A Greek Tragedy and US deception

Greek TragedyI very rarely focus on Global Economics and prefer to turn that “noise” off, but I think the current global situation has implications for value investors in Australia and globally. So much so that I thought I’d share my thoughts with readers.

Did you know that most of Greece’s sovereign debt is held by European banks? There are concerns that the debt is worthless as Greece is unlikely to repay. Greece can’t get out of it by printing money. Either Greece will have to default, or pretend it isn’t, while the rest of the Euro ignore the pretense, pretty much like they are doing now. Banks in Europe are now being downgraded, with Standard & Poors downgrading seven Italian Banks and three US banks (Bank of America, Wells Fargo and Citigroup) overnight. There have also been reports in the media that some International banks are refusing to trade with European banks. I’ve also read that several European Banks are technically insolvent, as much of their assets aren’t worth the paper they may or not have been printed on.

The US is also kidding itself that it’s sorting itself out. The current economic state is very unstable, and any crisis in Europe will likely affect the US as well. I think the US is over-confident that it can control its economy and avoid a recession. However, the US is lucky in that it can print money to devalue its currency (unlike Greece) making the US dollar cheaper, supporting its exporters and encourage investment into the US.

So what can we expect if this scenario comes to life? A recession in the US akin to the 1930’s Depression, large stock market falls globally and riots and protests in Europe is probably the worst case. The most likely scenario in my view, is for Europe and the US to muddle through for a few years with little or no growth. Expect markets to be much more volatile with large swings both upwards and down.

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Rudd's Resource Super Profits Tax

A tax that won’t reach its targets

There’s been much said about the Rudd Government’s Resource Super Profits Tax (RSPT) in the media, by both the government and the mining companies. The RSPT is simply not going to achieve what its been designed to do, and in the process its going to cause a lot of harm to Australia. While I agree that the profits from Australia’s resources should largely be for Australians, this RSPT is completely wrong.

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