Our Unique, In-Depth Budget Analysis…


  • Any excuse
  • Why so calm?
  • Vindication?
  • None of it matters
  • The Doomers’ Ball


Last night, while your editor, a bunch of our staff, and 180 guests were enjoying drinks and canapes at the Doomers’ Ball in Melbourne, the federal budget was announced in Canberra.

No doubt you’ve read analysis here and there about what it all means.

Here’s our takeaway:

  • You’ll pay more tax; and
  • Those tax dollars will head into the pockets of bureaucrats and the government’s favourite vested interests.

That’s it. That’s all you need to know.

Now we’ve gotten that out of the way, we can move on to other, more interesting events…


Overnight, the Dow Jones Industrial Average fell 36.5 points, or 0.17%.

The S&P 500 fell 2.46 points, or 0.1%.

In Europe, the Euro Stoxx 50 index gained 6.97 points, or 0.19%. Meanwhile, the FTSE 100 added 0.57%, and Germany’s DAX index gained 0.43%.

In Asian markets, Japan’s Nikkei 225 index is up 199.24 points, or 0.8%. China’s CSI 300 is up 0.42%.

In Australia, the S&P/ASX 200 is up 25.9 points, or 0.44%.

On the commodities markets, West Texas Intermediate crude oil is US$46.10 per barrel. Brent crude is US$48.89 per barrel.

Gold is trading for US$1,222.72 (AU$1,665.08) per troy ounce. Silver is US$16.18 (AU$22.03) per troy ounce.

The Aussie dollar is worth 73.44 US cents.

Any excuse

With the government promising to splash the cash on infrastructure spending, it can surely only be a matter of weeks before government debt hits half…a…trillion…dollars.

As the graphic below shows, it’s just a whisker away:

chart image

Source: Australian Office of Financial Management
Click to enlarge

What a whopper of a debt.

Less than $10 billion to go. This morning, the Australian Office of Financial (mis)Management (AOFM) spruiked $600 million of bonds to the market.

It’s no surprise that the market lapped them up.

In fact, the coverage ratio was 4.8417. In other words, the government received bids from investors for nearly five times the value of bonds on offer.

It’s no wonder the government is keen to make the most of the current bond market dynamics.

Especially when interest rates remain at record lows. Check out the chart below to see why:

chart image

Source: Bloomberg
Click to enlarge

The chart shows the maturity distribution for Australian government bonds. The blue bars indicate the amount of principal owed and the yellow bars indicate the amount of interest due each year.

This year, of the $20 billion the government has to pay bondholders, $7.8 billion is in interest.

With interest rates so low, it’s a dream come true for the government. It can issue a significantly greater value of bonds in order to fund spending, without necessarily having to add to current obligations.

Of course, it won’t do that. Like most governments, it will spend up to and over the existing amounts issued, so it can spend even more. Not to mention the need to do so anyway, due to the gaping budget deficit.

Borrow, borrow, borrow. Spend, spend, spend.

Why so calm?

CNBC reports:

Stock market research guru Laszlo Birinyi says this is the kind of market he likes, and he sees plenty of opportunity even with its slow-motion moves…

Birinyi said he’s not really watching the VIX, the CBOE’s Volatility Index, which has been trading under 10. It moved higher Tuesday as stocks turned slightly negative. He said the VIX is not that valuable, and it climbs once the market begins to slide.

As it happens, the VIX is at its lowest level since its inception in the early 1990s:

chart image

Source: Bloomberg
Click to enlarge

Does that mean everything is fine? Or is it the proverbial calm before the storm? Need we even answer that question…we’re sure you can guess the answer.

What explains the calm when, politically and economically, things appear to be far from calm?

It’s only a guess, but we figure this story may have something to do with it. From the Financial Times:

For several months, the identity of a mystery buyer of millions of dollars of insurance against financial meltdown has consumed Wall Street traders.

The investor, who has been regularly sweeping into an obscure corner of the derivatives market and purchasing contracts priced at half a dollar, has been dubbed “50 Cent” after the US rapper known for his album Get Rich or Die Tryin’.

Several bankers and traders familiar with the trades believe that the buyer lies far from the streets of lower Manhattan.

Instead, they point to a UK investment firm just a few minutes’ walk from Buckingham Palace in London whose co-founder has donated some of his fortune to restoring a castle in the north of England.

Ruffer, a $20bn investment fund co-founded by Jonathan Ruffer with clients including the Church of England, has been systematically buying up derivative contracts linked to an index known as the Vix, according to four people from trading departments at banks who are familiar with the trades. Those contracts would pay out if volatility jumps, as it could in the event of a large drop in the US stock market.

According to the FT report, Ruffer’s fund has spent around US$120 million on call options (betting that volatility will rise). Apparently, of that, US$88 million of premiums have expired worthless.

Now, that doesn’t mean Ruffer’s fund has actually lost money overall. These could be hedging or off-setting trades against another profitable trade.

But regardless, the biggest part of this is that other market players appear to know about these trades and are, or have been, taking the other side.

That could involve other big investors betting heavily on volatility falling further, and therefore going ‘short’ the VIX market.

The issue then is what will happen when Ruffer’s buying spree stops? Ordinarily, you’d think that a big buyer would push up the price of something, and that the price would fall when the buying stops.

But in this instance, if the opposing side is equally or more confident in their view that volatility will fall, it’s possible they could push the price down, anticipating Ruffer’s opposing trades.

It seems counterintuitive to think that buying could cause a price to fall…but not if the supply increases to a greater extent at the same time.

The VIX is at its lowest ever level. Is that calm and tranquillity you can see in the markets? Not from our vantage point.

We expect the VIX to shoot higher. Perhaps soon.


If the VIX does go higher, it could support colleague Vern Gowdie’s view that a major economic, financial and market crash is on the way.

He explained why at last night’s Doomers’ Ball. And if you want to know more about Vern’s thesis yourself, we recommend you check it out here.

None of it matters

Of course, there is another way to approach this stuff as an investor.

And that’s to say, ‘None of it matters’. Instead of worrying and thinking about government debt, deficits, sky-high house prices, and the rest of it…why not just trade the markets based on price action?

That’s all. Nothing more. Nothing less.

It’s certainly how one former institutional trader treats the markets. And to good effect too. Find out the full story here.

The Doomers’ Ball

For your enjoyment, the following is a copy of our opening remarks at the Doomers’ Ball at the Windsor Hotel in Melbourne:

Welcome to the fourth, fifth, or sixth Daily Reckoning Doomers’ Ball. No one is completely sure how many of these we’ve held.

The first was in either 2005, 2006, or 2007 — again, we’re not entirely sure when. It was a tradition begun by my learned predecessor, Dan Denning.

The first was attended by around 10 people above a café on Brighton Road. We’ve come a long way since then.

However, since 2011, the occasion of the last Doomers’ Ball, it has been a neglected event.

So this year, we decided to resurrect it.

I’m Kris Sayce, and I’m the publisher at Port Phillip Publishing, and the host of tonight’s event.

The significance of today isn’t that it’s the day of the Federal Budget, although that may be significant for some. It’s that Thursday of this week, for the Aussie on an average income, marks Tax Freedom Day.

Perhaps you’d like to take a moment to raise your glasses to that.

The Budget, Tax Freedom Day, and even our recent Great Repression conference are all inter-related.

They all help to highlight how much things have and haven’t changed over the past 18 years, since our founder, Bill Bonner, began writing The Daily Reckoning from a cramped office in Paris all those years ago.

Our job at Port Phillip Publishing is to talk and write about that which, although it may seem improbable, is also eminently possible.

10 years ago, few in the mainstream wrote about the gold standard, central bank money-printing, and fiat currencies. But we did. We wrote about them because, thanks to our knowledge of history, we could foresee that trouble lay ahead.

And so it did.

Back then, few wrote about gold, except to praise or ridicule Gordon Brown, the British chancellor of the exchequer, for selling half the nation’s gold from 1999 to 2002 — in what has infamously become known as the “Brown Bottom”.

Back then, few admitted that it was the job of the central bank to “print money”. The central banks were equally coy on that fact. But coy no more. Now they are more brazen than the girls at the Folies Bergere, with their “whatever it takes” money printing mentality.

Naturally, their friends in the mainstream press applaud their brazenness — with little sign of embarrassment or shame.

So, with the encroachment of the mainstream onto our “patch”, we need to make sure that we don’t encroach onto their “patch”. We need to resist the temptation to seek credibility and fame in the mainstream.

We need to keep poking the establishment in the eye and firmly in the throat, in the style of the pamphleteers of the 18th century, such as Thomas Paine and others.

Therefore, despite the mainstream encroachment, it’s important that we keep writing to you about the same things that we’ve always written to you about.

Because while the mainstream may write about them, they no more understand them today than they did 10 or 20 years ago.

The infringement of the state on individual liberties is as bad today as it was then — maybe more so. Equally, the destruction of wealth by central banks and governments. The crony capitalism of big business and government. And the rise of militarism, welfarism, and statism.

These are all part of what former US president Dwight D Eisenhower labelled the “military-industrial complex”.

Make no mistake about this threat. The centralisation of power among the few is a direct attack on individual liberties and identities.

Take the European Union as an example. It isn’t what it’s fans claim it to be. It isn’t about economic harmony, or preventing World War Three. It’s about power. It’s about destroying local liberties and identities and replacing them with a centralised pan-European identity.

The EU has a flag, an anthem, a parliament, a president. It encourages people to talk of themselves as European rather than French, German, or Italian.

It is, in short, a despotic regime. And we predict therefore, that like all despotic regimes, it’s odds of survival are low.

In fact, the odds of survival of any cobbled-together super-national entity are low. Different people. Different religions. Different colours. Different attitudes and traditions make it difficult to keep any large grouping of peoples together.

In our lifetimes we’ve seen the collapse of the Soviet Union, Yugoslavia, Czechoslovakia, and others. The collapse of cobbled together states in Africa, the Middle East, and Asia.

The centralisation of power in distant hands is, quite simply, an unnatural human state. George III learned that with the American War of Independence.

Yet, America’s Founding Fathers learned it too. Even before the ink was dry on Thomas Jefferson’s Declaration of Independence, there were calls for secession from disparate parts of the new Confederation.

It was later found that even Jefferson’s vice president, Aaron Burr, while vice president and shortly after, was plotting to overthrow the federal government in Washington!

The Americans eventually fought a civil war over the encroachment of federal power on states’ rights.

And even today, movements have formed in at least seven US states: California, Texas, Maine, Oklahoma, Utah, West Virginia, and New York’s Long Island. Reports suggest that secession movements have gained support in up to 14 US states.

Could America break apart? Could the EU fail? Is Australia safe from being dismantled into its pre-federation form?

Who knows? We don’t know. We merely ask questions, and try our best to come up with answers. Is it improbable? Perhaps. Is it possible? Perhaps.

The point is: Change happens. Yet, even when it does happen, it’s not so different to changes that have happened in the past. And it’s our job to remind you of this. To help you prepare. And where possible, to help you save money or make money from your investments.

Do we succeed in that? Not always. But we hope we do so more often than not.

To end, before I hand you over to our first speaker, Vern Gowdie, I’ll remind you of two famous, clichéd but nonetheless [important] quotes worth remembering.

From George Santayana: “Those who do not learn from history are doomed to repeat it.”


Attributed to Samuel Langhorne Clemens: “History doesn’t repeat itself, but it often rhymes”.

Just remember that while we may offer those quotes as a word of caution, the despots, control freaks, statists, and totalitarians, who actually seek to repeat history, consider those quotes not as a warning, but as a learning aid in their bid to achieve their goals.

On that bright note, I give you Vern Gowdie…

Back tomorrow.