We’re still in Australian Small Cap Investigator mode today. But that won’t stop us from casting our eye across the landscape to spy things that just don’t quite look right.
Such as stimulus spending…
Let’s be honest, the Australian government’s stimulus package is small fry compared to what the Chinese have thrown at their economy.
According to Bloomberg, the Chinese government has stimulated the nation to the tune of over $600 billion. And furthermore, Chinese local authorities have planned about $1.5 trillion worth of investment projects.
That’s one hell of a lot of school buildings and hospital wings.
Of course they are building much more than that – roads, airports, power grids, low cost housing.
You name it, the Chinese are building it.
It shouldn’t come as any surprise then that the Australian economy and the resources sector in particular is benefiting from this continuing boom.
Look, I’ll be frank, the “China Story” is a big part of the investment strategy for Australian Small Cap Investigator. It’s not rocket science, but it’s producing some stunning results.
For instance yesterday I sent out an alert to subscribers telling them to lock in a gain of up to 428% on a stock that was added to the portfolio in March last year. That’s a pretty good return compared to the broader market.
What was the driver for that return? China of course.
And we’ve seen the same pattern with many of the other stocks in the Australian Small Cap Investigator portfolio. China’s appetite for raw materials is immense – you don’t need me telling you that.
The question we have to ask is whether it’s sustainable?
Because when you strip everything away to the bare bones, China is doing what other Western economies – including Australia – are doing, they are trying to spend their way out of trouble.
The major difference of course is that China has a whacking great big stash of cash to fall back on. It’s got the cash proceeds from all the stuff it’s still selling overseas. And it’s got all those investments in lovely US treasuries.
In contrast, Western nations don’t have the benefit of savings to fall back on. Hence why every one of them – again, including Australia – has had to find some way of justifying the policy of borrowing money to solve a debt caused recession.
So far they seem to have gotten away with it. The politicians know they won’t be believed, so they’ve had to roll out the central bankers to make the argument for them. Naturally, there isn’t a single soul in the mainstream press who would dare disagree with a central banker.
Central banks are independent from government, so if the banker says debt spending is good then it must be.
After all, as RBA governor Glenn Stevens told the Senate committee yesterday:
“I can assure you that the bank has made its assessment of all these things with total independence and our policy decisions are made the same way.”
Look, we’re happy to accept his comments as true. But it doesn’t mean to say the policy decisions are correct. It just goes to prove that central bankers are as mentally bankrupt as politicians.
Take the following comment from Mr. Stevens:
“So I think it is reasonable to conclude, against the benchmarks of historical and international experience, that Australia has done quite well on this occasion.”
As we wrote in Money Weekend on Saturday:
“Of course the economy isn’t going to go into a technical recession if the government props it up by spending hard earned taxpayer cash.
Of course house prices will remain stable or even rise if you’re giving ‘free’ money to people to buy a house.
Of course unemployment won’t be as bad if the government gives ‘free’ money to people to buy stuff.
Of course Australian banks have weathered the global economic storm after receiving trillions of dollars worth of taxpayer support.”
The arguments put forward by the policy makers are stunning to say the least. You cannot claim that an economy is resilient when governments have blown billions of dollars to keep it afloat.
On a side note, you hear the same comments from the property spruikers who claim that property is resilient and always goes up – well it does if it’s being pumped up by interference and manipulation from government.
The point in all of this is that artificial stimulation of an economy or an asset price or a house price is not sustainable.
It is just not possible to endlessly keep pumping something up without it ending with a bang.
But that won’t stop the policymakers from trying. The urge from government is to spend, spend, spend. And they’ll get the money to do it any way they can.
Just look at some of the news items that are on the periphery.
Last week we read one story about the ‘super computer’ at the Australian Tax Office that can scan every single tax return in order to pick up anomalies. If you’re claiming more tax than others in a similar occupation then you can expect an audit.
But we’ll assume the ATO won’t contact those who are ‘under claiming’ to tell them they should increase their expenses claims!
A couple of months ago the tax office announced it was going to target sales reps and high income earners.
That doesn’t seem to suggest the tax office is indifferent about collecting tax receipts. It’s desperate to get as much as they can to feed the master.
Then there’s the unified global attack on tax havens. The Swiss have over-turned years of banking secrecy in order to give records to the US Internal Revenue Service – which should now obviously be renamed the External Revenue Service.
Other tax havens are being threatened with sanctions and boycotts if they continue to allow people to stash cash in their jurisdiction without letting tax authorities know about it.
Even here, people working overseas are now being slugged with new tax rules, penalizing them for not staying in Australia to pay tax.
And of course, there’s the $1 trillion of booty in superannuation just ripe for the picking.
Anyway, what’s our point? What are we getting at?
The point is, governments really do know that their stimulus spending plans are not sustainable in the long run. They know that cutting spending is politically unpopular so instead they have to snaffle as much tax revenue as they can.
Or even find ways of re-gaining control of retirement savings.
But it also tells us something else. The spending isn’t going to stop in a hurry. And the propping up of the economy and of asset prices isn’t going to stop any time soon either.
I mean, look at all the savings the Chinese still have in the kitty. And once they’ve run out of savings, they can go into debt too.
Potentially, there is much further for this new bubble to expand. Do you remember the massive credit and asset price bubble that built up through until the end of 2007?
Well, it’s back. It’s just a case of knowing whether we’re at the beginning, middle or end.
It’s why I’ve continued to tip super high risk small cap shares all the way from late 2008 through to today. And when the September issue of Australian Small Cap Investigator is finally put to bed later today (hopefully) there will be another two stocks added to the list.
And there’s a simple reason why this is the case…
You see, all the talk of deleveraging that mainstream financial commentators have espoused is nothing short of nonsense. It’s a tidy little phrase created by the central bankers and the retail bankers to give the false impression that the addiction to debt is over.
It isn’t. You only have to look at the Reserve Bank of Australia’s own statistics on bank lending to see it isn’t true.
At the end of July 2009, Australia’s banks had over $1.62 trillion of loans outstanding. That’s compared to $1.47 trillion in July 2008, and $1.22 trillion in July 2007.
How could that be deleveraging?
It’s just a matter of how far the leveraging can continue. And that all relies on whether the Australian banks have further room to stretch.
Which brings us to a timely email we received from Money Morning reader Greg this morning:
“An astute observer notes how you have gone very quiet on the ‘we wouldn’t touch bank shares with a barge-pole’ line adopted earlier in the year, when every bank share under the sun was trading at a 50-80% discount to where they currently are. That tip was a shocker. Period. And they’re still going up.”
Don’t worry, we haven’t gone quiet on the banks. We’ll have more to say on this later in the week.
But to give you a taste of what to expect. We still wouldn’t touch the banks with a barge pole. There’s no need. Australia’s banks account for six stocks out of about 1,800 listed companies on the Australian Stock Exchange.
If you take the time to look at the balance sheets of the banks, you’ll see they are just as risky as some of the small caps I tip in Australian Small Cap Investigator.
In fact, they’re riskier than some of the stocks I’ve tipped.
But even if you don’t like small caps and you want blue chip growth or blue chip income, seriously, there is no need to invest in any of the banks. There are plenty of other choices.
When small cap investors punt on a tiny energy company, or a small cap retailer, or a speculative technology firm, they know what they’re letting themselves in for. Whereas most retail investors have no idea what they’re getting into when their broker tells them to buy a ‘safe’ bank.
Look, the reality is, bank shares could go higher, and I’ll be honest enough to say I’m surprised they’ve run as high as they have.
As far as I’m concerned I’m equally surprised the Leaning Tower of Pisa hasn’t toppled over yet. But I still wouldn’t be game to climb to the top, just in case your editor’s girth is enough to cause it to fall!
The fact remains I’m happy to tell subscribers to my income focused newsletter, Australian Wealth Gameplan to stay well away from the banks. If you’re after a stable low-risk investment for reliable income, there are much better places to put your money than the banking sector.
Other Stuff on the Markets
The S&P/ASX200 dropped 0.76% yesterday, while overnight on Wall Street the Dow Jones Industrial Average added 124 points. In Europe the FTSE100 gained 1.64% and the CAC40 added 2.30%.
The price of gold in Australian dollars is trading at $1,135.18, while in US Dollars it is trading at $990.90. And the price of silver in Aussie dollars is $18.56 and in US Dollars it is $16.20.
The Aussie dollar gained versus the US dollar and Japanese Yen, trading at USD$0.8720, and JPY78.16.
Crude oil closed overnight at USD$67.00.
For the biggest movers on the market yesterday click here…
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All on the gravy train, Sandra, and they will not get off it of their own accord, or that we can be sure.
I agree that there should be less tax on land ownership and that, all other things being equal, that would increase home ownership affordability. The problem is that this could still leave increasing numbers of people locked out of the market by demand for investment property because investor demand could still trump demand from owner occupiers, and prices could simply keep climbing higher in spite of lower development costs.
However, if investors were hit by punitive taxes, then a lot of property would come back onto the market and prices would be likely to fall to a new equilibrium level where owner occupiers were competing only against each other, with investors out of the picture.
CB – point taken
The other alternative would be what has been suggested earlier, of simply increasing supply with fresh, new homes, until the market is saturated and prices start to fall.
PF – I’m clearly not getting through to you with my basic argument, probably my fault. YES supply of new houses and population dynamics matter, absolutely. But NO – they are not the only drivers of house prices. I can only refer you to my above posts.
And yes the Japanese bubble had different characteristics from the Australian bubble, but they were both highly leveraged asset speculation games rooted in faulty extrapolations of unsustainable macro trends. The details don’t matter that much – the process is repeated again and again and again throughout history (which doesn’t repeat but rhymes – you’ve heard that one a thousand times). I can only refer you to my above posts for my views on this.
CB – the taxes angle is almost certainly a red herring, the problem was excessive credit-fuelled speculation and (perhaps) population dynamics (ageing) where Japan were about 20 years before the west (see H. Dent for further details if you subscribe to the generational trends theory). I have no problem with tax reform being the needle that pricked the bubble, or any other of thousands of factors that all seem rational in hindsight. But beware – post hoc ergo propter hoc.
Indeed, N. And ditto as regards to the debt – bust connection with regard to the burst “bubble,” in the US, let alone its extrapolation of the very same thing being inevitable here.
Punt Pal – wow, now you’re chucking questions my way like I’m some oracle, which is flattering but misguided. Don’t listen to my advice, I have a hard time believing it myself – the consummate sceptic. You’re a bright kid and can work this out yourself, with a bit of pain.
The only advise I have is not to get wrapped up in the hype of the day. Think high level and long term. Study market history. Learn to stand back and just enjoy the spectacle. Nassim Taleb can provide you with the foundations of the scientific method as applied to markets.
cb – it is a game of chance and I’ve never claimed anything else. Nothing is inevitable. You assess the spectrum of probable outcomes and act accordingly.
N – Your argument is that in past bubbles there was always a popular misconception such as an undersupply that was repeated as a mantra so that all would continue to believe that the market would continue to rise until that argument could no longer be sustained.
That part I do understand and accept, I just don’t accept your mantra that all claims to an undersupply are therefore incorrect.
I’m not wishing for further price growth, quite the opposite, but due to several factors that it has become useless to debate, I actually believe the undersupply story. You clearly see that differently, but we each draw our own conclusions and stand or fall on those decisions.
Given that I see a short supply my response must be that if we increase supply we will keep downward pressure on prices and maintain a more stable and affordible market.
Enough has been said.
Indeed, that is how it is, N. The most frightening thing about the current situation is that diametrically opposing views can claim to have solid and legitimate justification.
The uncertainty, my guess is, is not merely epistemological, but downright metaphysical, i.e., the uncertainty is not merely due to a lack of knowledge, but to a deeper and genuine state of indeterminacy regarding what is going to happen next in the shor to medium term.
Things are balanced, as it were, on a knife edge, and we can be pushed in either direction by the smallest things. Such deep and fundamental uncertainty cannot be good, and is not a good sign going forward.
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