Petra indicates a net present value on Alkane of $A4.86 a share, compared to Friday 3/2/2012 1.30pm price of $1.185 up from last Friday's close of A$0.94.

Alkane Resources Set for significant re-rating
BUY Alkane is on the verge of becoming a significant player in the zirconia and rare earths markets with its Dubbo Zirconia Project (DZP) – 100%.

Having operated a demonstration plant for over 3 years, the company has a proven flowsheet and is confident of a transition to commercial scale.

The DFS was completed in September 2011 with an initial mine life of 20 years from Q2 2014.

Upside also exists from the Tomingley gold project which is targeting ~50kozpa from Q1 2013. We recommend buying ALK with 373% upside to our NPV of A$4.82/share.

MiminingNews.net: The valuation includes, of course, Alkane’s gold projects in NSW. But it (Petra) likes the stock because 70 per cent of the Dubbo deposit comprises heavy rare earths, some 60 per cent of Dubbo’s overall production will consist of zirconium and niobium (metals that will provide a hedge against any fall in REE prices), and because Alkane has done its project estimates based on REE prices well below present levels and even Petra’s conservative forecasts.

Previous Alkane posts

I hold ALK

Sounds simple. Sounds much like what is done at the major power stations throughout Aust. But the difference comes in 2 parts: gas supplied through non leaking lines has very little energy loss. Electricity pushed down power lines looses up to 8% of its energy getting to your house. And it gets worse for the power companies: most of the stuff coming out of the stacks at power stations is steam... which is heat lost. Just imagine if that heat lost was converted into heat used to make you hot water. Energy saved to the tune of 25%.

The numbers say that just 25% of the energy used to make power from a coal mine in Latrobe valley actually gets to your kitchen. But if everyone had a Ceramic Fuel Cell beside their house that took its power from a gas line then you would use 70% of the potential power to run your house. So much energy saved.

CO2 emissions would reduce by 250% in no time. Cost of energy would fall. Everyone wins except those in the Aust coal game.

My numbers do not yet add up: I neglected to say that much of coal power is used to heat the 30% of inorganics in brown coal. This energy is also lost as the ash is dumped.

Australia can win from this Carbon pollution debate. Knowledge of the opportunities is needed.

Alite

Giant OTR Sizes:

3700R57 4000R57 3300R51 2700R49 45/65R45 45/65R39

Smaller Sizes:

35/65R33 20.5R25 23.5R25 26.5R25 29.5R25

Modern Monetary Theory (MMT) has consistently reminded us that borrowing by Government, who issue their own currency, actually puts downward pressure on interest rates. Counter intuitive maybe, but that is actually how it works. The Government spends a $1 million dollars in social security benefits, overdrawing their RBA account. People spend the money or save it in a bank account, but by the end of the day that $1m dollars is a surplus deposit in someone's bank account. That someone could be Woolworths, Harvey Norman, a child care centre, but it must be surplus cash somewhere. The bank or banks in surplus must lend it to someone that night, and the only borrower is the Government who has the mirror borrowing. What happens when there is surplus cash in the system? Rates must go down. The RBA cash rates have nothing to do with money supply. A financial asset always has a corresponding financial liability by definition, the system is always in balance. RBA cash rates are just a self imposed straight jacket that are deemed necessary to achieve mandated policy aims. How many breathless media articles have you read telling you the opposite, that printing money must be inflationary?

The Credit default swaps tell us that to insure Australian Government debt costs 0.88% per annum. That bet is saying that Australia will forget how to print money. The only risk may be the intransigence of a political party not wanting to borrow anymore, as nearly happened in the US recently.

Over the past few decades developing countries have been exporting to Europe and the US, exchanging their goods for foreign currency. When you are an exporter with US dollars you will likely try and sell the US dollars and buy your local currency. Countries like China prefer not to have a strengthening currency, so the Government sells the local currency and buys the US dollars to suppress their exchange rate. Locally the developing country has a booming economy and the Government is printing money, see Developing Nations fight Inflation. It may be an idea to also read one of the many articles about Chinese inflation. There will come a point when developing countries will allow the currencies to reset to a higher level. If China stopped buying US dollars, the Renminbi (RMB - the official currency of China) will appreciate and the US dollar will fall. The US (and Europe and Australia) will have much higher import prices and inflation will result. The danger to the world economy will be this inflexion point - where the US and other countries moves from a monetary easing bias to a tightening bias. This is the real inflation trade and the one to prepare for.

Michael Cornips to view graph visit: http://www.traderscircle.com.au/free/email/PCAS_Articles20111122.html

An improving budget position flows naturally to the debt being issued by the Government. The annualised net financial debt issued has fallen from $57 Billion increase in April to currently a $37 Billion increase. Other than the Government debt being issued, the Government maintains a surplus cash account with the RBA. This account has a balance that has increased by $16 Billion in a few weeks, as quarterly tax flows are collected. Relative to most of the developed world, Australia appears to be well placed.

Given the lower inflation outcomes, and the propensity of consumers to pay down debt rather than spend, it is almost certain (in my view) that the RBA will lower rates again in December. The RBA doesn't meet in January, so the next meeting is in February, so next month is the RBA's last chance to respond to Europe's growing credit crisis. The one year bank bill rate is 3.88%, so with cash rates at 4.5% the market is pricing in large interest rate cuts. As with the dramatic rate cuts in 2008/09, the drop in interest rates will flow straight to the consumer.

The overriding macro issue though is what appears to be a growing consensus of a doomed Eurozone. Prior to the Euro currency, each country could depreciate their domestic currency to try and regain their competitiveness. You socially can't drop wage rates, but you certainly can drop the value of your currency. But this option is not available to the members of the Eurozone since each country borrows 100% of its funds in a foreign currency (the Euro). The Euro is not a relationship of a central bank prepared to support debt issued by its member states as the US Federal reserve would support the issue of their Government debt. Socially the debtor nations of Greece, Italy, Portugal and Spain will not support the severe austerity required to have a chance of repaying their debts. Similarly the surplus nations like Germany do not want to give a free kick to nations who spent more than they could produce. In a typical prisoner's dilemma it would appear that co-operation between the member states would benefit everyone, but it is unlikely to happen. If the Eurozone unilaterally guaranteed all member states debts then the yield on bonds would fall to below 2%, giving countries a chance to repay their debts. With Italian yields near 7% and over $2 Trillion in debts, the chance of repayment seems remote. But if the debtor nations default the surplus nations, and the world, will suffer as well. As Churchill said about the Americans, Europe will eventually do the right thing after they have tried everything else.

http://www.traderscircle.com.au/free/email/PCAS_Articles20111115.html

By any measure, the population is growing rapidly. If you were born in 1960, then the population has grown from 3 Billion to 7 Billion. In our lifetime and in our children's lifetime, the growth has and will continue to have a significant impact on the world will live in.

The natural and unavoidable outcome of the population growth is that there is a greater demand for resources: food and commodities. If you are planning your investment profile between now and when you retire in 20 or 30 years, it is not unreasonable to be bullish resources. By then there will be at least another 2 to 3 billion people, all needing to eat and house themselves.

RBA Commodity Price Index 1982 to 2011

At the turn of the 21st Century commodity prices broke out of long term sideways price patterns, moving upwards. A sideways price pattern in an inflationary environment means that real prices were moving down. This scenario has now permanently changed.

Breaking down population growth patterns between countries highlights a greater stark change in the composition of wealth between countries. The early phase of this change may go some way in explaining the financial malaise now afflicting the developed world. What is happening now may just be inevitable.

Which countries are having the greatest financial difficulty? It would appear that it is most of the low population growth countries, ie the developed countries. It is clear that Asia and South America (anything south of Miami USA) have economic growth corresponding with population growth. In terms of growth and in terms of absolute population size, Asia is certainly the place to be. Paul Keating was on the ABC last night reminding us that we share our head of state, the Queen, with the UK and 15 other Commonwealth realms, and that our flag has an image of the British flag on it. For our politicians trying to define what Australia will be in the future, it is probably time to move away from being a protectorate of the USA and 'doffing our hat' to a bygone British Empire.

Australia's population growth since 1950 has been 175%, sitting in the middle between the old world economies and new world economies. The challenge, if the politicians can be brave enough, is to become part of Asia and form alliances (not just economic) in our region, rather than sit on the periphery as a supplier of raw materials.

The developed countries realised in the 1970's and 1980's that Asia was prepared to provide cheap jobs and cheap manufacturing in return for pieces of paper in the form of debt. It was a good deal for the developed nations who increased their consumption and lifestyle with gusto, piling up mountains of debt. Paper wealth, in theory, is a store of wealth. However, this idea is not as secure as previously thought as we are currently in the process of change. We focus on debt, but an equal part of the problem is that the growth of Asia has produced surplus savings, seeking a secure store of wealth. We are now in a process of trying to neutralise the damage of excessive debt in low growth countries, who are all embarking on austerity programs. Surplus nations,seeking more security will diversify their saving patterns. Looking beyond that though, Australia's future can be exciting. We are all looking to create wealth over the next 10, 20 or 30 years, and it is clear where our focus should be.

Michael Cornips http://www.traderscircle.com.au/free/email/PCAS_Articles20111109.html

In this context the PEP 11 Off Shore Sydney Oil and Gas prospect may be of major significance....

The offshore Sydney Basin contains all the elements seen in other producing world class structures. The PEP11 permit covers 8,250 square kilometres on the doorstep of Australia's largest energy market and extensive gas infrastructure. PEP11 covers a significant proportion of the offshore Sydney Basin, and also lays claim to being NSW's sole offshore petroleum exploration permit.

The media continually references the US's ability to print money as a basis for predicting economic doom. Unfortunately the concept of printing money connotates that the US is spending beyond its means and therefore what eventually follows is financial Armageddon. Japan has a debt to GDP ratio of 226%, and has spent more than the revenue it collects for 20 years. Japan's 20 year bond rate is around 1.7%. Rather than say increasing government debt to GDP ratios is bad, the question that should be asked is: why hasn't it been?

All government spending is printing money, and Australia does $350 Billion of it a year. When the government spends a dollar it in effect overdraws its account with the RBA. Every dollar spent by government is then deposited into somebody's bank account. That dollar may pass through a few hands, but by the end of the day it is still a deposit in a bank account and sits as excess reserves in bank accounts with the RBA. A bank's surplus dollar matches off with the spending of the government. The process is purely an accounting treatment, with no shortage or surplus to be concerned about. Government spending creates its own deposit. Countries who issue their own currency have no problem funding their debt since the spending creates the deposit to fund it.

So government debt is exactly equal to private sector financial savings. So when mainstream media says that excess government debt is bad they are also saying that private sector savings is bad. Is it? You could say that excess savings should cause inflation, which is where the hyperinflation Zimbabwean argument comes from. This is wrong at two levels. Inflation is generally considered to be caused by excess demand. Does anybody reasonably consider that the world is suffering from excess demand? I think not. And Japan realizes this and so does the US, which is why they conduct their monetary policy the way that they do. Secondly, Zimbabwe, the German Weimar Republic and other hyperinflationary events are generally associated with a country borrowing in a foreign currency. The governments of Japan, US and Australia do not borrow in a foreign currency. Mainstream media references capacity to create money as a basis of their argument rather than the level of governments' external debt. And because a government prints money it therefore incorrectly justifies the consideration that the US credit rating should be lowered.

Misjudging the effects of monetary policy can and does cause investor losses. Operator of the world's largest bond portfolio, the $240 Billion Pimco Total Return Bond fund, is up only about 1% year to date, ranking 536 out of 584 managers. Pimco made a major tactical error in the first half of the year by avoiding U.S. Treasury securities, asserting that they didn't pay enough to make them worth holding. But the world continued to flock to Treasuries, pushing bond yields from 3.72% in February to a low of 1.78% in October. Clearly something is terribly wrong with the continual doomsday analysis. Comparing the financial constraints of households and corporations to that of governments that issue their own currency is fraught with danger. In the paradox of thrift, it may be commendable that individuals maximise their savings, but if all individuals saved then it would be disastrous for the economy.

I would not attempt to dismiss the problems besetting the world, but it is important to argue within the financial structure in which we operate.

Michael Cornips

Interestingly the variance is between minus 20% to plus 20% and negatively correlates very closely to the direction of the market. Intuitively this seems to make sense. A 40% trading range is something worth keeping in mind.

Trading in small cap shares is all about liquidity. When the market is bullish investors seek out the relatively cheap stocks that offer the best value. The lack of liquidity assists in the rise of the small cap stocks. But when it comes to a bear market, volatility rises with the small cap stocks getting punished as the sellers look for the buyers. Typical of a bear market is when stocks all correlate with each other. In that scenario, it is all about liquidity and the ability to dump your stock as quickly as the next rumour surfaces. There are quite a few stocks with low P/E ratios looking to be re-discovered in the chase for value, and clearly they are undervalued by over 20%. With the 12% rise in the market over a week, and the dollar back at parity it might be time to have another look. Michael Cornips

To see the graph visit: http://www.traderscircle.com.au/free/email/privateclient/PCAS_Articles20111011.html

Aside from the GFC inspired contraction, it is unusual to see a fall in total resident Bank assets. Total assets fell by $16 Billion, from $2,447 Billion to $2,430 Billion. The movement mirrors other indicators in the market, lower consumer confidence, lower retail sales, and the 1.6% fall reported in home prices reported by Bismark.

A good sign of a more cautious consumer is that credit card balances fell by 2% in the month of January. Whilst there is normally a contraction in credit card balances, this fall is more pronounced.

The usual suspects added to borrowings for the month, Owner Occupied home lender, Home Investment lending, and Government. Home lending, although increasing, has a declining growth rate. Commercial lending growth remains stuck in negative territory.

Despite the rally in the sharemarket, margin lending facilities continue to decline (and with a 9.75% interest rate, it is no wonder).

The RBA publishes total assets and total liabilities of the Banks which highlights the equity positions of the Banks, including equity ratios. When Banks report Capital (Equity) ratios, they are able to weight Home lending assets at less then their face value due to their perceived lower risk profile. Therefore Banks are reporting Capital ratios around 12%. On an un-weighted basis, the ratio has declined to 7.1%. The chart highlights that the Banks were desperate to re-capitalize as the GFC hit in 2008. They pushed their un-weighted Capital ratio from 5.7% to 8%. As bad debt charges rose, equity positions have leveled off and declined. Banks have been able to manage the slow growth environment by focusing on home lending assets, which carry lower risk weights, so as to be able to report higher capital ratios. It also highlights why annual Commercial lending remains negative and probably why the National Australia Bank is aggressively targeting the other Banks' home loan customers with enticing discounts.

Bank profitability has been maintained by this shift in asset focus, cost cutting, reduction in bad debt write-offs, and expanding margins above official Reserve Bank interest rate rises.

Banks are cashing in all their one-off profitability chips, but with zero growth in Bank resident assets over 2 years, a more cautious consumer, a new carbon tax, a new flood levy tax, fear of interest rate increases, a budget deficit that politically will need to be cut back, a lifetime best terms of trade that hasn't boosted the economy, you would be right to remain cautious.

Michael Cornips

To know more about Value Investing, please visit the site myclime.com.au

I have adjusted the figures by the amount of GST the Federal Government collects and hands back to the States. Annual GST receipts are currently running at $50 Billion per annum, a 15% increase from the previous year. In July 2007, the Federal Government increased their receipts by the amount of the GST, and similarly increased their expenditure by the same amount.

Back to the core budget figures, the graph shows that annual receipts are still lower than April 2007. Expenditure is still meeting budgetary expectations, showing a 39% increase since April 2007. Annual receipts in December 2010 is tracking a $26 Billion shortfall from June 2011 Federal Budget, without any apparent trend change towards closing the deficit gap.

The biggest shortfall is in company tax which is tracking at an annual $53 Billion of revenue compared to the expected annual rate in June 2011 of $66 Billion. Individuals' tax is about an annual $8 Billion short.

I will continue to make the same point that these figures have consequences for our economy as the Government faces the political reality that this deficit will need to be addressed. With the figures being current as of December 2010, they do not take into account the impact of the recent costs of the devastating floods. Unfortunately they do take into account the best terms of trade for our exports for a lifetime.

Michael Cornips

To see graphs and read this article in full please visit: http://traderscircle.com.au/news-option-Trading.aspx

Alite

Once the Government sets its budget course in May it holds the fiscal course in the hope the forecasts made in May hold true. The budget of course predicted a beginning to a return to surplus. The reflection of this is simply the amount of outstanding Government gross debt published each week. And that growth in annual debt is simply not being reduced and if anything may be growing. The rhetoric of the RBA is the same as 2008 as interest rates were held at high levels: weak international data but inflation expectations due to our commodity boom and great terms of trade. The RBA will hold the steady interest rate line until things really fall over the cliff - just like 2008, when it dramatically dropped interest rates in a catch up.

The world is in austerity mode, the IMF has lowered world growth forecasts, consumer confidence is hitting lows and the RBA insists that the world's best economic performer has to have the highest interest rates among the developed countries. Australia has a cash rate of 4.75% against US's rate of zero and Great Britain's rate of .50%. The Australian consumer is doing the only logical thing - the people are saving and reducing spending. And in the paradox of thrift, what is sensible for the individual is terrible for the country. The mirror of private savings of financial assets is the growth in Government debt,increasing unemployment, with the automatically stabilizers increasing social security payments.

Wayne Swan may be the world's greatest treasurer, but the captain has the ship on auto pilot in a fog of rhetoric.

Michael Cornips

view graphs at: http://www.traderscircle.com.au/free/email/PCAS_Articles20110927.html

Here is a list of some important documents:

Pythagorean theorem: 24 words

Lord's prayer: 66 words

Archimedes' Principle: 67 words

Ten Commandments: 179 words

Gettysburg address: 286 words

US Declaration of Independence: 1,300 words

US Constitution with all 27 Amendments: 7,818 words

EU regulations on the sale of cabbage: 26,911 words.

Message to politicians: Drowning, not waving.

Michael Cornips

Read full article at: http://www.traderscircle.com.au/free/email/PCAS_Articles20110927b.html

Since being issued it has struggled to maintain the 1.05% margin by consistently trading below the par value of 100. Until July 2011 it traded between a margin of 1.3% to 1.45%. Currently ($98.65) the margin is around 1.75%, which is quite a hefty increase over the original margin of 1.05%. The current margin is also reflected in the Credit Derivative market.

CBAHA pays a $1.56 dividend in 10 days, making the ex-dividend price around $97.00.

ANZ recently launched a Convertible Preference Share (CPS3) at a margin of 3.10% above the 180 day bank bill rate. This is the same margin as ANZ's previous CPS issue - ANZPA. Whilst CBAHA is senior debt, the ANZ CPS is sub-ordinated debt that ranks above common equity, but behind other claims including depositors. Given the deterioration in the margins of senior debt, it was surprising that ANZ achieved a margin of only 3.1%. The nature of converting preference shares is that on maturity you generally receive $101 worth of shares at the future share price. Since the bank is guaranteed to issue shares, rather than repay the loan, the securities are treated as equity for capital adequacy purposes. So if ANZ is $20 at maturity you get about 5 shares, if it is $25 at maturity you get 4 shares.

One of the features of CPS is that there is a maximum number of shares that you can receive. The lowest share price for conversion is around $10.21, so that the maximum number of shares you receive is 9.89 ANZ shares. If the ANZ share price is $5 on maturity, you don't receive 20 shares, you only get the 9.89 shares. In effect, you are granting ANZ a put option at a strike price of $10.21, maturing in September 2019. That has got to have some value. Fortunately APRA is changing the rules on maximum conversion rates so that instead of a put option at 50% of today's share price, it is being reduced to 20% of today's share price. So the strike price should be reduced from $10.21 to $4.04. Changing the rules may take some time, so until then the put strike price is still $10.21. ANZ did trade at $12.06 in January 2009, so the value of the put should not be undervalued.

To see graphs and read this commentary in full please visit: https://www.private-client.com.au/views-investing-superannuation.aspx Michael Cornips

The iron ore being dug out of the ground should benefit all Australians. We own the ore... not BHP or RIO. They just have the rights to mine it.

Your thoughts?

Alite.

With the USA dollar consistently being devalued I see 3 possible safe havens / growth areas. The 1st is in the form of precious metals stocks. The 2nd is with Energy Stocks, with a preference for Oil reserves. The 3rd is in agriculture (fertilizer included).

Thoughts?

Alite

The ceramic filter consists of ceramic filtering plate, rotator, slurry tank, discharge scraper, distributor, agitating device, cleaning device (including ultrasonic cleaning & acid cleaning), frame, vacuum system, pipe system, filtrate discharge system, automatic lubricating system, automatic acid-dosing system, discharge chute, valve and PLC automatic control system (can be made as remote control system).

Five billion dollar estimate for central Australian oil and gas resources.

Two new reports on the unconventional oil and gas resources in Central
Petroleum?s vast Northern Territory acreage have estimated their value as
high as $5 billion dollars.

The higher estimate, by Perth?s Holt Campbell Payton consultancy, also
identified a Darwin-based gas to liquid plant as an attractive option.

A second report, by geologist David Warner of DSWPET, suggested a value
of $412 million based on transactions in unconventional acreage to date in
Australia and anticipated fully risked EMV values- but added that this
valuation will need to be re-visited as more exploration is done for
unconventionals in central Australian basins.

DSWPET forsees a pipeline-delivered cost, in Darwin, of $5.50 per thousand
cubic feet for gas based on a fully risked 5 TCFG and 250 million barrels of
oil recoverable based on fully risked gas and oil prospective resources.

A recurring factor in both reports is the fact that the unconventional
petroleum sector is virtually unknown in Australia, whereas in North America
it has become a major factor in the continent?s fuel supplies.

Recent success by Beach Oil in the Cooper Basin has encouraged confidence
however in the potential success of unconventional fuels as a major factor in
future oil and gas supplies for Australia?s needs, and as valuable long-term
export commodities.

Central Petroleum CEO John Heugh, in releasing the reports, pointed to the

benefits indicated in the report: Australia's government is acutely aware that
oil and gas are currently costing the country a $16 billion deficit in the
import/export equation, which will double by 2015 unless more is done,
quickly, to exploit more home-grown fuel.

As an added bonus, the gas to liquid process uses most of its available
carbon, leaving a very small carbon footprint, so there is a double benefit of
low pollution and a low potential carbon tax cost in the future, he concluded.
Full reports are attached to the ASX announcement.

For further information contact:
John Heugh, Central Petroleum
Tel: +61 8 9474 1444 or
Ray Beatty, Corporate Writers
Tel: +613 9224 5272, M: +61 409 174 565

increasing from 28 to 110 people. There was some minor time lost due to typhoon Muifa and local flooding.

Galaxy Resources Managing Director, Iggy Tan said good progress had been achieved at the Jiangsu site with the project developing according to the previously-announced schedule.

"We are pleased with the progress being made towards the commissioning of the Jiangsu Project. Construction workforce levels have markedly improved and will continue to increase. Pleasingly, project costs are also in line with expectations", Mr Tan said. Ends

As a long term investor in GXY I am pleased with progress and look forward to the value add (3x) that the new plant will provide. As can be seen from the graphic below there is a lot more to come re value adding.

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The S&P downgrade appears to be more of a political comment than the reality of the US monetary framework. Remember, S&P rated AAA the worst forms of sub-prime securitized loans, backed by inflated property prices, backed by borrowers who misstated their incomes, and guaranteed by AIG who proved eventually insolvent. Are S&P saying these securities they rated AAA were more secure than the US Government? The hypocrisy is breathtaking.

Does that mean that the US economy is healthy - of course not, but the catalyst for a correction should be the infantile bickering of US politicians not the ability of the US Government to meet its US dollar obligations. S&P downgraded Japan, starting in 1998, removing the AAA rating down to A2 in 2001. Japan has proven that its has never failed to meet its Yen obligations, and interest rates have not risen, remaining at close to zero until now.

With the price falls the yield on our banks stocks, for example, are around 12% (including franking credits). And you have our Government, the IMF and the Treasury sticking to the story there will be a mining boom to support our economy. Also, the US Government and Treasury will need to respond further to this crisis. I think that they will follow Japan's lead and provide further stimulus to the economy via another version of QE3.

Michael Cornips

Last night the DOW reversed 620 points to finish up 429 after the Fed announcement. For all the talk of money printing hysteria, the 10 year bond rate fell to 2.18% and a 3 year bond auction for $32 Billion of Treasury notes yielded .50% last night.

The US is simply doing a "Japan" - leaving interest rates at zero for a very long time. In the process they have printed money to be 200% of Gross Domestic Product. The US debt is still only about 90% of GDP. So expect a long and protracted period of easy monetary policy to try and stimulate the economy. However, the Japanese economy shows that this action guarantees nothing - with their market just moving sideways for the past decade, as you can see in the chart below. Also remember S&P downgrades and printing trillions of Yen did not cause any economic collapse or hyper-inflationary event.

The market may have got their monetary policy "fix" last night, but we need a change in policies (more jobs, infrastructure investment etc) rather than just repeating the mistakes of the past.

Michael Cornips

Overall, the picture of lending in Australia is one of a negative trend. The graph below is annual year on year growth rates of each of the lending sectors. Owner Occupied and Investment home lending growth is at its lowest for 20 years - and the trend is pointing down. Personal lending, having dipped into negative growth during the GFC, is touching the zero growth line again. Business lending growth is just outright negative (minus 2.7% year on year) and has been negative since June 2009.

Below is the breakdown of the latest annual growth rates of each of the major banks in each of the sectors. Macquarie shows the withdrawal of the bank from home loan lending. You can see that Macquarie has a large growth rate in deposits due to the Government guarantee. The Government deposit guarantee expires in October and it will be interesting to see what it is replaced with and therefore the potential impact on Macquarie to continue to fund its book via deposits.

The figures illustrate the success NAB has had in attracting new home lending business with its advertising campaign and more aggressive lending rates.

Overall, given the negative trends in most sectors of bank lending, and given the diabolical performance of the retail stocks, you would be hard pressed to believe that the RBA would lift rates next Tuesday. Opinion on the direction of interest rates is the most polarized it has been for a long time. ANZ's economist believes interest rates will go up next Tuesday, and Westpac believes the next move will be down. HSBC believes nothing will happen this year, but probably a rate rise next year. I believe the CPI figure was a one-off, and after removing volatile items, the trend remains within an acceptable range.

The only result coming out of the US is that spending will be cut, and most of Europe and the UK is on an austerity drive. Less government spending will simply mean less income to the non-government sector. This not the environment for interest rate increases.

Michael Cornips

view graphs at: http://www.traderscircle.com.au/free/email/PCAS_Articles20110801.html

This brings up the question of how money is managed at a national level. I will attempt an explanation but you will need to appreciate that it is all about accounting and not economic theory. For countries like the US, UK and Australia the process is the same, but it is not for the Euro area since the member countries do not issue their own currencies.

At the top of the banking pyramid is the Reserve Bank of Australia. In America it is the Federal Reserve. Every financial dollar circulates through the economy eg. from Government to Centrelink recipients to spending with businesses, into business bank accounts, netted back to the Reserve Bank and back to the Government to fund the original spending. A dollar created by Government cannot be destroyed or disappear until it is paid back by a taxation payment. A dollar created by bank lending creates a bank deposit that can't be destroyed until a bank debt is repaid. If you follow the money around it is all quite logical, and that combined with monetary conventions will give you a better understanding how the system really works.

Australia has the Australian Office of Financial Management (AOFM) to manage its finances, dealing with the RBA and issuing debt into the market. The US has the Financial Management Service (www.fms.treas.gov) that operates with the Federal Reserve and markets on a similar basis. The great thing about the US is that they report Government revenue and expenditure on a daily basis, whereas in Australia reporting can be delayed for months at times.

Below is a table that tries to highlight the main financial operating accounts in Australia. By convention only, the Government chooses not to simply run an overdraft on its RBA current account (it could and can). Rather than run an overdraft, the monetary convention (which is a throwback to the gold standard) is that the Government issues debt securities to the financial markets. In May 2011 the Government spent $29,542 million and receive taxes of $27,202 million, for a net spend of $2,321 million. The AOFM always runs a positive deposit balance with the RBA, issuing short term Treasury Notes, long term fixed interest bonds and indexed bonds, as needed to maintain a positive balance. Check the website: www.aofm.gov.au - you can see the debt on issue totals $193,242 million as of 22nd July 2011. The AOFM maintains a deposit account with the RBA that has a balance of $8,812 million. The RBA publishes its balance sheet weekly. Check out: www.rba.gov.au - Release A1.

The Government is not debt constrained. It can spend first and in the process create the dollars required to balance its books. Let us look at an example (below) of the Government paying $10,000 million in Centrelink handouts. The AOFM simply withdraws the funds from its RBA account and electronically pays the funds into beneficiary's accounts. The AOFM, initially, overdraws their RBA account and creates a deposit in peoples' bank account. Whether that money is directly kept as savings with a bank, or it is spent with business, those funds must end up as a deposit in a bank account. At the end of the day when the banks balance their accounts the "banking system" must be in surplus by $10,000 million. If every bank is in surplus, the only borrower must be the RBA, otherwise interest rates would be forced to zero as the banks scramble to find a borrower. The RBA is happy to borrow the $10,000 million, since they must maintain their target interest rate policy and besides, they need to fund the earlier drawdown by the AOFM. Important Rule: Government spending creates its own savings.

Rather than be hysterical at creating Government debt, why is the media not hysterical at the private savings it creates. We know for a fact that people are saving more (by definition they must) and that bank debt is not growing (another by product of saving) and retailing is suffering.

How in this world can anyone think that the Government could ever be debt constrained. Government spending creates its own deposit. Monetary convention requires the AOFM's overdraft be turned into fixed term debt (ie going from variable rate to fixed rate debt). Anybody wishing to buy the Treasury Notes or Bonds will use their bank deposit to pay for the Government bond. Overall, net Government spending is captured as a bank deposit with the RBA or a Government bond owned by the private sector. Bank deposits and bonds represent private savings. Government net debt must equal net private savings. It is an accounting identity, not an economic theory.

Get this - Government debt will soon exceed $200 Billion. That $200 Billion must be private savings. And what is the consequence of excessive savings? Ask the retailers - while the private sector lacks confidence it will continue to save, and the Government, as it doesn't collect tax, will continue to borrow.

And that describes what Quantitative Easing (QE) was. The US Government wanted to get bond rates lower to encourage investment. QE simply purchased Government bonds and funded that with the bank deposits it created. Logically, if the Government pays you a $1 million cheque to buy your Government bond, you must deposit that into your bank account. And that finishes up as a bank deposit with the Federal Reserve which funds the bond purchase. Important note: QE did not create cash for banks to lend, it only lowered the cost of long term borrowing.

Geithner and Bernanke get all this, but most politicians and some in the media don't. A debt default will be self-inflicted stupidity which by all logic has a nil chance of occurring.

Michael Cornips To view graph visit: http://www.traderscircle.com.au/free/email/PCAS_Articles20110726.html

Michael West in The Age put it best this morning: "The rub for Julia Gillard is that only one quarter of the country backs her. That's not enough to push through such a landmark reform. The public mandate is too skinny, the risk of parliamentary defections too fat. Only one member has to cross the floor. And bear in mind, Liberals crossed the floor to support the CPRS when Kevin Rudd was in power. It happens."

Looking back in history might help us to find a solution.

The Gair Affair. Vince Gair was elected the Premier of Queensland in 1952 by the Labor Caucus when the then Premier, Ted Hanlon died. Even though Gair won the 1956 election he managed to get the union movement offside after circumventing union support for a shearers' strike by arranging the Federal Government to support the export of wool shorn by non-union labor. Although the strike eventually ended, an anti-Gair alliance was formed by the militants of the Queensland Trades and Labor Council.

One of the main issues that caused conflict was the Labor Party's support for 3 weeks paid annual leave to be included in State Industrial Awards. The Party's Central Executive directed the Parliamentary party to introduce legislation for the leave. Although a bit heavy handed, Gair "promised" to introduce the legislation after the 1956 election. Gair was re-elected but then said circumstances had changed, saying it was financially irresponsible to extend the leave.

The Central Executive of the party, not happy with a broken promise, removed Gair as the leader of the party on the 24th April 1957. Unlike Kevin Rudd's removal as party leader, Gair was able to convince 25 Labor ministers to resign with him from Caucus and form the Queensland Labor Party. Gair tried unsuccessfully to form a minority government with the Country Party. The ALP, Country Party and the Liberal Party blocked supply (it can happen) forcing a new election in August 1957. The Liberal Party won, ending 25 years of Labor Government.

Gair held his seat, with the Queensland Labor Party merging with the Democratic Labor Party. In 1964 he was elected as a Federal DLP senator in the Senate. This brings us to the 1974 Whitlam Labor Government. Whitlam was trying to create a vacancy in the Senate to give Labor a better chance of picking up an extra seat. Whitlam offered Gair to become Ambassador to Ireland if he resigned. Gair, who was a leader dumped by the Labor party and was disillusioned with the DLP, happily took the opportunity offered.

The Queensland Premier Joh Bjelke-Petersen tried to thwart the plan by issuing 5 rather than 6 writs for Senate Vacancies. Whilst this was going on, two Country Party senators kept Gair occupied in his office with beer and prawns until 6:05 in the evening. Gair missed the 6pm cut-off time to resign and Whitlam's plan was thwarted. The event became to be known as "the night of the long prawn".

After the May 1974 Senate election the ALP failed to have a majority in the Senate, precipitating the eventual sacking of the Whitlam Government and the double dissolution in 1975.

So there are some similarities to today, a former Labor leader sacked by his own party, a minister who likes to go overseas, a Labor party that is without control in its own right in the Senate (or the House of Representatives), a party at a low point in the opinion polls, a general mistrust and disenchantment with policies, never has a political environment felt more like 1975.

The current Government needs to re-stablish its mandate with the people, given the opinion polls (Rudd was sacked with better polls), the broken "carbon tax"promise, and a softening economy focusing voters minds on the economic decisions being made.

Abbott could try a Whitlam tactic and find a former Labor leader sacked by his own party, who likes to live overseas, and who wouldn't get a plum overseas posting if Labor lost the next election. Just try it without the prawns.

Michael Cornips

The recent spike in rates on the 1st July 2011 was the end of QE 2 in the United States. The sell off was short lived, with the downtrend re-establishing itself both in Australia and the US. The current 10 year US rate is 2.96%, having spiked to 3.20% on the 1st July.

Update: 11:00am 12th July - 10 year bonds - 4.99% , 3 year bonds - 4.47%

Michael Cornips to view graphs visit: http://www.traderscircle.com.au/free/email/PCAS_articles20110712a.html

State Government debt has grown by $25 Billion over 12 months. Federal Government debt has grown by $49 Billion over 12 months (as at 31st May 2011. Source:RBA). Total Government debt growth: $74 Billion. Total Government Debt: $369 Billion.

It will be interesting to see the political landscape 12 months from now, if this trend is maintained. The promised budget surplus will need to be re-assessed, the government will be looking to cut spending as an alternative to increased revenue, the economy will have slowed further and all of this running into the start of the carbon tax. Tough politics indeed.

Michael Cornips to view graphs visit: http://www.traderscircle.com.au/free/email/PCAS_articles20110712b.html

The Age newspaper: "A 4.4 per cent rise in home loans in May suggests the housing market is starting to pick up after the slowdown earlier in the year following November's rate rise." "ANZ economist David Cannington said May's figure meant there had been two months of fairly positive data after the sharp downturn early in 2011. The initial softening after the November rate hike is fading out of the market,'' he said. He added that the numbers suggested investors were coming back to the market after the drop off earlier in the year."

Herald Sun: "A RISE in the number of home loans approved in May indicates that strength is returning to the housing market, according to economists. Home loans approvals increased over April by 4.4 per cent to 49,437 as bank lending increased to the highest level in two years in an indication home buyers were gradually returning to the market."

Sounds rosy but data from the ABS suggests a bit of bottom bouncing rather than a recovery.

The recovery they are talking about is the last data point going from $19.92 Billion in April to $20.49 Billion in May.

The ABS also published today the total for all residential housing lending for May 2011. The annual growth trend probably shows a clearer picture of housing finance:

Total residential home lending in March 2002 was $326 Billion. To help fund our lifestyles home lending has grown by 334% to $1,089 Billion. Gross Domestic Product has only grown by 83% over the same period. So that is 4 times as much debt growth as economic growth. So the question is and always has been, do we need this sort of debt growth to get an acceptable economic growth.

History has shown that this is actually the case, but it now appears that consumers are reluctant to grow debt at previous growth rates.

Michael Cornips to view graphs visit: http://www.traderscircle.com.au/free/email/PCAS_articles20110712.html

As of March 2011 (source: RBA), total bank assets were $2,683 Billion. The risk attributed to those assets was 48% lower, or $1,385 Billion.

Bank capital was $162 billion, so as a percentage of $1,385 Billion, this gives you the capital ratio of 11.7%. (The red line in the graph). But as a percentage of published total assets ($2,683 Billion) it is 6.05%. (The blue line in graph).

This trend is quite stark as it has been in clear decline since the late 1980's when it was 12.66%. Blogsite, Macrobusiness has pointed out that as house prices have increased over the years, the banks internally are able to revalue upwards the value of your home so as to achieve the lower risk weightings. Again, this is what puts further pressure on our banking system that high home values are maintained. If home prices were to fall then conversely banks would be required to increase their risk weightings on asset values. So without any bad debts or losses, the bank will be required to raise capital to maintain the regulatory minimum.

Michael Cornips To view graph visit: http://www.traderscircle.com.au/free/email/PCAS_articles20110712c.html

http://www.australian-phosphate.com

What better analysis than to buy 1000 BHP shares in May 1984 for $14.40 each, for an investment of $14,400?

Over the years the dividends have been re-invested to purchase additional shares, share splits have occurred, and Bluescope Steel was hived off and so was Onesteel Ltd. Cash dividends of $180,000 were paid that were re-invested into buying more BHP shares. Franking tax credits of $77,500 were paid. Depending on your tax rate, the dividends could even be free of additional tax because of the franking tax credits.

As of 1st July 2011 this is what 1000 BHP shares worth $14,400 have become over the 27 years:

22,140 BHP shares valued at $969,067

5,517 Bluescope shares valued at $6,841

3,488 Onesteel shares valued at $6,417

Total $982,200 - 68 times the original investment or 16.8% compounded return.

BHP's performance demonstrates what was right with Australia's economy, and possibly what is now wrong as we face a two speed economy punishing the non-material sectors.

Michael Cornips

Debelle also commented on the current lack of growth in bank lending: "On the corporate side of banks' assets, growth has been very subdued reflecting a number of different dynamics. The large investment boom currently underway is being financed in quite a different way from growth episodes in the past. Companies in that sector are funding themselves from cash or directly from global financial markets. Hence the domestic banking system is seeing much less of that business than in the past. To put it another way, inter-mediated business credit is likely to grow a lot slower in the period ahead than historical relationships with GDP and investment would lead one to believe. Finally, lending conditions to the commercial property sector remain tight as banks are still reluctant to increase their exposure to that sector."

Some sectors in the economy have lost favor with the banks, so they are accessing alternative funding outside the banking system. As an example, there is a company in the MIS forestry sector, TFS Corporation (TFS:ASX), an owner and manager of Indian Sandalwood Plantations in Western Australia. The Commonwealth Bank withdrew their funds from the MIS sector having lent to Gunns (click here), Timbercorp (click here) Great Southern (click here) and TFS. With the implosion of the MIS sector the Commonwealth Bank last year simply requested the repayment of loans by TFS. ASX releases show that TFS reduced their $67m CBA debt to $57m by 31st December 2010. The release makes interesting reading as TFS documents the negotiations with the bank. The CBA required TFS to reduce the facility to $15m by 31st January 2011. The directors and other parties advanced $10m to TFS and $13m was repaid to CBA reducing the debt to $20m in February, which in turn CBA required to be repaid by April. TFS undertook a placement and rights issue for $37.9m in March, and together with Institutional sales, the debt was repaid.

As an example of a relatively small company circumventing the domestic funding market, TFS undertook an international roadshow to raise debt funding. On the 17th June 2011 TFS announced they raised $150m US dollars in 7 year fixed senior secured debt. It is an interesting contrast that a company threatened with withdrawal of funding and its very survival actually has assets that a lender is prepared to lend against. It goes to Guy Debelle's point that borrowers, if they can, need to go offshore to circumvent reluctant local lenders.

Banks may have the luxury of "lender of last resort" facilities from the RBA, if they have quality assets, but quality assets can not necessarily guarantee funding for businesses to the detriment of the broader economy. As tens of thousands of investors lost their savings as the MIS sector imploded, you wonder whether it was solely an asset quality issue or was there a liquidity issue?

As the RBA's Guy Dubelle reminds us, business is funding itself from global financial markets and banks are reluctant to lend to the commercial property sector, a banking industry focusing predominantly on the humble family home is not healthy and fraught with danger.

Michael Cornips

to see graph visit: http://www.traderscircle.com.au/free/email/PCAS_Articles20110629.html

Total income over the six years was $232 billion. This included the negative returns of $206 billion for the six quarters between December 2007 and March 2009. Due to these losses, tax on earnings was a net refund of $1.7 Billion over six years.

The total income of $232 billion represents a rate of return of 5.53% per annum over the period. It is a shame that a good proportion of employees who have a mortgage paying about 7.5% interest are investing their retirement savings in a more risky investment than the certainty of making mortgage payments.

Maybe it is time to cut out a lot of middlemen and allow a member's superannuation fund to invest in a mortgage offset account in the member's own mortgage. The interest on the offset account could be paid back into the superannuation fund. Simple rules could be established so that loan to valuation ratios remained at conservative levels. The process would cut out a lot of fees and give the member a chance to invest in their own future.

The Government should mandate the banks to provide the facility for owner occupied homes.

The banks would be provided a direct guaranteed funding source, easing funding requirements.

The offset facility would be seen as easing the growth of debt for consumers in the economy.

Mortgages are provided under normal lending criteria, with mortgage insurance being relatively cheap up to 80% of value of the home. The superannuation fund, as a bank depositor, would have the normal protections.

As interest rates rise, the same benefit would flow into their retirement savings.

As earnings of the fund are normally taxed, there would be no loss to the Government, as returns on investments are taxed anyway. As the assets are a bank deposit, the tax would be less cyclical, avoiding the $14 Billion in refunds the Government made during the credit crisis.

People would be more encouraged to save for their retirement if they could see a real direct benefit in saving.

As the superannuation system already exists, it is only a question of where you invest your money. Should you be forced into speculative investments to get a decent return, or should you invest in what is a high rate savings account. Remember, 7.2% return over 10 years doubles your money. Doubling your money with safety sounds like a good idea.

It probably makes too much sense to be practical.

Michael Cornips

GDP figures are reported in two ways: Nominal GDP growth and Real GDP growth. The nominal GDP figure is the actual unadjusted figure using current dollars. The real GDP figure is adjusted by inflation, such that our concern should really be the economy's growth adjusted by inflation. It is of no use if nominal GDP growth is 5% whilst inflation is 7% - it means the economy is going backwards.

Back to the GDP numbers of last week - the fall of 1.2% in the March GDP was a fall in real (inflation adjusted) GDP growth. From March 2010 to March 2011 the growth in real GDP was 1%. But in stark contrast was the nominal GDP growth for one year. Nominal GDP growth was 7.1% from March 2010 to March 2011. This was definitely lower than the 8.9% annual growth the previous quarter, but hardly recessionary. Keep in mind that the Government taxes nominal dollars, not real dollars, so a 7.1% growth rate is not entirely inconsistent with the growth forecast in the May budget.

So what turns a nominal GDP growth of 7.1% into real GDP growth of 1.0% - answer - rising inflation.

The graph shows the downturn in GDP growth rates, but also highlights increased inflation reflected in the GDP deflator.

This is probably the figure that is concerning the RBA when considering the raising of interest rates over the next few months. The recent bad economic news may delay a rate rise today (Tuesday, 7th June) but if the March GDP figure only reflected the effects of the floods on the mining sector, then rates rises are definitely to be expected.

The next graph tracks the GDP deflator, CPI and official RBA interest rates. The GDP deflator rate, implicit in the just released GDP figures, points to rate of 6.1% (ie Nominal growth of 7.1% less real growth of 1%).

The last time the rate was in this range in 2008, the official interest rate was 7.25%.

If I was to try and make a case for an interest rate rise today, I would point to a fall of 1.2% in real GDP for the quarter and a rise of .70% in nominal GDP for the quarter. This points a GDP deflator of 1.9% for the quarter or 7.6% annualised.

The Federal budget, using Treasury figures, is based on a projected investment boom. Any sign that the March 2011 GDP was only affected by the floods, and a sign that the investment boom is commencing, will definitely prompt the RBA to lift interest rates.

Michael Cornips View graphs at: http://traderscircle.com.au:8888/httpdocs/wp-content/uploads/2011/06/realGDP.gif and http://traderscircle.com.au:8888/httpdocs/wp-content/uploads/2011/06/GDPa.gif

The Times article The Benefits and Costs of a "Golden Age" of Natural Gas and Fracking gives a quite lengthy overview and some great links and tasty bits.

The part about China, reproduced below, got me thinking of ways to play the China gas story and that led me to think about one of my shares ASX: SEH:

Snipett: "Seeing natural gas displace coal will make a real difference—especially in the world's most polluted cities. China has embarked on an aggressive strategy to develop its own unconventional gas resources and bring in more from abroad, not so much for climate reasons—though natural gas is a cleaner fossil fuel—but for health factors. China is faced with a "very grave" environmental situation, as its top green official put it recently. Though there is worry here in the U.S. about the threat that hydofracking gas might pose to water supplies—more on that later—in China, home to 16 of the 20 most polluted cities in the world, that would be an acceptable risk. In fact, it would almost certainly be a welcome tradeoff—as anyone who's spent time in blackened Chinese cities like Beijing or Chongqing would know."

MyClime is a division of Clime Investment Management Ltd (ASX: CIW). Clime is a listed, specialist Australian equities manager whose main operating divisions are Clime Asset Management and MyClime. Clime was established in 1996 and has a value-based investment philosophy with a focus on preserving and growing capital. Clime Investment Management Limited has a strong balance sheet with net tangible assets of $24 million.

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Also, although total profits were down $1.3 billion for the quarter, mining profits were actually down $1.5 billion for the quarter. This means everything else was up $0.2 Billion. After the supply disruptions in the mining sector due to the floods, it is a reasonable expectations that profits will rebound in the next quarter.

Adding to the current bearishness has been the active short selling occurring in the banking sector over the last 5 business days. Short selling has accounted for about 33% of the stocks' turnover.

The current news has been reflected in the banking figures published over the past months and was also reflected in the recent budget forecasts. Yes, economic figures have been quite lacklustre these past few months, and the Gross Domestic Product figure will quite likely be negative for the quarter when it is published on Wednesday.

But the budget and treasury forecasts were all premised on the expected growth in the economy, so it is about the future, not the past.

No doubt the traders will sell into the expected negative GDP figure on Wednesday, but what short term traders sell - they will need to buy back. Remember, NAB is paying an $0.84 fully franked dividend on Thursday, which equates to $1.20 when you add in the franking credits. That is a 4.80% dividend for six months. You could call that a value trap, but with $70 billion a year entering the superannuation system, there will be plenty of value buyers in the market looking for the cash-flow and of all the banks, NAB has been growing its lending book the most.

If the sellers lose their commitment, look for a quick pullback.

Michael Cornips

To see graphs visit: http://www.traderscircle.com.au/free/email/articles20110531.html

The debt game has been going on for quite some time. Bank debt growth of 10% to 20% has been going on for so long most people would think it is the norm. The last time we had debt growth that dipped below 5% was back in the 1991 recession. I remember Westpac dropping to $2.50 in July 1992 from $4.00 two months earlier. I think Kerry Packer took a private placement at $2.25 and a board seat to shore up the bank's finances. At least Kerry picked the bottom. From there debt growth picked up and, from 1995 the housing boom kicked in. That enabled us all to finance the things we needed from debt rather than old fashioned savings.

The current political structure of the world is that the Lenders must be protected at all costs. The American banks were paid out at 100 cents in the dollar on the basis that if they weren't, the financial meltdown would have even been worse. As Krugman says, "European leaders offered emergency loans to Nations in crisis, but only in exchange for promises to impose savage austerity programs, mainly consisting of huge spending cuts. Objections that these programs would be self-defeating not only would they impose large direct pain, but they also would, by worsening the economic slump, reduce revenues were waved away. Austerity would actually be expansionary, it was claimed, because it would improve confidence."

Lenders managed to lend Iceland $100 billion or 850% of their Gross Domestic Product, with all three of their major commercial banks failing. The stock market fell 90%, interest rates were 18%, and their currency was devalued. Thats the problem when a country borrows in a currency other than its own. It means other countries get a say in how your economy is run. The UK Government used anti-terrorism legislation to try and get compensation for 300,000 UK savers and suspended Icelandic assets.

The stage was set back in the 1970's when Richard Nixon took the US off the gold standard after the world worked out that the US was spending more than they had in Gold. Had that been the end of it the US would have taken a different path. The greatest coup for the US was in 1974 when they convinced OPEC to settle oil only in US dollars. If you wanted to buy oil for your expanding economy then you would have to buy dollars first. There was natural demand for the US currency. This led us to the 1980's with Ronald Reagan and Margaret Thatcher convincing their countries to close all those inefficient mining and manufacturing industries, take on the unions and shed jobs, and get Japan and China to do it all cheaper. Companies became a lot more profitable, but getting rid of all those jobs caused a problem - not enough demand. Here is the good bit. Japan and China were prepared to swap all their hard work and goods for pieces of paper. So to create demand you just needed to get the consumer to borrow it, all funded by Japan and China.

It was a virtuous circle, a few hiccups admitably, but debt growth soared, with our housing and investment assets going up in value. We hit a low point in 2005, but that was solved with a bit of sub-prime lending.

The Australian Government's budget is premised on debt growth. You won't get a 20% growth in GDP without borrowings increasing by a similar magnitude. The paradigm will eventually change, but probably not over the next few years.

Michael Cornips view graphs at: http://www.traderscircle.com.au/free/email/articles20110524.html

It goes to show that the Democrats are prepared to push the issue to the limit to maintain its own agenda.

The limit is obviously a political constraint, where the Republicans, in a game of brinkmanship, are trying to force the Democracts into deep spending cuts.

The average monthly deficit spend is about $120 billion. April is the biggest month for revenue tax collections, with the deficit “only” being $40 Billion for the whole month.

The chances of the US defaulting on their debt is minimal. By law, interest on debt securities is paid before any other expenditure. So even if there is continuing political intrangience, if the expenses like Public Service employees’ wages or unemployment benefits are not paid, the Republicans will be the likely losers.

Tax revenue is running at 15.14% of Gross Domestic Product (GDP), but expenses are running at 24.25% of GDP. The US targets 20% of GDP as taxation revenue. Australia by comparision targets 23.5% of GDP for taxation revenue. The Republicans want expenditure cuts, but don’t want tax increases. Any expenditure cuts will be a negative for the economy trying to maintain its income.

Given that the deficit chart above, I personally think that the debt limit will be increased with minimal spending cuts, and there is probably a good chance of QE 3. Quantative Easing is only shifting long term debt to short term debt, but it will give confidence to the market.

Michael Cornips

To view graphs visit: http://www.traderscircle.com.au/free/email/articles20110517.html

Look at the rhetoric in today's newspapers:

Australian Financial Review (afr.com May 10, 2011): Treasurer Wayne Swan is to force the long-term jobless to re-engage with employers or lose their benefits, as Labor braces for a fight over its budget deficits.

The Age newspaper: (theage.com.au May 10, 2011): Swan budget to offer carrot to long-term jobless: Michelle Grattan, "TONIGHT'S budget will crack down on the very long-term unemployed as part of its stick-and-carrot policies for getting people into work and working harder." "With participation a central theme of the budget, the government will also apply a ''stick'' to teenage mothers to try to keep them in education. It will give ''carrots'' in the form of more generous support for families with older teenagers who stay at school and bring forward tax relief for lower-income earners."

You will notice that Government policy is not to create jobs, but to prepare people for jobs. That is a massive difference in policy approach. And the media follows the political lead with stories like those above which vilify those who cannot get job.

It is based on the premise that the unemployed choose not to work and therefore need to be "encouraged" to take those jobs that are supposedly available. It is great if you are a skilled worker, but it is bad luck if you are unskilled.

The simple fact is that full time employment has shifted to part time employment over the past 24 years. Is this full employment?

You can see it in the aggregate hours worked figures. You may be employed, but it is not for the full week. Even though the headline rate has improved to 4.9%, the number of hours worked simply has not recovered from the slump of a few years ago. Household bills are paid by cashflow generated by the number of hours you work, not by the fact that you just have a job.

Tonight's budget will be based on a self imposed political constraint of trying to balance the budget by 2013. As Steve Keen says in the following article , the Government is filling "the airwaves with alarm about the level of government debt in Australia (which) is truly surreal". He makes the point that American government debt is 15 times larger than Australia's - relative to our respective GDPs.

Given Australia's relatively low debt position, is it really appropriate that the government throws an anchor out to slow the economy by reducing expenditure/increasing taxes to the tune of $55 Billion over the next few years. And who will help pay for the slowdown? Those on social welfare who are not taking jobs that are being offered to them. It is interesting to see the Labor Party are more conservative than the Conservatives, but that is the nature of politics today.

Michael Cornips

(source: rba.gov.au)

There were no net expenditure cuts, which was opposite of what was expected. The budget relies totally on an increase in revenue and a booming economy. This budget was not a dissimilar framework to the high hope budget presented last year.

Expenditure for 2011 is $349.7 billion

Expenditure for 2012 is forecast to be $362.1 billion - a 3.55% increase. Hardly fiscal austerity.

Expenditure for 2013 is forecast to be $372.1 billion - a 2.7% increase. Expenditure is a guaranteed outcome, whereas all the wishful thinking will be on revenue.

Revenue for 2011 is $303.7 Billion - a $46 Billion shortfall this year.

Revenue for 2012 is forecast to be $342.4 Billion. A 12.74% increase over a year. Boom time indeed.

Revenue for 2013 is forecast to be $378.5 Billion. A 10.5% increase over 2012.

As mentioned previously, tax revenue is based on a percentage of GDP. The forecast GDP growth figures built into the budget are as follows: GDP for 2011 is forecast to be $1,386 Billion, rising by a nominal 6.4% in 2012, followed by a nominal 5.5% in 2013. This is an overall 12.32% increase over 2 years or an increase in GDP of $170 Billion.

Also mentioned previously, GDP is linked to bank debt growth. Recent history shows that it takes about $2 dollars of debt for a $1 increase in GDP. So we can expect, on these forecasts, about a $370 Billion increase in bank debt over the next 2 years. And if this is true, the major bank shares will be the main beneficiaries.

These figures are not dissimilar to the forecasts I made 2 weeks ago. I figured that expenditure would increase by 2% per year, with a balanced budget forecast by 2013 - which is pretty much in line with tonight's outcome.

The share market certainly hasn't embraced these growth figures, but any sign that growth is starting to appear will figure in the forward indicators. Overall, no net expenditure cuts is positive for the income of the economy, with cautious optimism for the economy's growth prospects.

Michael Cornips

With taxation running at about 22% of Gross Domestic Product (GDP), the current $53 Billion shortfall in taxation represents a required increase in GDP of $240 Billion, or a required 18% increase in GDP; that's if Government expenditure does not increase. If you allow for a 2% increase in Government Expenditure each year for two years then, from an annual expenditure base of $350 Billion, another $7 Billion in tax revenue is required for each of the next two years.

That $14 Billion increase in required taxation revenue requires about another $60 Billion increase in GDP (based on taxation equaling 22% of GDP). So the economy needs to grow by $300 Billion ($240 Billion plus $60 Billion) by 2012/13. That is nominal GDP growth of 22% over two years. Not impossible, of course, but definitely boom times are being predicted by the Government.

(Note: Our expectations for March 2011 GDP will be, at best, flat)

We are currently hearing from Ted Baillieu in Victoria that there are unexpected blowouts in the State's budgets. Well, it is not really unexpected if you look at the State Governments' debt growth since 2008. The State Governments have been doing a great job in maintaining our standard of living with annual debt growth (to February 2011) of $20 Billion. With the political power moving to the right in NSW and Victoria, and given Ted Baillieu's statements, you will clearly expect the State Governments to begin to bring their budgets into balance.

Total Government Debt, both State and Federal, now stands at $351 Billion (as at February 2011), a $77 Billion increase over the year. Without arguing the merits or otherwise of the move to balance the budget, the political forces in Australia are moving to decrease Government spending, which is private sector income, by a substantial amount. Their logic is that the private sector will expand.

Again, not arguing the merits of the current course of action, it is a better to understand the framework our economy is operating in, the future Government expectations, and how you can best manage the investing environment as events unfold.

Michael Cornips to view graph visit: http://traderscircle.com.au:8888/httpdocs/wp-content/uploads/2011/04/state.gif

The annual headline deficit jumped from $58 Billion to $62 Billion, putting it nearly on par with the worst annual deficit recorded last September.

The Annual figures over a 3 year period (Jan 2008 to Jan 2011) are as follows:

Receipts:

Net Individual Tax: +6.7%

Company Tax: -15.0 %

Superannuation: -46%

Total Income Tax: -4.0%

Interest & Dividend Receipts: -29%

TOTAL REVENUE: +6%

Payments:

Defence: +15.9%

Education: +144%

Health: +27%

Social Security & Welfare: +19.5%

Housing and community: +164%

Recreation & Culture: +29.7%

Economic Services: +45%

General Public Services: +22.4%

Public Debt Interest: +92.6%

TOTAL EXPENSES: +40.98%

Headline Surplus/Deficit: A lot%

From: $20.4 Billion surplus to: $61.5 billion deficit.

Michael Cornips

to see graph visit: http://www.traderscircle.com.au/free/email/articles20110419.html

This is how the Government manages its interest cost to a (relatively) negligible level.

For the 12 Months to February 2011: Interest on Debt Securities: ($424 Billion) Rebate of Earnings: $100 Billion The Federal Reserve pays a dividend on its earnings on assets purchased. Rebate on Public Debt: $185 Billion Even though the Government issues bonds to Public Government Departments, the interest is actually rebated on the outstanding public debt of $4,600 Billion. Net Interest Cost: ($139 Billion) On $14,200 Billion of outstanding debt - a little bit less than 1%.

With Quantitative Easing, the Federal Reserve is investing in 10 year bond yielding 3.5%, and paying for it by borrowing short term funds from the banks at an interest rate of around 0.15%. The positive funding return is rebated back to Government. (source: www.fms.treas.gov )

The decreasing net interest costs is quite impressive given the increasing Trillions of outstanding debt.

Michael Cornips to view graph visit: http://www.traderscircle.com.au/free/email/articles20110412.html

Rare earth element prices are likely going to continue heading upwards, and China, which produces about 95% of global supplies, might halt exports altogether, an industry association warned on Thursday.


"The general consensus is that it (pricing) is going to get worse before it gets better"

Rare Earth Industry and Technology Association (REITA) director Keith Delaney said.


Prices have skyrocketed over the past two years as China drastically curbs exports and the rest of the world scrambles to secure supplies of the metals, used in consumer electronics, electric vehicles and wind turbines.


Delaney, speaking a conference call hosted by US-based Technology Metals Research, said that even with new production coming on stream at Molycorp's Mountain Pass mine in California and Lynas Corp's Mount Weld project in Australia, customers might struggle to secure supplies. Read full article


No wonder ALK has been so strong recently





Read about Australian Rare Earths

Is there excess demand in the economy? With the increasing shift to part-time employment and the underemployment rate at around 12%, with Bank balances sheets not growing over the past two years (especially after ranging between 16% to 25% growth, which we thought was normal until 2007) and with commercial lending having negative growth, along with a few of the major world economies on austerity programs, I don't think there is excess demand.

The current rhetoric is that Government deficits, per se, are bad and surpluses are good. The Federal Government budget forecasts suggested that Australia would eliminate the deficit by a boom in the economy (ie Revenue is going up). In December 2008, annual Government revenue was $306 Billion and expenses were $293 Billion. In two years, expenses have increased 20.4% and revenue has decreased by 3.7%. This happended in the middle of the best export market and terms of trade we have ever had. That is $353 Billion in expenses and $295 Billion in revenue; a $58 Billion gap. Where is the demand?

The Australian Government is just not framing any media around the impending deficit "crisis", and by that I mean a self imposed crisis. The Government has committed to a surplus within two years (unnecessarily) and eventually will need to prepare the electorate for the belt tightening.

What we have heard about is the mining tax, the carbon tax and some snippets in the media about welfare spending cuts. If the revenue is not meeting budgets, then expenditure needs to be cut. A deficit of $58 billion with a Gross Domestic Product of around $1,300 Billion is over 4% of the economy. The Government needs to either tell the electorate that balancing the budget will be delayed, or begin their journey of fiscal austerity.

The US is currently maintaining their $1.3 Trillion plus annual deficit and their 10 year bond rate is 3.4%. Japan's debt is 200% of Gross Domestic Product and their 10 year bond rate is 1.25%, which has been there for 20 years. Why isn't the inflationary fear being expressed in the World's bond rates? Australia's 10 year bond rate recently peaked at 5.75%, but is now 5.45%.

The danger to you, as an investor, is when the Republicans in the US start getting their spending cuts implemented and when (if) the Australian Government starts making spending cuts.

Michael Cornips

BARAKA PETROLEUM LTD - ASX: BKP changed its name to BARAKA ENERGY & RESOURCES LTD - ASX: BKP

IMPERIAL CORPORATION LTD - ASX: IMP changed its name to EMPIRE ENERGY GROUT LTD - ASX: EEG

PEEL EXPLORATION LTD - ASX: PEX changed its name to EMPIRE ENERGY GROUT LTD - ASX: EEG