We only have a brief Money Morning for you today as we’re rushing to get the Australian Wealth Gameplan weekly update out to members by this afternoon.
But there is something I wanted to mention today…
It’s been a while since we caught up with any of our old broker pals – probably because we’re a bit of a pariah these days.
But when we do meet up over the $13 all-you-can-eat buffet at the RACV Club in the next couple of weeks we’ll try and eke out of them what kind of message is going around Australia’s broking rooms.
Our guess – and it’s only a guess – is that it will be similar to the message written by Michael Pascoe in The Age yesterday. It was under the headline, “Why a China slowdown will be good news.”
The whole article has a similar ring to the “house prices will plateeeeeeaaaaauuuuu” argument.
You’ve got to give it to the mainstream, apparently nothing ever goes down. Except when it’s already gone down of course. But don’t mention that because everything’s going back up again.
But a pretty good sign of the market getting near the top is when brokers and commentators start cheering 5% and 10% falls in the stockmarket, or when growth in the economy slows, “Oh, it’s OK, the market needed to take a break, it’s a good buying opportunity.”
Or, the economy “needs to pause, it should plateeeeeeeaaaaauuuu from here for a few quarters…”
Sometimes that’s true, but when the mainstream is singing it in unison, it’s time to be on guard.
But all that aside, there’s more to worry about that just whether Pascoe thinks a slowing China will be good news.
It’s the whole attitude towards China that’s even more worrying. The general idea that the Chinese are privy to a miracle formula that enables them to conduct not only the Chinese economy but the global economy in the same way that Andre Previn conducts an orchestra.
Take this quote from Pascoe:
“China knows the switch must be thrown to greater domestic consumption and less reliance on export growth. The comrades are taking steps in that direction. It would be nice if they took more of them and did so faster, but they are wary of rocking their bus – there are an awful lot of people jammed into it.”
Again, the assumption is that China can throw a “switch” and miraculously everyone in China will perform exactly as directed. That everyone will buy and sell in exactly the correct quantity and at exactly the right time.
Not only that but they’ll also pay exactly the pre-set price when they buy something and receive precisely the right pre-set money when they sell something. And when they’ve got that money they’ll hold it for just the right time before spending it on something else as directed by central planners.
Make no mistake, that’s what central planning requires. Heaven forbid if someone should buy two pairs of shoes rather than one pair, or a jar of jam rather than marmalade. Doing so would send the whole plan out of kilter.
And even worse, should a black market develop where goods and services are provided at a different price or quantity than the central planners decree, then there’s another spanner thrown in the works.
Not that the mainstream commentators consider any of that. According to them, central planners such as the Chinese or the Reserve Bank of Australia can just throw a switch and individuals and businesses just eagerly follow the determined path like brainless automatons.
To be honest, we’re not sure why the Chinese government have been placed on this pedestal. We can only think that the mainstream believes because China operates a fully coercive economy, that it can order people about at its whim and therefore economic success is assured.
The reality is far from that.
No economy can be centrally planned continuously without it leading to an eventual total collapse. That the Chinese economy has managed to go on for so long is what’s really amazing.
But get something straight. I’m sure you’ve seen the impressive photos of the Shanghai skyline and the vibrant and bustling downtown areas. But just because yuppies in Shanghai are buying Rolex’s and Louis Vuitton bags doesn’t signify wealth any more than Australians buying a 150 inch plasma television or a seven-bedroom house signifies wealth.
Wealth and spending aren’t the same thing. You can have wealth without spending, spending without wealth and spending with wealth. Oh, and no wealth and no spending of course.
But to simply come to the conclusion that because some Chinese are spending on fancy watches and fancy cars that those individuals or the whole economy is wealthy is misleading to say the least.
The important thing to remember is that the Chinese economy has taken off, largely thanks to being able to provide western businesses with cheap labour and cheap production. But it has done so coercively.
For every fancy watch buying person in Shanghai, there’s thousands of others who haven’t curried favour with the government and are therefore left to suffer the consequences of a repressive society. A government created oppressive society.
And like any other coercive and violent government it has rewarded those it favours and hurt or destroyed those it dislikes.
But that doesn’t mean Western governments are no less discriminatory, just because Western governments have adopted minimum wage legislation. All that’s done is to push employment offshore into the lap of coercive governments. Where they own the means of production and force individuals to accept labour terms or… well, you get the picture.
Those left in the West unable to find work because they’ve been priced out of the market may not be forced to work in oppressive conditions, instead they become part of a permanent underclass relying on favours from their own coercive government.
A government that can turn the welfare tap on and off as it sees fit.
Without minimum wage legislation in Western economies, there would be less demand for cheaper overseas labour and less ability for socialist governments to control those individuals.
Besides, Western governments are no less guilty of giving favours to certain people and industries while simultaneously penalising those it considers to be less desirable.
So while Pascoe and the other mainstream cronies talk about the heroic Chinese government and its ability to flick a switch to point the economy in the right direction, they should remember that the switch flicking is not the result of free markets and free will.
It’s the result of coercion and violence.
I’ll make the point again, there’s much, much more to fear from putting more power into the hands of governments than there is from putting power into the hands of individuals. Yet people in the West have somehow become dependent and reliant and over-trusting of government authority.
The result is less freedom – as Shae will explain in Money Weekend tomorrow.
But to sum up, the idea that Australia can ride on the coattails of a booming Chinese economy forever is mistaken. Sure, take advantage of it while you can from an investment perspective – as we have in Australian Small-Cap Investigator and Alex has in Diggers & Drillers – but if you think it will last forever as the mainstream commentators seem to believe then I’m afraid you’re going to be sorely disappointed.
Cheers,
Kris.
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PF – you couldnt stop the boom, you are right. But by participating it, you are perpetuating it. Which it totally your right, but dont dare take the moral high ground when the crash comes. That was my point – you were the one that profited from the boom so its totally insulting, weak and innacurate to make out that I am imoral or sickeing in hoping for house price declines.
Totally idiotic statement that shows your argument for this is on shaky ground.
cb – I will say it again, you cannnot pretend property mania exists because people are being defrauded by the RBA throgh rampant and hidden inflation. People are playing this game to leverage up and leverage up and in the end they want to seel those houses so they can get this paper money you are are sure wikll be so worthgless in a few years time. Its just total rubbish that we are now arguing over whether a house is a good inflation hedge. Typicall strategy imployed by you and PF – did you notice PF ignored my entire post….he still cant answer why ‘propertyganda’ exists…please answer me, if there is a massive scam going on, how come there are dozens of examples of pro-real-estate lies in the media. To me, if I found out that something I believed in (housing shortage, Ozzies arent in too much debt, bubble can continue etc…) then I would be concerned if Ifound out those messages were being sent out by a corrupted media, yet PF ignores it and just plays it down as the “way it is”
cb – you asked me:
“And what lesson will people learn – will they be scared of taking on too much debt in 10 years time????”
They will learn many things:
1) All bubbles burst and if its too good to be true, it is a scam
2) You cant get rich by borrowing money, buying a house, holding onto it and selling it in a few years time.
3) All debt is dangerous and should be used sparingly and for productive purposes mainly. Consumer items should be at least partially saved for.
4) Dont trust the media, there is nothing to prevetn them for distorting the news to help their commercial interests.
5) Dont just worry about interest rates, property prices and the size of bloody bank account. Worry about your neighbours deterioting well being, your friends struggling career or your lonely mother.
Rising interest rates wont achieve this, but waking up from out debt-fuelled dreamstate and facing economic reality will not be as bad as you make out.
PuntPal – perhaps you would not mind sharing with us the name of the cool aid you are using. When going to the next party, I should like some.
Anyhow, just to keep ourselves reminded, you and I have agreed to give until the end of the year whether Sayce’s alarmism about a property crash, which you so heartily endorse, had any predictive value.
And, by the way, that question was posed by you to me, rather than the other way around. Even so, some of your answers are menifestly false, vit. No.2, where given the right conditions, such as we have had since central bankers have gone viral with thier fiat money printing, leveraging against property was the best way to preserve and grow one’s wealth.
Cool Aid – I dont follow? Its a US version of cordial isnt it??? Why would you drink that at a party. I prefer a six pack and then some Vodkas with a dash of lime…always have a solid night with that combo.
In terms of the impending chaos, I am not trying to hurry the crash and by the end of the year you are right, things will be a lot clearer – but you and PF cant have it both ways…. If there is no crash you will say ‘told you so’ and if there is a crash then I am heartless for wishing it upon Australia…seems like I cant win with you two.
In relation to your point about
“No.2, where given the right conditions, such as we have had since central bankers have gone viral with thier fiat money printing, leveraging against property was the best way to preserve and grow one’s wealth. ”
THEY ARE NOT PRESERVING THEIR WEALTH – THEY ARE TRYING TO INCREASE IT!!!!
So the exact people you descrribe above should not be felt sorry for when rising rates ruins their little leverage-property game..,
You havent once noted that higher rates would reward savers and importers. You only look at the effect of it on importers and debt junkies
Oh, and with regard to point 1, Drew and I have discussed and came to the conclusion only a few days earlier that a bubble need not burst, and that prices can collaps even if there is no bubble. I notice that instead of participating in that discussion, you are simply ignoring the evidence and reasons marshalled, and assert afresh that all bubbles must pop. It is hard to find benefit in this way of conducting a discussion.
PuntPal – we need to increase our imports like a pimple on the tip of our noses. We are already running chronic foreign account deficits, an imbalance which should be forcefully stamped out at the earliest opportunity. You may, and may not, recall that I am of the view that all importers should be required to be in possession of a permit to import any goods or services, which they must purchase off from exporters. Any exporter should be licenced to issue and sell on the free market a permit to an intending importers a permit to import to the value no greater than the sum of their export earnings. This would have the instant effect of putting on an even keel our balance of trade. No more living beyond our means on borrowed money as a nation, and this should be non-negotiable.
And I would also like to remind you that I have formerly expressed the view that no retail banker ought to be issued with a licence, unless they paid 10% on any cash deposit customers cared to make and keep with them. There were some objections to this from PF, that that was impossible, and the matter was left unresolved at the time. Anyhow, this is meant to address your concern that I am only thinking about the speculators, and not the savers. Clearly not so.
Ah, and about people leveraging up, maybe some have done that, but I suspect that a great many took the opportunity to do the opposite by selling their investment properties and paying down debt. But I don’t really know, and if they have not done that, then I would say that they are probably making a mistake. That is what I would have done, anyhow. But maybe Nick is right – there are few people left today who still remember and regard prudence as an important principle and virtue.
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