“All the papers in France agree with your friend Porter,” said Gabriel this morning. “They say that this is a once-in-a-generation chance to buy financials as cheap as they are going to get. It is everywhere. They say the selling is a kind of ‘irrational excess’.”–”They” are all morons, we reply modestly. Having been wrong plenty of times, we are more than willing to admit we could be wrong again. It’s going to happen. We’re certain about that. But those who call the action in financials ‘irrational excess’ show a distinct poverty of imagination, or rational poverty, if you will.

–They believe that because it’s never been this bad before, it can’t get any worse. Haven’t these people seen “The Man Who Saw Tomorrow?”

–C’mon people! Get it into your rational heads that irrational things happen. Your once-in-a-lifetime buying opportunity is a-once-in-human-history collapse of the financial system responsible for the last 200 years of global growth.

–Not that we are cheering the prospect. But we are at least honest about the scope and depth of the crisis. This is not an ordinary dip. Late Monday in the U.S., Goldman Sachs published a research note saying that total credit losses will hit US$1.2 trillion before it’s all over, with Wall Street taking $460 billion losses.

–The Street has only taken around $195 billion in losses so far. Hedge funds, banks, brokers, and the government sponsored enterprises… there are more losses in store for all of them. “Is it over,” you ask?

–Was it over when the Martians invaded New Jersey?

–Hey how about a little real stock market news? Copper, zinc, aluminium, and gold were all up in futures trading in London and New York. “We are used to cycles (in prices). I don’t think this fall implies a permanent decline, it’s within the volatility copper has experienced in this scenario of high prices,” said Diego Hernandez, the President of BHP Billiton’s Base Metals Division.

–BHP and Rio Tinto have planned the next twenty years based on gentler “glide paths” for base metals prices. That is, they expect that expanded production will bring prices down over time. But they also expect growing demand to keep commodity prices from taking the big nose dive that usually come at the end of the resource cycle. In other words, they still expect the cycle to be stronger and longer than normal.

–They could be wrong, too. But at least for yesterday, they were right. Copper futures in London rose 1.7%. Shanghai’s June aluminium contract gained 2%. Gold futures in New York are back near US$940 as we write.

–Speaking of gold, here’s a note from a perplexed reader.

“Gee - all this spruiking about Gold and gold stocks still track down. You aren’t the only ones doing this. I’m perplexed - how can you and others hold a view which the market doesn’t agree with. Interesting in your reasoning? I hope it’s not out of a desire to see your own stocks perform.

Nick

–Who doesn’t want to see their own stocks perform?

–We write about gold because we think it’s an excellent store of value at a time when financial assets are being revalued (going down) and the U.S. government is on the verge of monetizing trillions of dollars in private mortgage debt. That’s inflationary and should mean much higher gold prices this year.

–And who says the market doesn’t agree with us? Gold (in U.S. dollars) is up 43% in the last year. Compare that to owning the All Ordinaries.

–For the record, we don’t own any of the gold shares we tip in our newsletters. That is a matter of company and personal policy. Having direct experience with the regulators in the States, we concluded we would remove any chance of even the appearance that we front-run the shares we write about.

–It is a bitter pill, considering how well some of our share tips have done in the past. But it is better than getting routinely hauled in front of lawyers. And with respect to gold, you can own shares as well as bullion and benefit from its long-term rise. It should be very long-term indeed, if we are witnessing the historic collapse of the dollar standard as the world’s governing currency regime.

–The first hostile Chinese takeover of an Australian company is receiving remarkably little press. Maybe that’s because no one is sure exactly what is going on. “Mystery owners of $150 million of shares in iron ore miner Midwest Corp have been revealed,” according to Michael Vaughan in yesterday’s Financial Review. The two are, “Malaysian businessmen who have no links with any other shareholder in the takeover target.”

–”The share registry of Midwest-a Perth-based iron ore miner now the subject of a hostile $1.2 billion takeover bid from China’s largest iron ore trader-has come under scrutiny due to suggestions of an undisclosed association between a number of major shareholders.”

–”The Australian Securities and Investments Commission has finally tracked down the two mystery owners behind Vital Rays Investments and Dawn Star Ventures, which together own about 12 per cent of Midwest and were thought to be linked to deputy chairman Dato David Law, who holds a 13 per cent stake.”

–That’s what’ so interesting about the era we live in. In the past, contests for scarce natural resources would have been settled by means of armed conflict. But the returns on state-versus-state armed warfare are diminishing. You end up destroying or consuming the very resources you need for your real economy.

–The conflict is still there, it’s just that it’s not armed conflict. It’s economic. And so the tactics and strategy play out in public listed shares, which any old investor can buy here in Australia.

–The fact that high-quality American and Australian assets are for sale on public equity markets highlights the trouble with wasting capital in property bubbles and racking up huge trade deficits: you expose your national crown jewels to outside buyers who have cash. Deficits do matter after all.

–Oil prices matter too. “China’s leaders are facing renewed pressure over shortfalls in diesel and gasoline, with lines growing at filling stations in major cities Monday as the gap widens between international crude oil values and centrally controlled fuel prices,” reports the Associated Press.

–”‘You could try your luck later in the day. Now, we have no diesel available at all,’ said an attendant in Shanghai’s futuristic Pudong district. “I can’t promise you anything, though, for once it comes, it will soon run out.”

–China’s government-like many around the globe-subsidizes key consumer commodities like food and fuel. In a country that values political stability, nothing destabilises like long petrol lines and an empty stomach. If you lack the freedom to move, or a dependable supply of calories to feed your family, you are far more willing to defy authority or risk punishment.

–Subsidizing key commodities keeps their prices artificially high and prevents the adjustment in consumer behaviour that higher prices would normally produce. But all that is text book stuff. China has inflation to keep under control and civil order to worry about.

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