Scoops Lane
Thursday, November 14th, 2013
Melbourne, Australia
By Dan Denning

  • The inside job exposed
  • Battle Lines for 2014
  • Does Switch Trader guarantee losses every time?
  • Markets and data
  • Reader mail on property rights

Battle lines for 2014

Will wonders never cease? Someone at CNBC is sure to get fired for letting Andrew Huszar go on television and tell everyone that Quantitative Easing is an elaborate scheme run by a banking cartel with the goal of inflating stock prices for the ‘cartel class’. Huszar was on to talk about his op-ed in the Wall Street Journal, in which he apologised to the American people for his role, as a Fed official, in inflicting QE upon the middle class.

This is a man who either means well, or who is trying to save his head from the guillotine in the same way the French elites did after they blew their financial system up during the Revolution. Once the masses are on to your financial fraud, and once trust disappears, the blood in the streets may not be far behind.

QE hasn’t freed up credit as Ben Bernanke intended, according to Huszar. And it hasn’t reduced unemployment either. The labour force participation rate in America is at a 35-year low, according to recent data from the Bureau of Labour Statistics. What’s more, many of the jobs that ARE being created are either part-time or low-wage.

The CNBC hosts quibbled over the data in the way that only sycophants and Quislings can. But you could see them practically filling their breeches when he pointed out that all QE has really done is pump up stock prices for the people on Wall Street. When he began talking about that and reviewing the program, the interview was hurriedly ended.

Because we can’t have the sheep finding out that they’re getting fleeced!

As I’ve argued in the just-published monthly version of The Denning Report, QE makes it possible for the already-wealthy to buy up productive businesses and tangible assets with money borrowed at cheap interest rates. But if your main asset is your income or your wage, you don’t benefit from QE at all.

We’re also told that more QE is justified because there’s no evidence of inflation in consumer prices. But as Salah said to Indiana Jones in Raiders of the Lost Ark, ‘They’re digging in the wrong place!‘ You won’t find a whole lot of inflation in consumer prices because the world has an excess of productive capacity which drives prices for goods and services down (good deflation). Official CPI is also kept low by excluding the things that ARE going up in price, like food and energy.

If you’re looking for the smoking gun, just look at the S&P 500 and the Nikkei 225. Japan’s stocks went up over 70% in the ten months after the bank of Japan said it would double the nation’s monetary base. And the S&P 500?  It’s up 160% since the lows in 2009.

QE has certainly done the job for the people on the inside of the global financial system. That may just be the way it evolved. Or that could have been the intention all along. If so, you might even call it an inside job!

Battle lines for 2014

You may find all of the above as fascinating as I do. Or it might be terribly boring to you. But no matter what your reaction is, it all still comes down to the same question: what can you do about it? What’s the right investment strategy?

Well, if QE really does (deliberately) create asset bubbles, to first thing to do is to be honest with yourself. You’re not investing anymore. You’re speculating in a market where valuations are already stretched and margin debt is high. Everything you do is high risk.

The fact that buying stocks is even riskier than it looks right now is especially true for another reason. QE forces down interest rates as the Fed buys bonds. In doing this, the Fed lowers the ‘risk premium’ on both stocks and bonds. As all interest rates are gradually lowered (even junk bonds) you have to take more risk to earn the same reward.

The trouble is, not everyone realises exactly how much risk they’re now taking for the extra return. The path of least resistance is to stop thinking so hard and just buy stocks. And that appears to be what most US fund managers have done. But you’re now seeing diminishing marginal returns on QE in the US market. Either Janet Yellen’s Fed ups the ante in 2014, or US stocks are due for a mighty correction.

But remember, we live in a world of competitive currency devaluations. Global capital flows don’t like wandering in the desert for 40 years, looking for the Promised Land. They want to flow where they’re treated best and can enjoy fresh stimulus. Where will that be in 2014?

I reckon it may be in Europe. ‘All options are on the table,‘ European Central Bank executive board member Peter Praet told the Wall Street Journal yesterday. The ECB is tired of sitting back and watching the Bank of Japan and the Federal Reserve have all the fun with unconventional monetary policy. Praet says negative interests rates – where banks pay to hold excess reserves at the central bank – and asset purchases will be considered. The goal is the same in both cases – get banks to lend money into the economy and let the multiplier effect produce growth.

Exactly why the ECB thinks that will work is a good question. It has failed in Japan and America. Maybe it will be different in Europe. Or maybe it will have exactly the same effect: banks will pour money into a narrow class of assets to make speculative gains. If form holds, liquid blue chips will be the winners, although don’t rule out technology and growth stocks if you really want to have a punt.

The ECB will pay lip service to boosting exports, lowering unemployment, and increasing lending. But once the investment banks get in the game, it’s all about using QE to speculate on stock prices. If the ECB intends to lead the charge into more folly, speculators ought to look at how to profit. In my latest report, I’ve suggested an Aussie-listed exchange traded fund that could profit if the ECB begins blowing up its balance sheet with asset purchases in 2014.

Does Switch Trader guarantee losses every time?

The Switch Trader service launched yesterday. Right now, a small group of readers who asked to be notified have a 48-hour window to review the presentation of the system and decide if they’re interested. That 48 hour window closes tomorrow, at which point I can tell you more about it.

But in the meantime, let me address one specific question: does Switch Trader guarantee losses every time?

You might be as surprised to see the question as I am. Yet I’ve received it twice. And it’s been in response to a chart like the one you see below. There’s a red dot (the stop sell level, a green dot (the stop buy level) and a series of black dots, which is yesterday’s closing price. Please note, this chart is for example purposes only and was taken from one of last week’s Switch Trader reports.

It certainly would be ground-breaking to publish automated trading signals on blue chip Australian stocks that guaranteed you’d lose money on every trade. But as a publisher, that’s not the kind of innovative service development I’m interested in. So where is the confusion coming from?

Well first, the how and why of placing both sets of orders is covered in a series of tutorial videos we’ve prepared for new readers. But the important point is that the orders are ‘stop’ orders, which is not the same as a ‘stop loss’ order. A stop order doesn’t refer to a profit OR a loss. It’s simply a type of order.

In the example above, you might have been short QBE for a few days or even a few weeks. It depends on the Switch signals. But if you were riding a short position in the stock for some time, the ‘stop buy’ order to go long would mean closing out the short for a profit and then taking a new position. In other words, you’d be taking a profit, closing the trade, and putting a trade on in the new direction.

The same could be true if you were long the stock. The stop sell order would tell you when to exit the position. But you might be sitting on a gain at that point. Also, if the stock kept going up, the stop sell level would move up to. It would be, in effect, a trailing stop to capture gains, not a stop loss to limit losses.

Here’s how the system’s designer, Brian Jagger, puts it:

Every Switch is an entry into a new trade. But that entry into the market could last for days’ weeks, even months. The two daily published order placements with prices are just that, orders. They will not become trades until their prices are reached. These price points serve as a mechanism to profit from trades which have moved a considerable way in the direction of the trade, then pulled back a bit, or to incur a small loss where the trade did not go our way.’

Obviously you have to get into the trade at some point. But that black line with the dots is not the entry point for the current Switch trade. It’s just the current share price. How to get into your first trade is one of the issues Brian covers in the tutorial videos. I’ll give you the short version: you can sometimes get into the current trade and other times its better to wait for the next Switch.

It’s pretty simple once you’ve seen it in action a few times. But if you’re not an experienced trader and or you don’t have access to an online trading platform, it’s definitely not for you. You have to be able to review the trading orders each day and place them online. If you can’t do that, it’s not likely you can use the product. And we can’t automatically trade your account for you. It’s something you’ll have to do yourself.

By the way, another common question is whether the transaction costs from all the Switching have been figured into the back testing performance and whether they erode or destroy your potential gains. The answer is that they HAVE been figured into the back testing and that the more you Switch, the more you can make.

Some of the stocks Brian’s back tested Switch a lot more often than others. Some, like Telstra, are relatively placid. Either way, if you can track the trends and switch at the right time, you ought to be able to out-perform a buy-and-hold strategy, even after trading costs. That doesn’t mean you’ll  get every trade right. That’s impossible. But so far, we like what we see.

Markets and data

The US indices have shown gains throughout this week amidst uncertainty about when the Feds would start tapering its bond buying program. Janet Yellen appeared before the Senate Banking Committee today for her confirmation hearing. Austin Goolsbee, a former top economic advisor to President Obama, thinks that there may be a slight chance that members of the Tea Party could use the hearing to delay Yellen’s confirmation. Tea Party member Rand Paul has already sent warning signs and intends to put on hold the confirmation, unless the legislation to audit the Fed is brought to a vote.   

Emerging Markets
A communique released from the four day meeting of Chinese Officials calls for fiscal reform, opening up of markets and accelerating social security programs. More details are expected to come out in the coming days. Investors were disappointed with policy shifts to combat lower economic growth.  The benchmark Shanghai Composite Index (SHCOMP) fell 1% and the Hang Seng Index fell 1.1% on Wednesday.

European Markets
Shares in London fell 1.44% (6630) on concerns that the Bank of England could hike interest rates after the bank lowered its outlook for unemployment and increased expectations on inflation. Meanwhile, in Europe shares fell modestly and the talk of more stimulus from the ECB did nothing much to bring some momentum into markets. The Dax was off by 0.24% (9054) and the CaC fell 0.56% to 4239 at finishing time on Wednesday.

Reader mail on property rights

My ‘radical ideas’ about property rights in Australia provoked some reactions last week. As you’ll see, some were positive and some were not. I’ve republished a little of both for your consideration and enjoyment. Send me your own comments to

From: Brent P.
Sent: Thursday, 7 November 2013 6:25 PM
Subject: Re:Dan Denning, your W.A speech

Dear Dan,

Your comments about the banks and housing are fair enough. Private land ownership and having all rights belonging to the owners; NO, the present status quo where Government controls what happens under the surface of the earth in Australia is an excellent one.


Well, if we may assume that our Australian governments rule for the good of all, then it is better that profits and royalties go into government coffers to the benefit of all.

That means; individuals, small business and large corporations will not be hit with yet higher taxes.

Environmental protection requirements are better administered by Governments across private property boundaries: again good for all.

Farmers and graziers will affirm with certainty that what a neighbour does or does not do on or with their land, affects their land. Water tables, soil and air are all affected by mining to some degree.

To re- establish original landscapes in Australia, with its ancient fragile eco systems takes longer than our lifetimes.

Private property rights: Look at Gina Rinehart. She had a father who had the foresight to recognise that those red Pilbara ranges did actually consist of iron ore, the stuff that is basic to building the Chinese skyscrapers.

She did not need private property rights and yet there are, sadly, many envious people who would do a lot to take her riches away from her. You want to get rich: stake your claim, get a licence and pay your royalties.

This system is just fine.

I might add a question: to what extent do Aboriginal people benefit from mining income in regards to their wellbeing? So far it adds mainly to ‘sit down’ money from taxpayer provided Government funds.

I hope you will find some food for thought in these comments. My recommendation is to stay clear of any comment that might encourage greed. Americans can keep their laws, guns, surveillance systems, the lot. If they consider hillbilly lifestyles as being the right of all, I prefer Australia, A LOT.

Love the place and please do not attempt to follow the Yanks.

Regards, Brent P.

Lots of food for thought Brent. Thanks. It’s naïve to think that government ‘rules for the benefit of all’ and that it’s better for royalties to go into government coffers. If you watched Kevin Rudd’s resignation speech in the Parliament last night, and the fawning yet insincere reactions from both sides of the bench, you’ll see that government rules for the benefit of itself at your expense. That may sound cynical. But it’s realistic.

Private property – and owning the minerals under your land – doesn’t encourage greed. It encourages good stewardship of natural resources and it DIS-courages the government and corporations making deals about the minerals below your property without your benefit.

Finally, you have America’s surveillance system already. You just don’t know it because so few people in Australia seem to care. Either that, or they think that because the government owns the land and knows how to govern ‘for the benefit of all’ it can be trusted to use powerful surveillance tools responsibly. And while we’re on the subject, they’re also likely to believe that the authorities can be trusted to be only ones in society with firearms.

I’ll simply say I disagree. If you let them, governments will accumulate power and then abuse it. You have to remain vigilant in the defence of all of your rights, including property, speech, and the right to defend yourself. But then, I’m a hillbilly from the Rocky Mountains, so I would say that!

From: Geoffrey O.  
Sent: Friday, 8 November 2013 8:11 PM
Subject: Scoops Lane 7 Nov 2013 – private property rights over land

Hi Dan

I like your ideas and the way you express them, not just in Scoops Lane but in other publications such as The Denning Report.  I agree in general with your stance on the importance of private property.

In relation to land, I agree that in Australia there is too much governmental regulation and restriction of property rights. It is a curious thing about the Australian psyche that on the one hand there is the larrikin streak and a good dose of the Irish ‘agin the Government’ attitude but, in contrast, an acceptance of governmental regulation and restriction of private rights that at times verges on the subservient. You must have noticed this but contradiction but are inhibited from remarking on it because you are an American and it would be deemed to be offensive for you to do so.

I as an Australian who has spent his working life abroad can do so – as long as there is somewhere I can duck for cover. My career was in what used to be the (British) Colonial Service, latterly Her Majesty’s Overseas Civil Service, first in Fiji and then in Hong Kong.

In Fiji there was a relatively high degree of governmental control, especially over the indigenous population (‘Fijians’) although it has to be said that in their case control was exercised by an indigenous ‘state within the state’. Fijian land was owned communally and could not be alienated. This reflected the nature of indigenous Fijian society. In the last decade before Independence in 1970, there was a policy of persuading members of Fijian land-owning units to agree to the subdivision of their cultivable land and granting of leasehold title to individuals within those units who wished to farm them.

With individual title they were in a better position to obtain loans to help them develop their lots. Hong Kong was a very different story. I think you would approve of the policies of Sir John Cowperthwaite as Financial Secretary of Hong Kong and would find this article interesting:

Clearly, this policy of ‘positive non-intervention’ together with guaranteed private property rights worked for Hong Kong and this was due in no small part to the nature of Hong Kong Chinese society. It is equally clear to me that this approach would not have suited Fiji, which was composed mainly of three broadly distinct societies – Fijian, Fiji Indian and European. It would have suited the Europeans and Indians.

When Europeans settled in Fiji before it was ceded by the Fijian chiefs to Queen Victoria – they saw this as a personal transaction with the British sovereign – they obtained grants of land from the chiefs (who did not always have the right to alienate land in this way) and they would have welcomed the opportunity to buy up ‘native’ land without restriction.

After British administration began, the validity of all these land grants was investigated; some were disallowed but where land had been sold on to subsequent purchasers, freehold title was conferred. Some of the choicest land thus remained under freehold title and was developed on a plantation basis but some 87% of all land remained in customary ownership by extended family groups. This land was and is regarded as belonging not only to the present generation but as being handed down from past generations through the present one to future generations, with no one having the right to alienate it.

The nature of Fijian society is bound up with land, which is not a mere commodity to be bought and sold. As the descendants of Indian indentured immigrants multiplied to the extent that they outnumbered the indigenous population and thrived they tended to displace European settlers, who diminished in number. They, like the earlier European settlers, wanted to be able to buy and sell native land. The Fijians were fearful of losing their land and the desire of the Indians to own land and not just lease it, a desire that was manipulated by politicians,  and fear on the part of the Fijians was the main cause of inter-racial tension which was never far from the surface and was potentially explosive. After Independence it did explode and manifested itself in military coups.

The point of all this is that, as I see it, the concept of absolute private rights of property over land may make sense from a Western perspective but is alien to some other societies and cannot be applied universally.

A complicating point in relation to private property rights in Australia arises from the common law of England, which was imported into Australia at the time of British settlement. A concept which is artificial almost to the point of being a fiction is that of ‘the Crown’, which is not identical with the Queen or King in person, though once no doubt it was. It is not a static concept: it used to be held, for example, that ‘the Crown is indivisible’.

Now it may be spoken of as ‘the Crown in right of Victoria’, ‘the Crown in right of the Commonwealth of Australia’, or of Canada, or New Zealand. You would be familiar with the feudal system in mediaeval Europe and with its application in England by William the Conqueror. Title to land was in the gift of the king. Barons and other magnates held their land directly from the king ‘in fee simple’, aka freehold.

Even this title, however, was not absolute, as the king reserved the right to certain things. This might be a right to hunt or fish, or more relevant to the present issue, to gold, silver, or other commodities below the surface. In fact the freeholder’s rights over the land did not extend below the surface or, for that matter, to the airspace above it – not that that would have been an issue in the feudal period. The rights reserved by the king and indeed the king’s ultimate power to take back what he had given passed in time to the Crown, whose powers became exercised by Ministers responsible to elected Parliaments.

Parliaments can pass laws that modify the powers of the Crown in relation to land just as they can pass laws that modify the common law but subject to those statutory laws the powers of the Crown remain. The position is further complicated by our Federal system. This as you probably know is based on the Constitution of the USA to the extent that the Federal, or Commonwealth, Government only has those powers conferred on it by the Constitution while the States have not only those powers expressly reserved to them by the Constitution but powers over any other matter not conferred on the Commonwealth by the Constitution. (The Australian and the US Constitutions differ of course in other important respects.)

Property law in general remains with the States and the Crown’s rights over minerals below the surface remain with the Crown in right of the State concerned. All of which brings me to that part of your speech to the Pastoralists and Graziers Association of Western Australia where you said: Your property is yours. What you do with it is your business. Not anyone else’s. In the light of the legal and constitutional framework within which we have to operate, it seems to me that it would be no simple matter to apply that philosophy to land ownership, however desirable it may be. (That is not to deny that there may be a case for converting pastoral leases to freehold title, but that seems to be a different issue.)

I’m sorry I can’t make my point more briefly.

Best regards,
Geoff O.

That was fascinating Geoff. Thanks for taking the time to write it. I may have simplified matters a bit when I said, ‘Your property is yours.’ It wasn’t a statement of fact. It was a statement of principles. I’d argue that  in cultures where property rights are respected and title to land is transparent, people are freer and more prosperous. That doesn’t make them automatically happier. But it doesn’t hurt.

From: Fay H.
Sent: Tuesday, 12 November 2013 9:23 AM

Subject: Freehold land

Dear Dan,

Our farm is free-hold land, near Stanthorpe in south-east Queensland. Owning free-hold land is superior to owning land leased from the Crown, but that does not guarantee you mineral rights, nor does it necessarily allow you to use your land how you choose. Because the States of Queensland and NSW did the ‘dirty’ work for the Federal government in the time of the Howard years, we are prevented from destroying any trees on 2/3 of our land. It was protected by law, thus allowing the Rudd government to sign the Kyoto Treaty.

I have enclosed two views of our farm [not included in Scoops]. The black and white map shows the black area where we have restricted use land use. We may graze livestock on this land, but we may not clear any trees for agriculture, nor can we clear any trees for new fencing or other purposes without paying for an expensive environmental impact study and then we might not get permission.

The river is owned by the crown so we can’t draw water from it for any purpose other watering our livestock and our household garden without paying for a permit.

We built two ponds on this land several years ago, but now would not be allowed to do so as all watercourses in this district are part of the Border Rivers catchment, and our water might be needed in Adelaide. We can’t drill for water unless we have a permit.

Naturally, all the Queensland farmers and graziers made an outcry against the Peter Beattie ALP State government when our forested country was locked up. But rural Australians only possess 7% of the vote. Not that it mattered, as all political parties need the urban vote and environmentalists everywhere believe it is good to save trees.

Fay H