From Dan Denning in St. Kilda:

--Rumble rumble rumble. Do you hear that? It's the sound of over-leveraged financial organisations beginning to crumble. Of course, by crumble, we actually mean "forcibly confront fiscal reality." It is not the end of the world. But it is, as Bill says below, the end of the world as we know it.

--Ratings agency Fitch began the rumbling when it downgraded Portugal's sovereign credit rating to AA and changes its outlook on the Iberian nation to negative. Analyst Douglas Renwick wrote, "A sizeable fiscal shock against a backdrop of relative macro-economic and structural weaknesses has reduced Portugal's creditworthiness... Although Portugal has not been disproportionately affected by the global downturn, prospects for economic recovery are weaker than 15 European Union peers, which will put pressure on its public finances over the medium term."

--Europe's monetary failure is bringing about a fiscal crisis, and probably a social crisis too. The Euro not only made 10-month lows against the dollar. But the viability of the common currency (one interest rate, many fiscal policies) is now being openly questioned. And in Greece, rising interest rates are already consuming the savings made by emergency budget cuts.

--It's a real pickle. Actual monetary contraction may be politically impossible. What elected official is going to slash and burn the public budget? But continued fiscal expansion is equally impossible if you can print the money you borrow in. No one in the European Monetary union can print money to effectively inflate their way out of the crisis. So the crisis persists.

--By the way, one quick point. We get lots of letters telling us we're an idiot. And many of them point out that a country that prints the money it also borrows in (like the United States for example) cannot default on its bonds. It can always pay back bond holders with new money.

--Yes. That's true. But money-printing is a de-facto devaluation of the currency against real goods. It's inflationary. And ultimately, rampant money-printing destroys purchasing power. An outright default is also the end of the fiscal road. But in terms of outcomes, there is not much difference between default and inflation.

--Or is there? Perhaps a default would be a quick and painful realignment...whereas an inflation would be far more weatlh destructive. We'll find out soon enough. Greece isn't going away. And Portugal won't be the last to be re-rated by the agencies.

--"Isn't it great that 30 million people in America now have health insurance?" we were asked by a mate at the pub last night. "Yeah. But who's going to pay for it?" we asked (it was a genuine question).

--"I don't know," he conceded. "But it's nice to see America joining the civilised family of nations. You should be proud of your government. It finally did something nice for the little guy."

--"That it did. The whole progressive project is finally capped off. But I still have no idea who's going to pay for it. You can have an idealistic vision of what kind of country you want to live in. And you can make people pay for it with higher taxes. But it doesn't mean it's going to stand up to economic reality. Just seems like weird timing to me...the whole welfare state system is proving that its financial model is defunct...and America's politicians expand it. Only in America!"

--By the way, new home sales in the U.S. hit their lowest monthly level since the figures began being kept in 1963, according to the Commerce Department. New home sales fell 2.2% last month and the inventory climbed again. It's yet proved more that America's over-investment in housing is going to take years to recover from - both at the household level and the bank level.

--But what about Australia's over-investment in housing? Did you hear Don Argus

--These are the kind of deals you can probably make money on. But as we've said before, you have to be early. Once the projects are "de risked" and final investment decisions are made, the smaller stocks tend to be fully valued. At that point, you're essentially buying producers. And producers are valued differently than explorers, developers, or prospect generators.

--Finally, http://clicks.portphillippublishing.net//t/AQ/AAE-3Q/AAFF-g/AAGDfQ/AQ/AgMlFg/-0xM" target="_blank">have a look at this if you get a chance. It shows that the average annual return on a super fund was 3.6% in the five years ended in June of 2009. Over the past three years - and this excludes most of the big recovery since March of last year - the return is 2.3%. And can you guess what the best performing in house corporate super fund was over the last five years? Go on....have a guess.

--It was the in-house staff superfund of GoldmanSachs JB Were. That fund delivered annualised returns of 9.6% in the survey period. Not bad huh?