Dairy farmers won’t like this reply…

  • $10 trillion and growing
  • ‘Tiny stocks’ are back
  • Conference sold out — again!
  • In the mailbag

Your editor left the Stockbrokers Association of Australia conference yesterday of his own volition.

We half thought that, after Wednesday’s edition of Port Phillip Insider, they may have escorted us from the premises.

But perhaps we have a bigger opinion of the influence and range of our editorial commentary than is reality…

Markets

Overnight, the Dow Jones Industrial Average closed up 48.89 points, or 0.27%.

The S&P 500 index added 5.93 points, for a 0.28% gain.

In Europe, the Euro Stoxx 50 index fell 4.91 points, or 0.16%. Meanwhile, the FTSE 100 closed down 0.1%, while Germany’s DAX index ended the day up 0.03%.

In Asian markets, Japan’s Nikkei 225 index is up 44.81 points, or 0.27%. China’s CSI 300 is higher by 0.46%.

In Australia, the S&P/ASX 200 index is up 39.81 points, or 0.75%.

On the commodities markets, West Texas Intermediate crude oil is trading at US$49.20 per barrel. Brent crude is US$50.04 per barrel.

Gold is currently US$1,211 per ounce.

The Aussie dollar is worth 72.48 US cents.

$10 trillion and growing

Today, we have an extensive mailbag. Lots of good stuff. So we’ll keep our usual windbaggery to a minimum in this section, so that we have the energy to huff and puff in the mailbag section.

A day in the markets isn’t a day in the markets without a sideways glance at interest rates. In particular, negative interest rates.

As the Financial Times informs us:

Negative-yielding government debt has risen above $10tn for the first time, enveloping an increasingly large part of the financial markets after being fuelled by central bank stimulus and a voracious investor appetite for sovereign paper.

The FT continues:

The amount of sovereign debt trading with a sub-zero yield climbed 5 per cent in May from a month earlier to $10.4tn, buoyed by rising bond prices in Italy, Japan, Germany and France, according to rating agency Fitch. Yields fall as the price of the underlying bonds climb.

We won’t deny how much it amuses us that Italy’s two and three-year government bonds currently trade for negative interest rates.

This is the same Italy which, not so long ago, was one of the PIIGS economies. That is, one of the nations deemed most likely to default on its national debt.

But now, no need to worry about that. That’s the strength of the central banks. Investors don’t need to worry, because the European Central Bank has assured them that Italy’s loans are ‘good’.

And if you want to invest in Italian debt, but with a positive yield, you have to go out as far as a five-year bond. Even then, you’re looking at a paltry 0.3% per year income.

The only good news there (if you can call it that) is that Italy currently has deflation of 0.3%. So, in real terms (assuming deflation remains constant), an investor in five-year Italian government bonds is actually earning the equivalent of 0.6% on their money.

Make the most of it. The world’s central banks have made it clear they don’t like deflation, and they’re doing all they can to stamp it out.

‘Tiny stocks’ are back

Last year we launched an audacious new trading service.

It seemed like a crazy idea given the volatility in the market — and your editor’s prediction of a big market drop.

But we went ahead with the service anyway. Mostly because we believed (and still believe) that a certain type of stock is one of the best ways to make multi-hundred percent gains on the stock market.

So, how have we done in the year since we launched that service?

Pretty good. Our best performing stock recorded a 1,140% gain…in less than nine months. It was the single best performing stock pick in Port Phillip Publishing’s 11-year history.

The good news is that, after keeping the doors closed to new members of this service for more than six months, we’re now ready to accept new applicants.

Be aware, spaces are limited. When we launched this service last June, the 500 spots were snapped up in just five days. This time, we may have to shut this down even quicker than that.

How can you get on board? I’ll give you more details in Port Phillip Insider next week. Stay tuned.

Conference sold out — again!

Tickets for the 2016 Port Phillip Publishing investment conference, ‘The Great Repression’, have officially sold out…again!

The ‘early bird’ pricing has now ended. The unofficial count this morning was that there will be 625 Port Phillip Publishing subscribers joining us in Port Douglas this October.

Considering we had initially budgeted for 400 attendees, the number of actual registrations is staggering.

We now have a difficult decision. Do we talk to the conference venue about the options for creating more spaces (not at the ‘early bird’ price though), or do we say, ‘that’s the lot’?

It’s a tough one. It’s not every day that Jim Rogers comes to Australia to speak to a roomful of everyday investors. To be honest, I’m not sure if Jim will ever come to Australia again on an official engagement.

For that reason, perhaps it’s important to make this event available to as many folks as possible. But I’m not sure. For now, tickets are no longer available. We’ll keep you posted if that situation changes.

In the mailbag

Subscriber Malcolm responds to last Friday’s controversial Port Phillip Insider:

Thanks for the article. I agree that debt is always a problem & that too many get into too much debt & then are in trouble.

However, in relation to farmers & the dairy industry, your explanation is a little simplistic. It does not take into account the ruthless behaviour of big companies who dictate to the farming communities what they will pay for product. The ACCC allowed Coles & Woolworths t become so big that they have been able to use their market power to get rid of small business competitors. Take meat for example, butchers once competed but with discounted lines at the supermarket often at prices too low to be really a commercial selling price, they have been able to shut the small butcher. Health regulations have been used to shut what once were very safe butchers in the country so that they just cannot compete with the big guys. Not only that, but once the small guys are gone, the big guys (two of them) go in & simply tell the farmer this is the price we will pay, take it or leave it. They have removed the competition & then dictated the market price for produce. The same goes for milk. They go to market with low price milk & tell the dairy what they will pay. Health regulations prevent many dairies from selling direct to the public & the classic was in SA where the health authorities recently prosecuted a dairy for selling raw milk direct to customers who were technically shareholders of the dairy itself.  Where is the choice when the rules are weighted against you & the big guys can get away with a lot of things that the small guy cannot? If the dairy producers are given a contract price how can it be fair for the milk producer/marketeers to then break that contract price ? If you have budgeted on a contracted price, it is not the farmer’s fault that he has bought machinery based on that projected income which, under normal commercial considerations would have been a sound investment. I understand supply & demand. I work with that every day as a farm machinery dealer ( John Deere by the way). You are always conscious of the fluctuations in the agricultural industry & commodity prices & its impact. However, this dairy problem is a little different in many ways & you seem you have missed the point on this.  The duopoly have been a problem in many areas for a long time & this is one of them. It is funny that the branded milk is now selling & the $1 milk is staying on the shelves. One wonders if the public agree with you! One wonders also if the $1 milk is not somehow inferior. But you probably do not consider that being into the share market where it is just figures rather than quality product.  They also do not care if producers go broke in the process of building their empire &, ultimately, they do not care about the customer. Once in a position to put up, prices, they will. So much for your argument re customer being better off!

Look at the duopoly & fuel. They discount fuel & put a bit more on groceries & in the process send independent fuel operators broke & out of business. Now there are less competitors. Now you can do what you like with prices. Simple! Where have you been in the finance world?

As for John Deere, they have always had the fluctuations. They have had John Deere Finance for decades. The reality is that when we sell to a framer we are able to supply a machine with finance terms & there are the normal financial checks & most people will pay it off over a number of years . That is just business practice . The drop off in the US may have something to do with the fact that farm subsidies were reduced. In other words, they finally are getting back to commercial reality so that farmers face the real world of real prices & real income, not tax payer funded. Australian farmers have not had that sort of subsidy & so are the most efficient producers in the world. We have been aware that the subsidies in other parts of the world make it difficult to compete but we still manage to do that.

Maybe you could be a little more realistic in your assessment of the situation as regards farming. I agree with you however that many people are getting into far too much debt & that includes the government , particularly socialist, left wing governments like the ALP that send the country broke & then will do nothing to assist the conservatives to fix the problem & then promise more debt to a gullible give me, give me public at the coming election.

Then there’s this note from Mike W:

I do not agree with your point that Coles and Woolworths are a neutral player when it comes to milk prices.

I have done the grocery shopping for the last ten years. I remember when the price of milk was $2.49 per two litres prior to the price freeze by the two supermarkets in 2011. I also remember a 2-litre bottle of Coca Cola being $2.45 in 2011. I checked the shelves today: 2-litre bottle of milk is $2; whereas, a 2-litre bottle of Coca Cola is $4.10. Obviously, there are two type of suppliers to the two monopolists: the free, Coca Cola who can set their own price, and the enslaved farmers via the milk processing monopolies who are too big to fail. We need to be reminded that the private sector is full of red tape and uncompetitive behaviour. This freeze on milk prices should not be allowed. We object to government regulations, but accept Coles and Woolworths putting a cap on the price of milk.

As an aside, I consider Coca Cola in the category of an industrial product, not a food product, which should be labelled as harmful to health. It does not require much by way of production. The main expense is in marketing.

I am certain that an alternative to milk by way of water mixed with melamine can easily be produced. The culprits told us that it was only harmful to infants. At the time, I chased Cadbury and Nestle, seeking advice as to whether our chocolates contained melamine. There was complete silence. It was worse than asking politicians a question. I am not that certain that the Chinese will sell this alternative milk for less, once the production of milk becomes not a viable proposition.

I am of the view that we should regard food as a special category of products, not a commodity a la iron ore, coking coal. The farmers are a very small and efficient minority of hard working individuals. The farming community is now about 2% of the workforce to meet local demand. Their produce should not be further debased by so called imperatives of market forces and technology to the point of becoming industrial contaminants. Milk needs to remain a clean product, and the cows, which donate this liquid should be treated well. The business of making the cows produce more milk makes them suffer. They become too big, indolent and suffer from lameness (18%). The unfortunate solution is feeding them medicine for the condition; and medicine, in this case, means the addition of another contaminant in our food chain.

Seeing that this is a financial/investment advisory, I will use the negative interest rate analogy, which you have covered ad nauseum, to remind ourselves that we should not accept absurd notions such as negative interest rates to compromise the integrity of the monetary system. In the same way, why should we compromise the integrity of a product such as milk, which is essential to our basic needs, under the guise of market forces.

I would be interested to hear from you on the matter.

A thoughtful letter. But it’s important to remember that without market forces there is nothing.

The population has an odd notion of what they think the ‘market’ is. When the mainstream, politicians, commentators, and analysts talk about the ‘market’, they wrongly use the term as a synonym for big corporations.

Big businesses are not the ‘market’. The ‘market’ is you…it’s me…it’s the 20-odd million Australians…and the seven billion other people worldwide.

That is the market. Businesses, whether it’s a retailer, a petrol station, a manufacturer, or a farmer is just part of the ‘market’.

The reason that so many folks use the terms ‘free market’ or ‘market forces’ as a pejorative term is because the market is largely uncontrollable.

The ‘market’ just ‘is’. The supply and demand and pricing structures within the ‘market’ work best when the ‘market’ is left to determine the supply, demand, and pricing for itself.

It tends to work at its poorest when someone, or something (government or a central bank), interferes in the market by introducing levies, taxes, subsidies, or some other measure.

The best example we can think of to explain the wonder and beauty of the ‘market’ is (if we recall correctly) an example that Austrian School economist Murray Rothbard uses in Man, Economy and State.

What example does he use? Nothing more or less than a simple ham sandwich.

The point he makes is that there isn’t a centralised planning body that determines the buying and selling of ham sandwiches. There isn’t a government department that decrees how many ham sandwiches a shop can sell.

In that case, how is it possible to walk into almost any sandwich shop in Australia on any day of the week, and buy a ham sandwich?

How does the shop owner know that on that particular day you will demand a ham sandwich?

The answer is that he doesn’t. Furthermore, how does the meat wholesaler know to sell ham to the sandwich shop in anticipation of your purchase?

How does the meat processor know to cure the ham, slaughter the pig, and buy the pig in the first place?

How does the farmer know to rear the pig, months in advance of your purchase? That’s a big deal for the farmer. He has to buy the food and pay the vet bills to take care of the pig, long before you walk into the sandwich shop.

What if you don’t walk into the sandwich shop on that day?

Then there’s the baker who bakes the bread to deliver to the sandwich shop. There’s the delivery truck service, which transport the fresh bread made by the baker each day to the sandwich shop.

Let’s take it further, consider the company that builds the truck for the truck retailer, for them to sell to the delivery company…and the oil company drilling thousands of metres below the surface of the ocean to extract oil…which can be refined into diesel…which is transported to the petrol station…for the delivery driver to refuel his truck.

Do you get our point?

That is the free market. Those are market forces. Where is the central planning? Where is the government official directing everyone about what to do and when to do it?

There is no ‘director of ham sandwiches’. All of this happens based on the experiences and estimations of the individuals and businesses involved.

Sometimes they get the planning wrong. They order too much or too little bread…or ham…or cheese. But that’s OK. That’s part of the experience.

In short, milk doesn’t serve a special purpose. Milk is milk. If people want it, they’ll buy it. If they want to pay a lot for it, let them pay a lot for it. But, quite frankly, we like our milk one way. Not on cereal, not in tea or coffee…we like our milk cheap…as cheap as we can possibly get it.

If the farmers don’t like it, we have a simple piece of advice: Get out of farming and get into a different line of business.

(By the way, after writing all that, we remember another excellent example of how the free market works. The essay ‘I, Pencil’, written by Leonard Read. You can read it here.)

Finally, Mike M writes:

Yes Kris, an idea for you & your team. Why not stop sniping at anyone trying to do business. You sneer at the brokers & their conferences, easy target but you sneer at most organisations. That is a sign of the dreaded “progressives”; are you one? you know the university educated lefty who has all the answers but can only peddle the old “envy” line which in my opinion does not help anyone & is rather puerile. Please tell me you are not one those people!

I love being a libertarian and free market capitalist.

One of the things I love most is that conservatives label me as a ‘lefty’, while socialists label me a ‘fascist’.

It’s wonderful. The statist socialists can’t stand the idea that individuals should have control over their own lives. They believe that only the state knows best how people should live.

Most of all, they dislike the idea that people should keep the fruits of their labour…they believe it’s the government’s money.

But of equal enjoyment is the ill-educated barbs we receive from conservatives.

As a libertarian, we believe that individuals should have the right to do whatever they like to their own bodies. That means taking drugs, imbibing copious amounts of alcohol, consenting relationships with whomever or whatever they like, and even riding a bike without a helmet [gasp].

And as long as individuals observe John Stuart Mill’s ‘harm principle’, it is no one else’s business (least of all the government’s) what an individual chooses to do.

But because we rail against the fascism of banks, corporations and government working together to screw individuals, conservative dopes think that we’re the reincarnation of Karl Marx.

It amuses us. Long may the receipt of these letters continue. We like to be amused.

Cheers,

Kris