIBOR a few basis points here and there can pay for more than lunch.

This was a scandal so huge that it involved some of the biggest names in the banking game: Barclays, HSBC, Deutsche Bank, UBS, Credit Suisse, Soc Gen, Citibank, JP Morgan, and Bank of America, amongst many others.

So global banking titans formed a cartel to deceive the world?

This is the kind of thing that should spark a revolution!

But sadly, no one seems that surprised or that fussed. Maybe investors are just too battle weary after four long hard years down in the trenches.

It seems the forgotten headlines about LIBOR are already today’s fish and chips wrapper.

Now the current ‘scandal-du-jour’ served up by the media is the ‘The London Whale’ which is now going through the courts.

Somehow, within six years of leaving Uni, this Ghana-born lad was in charge of multi-billion dollar bets in UBS’ London office.

Didn’t anyone ever question the wisdom of this?

Or just perhaps…keep a bit of an eye on him?

But no! The trading culture and poor oversight let ‘The Whale’ singlehandedly rack up a loss of nearly $12 billion.

It’s not too hard to draw the dots from this loss, to the recent announcement that UBS is cutting 10,000 jobs (16% of its workforce) over the next few years.

Obviously HQ in Switzerland isn’t too chuffed at what’s been going on at the London branch, as the job cuts kicked off with a swift axing of 100 traders in London.

But this is happening everywhere.

The Australian Banking and Finance Industry Under Attack from a ‘Meat Cleaver’

The financial services industry blossomed for decades on an irrigation channel of cheap credit. Now that the channel is drying up, the sector is being ruthlessly rationalised.

We saw big cuts last year and they continue unabated. Nancy Bush, a famous bank analyst puts it bluntly. ‘The whole structure of the financial services industry has got to change. We are in the meat cleaver stage right now.’

Just recently, I heard a broker in the Aussie market, Marcus Padley, saying that two hundred Aussie brokers are now leaving the industry each week.

I’ve also heard rumours that one of the big four Australian banks is facing a major ‘restructuring’, which is a nice way of saying mass redundancies.

It took years for the Libor scandal and the London Whale scandals to surface.

So you have to wonder what is unfolding behind the scenes a bit closer to home at the big-4. Regular Editor of Money Morning, Kris Sayce, has already uncovered a few stinkers like the secret loans NAB and Westpac took from the US Federal Reserve.

And looking ahead, my pal Greg Canavan of Sound Money. Sound Investments sees more trouble unfolding for Australian banks. He thinks 2013 could be the year the polished facade collapses.

Australian banks would have you think they are amongst the most secure banks in the world, but Greg reckons they’re just houses of cards built on quicksand. For example, he calculates that if Commonwealth Bank (ASX: CBA) suffered a 5.8% fall in the value of its assets, all shareholder equity would disappear. In other words, Australia’s biggest bank would be bankrupt.

Greg’s not saying this this will happen. He’s just pointing out the inherent leverage and riskiness of bank balance sheets. This leverage works a treat in the good years, but it has the opposite effect when things slow down. And Greg reckons Australia’s looking at a major slowdown in 2013.

Be Worried About Australian Banks in 2013

Let me say that Greg is very good at making big-picture calls that start out as unpopular but turn out to be correct.

For example when China was still flying along, he was calling it to slow down during 2012, several years before anyone else. Listening to his reasoning back then was part of the reason I avoided iron ore and coal stocks for almost two years. And thank god too.

So if he’s pointing the finger at Australian banks today, it’s worth listening to why. Part of the issue is with property prices. As national income falls off the back of China slowing down, he expects property prices to correct in a major way.

In fact, he reckons a $1.3m home in Paddington, Sydney could be worth $880,000 two years from now. And this would simply kill the Australian banks, whose balance sheets are dominated by residential property loans.

The Aussie dollar has defied gravity so far, but at some point this has to reverse. Iron ore prices have taken a hit on falling Chinese property construction, and coal has dropped as the US moves to cheap gas.

By rights, the Australian dollar should have fallen by now. However, Aussie bonds are the best yielding AAA rated bonds globally. So investors are buying in, which keeps the price up. Once rates fall, which they will, then this tide of buyers will reverse – and spectacularly so.

Goldman Sachs certainly reckons the Aussie is primed to collapse, and are selling it. They think it’s 20% overpriced, so worth closer to 85c. A slowing economy and falling commodity prices will see it tumble. In fact they’re going as far as to call ‘Short Aussie, Long Euro‘ the ‘trade of the century’.

Taking Goldman’s advice on anything can be dangerous of course. They’re not famous for respecting their clients, and have recently been dragged over the coals for endemically referring to clients as ‘muppets‘.

Neither are they famous for giving out advice for free, so perhaps take the ‘trade of the century’ call with a pinch of salt.

However I put more weight on Greg’s calls in this area. For one thing he’s not an investment bank taking the other side of the same trade! He’s far too nice a bloke for that. And most importantly, he’s been calling the big picture correctly for a few years straight now.

So when he’s saying a tough year for Australia in 2012 was the warm up for the main course in 2013, it’s worth taking the time to listen why.

Dr Alex Cowie
Editor, Diggers & Drillers

From the Port Phillip Publishing Library

Special Report:
Retire Rich, Happy and Free From Money Worries

Daily Reckoning:
Why the Worst is Not Over For China’s Economy

Money Morning:
What Japan’s Energy Supply Crunch Means for Uranium Stocks

Pursuit of Happiness:
The Right to Protect Yourself: Why the State Disarmed You

Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks

Will Australian Banking Scandals Rock the Economy in 2013?

By MoneyMorning.com.au

China’s economy is starting to haemorrhage money.

How much?

Over the past decade, about $3.8 trillion has left China illicitly. The trend is accelerating. Somewhere around $50 billion per month is flooding out of China.

Today I want to cover the final ramifications of this monetary haemorrhage, and why it matters to your investments and your wealth…

A Shockingly Huge Amount of Money Leaving China’s Economy

At the individual level, what’s a Chinese saver to do? Over the past decade, the Chinese have sought wealth preservation, if not investment returns, in China’s stock market, as well as in Chinese property markets.

These ideas worked out well for some Chinese investors, but not for others. Plus the Chinese buy gold – lots of it. In addition to investing in Chinese assets – stocks, property, gold, etc – there’s long been anecdotal evidence of Chinese moving funds offshore in shady ways.

There’s an old saying in the field of statistics that ‘The plural form of the word anecdote is data.’ And recently, a number of investigators have gained access to much more hard data about how much Chinese money has moved overseas. The amount of money is huge, to the point of shocking.

When it comes to funds that have moved away from China – and the fate of the individual owners is something else entirely – we’re dealing with what The Economist magazine recently called a form of ‘voluntary exile’.

The bottom line is that large numbers of Chinese are moving money offshore, by hook or by crook. According to Hurun Report – a Shanghai-based service that caters to a very upscale clientele – the average wealthy Chinese (defined as having a net worth over 10 million yuan, or about $1.6 million) holds 19% of his assets overseas.

Meanwhile, per Hurun, 85% of wealthy Chinese plan to send their children to school outside China, while 44% have plans to emigrate at some point in their life. In and of itself, that’s hardly a ringing endorsement for the future livability of China.

Also, according to a report issued Oct. 25, 2012, by the Washington, D.C.-based Global Financial Integrity (GFI) group, almost $3.8 trillion (yes, trillion!) illegally exited the Chinese economy between 2000 and the end of 2011. About $602 billion left China in just 2011, so the trend is accelerating.

Indeed, if about $50 billion per month ($602 billion divided by 12 months) left China in 2011, it’s no wonder that, for the past year, we’ve seen market-moving reports that China’s economy is slowing down. Perhaps China’s economy isn’t so much ‘slowing down’, in many respects, as it’s decapitalizing due to illicit outflows.

Naked Officials and Hot Money

What’s the source of these illicit funds? According to GFI, some of the proceeds are outright ill-gotten lucre from bribes to officials, or raw government corruption. Chinese Internet bloggers have coined a term for modestly paid officials who move their families, and/or large piles of assets, abroad: ‘naked officials’.

Other capital that flees China may be money that was earned initially through legitimate business means. However, these funds then moved out of China in defiance of law, regulation and other capital controls, usually hand in hand with evasion of applicable taxes. It’s often called ‘hot money’, a term that originated in Hong Kong.

Right away, this hot money puts other entities at a competitive disadvantage, especially Western companies that must go to extreme lengths to obey tax and banking laws on an international scale.

Now consider the difficulty a Western business might have in competing with a Chinese business. The Western business has to conduct itself transparently, while obeying a long list of home-country laws and regulations.

Meanwhile, the Chinese business has access to cheap and hot money and operates under a business plan that’s based on nominal underpricing of goods and services, made up with accounting shenanigans.

Evading ‘Normal’ Export Channels

Let’s look at some examples. Consider the rare-earth (RE) business, which concerns a set of exotic elements crucial to modern industry – electronics, magnetics, optics, the auto sector and more. The RE biz is about 95% controlled by China at the source.

Over the years, I’ve heard stories from reputable Western buyers about procuring raw RE supplies – of Chinese origin – in places like Thailand and Myanmar. The RE materials come in poorly labeled bags of product (I’ve actually seen examples!) and are hauled in rickety trucks through uncontrolled mountain passes down from China. It’s hardly a ‘normal’ export channel.

I’ve also heard reports of Chinese sellers mislabeling RE elements as, say, a low grade of steel scrap. The scrap gets exported to, say, Japan or Korea, using bills of lading that dramatically understate the value of material.

Then the ‘scrap’ buyer pays a second bill for the RE elements using a wire transfer to a numbered bank account somewhere far from China. Again, it’s hardly a ‘normal’ export channel.

The GFI report highlights other shady export practices – far beyond what happens with RE elements – that serve to hide the true cost and/or price of products moving through otherwise legitimate export channels. That is, GFI identified chronic levels of ‘mis-invoicing’ of Chinese exports to the U.S., ranging from $49 billion in 2000 to $59 billion in 2011.

Specifically, Chinese companies are known to cook the books in a way that understates export value out of China versus income from sales at the destination. The ‘missing’ funds pass through any number of tax havens, where there’s no physical value added but where business secrecy is sufficient for markups and profit skimming.

According to GFI, Chinese products most susceptible to trade mis-invoicing include power equipment (even nuclear reactors), boilers, machinery, electrical and electronic equipment and electronic circuits – think of all those ‘Made in China’ products that fill the shelves of Wal-Mart, Target, Best Buy and other stores. GFI identified $84 billion of such mis-invoicing in just 2007-2011.

Chinese Hot Money Resting Offshore

Along the way, GFI located almost $596 billion of cash deposits and/or financial assets (such as stocks, bonds, mutual funds and derivatives) that landed in tax haven jurisdictions from 2005-2011.

According to GFI, just the British Virgin Islands – with a population of 28,000 – accounted for over $213 billion in officially reported investment in China in 2010. One might say that the British Virgin Islands glow at night from all that Chinese hot money.

The situation with the British Virgin Islands illustrates another point. Some of that hot money actually goes back into China disguised as ‘foreign’ investment, despite being owned by Chinese nationals, with the value-added originally generated in China.

Thus, this hot money isn’t really ‘new’ investment. Instead, we’re just looking at a very roundabout, economically inefficient way for Chinese business owners to recover a return on their original investments. It’s a strange way to grow an economy.

Meanwhile, rampant capital outflow from China greases wheels within a shadow global financial system. Not to paint with too broad of a brush, but it’s accurate to say that illicit funds have been found in proximity with all manner of improper and illegal activities.

These include crimes like drug running, human trafficking, arms smuggling, trade in contraband (such as ‘blood diamonds’) or stolen goods (high-end cars, for example), environmentally damaging land use and much else.

China’s Economy is a Ticking Time Bomb

In the GFI report, the authors state that there are ‘serious questions about the stability of the Chinese economy’. Furthermore, per the report, ‘If outflows continue to ratchet upward, adverse repercussions on social and political stability cannot be ruled out.’

In other words, the massive, illicit capital outflows from China contribute to a growing sense of economic inequality, as well as pervasive corruption.

The principal author of the GFI report, Dev Kar, formerly of the International Monetary Fund (IMF), opined that ‘The Chinese economy is a ticking time bomb. The social, political and economic order is not sustainable in the long run given such massive illicit outflows.’

The Chinese system is ‘not sustainable’? Now, that’s a problem.

Byron King
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Daily Resource Hunter

From the Archives…

Why You Should Always Be Looking to Buy Small Cap Stocks
23-11-2012 – Kris Sayce

China is Now the World’s Biggest Gold Producer – and Consumer
22-11-2012 – Dominic Frisby

The Stock Market Gets Squeezed
21-11-2012 – Murray Dawes

Buy Quality Gold Stocks That Have the ‘Right Stuff’
20-11-2012 – Dr. Alex Cowie

Picking the Hot Commodity Stocks of 2013
19-11-2012 – Dr. Alex Cowie

China’s Economy Suffering a $3.8 Trillion Haemorrhage

By The Sizemore Letter

In recent weeks, I’ve written that Microsoft ($MSFT) will ultimately muscle-out Apple ($AAPL) as the leader in smartphones and tablets.  It will be a long war of attrition, but Apple has no durable long-term advantages—what Warren Buffett calls “moats”—to keep most of its customers loyal.  And Apple’s insistence on controlling every aspect of both its software and hardware puts it at a disadvantage to a more flexible Microsoft.  With Nokia ($NOK), Samsung, and other major manufacturers lining up to produce Windows phones, we will likely see a very different smartphone market a year from now. (To read the whole story, click here.  And to see what caused Nokia’s share price to jump 30% last week, see Nokia Lumia sells out in Germany.)

But what about Google’s ($GOOG) Android?

It may seem odd that Google gets barely a mention from me, given that the Android operating system dwarfs both Apple and Microsoft in market share.  By some estimates (it depends on what your threshold for “smartphone “ is), Android has over 75% of the market.  And I myself carry an Android phone.

If you want to know why I don’t take Google seriously as a long-term competitor, consider my recent experience with Google Play Music, which is Google’s (shoddy) attempt to compete with Apple’s iTunes. 

Google Play Music sounds great, in theory.  It offers you the ability to upload your entire music collection into the cloud and sync all of your mobile devices to one library and one set of playlists.  You can stream the songs over the internet or keep copies locally on your phone…or so I thought.

This is where I start to curse Google under my breath.  Google Play is incapable of syncing music to an SD card; it can only save your music to your phone’s internal memory.  That’s a problem when you have 32 gigs available on your SD card and less than 2 gigs in the phone’s internal storage.

This has been a “known issue” for over a year, and one that Google should seemingly be able to fix in a matter of hours.  Yet in order to get Google Play Music to use my SD card, I had to hack my phone with a jury-rigged scripting file.

Seriously?

You simply don’t have these sorts of problems with Apple or Microsoft.  Why?  Because they are real companies with real business models.  With a few exceptions, they actually charge for their products and offer some degree of support.

Given that Google gives most of its products away for free, you have to question how seriously they take them.  And given my experience with Play Music, the answer is “not very.”

I should be clear that I am not forecasting an immediate collapse in Google’s share price.  I simply have no way to gauge the sustainability of their advertising model, so I find it more prudent to invest elsewhere.

Disclosures: Sizemore Capital is long MSFT. This post first appeared on TraderPlanet. 

SUBSCRIBE to Sizemore Insights via e-mail today.

The post Microsoft Will Crush Google appeared first on Sizemore Insights.

Related posts:

• In a War of Attrition, Microsoft Will Beat Apple
• Microsoft, Apple and Big Tech for the Remainder of 2012
• How to Spot a Value Trap: Research in Motion

AUDUSD is facing 1.0480 resistance, a break above this level will confirm that the uptrend from 1.0149 (Oct 8 low) has resumed, then further rise towards 1.0550 could be seen. Support is at the upward trend line on 4-hour chart, only a clear break below the trend line will suggest that lengthier consolidation of the uptrend is underway, then sideways movement in a rang between 1.0287 and 1.0480 could be seen.

Daily Forex Forecast

USDIndex moving as it expected to move. Currently closed near support
level, It may retrace a bit but it has a good chance to break the
support and get close to 79 level.

USD INDEX

Most USD news forecast suggest mix move on price next week. Most
importantly USD unemployment claim cross 2012 high so far, It will not
stay there long so we can assume next week  it will be more neutral this
would effect market movement.

Uptrend likely to continue on EURUSD,GOLD, AUDUSD at the beginning of
the week. Later however some news may affect price movement.

Next week important news.

Nov 26 -Eurogroup Meetings

Nov 27 -GBP-Revised GDP q/q

Nov 27 -USD-Core Durable Goods Orders m/m (Forecast – negative)

Nov 27 -USD-CB Consumer Confidence (Forecast – positive)

Nov 28 -USD-New Home Sales (Forecast – negative)

Nov 29 -Italian 10-y Bond Auction

Nov 29 -USD-Prelim GDP q/q (Forecast – positive)

Nov 29 -USD-Unemployment Claims (Forecast – positive)

Nov 29 -USD-Pending Home Sales m/m (Forecast – positive)

Nov 30 -CAD-GDP m/m (Forecast – positive)

By Central Bank News

By JW Jones – www.OptionsTradingSignals.com

The recent massive sell off in AAPL stock has presented some interesting opportunities for low risk trades. For long time readers of this column, you may recognize that my portfolio usually contains an AAPL position.

Why? I cannot overemphasize the importance of trading liquid instruments, and in the current world, very few underlying issues have options with the degree of liquidity routinely available in a wide spectrum of strike prices and expiration dates.

What is the big deal about liquidity? When markets trade in an orderly fashion it is usually possible to negotiate a reasonable price for all but the most illiquid underlying. However, when blood is running in the street, market makers will routinely widen bid / ask spreads and attempt to extract well more than a pound of flesh. It is only in the most liquid series that any hope of a reasonable exit in these times can be found.

Ok, sermon is over; I like AAPL! For those who have not looked at the option chain for AAPL since last Thursday, I want to call attention to another new aspect of the tremendous flexibility that exists in this name. Entirely new sets of weekly options are now trading, not just those for the next upcoming Friday expiration.

This means as I type on Tuesday morning, I can trade liquid options for calendar year 2012 that expire in 3, 10, 17, 24, or 31 days. That is a lot of choices and will allow us to exploit a never before level of granularity in constructing our trades.

The trade I would like to discuss is a high probability of success trade that is based on the expansion of implied volatility in AAPL as a result of the brutal sell off that has brought the stock from its recent highs a bit over $700 to its current price of $565 despite yesterday’s neck snapping $30 / share rally.

As regular readers know, the first characteristic I evaluate in seeking a high probability trade is that of the current status of implied volatility.  AAPL is one of a handful of stocks that have listed values for implied volatility.

As an aside, the history and current status of implied volatility is discernible for all stocks having listed options, but may require access to a broker database or one of several fee based sites.

The current status of implied volatility for AAPL, symbol VXAPL, is shown below:

As is obvious, the value has “come in” recently but still remains in the upper half of its recent range, particularly when excluding the characteristic spike in volatility preceding the recent release of third quarter earnings in October. Since currently elevated levels of implied volatility indicate that options are rich on an historic basis, it seems logical to consider a trade that benefits from selling these rich assets.

The purest way to sell option premium in a non directional based trade is to sell a naked strangle. A naked strangle is a position established by selling both a naked put and a naked call. The trade is typically constructed in far out-of-the-money strikes, typically with a delta valued at an absolute value of 5 to 10, and having duration of 25 to 35 days.

I have illustrated below the P&L curve for a 10 lot naked strangle for December monthly options. The put and call are sold at the $475 Put and the $630 Call strikes. The trade has an 87% probability of profitability and yields 9% for a 32 day holding period.

A word of explanation of the manner in which the probabilities are derived is in order. One of the helpful practical characteristics of the options “Greeks” is the fact that the delta of an option is closely correlated to its probability of being in-the-money at expiration.

In the case of the options we are selling, the puts have a delta of -6 and the calls have a delta of 10. This means the puts have a probability of 94% of being out-of–the-money at expiration and the calls have a probability of 90%.

The probability of both contracts being out of the money is therefore 0.9*0.94= .84 or 84%. The credit we initially received serves to broaden the profitability zone a bit, resulting in the stated 87% probability of profit.

This is a very capital intensive trade with unlimited risk. In the illustrated size of a 10 lot trade, the buying power reduction required in a regulation T account is around $56,000. On this basis, the trade yields 9% at expiration.

For those with risk based margin, more commonly known as Portfolio Margin, the margin is a bit less than half that amount. This dramatic reduction in margin requirements results in a yield in excess of 18%.

These trade constructions illustrate the pure return and probabilities of success for a premium selling approach and illustrate the logical thought process of pursuing such a strategy. An important caveat is that these unlimited risk trades such as illustrated must be taken in small size relative to the total portfolio to reduce risk and allow for adjustments when price does not behave.

While these structures are not common and require a certain degree of capital and professional understanding, the probabilities and potential returns are such that small positions can result in large profitability outcomes on a monthly basis.

Right now we are offering a special trial offer for traders interested in trying out OptionsTradingSignals.com! The recent track record has been almost too good to be true. Check out this special offer by click here.

Happy Trading & Happy Thanksgiving!

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JW Jones

This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.

By MoneyMorning.com.au

Could it be that the French Economy is the real danger at the heart of the European project?

Indeed, France’s bonds were stripped of their AAA status by yet another ratings agency – Moody’s. What’s more, Moody’s says it may cut again, citing inflexible labour markets and low levels of innovation as key problems for French competitiveness.

Oh, and then there is, of course, the matter of what looks like a shocking double dip recession spreading across the eurozone.

Yes folks, eurozone troubles keep piling up – and the infection is spreading deeper into the core.

Today, I want to show you a fascinating chart that tells you all you need to know about Europe’s ills – and why we need to continue to tread carefully here.

High Stakes: Democracy on the Line

At first sight, the chart I’m about to show you may look a bit confusing. But bear with me – it’s worth investing a few moments to understand what’s going on.

The chart shows the poll ratings for the leaders of the PIIGS nations (I’m sure you don’t need me to spell them out) through the financial crisis period. Actually, it’s not just the PIIGs, it also includes France. Oh, the French will be happy that Citi-Group saw fit to lump them in with the so-called peripherals!

You’ll notice that new leaders come in on a high. And from there, there’s only one way to go – down!

Let’s take the green line for example. It shows Berlusconi’s gradual fall from grace. But then there’s a break in the line – that’s when Mario Monti took the reins, his rating went sky-high. But only for a while. Most politicians have some sort of a honeymoon period upon taking office.

But it’s looking like they’re very short-lived these days. It’s all very well making promises on the campaign trail – but they’re much harder to keep once you’re in the job.

Take François Hollande. He may have come into the Élysée Palace all guns blazing, but just look at how quickly his popularity plummeted.

Looking at each country’s progression of leaders in turn is fascinating. And it highlights a serious problem at the heart of Western democracy…

Enough Rope to Hang Us All

As Bill Clinton once famously said, ‘It’s the economy, stupid’ and never has that been more true.

Everyone wants a slice of the economic pie. And it’s not just the welfare dependents – business is increasingly dependent on government handouts.

In fact, François Hollande recently launched his ‘competitiveness pact’. He aims to lift output by half a percent over five years by granting €20bn a year in corporate tax relief and pruning public spending by 1%.

This is not what many voters had been expecting of their socialist leader!

The point is, in the West both industry and vast swathes of the public are hooked on government. But the only way to give to one group without having to take it from the other, is to borrow the extra cash.

And for the likes of France and the UK – they’ve been able to do that. You see, as capital has fled southern Europe, the cash has migrated north.

As money floods into French bank accounts, the banks use much of the cash to buy French government bonds (for safety, you know!). And so the yields on government debt are down to just over 2%.

It’s just the same as in the UK – perceived safety allows government borrowing to continue to rise. None of the hard-core austerity… and precious little rioting in the street too.

The thing is, neither stimulus (more borrowing), nor austerity have shown any meaningful and sustainable impact on listless economies. Despite the best efforts of the politicians to spend and borrow, or indeed make cuts, the opinion polls still point downhill.

The truth is wholesale reform is required. And Western democracies are simply not geared up to delivering that. Or is it simply that the politicians aren’t made of the right stuff?

Who knows? But one thing’s for sure, things aren’t getting any better.

Money Printing Good for Some Assets

I think it was Hemingway that answered the question, ‘How does somebody go bankrupt?’ Answer: ‘Slowly at first… then, all of a sudden.’

Western nations have been gradually bankrupting themselves for decades. And though a few years of crisis may not seem like ‘all of a sudden’ – if you take the long-view, things are coming to a head pretty quick.

There’s no easy way out of the funk we find ourselves in. It’s now pretty obvious that austerity doesn’t work. So that just leaves one option on the table. Print and spend.

Yes, I know I said wholesale reform was another option – but so long as there are opinion polls, that seems highly unlikely. Doing things right will cause too much pain.

On the bright side, print and spend policies don’t need to be bad for investing.

I expect that today’s short-term economic policies will be ruinous over the long run. Not least because they’re not helping to get the economy back on track anyway.

But over the short term, I welcome the money printers with open arms. There’s no doubt it’s good news for many asset classes – not least gold.

Bengt Saelensminde
Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

Retirees and the Fed Face Off
16-11-2012 – Kris Sayce

Attention Investors: This Market is Worse Than it Looks
15-11-2012 – Kris Sayce

Avoid the Slaughter: Watch This Key Stock Market Pointer
14-11-2012 – Murray Dawes

Why Lithium is Another ‘Rare’ Element on China’s Radar
13-11-2012 – Dr. Alex Cowie

Who Says Gold Doesn’t Pay ‘Interest’?
12-11-2012 – Dr. Alex Cowie

The French Economy Time Bomb Will Explode

By MoneyMorning.com.au

The bull case for the euro took a hit from a bunch of baguettes this week.

The Economist magazine ran a cover of some tasty bread sticks wrapped in French colors and topped off with a burning fuse. The headline was, ‘The time-bomb at the heart of Europe’.

Those baguettes will blow some day. France has big debts and a stupid and oversized government. But it’s hardly alone in that regard. Take Japan, for example.

The industrial and financial titan of the last forty years is on the same path to ruin as France. It’s the time bomb at the heart of Asia.

Today’s Money Weekend will show why the crisis in Japan could be the catalyst for the rerating of certain Aussie stocks.

Sumo Wrestler Recruited to Peddle Japanese Debt

Japan is a warning for the shemozzle practically every Western country is in. It has an enormous debt-to-GDP ratio of over 200%, zero interest rates, a stagnant domestic economy and an ageing population.

Now the last pillar of its strength is beginning to show serious weakness – its export sector. Japan began to run a trade deficit in 2011, after thirty years of surpluses. The government also continues to borrow money to pay for its spending.

Because of this, Japan will soon need to attract foreign money because its domestic savings can no longer support the current level of government borrowing.

But why would anyone invest in Japan with interest rates practically non-existent? Not to mention the currency risk of the yen falling thrown in as well.

The answer is they probably won’t – unless the return rises to make the risk worth it. That means the Japanese government must offer higher interest rates.

But the Japanese government can’t afford higher interest rates because paying higher rates on its huge debt would consume too much tax revenue.

That’s one reason the Japanese government is using Japanese celebrities such as a national sumo wrestling champion and an all-girl pop group to encourage the Japanese public to buy more government bonds (JGB’s).

The Japanese government is going to these lengths because the number of retail investors in JGB’s has been declining since 2009, according to the Japanese Ministry of Finance.

One reason is that Japan isn’t just running out of money, it’s running out of Japanese!

With a falling birth rate, closed immigration policy and ageing population, there just aren’t enough people to save at the rate needed to support the government by buying government bonds.

And so with a shortfall of domestic savings and the limited potential for foreign investment, the only other choice is for the Bank of Japan to print money to buy the government’s bonds (‘monetize the debt’).

Hedge fund manager Kyle Bass pointed all this out in his latest report to investors. You might’ve heard of him before. If you haven’t, he made millions (after founding his own firm, Hayman Capital) shorting the US subprime housing market before it blew up.

Now Japan is his target. He wrote, ‘Japan now sits on the doorstep to its own demise. We believe they have reached zero hour, where things will begin to unwind altogether.’ He also says, ‘Japan is teetering on the precipice of financial collapse.’

Now, many a trader and speculator has bet against Japan and lost money over the last twenty years. But the current situation puts the spotlight on one key industry – energy.

A Rising Market for Energy Meets Supply Crunch

A major reason for Japan’s trade deficit is that it now has to import almost all of its energy. Japan has few natural resources. Previously it used nuclear power to generate the majority of its electricity.

But after the Fukushima disaster in 2011 it shut down its nuclear reactors. This caused a spike in liquefied natural gas (LNG) imports.

You may have heard recently that the glut of cheap gas in the USA might find a welcome export market in Asia looking to cut its energy costs. That’s bad news for the Aussie companies with billion dollar LNG projects that now face the possibility of a major competitor and smaller revenues than they’d budgeted for.

But a US LNG export industry would take time to develop. Time is something Japan is short on. After all, it has bills to pay. That puts nuclear power back on the agenda in Japan.

Japan restarted two of its reactors in the middle of this year. This was despite considerable public protest at the time.

Check out his from Money Morning (USA): ‘The Prime Minister of Japan called restarting the reactors a “matter of national survival “, because the high cost of imported liquid natural gas was crippling the economy.’

That also explains this in the New York Times last month:

‘Japan’s stated policy of eventually ending its dependence on nuclear power has suffered another apparent setback with the announcement Monday that construction will restart on a nuclear plant in northern Japan after three local municipalities gave their consent.’

Nuclear reactors that were approved for construction before the Fukushima disaster are still getting the go-ahead for completion.

The politics of this are murky. But an obvious conclusion is this will stimulate demand for uranium.

And don’t forget that the US, China, South Korea and the Middle East all have nuclear energy in the mix to different degrees. China has the most aggressive expansion plans.

But there’s a crunch brewing in the uranium market because of supply. The current spot price for uranium is just over US$40 per pound. This is down from a high of US$140 before the global financial crisis.

That’s cheap energy for the existing reactors. The problem is at that price there’s no incentive to go into the uranium mining business.

The Uranium Market Could Be a Speculator’s Delight

You might’ve heard of Aussie uranium industry player Paladin Energy (ASX: PDN). Perth Now reported earlier this month that the company was slashing costs in the face of the falling uranium price:

‘The company said it would not expand or develop new projects in the current price environment.

‘”Paladin is of the view it would require a sustainable uranium price at or above $US85 per pound ($A81.78) to warrant any further expansion or new mine development.”‘

No new mines or projects means no new supply. Every day existing reserves are run down. It means the uranium price will have to rise, or uranium producers will go out of business.

That brings us to commodity veteran Rick Rule. He has decades of experience in the resource market. So his opinion counts. He put it like this earlier this month:

‘For the uranium industry to continue supplying power around the world, the uranium price has to go up.

‘And the uranium price can go up because the price of uranium is as little as 3% of the total cost of delivering electricity from a nuclear power plant. Even if the uranium price were to double, it would make an almost imperceptible difference in the final cost of producing electricity from a nuclear power plant.’

Uranium is shaping up to be a classic resource scenario Rule loves – a contracting industry in the face of a supply/demand imbalance in a market everybody hates.

This is a good reason to put uranium stocks on your speculative watch list.

Callum Newman
Editor, Money Weekend

The Most Important Story This Week

A key signal professional stock market traders watch is the ’200 day moving average’. When the market breaks below or above this point, it’s often a reliable guide for which way the market is going to go. The Aussie stock market had dipped below this level but rallied this week. But don’t trust the rally – the market is at the risk of a big drop according to Slipstream Trader Murray Dawes. See why in The Stock Market Gets Squeezed. Keep your eye out for an update this afternoon, too!

Highlights in Money Morning This Week…

Merryn Somerset-Webb on Two Reasons to Steer Clear of the Chinese Stock Market: ‘The real argument against anyone but stock traders investing in the Chinese stock market isn’t really anything to do with the current price or with the various theories about how equities should or could be valued, or about the noise surrounding the political changes and economic slowdown. Instead…’

Kris Sayce on Don’t be Fooled by Australian Housing’s Death Fart: ‘Bottom line: Investments should make you money. That’s not to say all investments will make you money, but that’s the goal. One thing’s for sure, borrowing to buy an expensive house is the easiest way to lose cash hand over fist.’

Dr. Alex Cowie on Picking the Hot Commodity Stocks of 2013: ‘First, a recap of previous ‘hot commodities’…In 2011 it was potash. In 2010 is was rare earths. And in 2009 it was lithium. In each case there was a trigger factor that pushed the simmering fundamentals to boiling point, triggering a mania phase in the stocks exposed to that commodity.’

John Stepek on Beware the Bank of England: UK Economy Going Down: ‘There’s one book that every central banker should read. It’s not by Friedrich Hayek or John Maynard Keynes. It’s Mary Shelley’s Frankenstein. In it, Dr Frankenstein has the hubris to believe he can use science to short-circuit nature, and re-animate something that should be dead…The parallels are striking.’

What Japan’s Energy Supply Crunch Means for Uranium Stocks

By Central Bank News
   Colombia’s central bank cut its benchmark interest rate by 25 basis points to 4.5 percent, a surprise to financial markets that had expected rates to be held steady, saying economic growth was slowing “slightly more than expected.”
    Banco de la Republica Colombia has raised rates two times this year and cut rates three times with the intervention rate now 25 basis points below the level it started the year.
    “After annual growth of 4.8 percent in the first half of 2012, recent indicators suggest that activity is moderating slightly more than expected,” the central bank said in a statement, adding that the weak global economy and decline in domestic demand was reflected in lower exports and industrial output.
     Colombia’s Gross Domestic Product grew by 1.6 percent in the second quarter for an annual rate of 4.9 percent, up from 4.8 percent in the first but down from 6.1 percent in the fourth quarter.
    The central bank said the range of forecast for this year are between 3.7-4.9 percent, with 4.3 percent the most likely. 

    The major risks to Colombia’s growth next year remains a “significant recession in Europe” and the uncertainty surrounding the U.S. fiscal issues.
    “For 2013 external demand for Colombian products is expected to show moderate but sustained growth, stable international prices and ample liquidity,” the bank said, adding economic activity should be close to the country’s productive capacity.
     Credit growth continues to slow, the bank said, adding inflation remains very close to the bank’s 3.0 percent midpoint target range. 
    In October Colombia’s inflation rate eased to 3.06 percent, down from 3.08 percent in September and 3.1 percent in August. A recent poll by the central bank showed that inflation this year is expected to end at 3.03 percent.

    www.CentralBankNews.info