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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cb – I think the point we are trying to make is that all bubbles have had at their heart a claim that there was a shortage of the relevant asset…in most cases, a bubble was revealed because there was no shortage, just a temporary (feverish) and unsustainable (debt fuelled) demand for the asset.
PF – my knowledge is as flawed as anyone’s but I get fired up when labelled with “stupidity” or “ignorance”, because I dare say I’m neither.
The problems in Japan were legio – in hindsight. Anyone that lived through the late 80′s would recall how Japan was the model for the industrialised world, and indeed would soon own the industrialised world. We would all be speaking Japanese by the year 2000. Everyone was gagging on raw fish and Hollywood stars were competing to appear in dreadful Japanese-themed films. For younger readers this may sound like some sort of joke but I can assure you that it is not. The Japanese miracle story was absolutely undeniable, infallable and destined to make Australia RICH. Sounds familiar?
The in 1991 it all fell apart and since then the same pundits have competed to out-deride the japanese people and their system. And in particular their BANKS. Using tax payer money to keep all those zombie banks alive, with their bad debts and rotten assets… Sounds familiar?
Your picture of the Japanese asset bubble is probably correct – but does it not also sound familiar? Rising asset prices driving up speculative demand and values for further leveraged investment? We have the same here in Oz, both in commercial and residential real estate. How many mom&dad property moguls really OWN those ticky-tacky weatherboard “investment properties”?
The takeaway (this is just my own view) is that speculative bubbles are always infallable and completely justified based on supply/demand arguments – as long as prices are rising. And they always look silly in hindsight. Once you’ve been through a few you know the symptoms well – and act accordingly. Everything else is just noise – unreliable data embellished with biased narative by vested interests, on both sides of the debate.
Punt Pal – you’ve boiled my ranitings down to the core argument, thank you
N – my paragraph was nothing compared to that – awesome read!
As someone that is only 27, I vaguely remember learning Japanese in year 4…the Japanese language program got shafted that year (1992). I think my good ol’ public school now has a Chinese language program. I never understood why learning Japanese stopped being important in early 90’s…now I know!
But I suppose I am most interested in your last point. You said –
“The takeaway (this is just my own view) is that speculative bubbles are always infallable and completely justified based on supply/demand arguments – as long as prices are rising. And they always look silly in hindsight. Once you’ve been through a few you know the symptoms well – and act accordingly. Everything else is just noise – unreliable data embellished with biased narative by vested interests, on both sides of the debate. ”
Now I am a renter/saver, so obviously I would prefer house prices to fall dramatically as it makes my goal of home ownership more achievable. So I suppose I could be accused of being too bearish on property (simply because that outcome would suit me). Alternatively, every home owner has been hoping house prices keep rising so they can feel safer and wealthier etc…
So I get that – but I still think that a basic and objective analysis of the long term data shows quite unambiguously that we are living through a massive housing bubble in Oz. Do you think people with mortgages/spruikers honestly don’t see it – or do you think it’s a matter of burying their head in the sand to avoid the stress and anxiety that comes with having a $500K mortgage for a house that is CURRENTLY worth $525K?
I see my home-owning friends (they are the ‘got their foot in the door types’, with $300K apartments purchased with help from Mummy and Daddy) who are usually quite rational and intelligent people, turn into inbred morons when the issue of house prices are discussed. They throw out wild accusations and of course they regurgitate what they hear from the spruikers.
But I always sense that deep down they know I have a point (that is why they get so upset) and that if their life depended on being honest, they would concede that there is a chance of a property crash in Australia (despite claiming that they honestly believe property prices in Oz don’t crash).
Do you think people are starting to acknowledge the risk of a housing crash? If so, is it simply because the powers to be have started using the word (Rudd, Stevens, IMF have all raised the issue in the past 2 months).
Do you think rising interest rates rises are the only way people will be alerted to the terrible situation that we have let unfold in the Australian property market?
Do you think the RBA and Government have a plan on how and when to slowly deflate the bubble?
Yes, PuntPal, I take the point. At the same time, the point is analytic. Without demand outstripping existing supply, whatever may have been behind it, prices would not have gone up in the first place. Your other point is also well taken about supply and demand both having a degree of elasticity about them, apart from being subject to change.
All of that is granted, as is the possibility that therefore prices can experience violent swings in either direction as the equilibrium point shifts with changing variables.
I was simply trying to draw attention to a neglected aspect of the Japanese property slump, namely that repeated punitive taxes that kept being heaped onto property owners played a very large role in heaps of investment properties being dumped onto the market. And until the same thing happens here, Japan remains a disanalogous and mostly misleading example for us to work with in trying to guage the likely movement of prices over here.
cb – wow, if the Japese can re-inflate their property market and as a consequense the whole economy by withdrawing a few taxes then someone better tell them quickly! Considering how 20 years of futile stimulus spending has resulted in a multiplication of japanese public debt, it sure sounds like a very cheap and simple way of fixing things!
Sounds to me like a post-hoc rationalisation by a confused economist, subscribing to the “debt is irrelevant” fallacy.
PuntPal, here is a recipe for deflating house prices:
1. Encourage home ownership by prohibiting all new finance against investment properties.
2. Hit existing owners of investment properties with higher and higher taxes, like:
a) a no tolerance land tax of 15%,
b) a 10% tax of greedy bastards tax, and
c) 5% per annum increase on the previous year’s figure of an “idiot still not selling” tax.
This would be a fast track replica of what seems to have happened in Japan, and would assure us of affordable home ownership in no time at all. As for the political fallout from something like this, I cannot guess, and hence cannot tell how likely it might be to see something like this here in Oz. But some of the noises coming out from the RB could be indicating that they might use additional taxes to deflate house prices quite independently of interest rates. I
N – I do want to cease posting here, but I also wish to reply, so here I am.
As far as I am aware the real problems in Japan existed due to companies buying property, not mum and dad investors. Housing in Japan is apartment style and many rent. I don’t have figures on that so correct me if you do. The real bubble existed in Commercial and Industrial real estate, but once one section of real estate booms it carries other sections along to some degree.
As I said earlier, the banks there engaged in pure asset lending which ended badly. I’m not against asset lending, but it has to be selective. With Japan re-investing into more of the same, it eventually ended up overinflating the market and then a crash followed.
The lending by the way was justified by asset price increases being taken as profit, similar to mark to market accounting so beloved of Enron and used as an accounting base standard up to this day,
Now from the population stats that I can find population either was stagnant or close to it in and around that period, so although it may have been claimed at the time that a shortage existed, I can’t see the justification right here and now.
However in Australia I don’t see most large companies buying real estate unless that is their business (GPT, Australand etc) in fact most larger Aust companies sold off their real estate years ago and lease premises.
But enough of Japan in the 1980′s. Our problem is here and now in Australia. If you don’t want to believe that an undersupply exists that is fine, but I do because of what I can see happening in the market.
The research from major players is telling me that it is so, and I have over many years come to respect that research. But the real telling evidence is in the market itself. I speak with buyers across all states except WA and I know what they are telling me.
I don’t want to increase home prices by scaring everyone with tales of short supply, on the contrary I would prefer that we address it here and now. Do you disagree that an increase in supply will have a dampening effect on prices. If not, what is the argument?
I don’t know what else has happened to the Japanese, N. I think that because of the punitive taxes heaped on their property investments a lot of investors sold out and took their inevitable losses, and learned a hard lesson of not going into debt because a bastard government can change the rules of the game on you and leave you dangling and whistling in the wind. The same thing could be achieved here, as I have pointed out in my previous post. Nothing like that to teach us never again touch debt.
cb – lol – yeh i can quite easily imagine how the Labor government (on all levels) would consider RAISING TAXES (with additional taxes as you say) in order to deflate house prices.
Call me stupid, but the first thing that comes to mind for me as a way of deflating house prices would be to LOWER TAXES related to land and property!
I guess I will never be reconciled to the moronic mentality of the comrades in the Labor party … they sure are Australia’s worst enemy!!
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