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Thursday, July 15th, 2010

This announcement is for those who are into trading?

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Trend followers alert: gold breakout!

Sunday, June 20th, 2010

For those of you who are into a trading technique called “trend following” (or “momentum trading”), you will want to know that gold prices had broken out of its trading range last Friday at around US$1256. For those who are unacquainted to trading, trend following traders are always on the lookout for prices that “break out” of a trading range in search for a trend to ride on.

The tricky issue for Australian traders is that though gold prices had hit a record high in US dollar terms, it is still below the record high in Australian dollar terms (in the first quarter of 2009).

Our? friends from Market Club has more detailed explanation on the charts here.

Meanwhile, for those who are into stock-picking, it is time to compile a list of stocks that you want to buy. We will talk more about it in the coming articles.

Growing structural unemployment in Australia

Thursday, June 10th, 2010

Today, the Australian stock market and the Aussie dollar performed relatively well. Alan Kohler, the financial news commentator in ABC News gave the reason why- China and Germany?s industrial production, Australia?s job ?boom? and so on. Incidentally, this is an example of narrative fallacy and lazy induction as described in our book, How To Foolproof Yourself Against Salesmen & Media Bias. Anyway, we will leave you to follow up on the issue of media bias.

But first, we will look at this news article,

Australian employment jumped a strong 26,900 in May to extend a remarkable run of jobs gains that suggests wage pressure could build earlier than thought and require yet further action on interest rates.

That article was published just before 5 pm. Coincidentally, in the streets of Sydney, another news article reported,

Thousands of protesters marched through the streets of Sydney’s CBD today, waving colourful banners and chanting demands for equal pay for women.

This is the sort of things that the RBA fears and give them a reason to raise interest rates. However, though the falling aggregate unemployment rate looks good, it masks a hidden problem. The problem is of the same nature as we described in Overproduction or mis-configuration of production?,

This is the key insight from the Austrian School of economic thought. Over-production or over-investment is not the problem. Rather, the trouble lies in the mis-configuration of production and mal-investments

In the same way, it is not the aggregate level of unemployment that tells the whole story. Rather, if unemployment is to be a threat to the Australian economy, it will be its configuration that is the cause. Recently, we saw this article, Recovery doesn’t extend to long-term jobless,

LONG-TERM unemployment continues to rise sharply and has increased for 18 straight months, despite the better performance of the economy and the overall improvement in th1e labour market.

A Herald analysis shows that Centrelink payments to people without a job for more than a year have risen by 27 per cent, or nearly 72,000, to 334,244 people in the year to April.


While the economic stimulus package has been credited with saving Australia from a deep recession, there remain pockets of deep disadvantage.

This mis-configuration between surplus supply of unemployable labour and shortage of employed labour is what economists call ?structural unemployment.? Also, according to the ABS, the youth unemployment rate in Australia is 3 times the national average. This is another large pool of structural unemployment.

As that article continued,

A senior analyst at the University of Sydney’s Workplace Research Centre, Mike Rafferty, said it appeared that as the economy had improved it was people moving jobs or within jobs that had benefited.

”The people who are benefiting first are perhaps those that already have jobs and are able to move into better jobs or perhaps from part-time to full-time work,” he said. ”It’s not the same picture for the people not in the labour market.”

Since the official unemployment is based on a sample of surveys whereas Centrelink payments is based on the actual number of people seeking welfare, we can argue that the latter presents a more accurate picture of the unemployment situation in Australia.

A rising structural unemployment will increase the drag in the economy as government welfare payment will have to be increased. If this growing trend is not arrested, then this growing pocket of disadvantage will increase, resulting in social problems down the track. Unfortunately, these structural unemployed do not make it to the aggregate figures.

Niall Ferguson on fiat money

Tuesday, June 1st, 2010

How to buy and invest in physical gold and silver bullion

Yesterday, at ABC1’s 7:30 Report, Kerry O’Brien interviewed Niall Ferguson, the economic historian who wrote the widely acclaimed The Ascent of Money documentary. In that interview, he discussed the present economic troubles in Europe and compared the future of United States and United Kingdom with today’s Greece. Near the end of the interview (at the 7:13 mark), Kerry O’Brien asked him this question:

What are the outstanding lessons from economic and financial history for Europe and the United States today?

For which, Niall Ferguson replied:

Well, let’s say there are three things… one is that we may be living through the end of the age of paper money, which began with the break-up of Bretton Woods in 1971…

Even as early as five years ago, if someone suggests that on mainstream TV, he will be ridiculed as an odd-ball.

There are more to what he said. You can watch the entire video of the interview below:

The good news for Australia, as he reckons, is that in terms of the government’s budget position, it is in a relatively much better position than the US and UK. But before we rest on our laurels, should Australia be hit by a home-grown banking/credit crisis, thus resulting in the government bailing out the private sector, the government’s budget deficit will blow out in an instance.

What if China crashes?

Sunday, May 9th, 2010

Regarding the current drama in Europe, if the European authorities does nothing (or stoically refuse any thought on moral hazards), the world will get a GFC II, in which Australia may not be so lucky this time round. Our guess is that when push comes to shove, the Europeans will eventually print money and kick the can further down the road. After all, with the nightmare of the Panic of 2008 still fresh in their minds, they will not repeat the ‘mistake’ of acting too slowly. The outcome will be more moral hazards and monetary inflation, which is something we and our children will pay down the road.

Meanwhile, as the global financial markets are fixated over the current sovereign debt crisis in Europe, contrarian investors (especially Australian investors) should look at another part of the world for any potential mishaps- China. Starting from January this year, the Chinese government had been tightening the supply of credit. Measures include turning off the credit tap to increasing bank reserves requirements. Recently, unlike 2008, the Chinese government seemed to be getting really serious about cracking down on property speculation, even to the extent that it is giving the impression that it wants the property bubble to burst (see Is China’s Stock Market Crashing?).

As we wrote in Marc Faber: Beware of investing in Australia (as it follows the Chinese business cycle), with all these tightening measures, China will slow down this year. The question is, will the Chinese government accidentally over-tighten cause a crash instead? Remember, its objective is a soft-landing (which they managed to pull off in the 1990s under ex-premier Zhu Rongji). But will they end up going too far, resulting in a hard-landing?

Only time will tell.

But if it happened, you can sure that Australia will have a very ride. As we warned our readers a few months ago in Hazard ahead for Australia- interim crash in China,

Therefore, investors should understand this basic principle: because of the leverage that Australia is exposed to China, any slowdown in China will have a leveraged effect on Australia.

The first effect of an economic slow-down in China will be a fall in base metal prices. Already, there are some signs that base metal prices are cooling off. For example, copper prices are approaching the lows made in January this year. If China crashes, we can expect base metal prices to crash too.

Next, given that the Australian dollar (AUD) is seen as a commodity currency, it will fall. This is to be expected as Australia’s terms of trade and business cycle is closely tied to Chinese demand for commodities, which in turn is tied to the business cycle in the Chinese economy. A crashing Chinese economy will be likely to test the AUD as it was tested in 2008. Mining companies in general will not do well in such an environment. In fact, speculators like Jim Chanos will be shorting the Australian mining stocks (see How is Jim Chanos going to short China? (Australia: take note)).

Then, with the deteriorating terms of trade (due to falling Chinese demand), the Australian economy will slow down. With that, there will be speculations (and hope) that the Reserve Bank of Australia (RBA) will be cutting interest rates.

If China’s coming slowdown is just a soft-landing, then the story may end here. But if it’s a hard-landing, then there will be more complications. In that case, Australia is very likely to have a hard landing too. This is where we are getting nervous. The critical thing to watch out for is Australia’s unemployment rate. As we wrote in RBA committing logical errors regarding Australian household finance,

Given Australia?s high household debt (see Aussie household debt not as bad as it seems?), prime debt can easily turn sub-prime when unemployment rises. As unemployment rises, it will eventually reach a critical mass of prime debts turning sub-prime.

Given that Australia’s highly leveraged banking system is heavily concentrated on mortgages (Black Swans lurking around Australia?s banking system), there will be a tipping point in the unemployment rate that will trigger a banking crisis. That in turn may trigger a currency crisis (see Will there be an AUD currency crisis?).

How to buy and invest in physical gold and silver bullion
If there is an AUD currency crisis, the RBA will be in a quandary. Should it cut interest rates further to support the domestic economy (and condemns the AUD)? Or should it raise interest rates to defend the AUD (and condemn the domestic economy)? This was what Iceland faced in 2008- high inflation, collapsing currency and rising unemployment. The Icelandic central bank had to raise interest rates to defend its currency. Remember, a collapsing AUD implies that the price of oil imports in AUD will sky-rocket (limited to the extent that oil prices are falling due to reduced Chinese demand). As you can read in Five potential emergencies- energy crisis, this will be extremely disruptive to the Australian economy.

Of course, the scenario that we painted is extreme. But after having read and understood Nassim Nicholas Taleb’s The Black Swan, we learnt not to say “never.” Hopefully, the outcome will not be that bad. But for those who want to be prepared, we highly recommend How to buy and invest in physical gold and silver bullion.

Five potential emergencies- climate crisis

Sunday, May 2nd, 2010

Today, we will talk about the last of the five potential emergencies- climate change. Now, we must stress that we are not scientists here and therefore, our opinions on climate change are one of an amateur.

With regards to climate change, our guess is that the minority do not believe that the earth is warming up. On the other hand, for those who believe that the earth is warming up, the debate is on whether global warming is caused by human activity or is due to a cyclical pattern of earth?s weather system. If the former is true, then the onus is on the world to adopt green technology and reduce fossil fuel usage (e.g. via ETS, carbon cap, etc). If the latter is true, the focus should be on adaptation by the human race.

For the rest of the article, let?s assume that the earth is warming up(regardless of whether it is caused by humans or nature). What will be the consequences then?

According to the April 6, 2007 UN climate panel study on global warming, damaged property and lost productivity caused by severe weather are expected to rise. Storms will be more severe, hurricanes, typhoons and cyclones will affect countries. For those who had been directly affected by floods and bush fires, it will be a mini-TEOTWAWKI scenario. Obviously, those with self-sufficiency and survival skills and stockpiles of supplies will do better than those without.

Droughts will also occur more often, which will worsen the depletion of underground aquifers, which supplies millions of people with water. It will also affect food production. As Sean Brodrick wrote in The Ultimate Suburban Survivalist Guide,

Looking ahead, global warming could lay waste to a wide arc of fertile, wheat-growing farmland stretching from Pakistan through Northern India and Npeal to Bangladesh.

As you can surmise by now, this arc of fertile land happens to be located at countries suffering from over-population. Elsewhere, he wrote,

Some scientists say that for each temperature rise of 1.8 degrees Fahrenheit (1 degree Celsius) above the historical average during the growing season, there is about a 10% decline in grain yields.


The important thing you have to understand is that by looking at each of the five emergencies in isolation, they seem manageable. But as we alluded in Thinking tool: going beyond causes & effects with systems thinking, the reality is more complex than each one of them added together individually. Each of these five emergencies will feed of one another, into positive and negative feedback loops. That will compound, accentuate the effects and introduce unanticipated side-effects, which in turn will feed back into the existing problems.

Five potential emergencies- food crisis

Thursday, April 29th, 2010

Today, we will resume the series on the self-sufficiency theme- food.

Global agriculture entered a new bull market since 2003. Look at this chart:

World Grain Production, Consumption

As you can see, the world has been consuming more grain that it produces for years already. There was a bumper crop in 2008-2009, but 2009-2010 is expected to return to deficit. That means, in the big picture trend, global grain inventory is running down. As Sean Brodrick wrote in The Ultimate Suburban Survivalist Guide,

The trend in global stockpiles has been lower- hitting 31-year-lows in 2008- as once-mighty surpluses were used up.

In the context of rising global population who needs at least an additional 31 million tons of grains per year. In addition, as the emerging consumers from China and India become wealthier, they are consuming more meat, which requires even more grain.

Also, if you believe in climate change (e.g. global warming), we can expect more floods, droughts, heat waves, cold snaps, crop-devouring pests around the world, which will affect agriculture yields.

Food inventory deficits are bad enough. Consider the fact that the average US meal travels about 1500 miles to get from farm to plate means that means that a looming energy emergency (see Five potential emergencies- energy crisis) will compound the problem further. Since much of the developed world is run on tight margins (see Another Achilles Heel of modern society- narrow margin), all it takes for many people to go hungry very quickly is an oil crisis. As Sean Brodrick wrote in The Ultimate Suburban Survivalist Guide,

The average supermarket only has about three to four days worth of food stocks on its shelves. In an emergency situation or real disaster, this food is going to disappear in a matter of hours as people stock up.

So, each day as you eat your meal in front of you on the table, do not take them for granted.

Marc Faber: Beware of investing in Australia (as it follows the Chinese business cycle)

Monday, April 26th, 2010

Currently, economists in major institution in Australia are still forecasting growth in the Chinese economy. Even the Reserve Bank of Australia (RBA) are pencilling in further boost of the Australian economy because they expect continuing growth of Chinese demand for Australia’s commodities. With such rosy forecasts, the mainstream pundits believe that Australia’s economy will continue to power ahead, which will result in further “skills shortages,” inflation, and for the property spruikers, further growth in property prices. This is the reason why the RBA had the guts to raise interest rates.

But as contrarian investors, this should be the time for you to be more careful. As we warned our readers a few months ago in Hazard ahead for Australia- interim crash in China,

Therefore, investors should understand this basic principle: because of the leverage that Australia is exposed to China, any slowdown in China will have a leveraged effect on Australia.

In other words, the ups and downs of the Australian economy follow the business cycle of China. And yes, the business cycle still exists in China. As we wrote in Will the China boom go in a straight line?,

Put it simply, we do not believe that the rise of China will take on the path of a straight line. Instead, there will be ups and downs, booms and bust and progress and setbacks. Anytime when the path does not look like a straight line upwards and take a temporary dive, the market will flip to the other extreme of this story and project extreme pessimism into the indefinite future. In other words, the market always looks at one side of the boom and completely ignores the flip side.

Contrarian investors like Marc Faber believes that the Chinese economy will “slow down regardless” any time from now on. Whether this slowdown will be a nice soft-landing or a gut-wrenching crash is another matter. This will have implications on the Australian economy, currency, stocks and property market. Make no mistake, this is what he said in an interview:

Mind you, there are massive excess productive capacities in the Chinese economy. As we wrote in Is China going to dump their excess metal stockpiles?, there are eye-witnesses’ reports of ghost cities, vacant office blocks and apartments in China. It had been reported that China’s excess capacity for steel and cement production is around the current capacity of United States, Japan and India combined. All these points to a massive mis-allocation of resources in China, which according to the Austrian School of economic thought, a pre-cursor to a bust (see our free report, What causes economic booms and busts?).

That’s why, as we wrote in Chinese government cornered by inflation, bubbles & rich-poor gap, the Chinese government will have to rein in their runaway economy sooner or later (e.g. through administrative means, revaluation of the yuan). The longer they delay, the bigger the inevitable bust will be.

A voluntary reining in of the runaway economy will definitely result in a smaller bust today (the alternative will be an involuntary and bigger bust tomorrow). That’s where the problem lies- the Chinese government lacks credibility in its will to cool down the economy. Within the circles of the Chinese property speculators, there’s an assumption that the Chinese government lack the guts to induce deflation in property prices (which will have negative effects on the rest of the economy). The reason is because once the deflation forces take hold, it will be very difficult to reverse. The same applies to the Australian government. The assumption is that at the end of the day, the government (whether it’s the Chinese or the Australian government) will indulge in moral hazards (e.g. bail out, print money, etc).

But dear readers, make absolutely no mistake about this: even if the government succeeds in avoiding a big bust today at all costs, this very success will result in more severe unintended side-effects and Black Swans. In Australia’s case, it will be a currency crisis (see Will there be an AUD currency crisis?) and/or social breakdown (because a policy of inflation is inherently unfair and widen the rich-poor gap). In China’s case, it will be complete social collapse, which is not uncommon for those who are familiar with China’s long history. Over thousands of years, China endured endless repeated cycles of corruption, dynastic collapse, followed by renewal through the birth of a new dynasty.

Hence, we will not be able to offer our readers the exact time-frame and predictions of what will happen next. No one can. But this is what you can do: be flexible and watch out for the signs and prepare the drills to be activated. So, bear this in mind: the moment the financial markets believe that the Chinese government’s talk about cooling its economy will be real concrete action, things will happen very fast.

Five potential emergencies- water

Thursday, April 15th, 2010

Continuing from our previous article, we will focus on the issue of water security today. Please note that while this series of articles are on the theme of self-sufficiency (or rather, using our reader David?s words, ?community-sufficiency?), they are also great investment themes. As the Chinese word for ?crisis? has two components- danger and opportunity, each of these five potential emergencies is a source of both danger (societal collapse) and opportunity (lucrative investments).

With 70% of the earth?s surface covered by water, it is ironic that water can be a problem. But consider this diagram:

With potable water, scarcity leads to profits

As you can see from this diagram, less than 1% of the earth?s freshwater are readily available for human consumption.

That reminds us very much of what?s happening to China?s water supply. We first mentioned China?s water crisis at What is the key risk faced by China (according to Jimmy Rogers)?. With a fifth of the world population, China has only 7% of the world?s fresh water. Of these 7%, we wonder how much are polluted and abused? We saw documentaries and reports of China?s rivers being so polluted that they cannot even support aquatic life, much less human life. As at 2006, half of China’s population consumes drinking water contaminated with animal and human waste that exceeds permissible levels, which is why China has the highest liver and stomach cancer death rates in the world.

Globally, the situation is not good. With global warming, dry areas are becoming drier (e.g. droughts) and wet areas wetter (e.g. floods). As Sean Brodrick wrote in The Ultimate Suburban Survivalist Guide,

In 2002, 8% of the world suffered chronic shortages. More than 80 countries, with 40% of the world?s population, are already facing water shortages? The UN forecasts that by 2050, 4 billion people will lack adequate water as entire regions turn dry.

In Australia, we have severe droughts for many years already.

Water scarcity and climate change is one issue. Water infrastructure that delivers the water to the taps in your home is another issue. Booz Allen Hamilton released a report in 2007 titled, Lights! Water! Motion!. estimated that over the next 25 years, modernizing and expanding the water, electricity, and transportation systems of the world?s cities will require approximately $40 trillion. Of that, 60% of that bill is water infrastructure.

Water pipes and systems have a useful lifespan of between 50 to 100 years. Therefore, we can suggest that say, 1/75th of water infrastructure have to be replaced every year. The best places in the world are replacing 1/200th of it every year. Water leaks from ageing pipes. Here are some rough figures for water loss through pipes:

  1. Hong Kong- 33%
  2. Sydney 35%
  3. Philadelphia 30-35%.
  4. Places throughout the state of California: 10-25%.
  5. London: 35%

As you can see by now, climate change, pollution, abuse and ageing water infrastructure are reducing the margins with regards to our water supply. We are not saying that there will be a water disaster soon. But water emergencies may manifest itself in the form of disruptions (e.g. burst pipes), contamination to evacuations, and in the worst case, war (the UN said that the next war in the Middle-East may be over water).

Bottom line: bad for localities, but potentially good for water companies.

Five potential emergencies- energy crisis

Tuesday, April 13th, 2010

As you have read from our series on the self-sufficiency theme, the modern complex societies that we live in is not as robust as it seems. The reason why it seems robust is that (as we wrote in our ?How To Foolproof Yourself Against Salesmen & Media Bias? report), we have the habit of falling into one of the mental pitfalls. When you see that the tap flows and lights turn on reliably day after day, this mental pitfall will lull you into complacency. Then one day, when crisis happens, it will hit everyone on the head that modern life is fragile.

One of the main potential emergencies that can quickly disrupt our modern way of life is this: energy emergency. As we wrote in An Achilles Heel of modern society- specialisation and division of labour,

The crucial question to ask is this: what is the ?glue? that stick together all these specialised and divided labour into a system that we called the ?economy?? The answer is: energy.

Today, we can have 99% (a figure that we plucked from the sky, but you get the idea) of the population not working and yet not starve. That?s thanks to the Green Revolution that allows more and more food to be grown by less and less people.

But this comes at a cost- energy. As Sean Brodrick wrote in The Ultimate Suburban Survivalist Guide,

Energy consumption by agriculture has increased 100 times, or more. According to 1994 data, 400 gallons of oil equivalents are expended annually to feed each American. The energy consumption breaks down as follows:

  1. 30% for the manufacture of inorganic fertilizer
  2. 18% for the operation of field machinery
  3. 15% for transportation
  4. 12% for irrigation
  5. 7% for raising livestock (not including animal feed)
  6. 5% for crop drying
  7. 5% for pesticide production
  8. 8% miscellaneous

These estimates don?t include the energy used in packaging, refrigeration, transportation to retail outlets, and cooking.

At the same time, the vast majority of Americans have gotten further and further away from their food sources.

The implication is clear. As energy prices increase (and they will), prices for our basic survival need- food- will increase. If you believe in the China growth story (i.e. the secular rise of China), you will have to seriously question whether the global energy production can keep up with the colossal demand of a rising China (see The Problem that can throw us back into the age of horse-drawn carriages). Since most of our energy comes from fossil fuels (especially oil), the question is this: how quickly can the global economy restructure itself away from using oil? To retool and reconfigure the entire economy away from using oil is not that easy and it takes time.

This is just the best-case scenario- a gradual rising in oil prices over the years, resulting in a gradual declining in the standard of living. There are other worse possible scenarios?

Now, consider these facts (source: The Ultimate Suburban Survivalist Guide):

  1. 81% of the world?s discovered and useable oil reserves come from just 10 countries.
  2. 30% of the world?s oil comes from just 3 countries- Iraq, Kuwait and Saudi Arabia.

Now, look at the second point more carefully. What is common among the three listed countries?

All three of them are close neighbours of Iran. The Iranians, who are Shiites Muslims, have ambition of dominating that region. They are steering the Shiites in these three countries into their sphere of influence. No doubt, part of their plan for domination includes acquiring nuclear weapons. If the Iranians (who are led by their mad President Mahmoud Ahmadinejad) acquire nuclear weapons, it will significantly tip the balance of power in the region away from the US.

If you see how Russia uses the supply of natural gas as a tool against its neighbours (e.g. Ukraine), we can imagine the Iranians trying the same on the Western world.

There is a worse scenario than that. That region is a potential military flashpoint. What if Israel miscalculates (see New urgency for action against Iran) and plunge the region into war? In any shooting war involving Iran, we have no doubt that they will find ways to block the Straits of Hormuz, one of the energy chokepoints in the world. As the US Department of Energy reported,

Chokepoints are narrow channels along widely used global sea routes. They are a critical part of global energy security due to the high volume of oil traded through their narrow straits.


The international energy market is dependent upon reliable transport. The blockage of a chokepoint, even temporarily, can lead to substantial increases in total energy costs. In addition, chokepoints leave oil tankers vulnerable to theft from pirates, terrorist attacks, and political unrest in the form of wars or hostilities as well as shipping accidents which can lead to disastrous oil spills.

A temporary disruption lasting not more than say, 40 days is manageable for the US because they can open up their Strategic Petroleum Reserve. But if the emergency last longer than that, then there will be a heavy price to pay.

That?s not all the Iranians can do in a shooting war. Since the oil fields of 30% of the world?s oil is so near Iran, our guess is that it would not take them too much to take down these oil fields? productive capacity. Back in 1990, Saddam Hussien sabotaged the oil fields of Kuwait by setting fire to them. An irrational Iranian President will surely think of trying something worse with missiles, artillery shells, ground troops or worse still, nuclear missiles. Although the Iranian may not have military technology as sophisticated the US (although the gap is probably closing with Russian help), they have a large pool of manpower to call up as canon fodder. During the Iran-Iraq war, the Iranians used human wave techniques to beat back the Iraqis.

Therefore, a second oil crisis (the first one is in the 1970s) is definitely possible. The question is, are you ready?