Morningstar provides premium
investment advice to Australia’s financial elite and I received a free
subscription to their service during the year. Their glowing appraisal of
Facebook one day before it debuted, then tanked, on the NASDAQ (18 May 2012)
confirmed what I suspected about Morningstar; a bunch of well connected wankers
who know little more than other well informed people. Investors who took
Morningstar’s advice have lost 60% of their investment. Australia’s investment
experts aren’t very good at predicting what will occur tomorrow, let alone a
year, so here goes; here’s my attempt. My track record is as good as any of
theirs.
History lesson
During WWI Germany paid for 85% of
its military expenditure by an elaborate ponzi scheme. Like modern America the
government could not face reality and increase taxes to match actual spending
so it issued ‘Bonds’. Patriotic Germans purchased these bonds and their Government
quickly spent it. As the money ran out they issued more bonds. To pay for the
second round of bonds Germans borrowed money, using their first bonds as
collateral. The third, fourth, fifth... rounds of bonds were paid by borrowing
against earlier bonds. This giant ponzi scheme came unstuck when Germany lost
the war but it took four more years before the currency totally imploded and
consumers started shopping with wheelbarrows of cash. It took 18 months to
effectively write off the old currency and begin anew. I see a similar
situation occurring in the US and Europe.
In 2008 when the global economy, run
by the same sort of people that run Morningstar, began to collapse, governments
pumped money into the banking system by selling Bonds, which the government
purchased by creating new money. In 1920’s Germany this meant physically
printing money, today it occurs with a few computer key strokes, but the
results are similar. More money chasing the same amount of goods or pumped into
the same number of companies on the stock exchange. More money chasing the same
amount of goods or investment opportunities equals inflation. The 10% rise in
the ASX200 since July, despite a deterioration in company performance, seems to
me to be indicative of inflation. While most Australian companies are not
improving, their share price is rising purely because there is more liquidity
and the money has to be invested somewhere. Australia’s compulsory
superannuation scheme has generated $1.4 trillion for funds managers to play
with and they are compelled to put it into the shares of unsatisfactory
companies, purely because there is nowhere else to send it. Eventually the
share price of profitless companies needs to collapse and it deserves to happen
soon.
The Danish investment bank Saxo
predicts the final meltdown in the Western economy during 2013 precipitated by
Spain. Euro bankers have been unwilling to let Greece declare itself bankrupt and
write off their ‘debts’ the way Germany was forced to in 1923. Instead of
cutting Greece free and allowing it to collapse then rebuild, the European Union has tenaciously resisted turning off the life support system, but Saxo
Bank believes when Spain defaults this year, as they expect, the dominos will
finally fall. Saxo Bank predicts the DAX sharemarket index will drop 33% and
the oil price will nosedive to $50 a barrel.
Saxo Bank were ridiculed for their
doomsday economic forecast, by the same type of people who recommended buying
Facebook shares (Morningstar). The reality remains that the US, European and
Australian economies have delayed recession by creating new money and perhaps
they can keep doing this for another year but the house of cards will fall
eventually. Western economies will soon reap the harvest their ‘voodoo economic’ policies have sown. Countries that transfer their manufacturing
industries to China and India then rely on services and consumption to drive
their economies forward deserve to underperform. The Western world cannot
continue to keep its head above water with debt forever. While the US, Europe
and Australia disregard the fundamentals of economics (balancing the books)
other countries like China, Korea, Taiwan, Brazil and Russia are doing
significantly better by being fiscally responsible. In short, the West deserves
another recession this year.
PaperlinX
Since 2000 the Australian based paper
merchant PaperlinX has gone from blue chip to burnt crisp. The company’s board,
led by the perennial failure Harry Boon and Toby Marchant were leading the
global company to certain oblivion. Shareholder agitation which resulted in a
successful coup however has come too late to save the once giant company.
Encore magazine announced in their
last edition of 2012 that it would be their final in a printed form. From 2013
the nice magazine will be digital only. Encore’s decision, which is being
replicated the world over spells certain death for PaperlinX. The world has a
surplus of paper merchants and PaperlinX have demonstrated they are behind the
ball every time, irrespective of who is at the helm. Profit margins on
paper are shrinking and volumes are declining. The ‘new’ PaperlinX recently
informed the ASX their new UK boss, David Allen
would require a base salary of £450,774 to perform his functions.
On top of his minimum wage are a set of lucrative incentives to motivate him
to do his job. His obscene salary, paid for by a company teetering on the brink of insolvency, seems identical
to the ‘old’ PaperlinX of Harry Boon. Other company changes, such as rebranding,
are hardly rocket science. Any Marketing 101 student would suggest a similar
strategy. Mediocre decisions continue to be celebrated as brilliance at
PaperlinX. Clearly at least one large paper merchant needs to exit the crowded
and declining European market and I expect it to be PaperlinX this year.
Instead of orderly liquidating the business and returning the company’s assets
to shareholders, the company is more likely to collapse in a heap as other
businesses associated with Harry Boon have done recently, returning nothing to shareholders.
So my crystal ball has storm clouds
in it. The stock market is little more than a giant casino. All gamblers with ‘a
system’ eventually lose. The giant ponzi scheme of bonds propping up the US and
European economy deserves to collapse soon. It could come as easily as a
Chinese refusal to buy more bonds or the assassination of Hamid Kazai. While
the conditions for a collapse are presently there, it could just as easily be
delayed by more bonds and money creation. Either way I expect PPX to be little
more than a memory next year.
