Why You Should Be Thrilled About Australia Right Now

If Henry David Thoreau was right when he wrote, “That government is best which governs least,” then Australia got itself the best government in the world on Saturday.

Of course technically speaking, Australia didn’t elect a government. And that government which is not a government cannot govern at all. Thus, “not at all” being less than “least”, the unelected government not elected on Saturday is best!

Okay. Enough of the japery. Let us put our dour and serious face on and see what Saturday’s election means for markets…

On second thought, let’s not be serious. After all, this is a great result, is it not? That would be the unconventional take on things. The conventional take is that markets hate uncertainty. What they got on Saturday was an extra portion of uncertainty with a dollop of extra time. But to paraphrase Gordon Gecko, “Gridlock is good.”

With neither major party able to secure 76 seats in the lower House of Parliament on its own, and with postal and absentee votes to be counted in some key electorates, there may not be an official result for at least a few days, and maybe longer. It’s a hung parliament left twisting in the wind. But upon further review, we’d be surprised to see a big move in the currency or the share market in the next few days. Why?

Gridlocked governments have to govern from the centre, and they usually don’t get very much done. About the only certain result from a gridlocked government is no major legislation will be passed. That’s generally a positive result for everyone. If no news is good news, no news laws are good laws. In fact, we’d be willing to offer politicians a raise if they promised to do nothing. Put them on the dole!

That the market could rise in such a fluid environment may seem wacky. But it’s a wacky world. Given the nature of the status quo, with three of the independent members of the lower House former members of the National party and another National elected in Western Australia, it looks like the Mineral Resource Rent Tax is dead (MRRT).

Killing the tax might not be popular with constituencies on the fringe, but it’s about the only thing Labor could offer the three ex-Nationals as a sweetener for their vote. On the other hand, Tony Abbott could probably promise some kind of hybrid public-private national broadband network and that might do the trick. It doesn’t look a carbon tax or a revised emissions-trading scheme will figure in the horse-trading.

But then, we know nothing in general and even less about Australian politics. It has been an entertaining weekend though. And full credit to the Australian people for voicing their discontent with both parties.

One possible outcome, according to former Treasurer Peter Costello, is a weak government that hangs on for a year or so and then is forced to go back to the polls. And that’s assuming that one of the parties is able to form a minority government. What would this mean for the share market and the currency?

The longer there is uncertainty about the two major policy issues that affect the resource market — the MRRT and the ETS — the more negative it is for Australian stocks. We reckon a weak, one-year government makes it a trader’s market, but that’s about it. You can’t expect a big rebound in Aussie shares until the threat of a mining tax is “de-risked” from the investment picture.

That said, one man’s uncertainty is another man’s Africa. The longer Australian resource projects are in limbo over MRRT doubt, the more appealing similar projects in other countries look. Is there less political risk in Africa — the threat of constantly changing laws — than there is Australia? Probably not. But is there more? Probably not.

On an entirely different note, data out from the U.S. government last week showed official Chinese holdings of U.S. Treasury bonds from $938.1 billion September of last year to $843.7 billion in June of this year. That’s an 11% decline. How about that?

By not rolling over or adding to their U.S. bond holdings, the Chinese slowly reduce their vulnerability to a weaker U.S. dollar. They also, you’d think, slowly dial back their position as the largest creditor to the U.S. government. And who is buying the bonds the Chinese are buying less of?

If it’s the Federal Reserve, isn’t that a rich irony? The Fed would effectively be covering China’s retreat from the dollar. It would allow China to gradually exit its dollar position without causing a panic. And meanwhile, the end result — the destruction of the U.S currency — would be accomplished vie debt monetisation by the Fed. Pretty nifty. Nice work Fed.

Dan Denning
Whiskey & Gunpowder

August 23, 2010

The Daily Reckoning