When You Stop the Lubrication… It Becomes Contagious

Friday, 19th February, 2016
Melbourne, Australia
By Bernd Struben

  • Olympic Ping-Pong
  • The only reason to be somewhat hopeful
  • The End of Australia

Please don’t get the wrong idea from today’s headline. Today’s Port Phillip Insider is still very much focused on finance…not something more salacious.

It’s a direct quote actually, from Dr Robert Gay. He’s a managing partner at Fenwick Advisors, and served as a senior economist at the Fed when Paul Volcker was running the show.

Those credentials sound impressive. At least, Business Day thought so. That’s why they based an entire article on his musings.

Here at Port Phillip Publishing we’re a bit more sceptical when it comes to fancy feathers in colourful caps. Particularly when these relate to the Fed’s witch doctors. Yet when I saw the article titled ‘Tighter lending rules will stifle growth: expert’, they had me hooked. And I read on with, er, interest.

We’ll get back to that shortly. First, a look at the markets…

Olympic Ping-Pong

Watching global markets move over the past months has been a bit like watching a game of Ping-Pong. And not the amateur variety. I’m talking Olympic ping pong. If you watch too closely, you’re liable to get a bit cross-eyed.

The graph below shows the performance of the ASX200 since the start of the year. Definitely not for the fainthearted.

Source: Yahoo Finance

This week was not much different.

After gaining an impressive 2.2% yesterday, the ASX200 is down 0.6% for the day as of writing (1pm). That still leaves it in positive territory for the week, up about 2.2%. That’s a nice trend. And if you leave out the first half of January, you’d just about break even. Of course, if you include those first few weeks of 2016? Down 6.9%.

In the US the S&P500 also fell 0.5% yesterday, following on strong gains earlier this week. The index is currently down 4.7% for the year.

Germany bucked the trend yesterday, managing to gain 0.8%, though the DAX is still down 8.0% in 2016.

And it appears interest rates just can’t go low enough in Japan. The Nikkei 225 tumbled 2.2% yesterday, leaving it 12.2% in the red for the year.

As for oil, West Texas Crude has recovered from its 11 February low of US$26.21 per barrel. Though it’s ticked down 0.7% again in recent trading to hit US$30.56.

Now my income doesn’t hinge on the oil price. And driving a big car with a big motor — and a heavy foot — I don’t mind the extra $20 a week I’m saving on petrol. Though the same can’t be said for my in-laws in Texas, where property values are falling, and jobs are on the line.

They’re not alone.

With oil producers around the globe feeling the pain, I expect to see the price creep up from here. Though, like stock prices, it will be a bit of a Ping-Pong recovery. And as to the heady days of $US105 per barrel last witnessed through June 2014? To quote Darryl Kerrigan (played by Michael Caton) in The Castle, ‘Tell ‘em they’re dreamin.

The only reason to be somewhat hopeful

Now let’s get back to Dr Robert Gay and his message of financial lubrication.

From Business Day:

A group of researchers at the US central bank in New York spent five years looking for a predictor of financial crises, and they found only one: bank lending standards.

“It’s the simple idea that the cost of credit is not what suffocates an expansion, it’s the availability of credit,” [said] Dr Robert Gay… “As long as you can roll over the principal at whatever price, things don’t shut down… Finance lubricates growth and when you stop the lubrication, you stop rolling over debt, then it becomes contagious.”

The article goes on to say, ‘There is no sign that lending standards in the US — where banks are still lending “like wildfire” — and Europe are heading higher…’

Hmm. Lending like wildfire. And that’s supposed to be a good indicator we’re not heading for another financial crises?

If all that lending is such a good thing, you’d think US bank stocks would be hitting record highs. Yet that’s far from so. According to the Australian Financial Review, ‘On February 15 2015, the S&P 500 was 23 per cent higher than on July 2 2007 but the US banking sector was still 51 per cent below where it had been then…’

I’m also not so sure our banker friends in China would agree. Here’s this from the Australian Financial Review:

Soured loans at Chinese commercial banks rose to the highest level since June 2006 as the nation’s economic expansion slowed to the weakest pace in a quarter century. Non-performing loans rose 7 per cent from September to 1.27 trillion yuan ($273 billion) by December…’

Speaking of China, Greg Canavan, editor of Crisis & Opportunity wrote in yesterday’s Daily Reckoning: ‘A few days ago, China announced that total credit growth jumped by a record $525 billion in January.’

That’s more than half a trillion dollars. In one month. That should buy a heck of a lot of lubricant!

Rather than leave off having a go at Robert’s prognostications, according to the ex-Fed chief economist, ‘the only reason to be somewhat hopeful for the year ahead,’ is the world’s major economies ‘leaning slightly towards fiscal stimulus which should give this expansion more time’.

More time until what, exactly?

For an answer to that question, I turned to our wealth preservation expert, Vern Gowdie. You may already know Vern as the editor of The Gowdie Letter and author of the almost prophetic book, The End of Australia.

The End of Australia

Now I know ‘prophetic’ is a strong word. And I don’t use it lightly.

But here’s the deal. Over the last five months since publishing, the exact collapse the book predicts has been set in motion.

Vern calls this collapse a ‘Long Bust’.

If you’ve been watching what’s happening in the markets — particularly since the start of this year — with a growing sense of unease, you should trust that instinct.

The absence of debt (in the massive quantities needed to keep the system afloat) leads to deflation. That is exactly what you are seeing right now.

The ‘Long Bust’ has begun.

Vern’s book explains what this means. But more importantly, the second part of The End of Australia shows you what you can do now to protect yourself from the fallout.

Here’s what Vern had to say today about the opinions of our ex-Fed chief economist.

Dr Robert Gay is firmly of the opinion access to debt is what’s needed to keep the world turning. He is of the opinion that the tighter credit standards being imposed by Australian banks have put us on the path to a recession.

Australian households are amongst the most indebted in the world (on a percentage to GDP basis). You can see that in the graph I’ve attached.

But, according to the good Doctor our banks should lighten up and lend more. We have to keep those wheels of commerce well oiled.

The world is awash with debt, yet the siren call from these PhD, Keynesian indoctrinated economists is always the same — more debt.

My question is “how much lubrication do you need before you end up on a slippery slope?” The credit crisis in 2008/09 showed us just how treacherous that slope can be. Yet, judging by Dr Gay’s comments, that warning seems to have been long forgotten.

Here we sit even higher on the well greased debt slope just waiting to once  again lose our footing. Next time there’s unlikely to be a Fed-erected crash barrier to stop our slide into a system-wide debt deflation cycle.

Bottom line…keep paying down your debt. No one ever went broke owning unencumbered assets.’

You can see why Vern Gowdie was the first analyst I approached for his thoughts on the wisdom of banks lending ‘like wildfire’.

And you can see why 16,000 people have ordered and read The End of Australia since it launched in September last year.

Yet unlike many books on finance, The End of Australia remains as relevant today as it was five months ago. I’d argue even more so. If you’d like to know more, and what you can do now to protect yourself from the coming fallout of too much debt, go here.

That’s all for today.



End of day market data

If you have any ideas about what you would like us to include in our end of day market data drop us a line at letters@portphillipinsider.com.au, and type ‘Market data’ in the subject line.

52-week highs: 30 stocks, including Cimic Group Ltd[ASX:CIM],  Dacian Gold Ltd[ASX:DCN], OZ Minerals Limited [ASX:OZL], and Service Stream Limited [ASX:SSM].

52-week lows: 30 stocks, including Consolidated Tin Mines Limited [ASX:CSD], Silex Systems Ltd [ASX:SLX], and Finbar Group Limited [ASX:FRI].