Every so often the Money Morning mailbag receives a note saying, “Can you quit the property bashing already!” – Or words to that effect.
Funnily enough we get that request from both property bulls and property bears. The bulls claim they’ve heard it all before and yet property prices keep going up. While the bears suggest we’ve made our point and shouldn’t labour the point too much.
I guess the problem is that your editor suffers from a not-so-rare condition called Pigheadedness.
But to be honest, as I’ve written before, the issue of the property market can’t be ignored. It’s an integral part of the Australian economy. Just remember that around 50% of all bank lending goes to the housing market.
That means the influence of property on the Australian economy is huge. It’s just as important to the Australian economy as the resources industry. Perhaps more so when you consider the massive borrowing in property.
Besides, the property spruikers pollute the airwaves and print media everyday spouting their bubble-enhancing propaganda.
If nothing else, we’re quite happy to be a thorn in their side to smack down the lies they come out with.
In fact we were going to take another swipe at them today but we thought we’d leave it until Monday as we’re looking forward to seeing what RP Data and Rismark have to say when they release their median or hedonic indices today.
Anyway, that’s for Monday. But today this…
When will the stock market bubble pop?
The S&P/ASX 200 had a nice little up day yesterday. But it was a drop in the ocean compared to the 200 point drop suffered over the last week, as you can see from the following chart:
And contrary to everyone’s thinking, the Australian market still hasn’t ‘de-coupled’ from the US market:
There’s not much difference at all between the Australian S&P/ASX 200 and the US S&P 500.
But what can explain the falling prices? I mean, especially when you see headlines like these on Bloomberg News:
“Microsoft Profit Beats Estimates on Release of Windows 7 Operating System”
“Amazon.com Profit, Sales Exceed Analysts’ Estimates on Holiday Discounts”
“Ford Posts $2.7 Billion Annual Profit After Record Loss, Beats Estimates”
Doesn’t that mean the good times are back?
Then in Australia we’ve had headlines such as:
“Woolworths 1H Total Sales Up 4.2% On Year.”
Of course Woolworths’ results were below analysts’ expectations and so the share price was hammered, falling 5.8% over the last couple of days.
Well, the problem for markets is just that of ‘expectations.’ And considering the stock market has already gained 43% since the start of the year the outlook has to be really good if investors are going to be convinced to keep buying.
Not only that, but you shouldn’t ignore the thought processes of the parasitic fund managers either. Take a look at the ten-year chart of the S&P/ASX 200 first and then I’ll explain:
Three years of gains in seven months
The market has gained the same amount in just seven months as what it previously took three years between 2003 and 2006.
I don’t know about you, but if I was one of those lucky fund managers who managed to keep their job while others were being thrown out on the street I’d be pretty keen not to stuff up.
And one way of not stuffing up is to protect your winning position.
It’s one of the flaws in the whole ‘weight of money’ argument. We thought the weight of money theory would have been dashed on the rocks during the last down turn.
If you’re not familiar with the idea, the weight of money theory went something like this…
Because there was 9% of every Australian’s salary being invested every year, and because a big slice of that was invested in the stock market, the ‘weight of money’ would help to prop up share prices.
Sounds reasonable doesn’t it. If everyone buys and no one sells and with all that money flowing into the market then share prices can only ever go up.
Only, that didn’t happen. And it won’t happen again. But that hasn’t stopped the superannuation weight of money theory being trumpeted by the mainstream again. However, there’s a simple reason why the theory is flawed.
Simply put, no one wants to be the last one on the sinking ship.
If you imagine a ship with a hole in it. And that there’s just enough people on board to be able to bail out the water so it doesn’t sink.
But then someone figures it’s pretty tiring work so they give up and get in one of the life boats instead. So everyone left has to bail faster, making them more tired. So then others start to prefer the safety of the life boat too.
You can picture what would soon happen. At some point the realisation would come that no-one wants to be the last one on the sinking ship. So they all head for the life boats and the ship starts sinking faster than ever.
Time decays your returns
It’s the same with this phase of the market. With the index up over 40% in less than a year plenty of fund managers will be looking for safety. And do you know what, I don’t blame them.
But that means unless there’s some really hot economic news on the horizon there will be little incentive for fund managers to put their clients funds at risk… sorry, let’s be honest about it, we mean their own bonuses at risk.
More likely – and we could be wrong – is that even if the market doesn’t fall off a cliff, then time will erode investors returns this year.
Think about it this way. From the market low of 3,120 in March 2009 until it reached 4,900 points in October, that gave the market a staggering gain of 57% in seven months. If you annualise that you’re looking at around a 97% gain.
That’s pretty darn good by anyone’s standards. Four months later and from the March low the index is now only up 47%, or 52% on an annualised basis.
That’s still very good and not to be sneezed at. But thanks to time, the annualised return has nearly halved in just four months.
You could argue that it was only annualised and therefore the 97% was never really there. That’s true. But the point is how impressive will a 47% gain from March 2009 look in September 2010, or March 2011?
Not quite as good. And that if the market manages to hold on to the gains it’s made.
If investors start heading to the life boats, then the joys of a 47% gain could soon be nothing more than a pleasant memory.
Maybe, just maybe, this could be one of those rare occasions where the interests of the investor and the fund manager are closely aligned. Just don’t bank on it lasting that’s all.
Cheers.
Kris.
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Thanks, AC. The problem I see with a wholesale crashing of the housing market, and potentially that of the entire economy is that it will not be the few who will lose, but the many. Just look at the devastation that is America. How much joy do you think they are finding now in their lower housing prices?
The bears here need to wake up and smell the coffee.
- The jobs we now lose to China through a crash will most likely be lost for good
- The crashing house prices where people have put a large part of their savings will simply wipe those savings out. The people will go into survival mode virtually overnight. How many businesses will go to the wall and how many jobs will be lost on that account alone?
- Our super savings will be similarly decimated. They already have been, but that would be chicken feed compared to what will happen with a massive crash. All those people who have saved throuth their super, will similarly lose much of it, and will end up retiring in poverty and at ongoing public expense, eating into the current earnings of the younger generations for decades to come. Plust it will mean more businesses failing and jobs being lost.
Where do you want me to stop? I see no end to the devastation and misory a serious crash is going to mean. As the saying goes, one should be careful what one wishes for. Some in the bear camp here seem to have no idea. None of us will be immune, or hardly any of us at any rate. And for what? Because some people want to buy a cheap house? Well, good luck with that, but the chances are that all these hopeful people will have another thing coming.
And, of course, I must not forge the many young families being pushed out onto the street with the loss of their homes.
But, to round my tirade off, none of this matters all that much. I believe that the die have been cast, and nilly willy, we are going to have the recession/depression we now have to have.
cb – don’t worry it won’t happen.
Fair points there, AC. But let me illustrate to you the problem of a sudden crash with an analogy. Suppose that you are on the 10-th floor and wish to get down to the ground. Now, you can get to the ground quick and smart by someone pushing you off the balcony. Has your wish therefore been fulfilled?
I trust that you see the problem. Do something suddenly and abruptly, and things break, and some things that break cannot be put together again. It is a permanent loss. It is the same in any economy. Sudden changes are very difficult to handle, as people find it impossible to adjust. Therefore, any desirable changes must be achieved through change that is as smooth and as gradual as you can possibly make ti to be. This is not what the sudden withdrawing of credit and the simultaneous raising of interest rates in a heavily indebted economy is going to achieve. That much should be clear.
cb – like i said, wont be pleasant, does it need to happen – yes.
for me this is no longer about buying cheap houses; the entire system by which we have got ourselves into needs to be unraveled and thrown away. Tax incentives that promote multiple house purchases that lead to inflated rent and demand for property; this might make a few a quick buck or even very wealthy on paper but it does not add to the health of the general public – especially when there are companies out there say everyone can do this, we can all be rich owning houses. there are other ways that super can be either invested or worked with without a make or break market which property is. Super investment funds should not be allowed to invest in medium or high risk classes in my opinion; if you want to do this then have a SMSF and take the risk yourself. General super funds should stick to conservative options and deliver what they promise or let there be consequences. taking risks with other peoples money is easy especially is you can lose it without penalty… what government thought that was good practice for its population… the same style of government that now cry about having a huge deficit against super and claims the only way around is to give more compulsory money to the same investment funds that continue to function without restraint or accountability.
not only that but its the investment funds telling the government what should be done and how much they need!!!
if the government could unwind this mess steadily and without incident then all the better. i would congratulate the guys and gals in office for doing a great job – is our head strong and clumsy government capable of this? now that is the question and i think you have already made up your mind about that cb…. and i agree with you.
AC – Yes, and isn’t that just disgraceful?! Rudd wants more of our money, so he is going to force us to “save” more from current income and put it into compulsory super, which then will be gorged on by the fund managers and channelled into “safe” government bonds and who knows what boondoogle hare brained scheme, such as the new NBN, where it will be pilfered along with the massive borrowings we are going to get on the national credit card with the assistance of yet more criminal gangs, such as Goldman Sachs. Unbelievable. As I said, the sacking of Australia is unlikely to be too far off now.
As for the politicians deflating asset bubbles gradually, well, we may even give them the benefit of the doubt and say that yes, it is likely, that they might prefer that to a crash. But, no, the politicians are not going to be in control of this one. Once the IBC has them where they want them, and namely greatly indebted on white elephant projects like the proposed NBN and an even more idiotic ETS, the rug is pulled out from under us, we lose our savings and accummulated wealth, while the criminals who lured the politicians and the nation into the trap laugh with our money all the way to the bank. In this instance, they will not even have far to walk.
OMG Even the Lord God of economists Michael Pascoe says that there is a housing bubble and thus we have to increase interest rates to control it
http://www.theage.com.au/business/rba-on-housing-told-you-so-20100201-n7x7.html
I need to get off the bousing bubble train now because if Michael is saying it it must be wrong! lol. Just kidding I will stay on I think.
DK I think you raise some salient points here in regard to the reform/improvement of governments but unless we, the people, get off our lazy fat arses and make our governments accountable then they will not be. Instead they will distract us with various vague things to fear (terrorists, housing bubbles, GHC, global warming, no food, no energy etc).
You know that includes protesting and running for parliament ourselves (and I have run, no sucess but I did lol. Well 10,000 senate votes not a total failure but….)
So shall we? Or shall we just talk.
AC & CB -
I addressed your point in the post just before you posted your point! ;p
I was actually responding to CB at the time, but it covers what you raised exactly.
CB – in a perfect world Abbott would/should just call it like it is – man-induced climate change is a croc o sh1t! The problem is that 95% of all the voters have never even heard of Lord Monckton and they also probably will never learn about the fact that climate change is a croc, because the government and mass media make sure that they never will hear about it. Hence my point about him not simply stating that it’s a croc, as the media and government would tear him apart for stating a simple truth! instead, he simply states that under a Lib government, there will be NO carbon tax whatsoever, nor any other environmental tax! NO ADDITIONAL TAXES period.
Now call me simpleminded, but that solves that issue for me.
No i dont worship Abbott or the Libs – but there is no viable alternative to them in Australia. At least not if you’re a liberatarian who believes that government should keep their beeks out of peoples lives as far as possible and stick to the job of protecting people from criminals and protecting property rights.
In apologizing for Tony Abbot’s inability to tell us what he believes to be the truth, Sandra wrote: ‘instead, he simply states that under a Lib government, there will be NO carbon tax whatsoever, nor any other environmental tax! NO ADDITIONAL TAXES period.’
What was the name of that other liberal leader who once assured us that under a Lib government, there would be NO GST ???
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