Just a few quick comments from your editor today before we hand over to assistant editor Shae Smith.
We’re concentrating on the May issue of Australian Small-Cap Investigator for most of this week, but we should still find time to lob a few grenades at mainstream thinking.
So, before Shae takes up the slack, a couple of quick things that took our fancy…
I said yesterday it might be worth waiting for the Aussie dollar to strengthen a little and the gold price to fall. Good luck with that. It’s piled on another few bucks overnight, trading above AUD$1,400.
And the GOLD exchange traded fund (the one your editor owns a few shares in) is trading above $139 per share.
But as the stock market continues to head south – as we feared it might, but hoped it wouldn’t – we think back to the warnings we offered over a year ago about the stock market rally and economic recovery being an illusion.
A government and central bank created illusion. But more on that another day.
Anyway, up in Sydney yesterday Luci Ellis, Head of Financial Stability at the Reserve Bank of Australia (RBA) spoke at an Australian Financial Review sponsored conference on housing. But for a start we’d like to grade her ‘F’ for the job she’s doing on overseeing financial stability considering how quickly the value of the Australian dollar continues to devalue thanks to inflation.
But best of all we liked this comment in her closing “Final Thoughts”:
“Recent data suggest that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one.”
We have this image of Ms. Ellis standing in front of a large bubble that she’s tried to cover with an overcoat, insisting to passersby that there’s nothing to see.
But what “recent data” would Ms. Ellis be referring to?
I mean, it couldn’t be the data from the Australian Bureau of Statistics (ABS), the chart of which Ms. Ellis used to open her presentation:
Because pardon us for commenting, that’s got bubble written all over it. Well, our version has anyway:
And obviously she hasn’t noticed the numbers contained on the RBA website which provide an insight into the, erm, non-existence of the “credit-fuelled boom”:
Those numbers are in millions. We pointed out last week that residential borrowing had increased 50% in the last two-and-a-bit years.
Clearly that’s not a “credit-fuelled boom.”
But then Ms. Ellis would naturally deny the existence of a credit boom considering it’s her employers that have caused it. You know the rules, gotta tow the company line.
We do like how she used the following chart, which unwittingly should help to dispel the myth that rising population growth is necessarily linked to house price growth:
Prof. Steve Keen pointed out in an article for Business Spectator last week that if population growth running faster than new dwelling growth leads to rising house prices, why didn’t house prices fall between 1955 and 2004 when dwelling growth exceeded population growth?
The simple answer is that the real driver of house prices is easy credit. Plain and simple.
And when that stops – which it hasn’t yet remember… POP!
Finally, before we hand over to Shae, a quick note on a wonderfully dumb comment from Emperor Ken Henry:
“Projects which are earnings super normal profits will continue to earn super normal profits.”
Ha, ha… We’ve had “normal profits”, then “super profits”, and now “super normal profits.”
What’s next? “Super normal extra spicy profits”? “Vindaloo profits”? “My God, What a Profit”?
Not that a coercive sector servant has any idea what a profit is anyway, but that’s another thing.
As our Slipstream Trader Murray Dawes pointed out, the idea of companies making big profits is that it draws new entrants into the market, so that they too can get a slice of this so-called “super profit” action.
But if governments decide to take a big slice of those big profits, guess what, where’s the incentive for new entrants to enter the market, provide competition, and therefore drive those profits down?
By taxing the super profits, or super normal profits, it actually kills several birds with one stone. It punishes the incumbent for making a profit, it reduces their enthusiasm to produce extra, knowing that it will face a higher tax burden, it makes it less attractive for new entrants to come into the market, and finally it puts a handbrake on supply, potentially causing prices to rise.
Anyway, we’ve blathered on enough this morning, over to Shae to wrap things up…
Cheers,
Kris.
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Erm.. CB, what degree of accuracy do you require of Sayce’s forecast?
Keen, for example, said the crash will occur within 5 years from the date of the bet (source: businessspectator by Rob Burgess), of which there is still 2-3 years to run.
If you are considering a long-term purchase, such as property, no matter if to live in or to invest, is 5 years not specific enough for you?
And look, RBA will drop interest rate again all right. Only by then people won’t queue up for real estate, because there will be a sea of it.
Here is a quote from Garth Turner’s greaterfool.ca: “They’re learning that these days in Australia. After yet another interest rate hike to try and cool off the housing bubble (it’s a tad worse than ours), consumer confidence has plunged, as VRMs start to head back into nosebleed territory. So, after purposefully creating a runaway real estate market with generous incentives, the Aussie government is, like most others on the planet right now, screwing it all up.”
Good points cb and Nick.
We will see what happens, I think the correction has well and truly begun. In 2007 US was broke, now we are adding Europ in 2010…sometime in next months Asia will suffer from financial problems (collapse in their export markets and bubbles bursting of their own)….then things will rebuild slowly.
Maybe gold is a good bet, just seems too unclear what could happen with gold
The DR has been talking about gold as long as I remember, so I don’t know why certain people seem to think this is a recent phenomenon. The fundamental reasons for buying gold haven’t changed; they have only become more illuminated. So every Tom, Dick, and Harry is talking about gold, so what? They probably are most likely not buying it. I have seen some of my GOLD ETF positions fall back close to 30% after GFC I. As for physical, I rarely think about what it’s worth.
JC you are right, the DR crew are not the ones spruiking gold recently – but this is the thing about Gold compared to Fiat currency.
The reason gold bugs bur gold is because they see Gold as a way of preserving your wealth in times of inflation and currency depreciation. But I believe gold could become a fad and its price could be inflated by an exagerated belief in the chance of currencies depreciating.
JC, PuntPal – Yes, that is correct. Gold has been Bonner’s trade of the decade, and it indeed worked out well for him. He gets loads of credibility from me on that front. Yes, it is almost certain that gold will eventually end up in a bubble. I say this on the strength of historical evidence. We, people, always push a good thing too far, and as we know, there is no fever like gold fever. And that, I would guess, is also no coincidence, because gold is money, and money talks, and it can buy you most of life’s needs and wants. But I would guess that we are still a very long way away from a bubble. If the current printing mania continues, as Marc Faber often says, it is impossible to say how high gold and silver are going to go, but just in order to reach its previous high in USD terms, when adjusted for inflation, gold would have to hit upwards of $6K. This is a moving target, of course, and the more time elapses, and the more printing gets done in the meantime, the target will keep going higher and higher. How much would gold cost in Zimbabwe dollars towards the end? It must have been in the gazzilions.
SV – Keen said over ten or so years, expecting it to be a slow, relentless grind ever further down, similar to Japan. Robertson, however, gave him only 5. What is overlooked in this is rather significant. Keen’s expectation and prediction was not that at some point in the next 10 years prices will correct by at least 40%, but that the 2008 correction that was already underway at the time would continue, and that his 40% fall would slowly and relentlessly materialise over the next 10 years, before prices stabilised and eventually turned around. Also, and by implication, the 40% fall was to be meausred from the previous high of 2007, not from any new highs the index would achieve in the interim, before prices crashed.
This much is pretty clear. And the reason why he lost the bet, to my mind, is precisely the fact that he miscalculated and was proven wrong by the index turning around to hit new highs, instead of continuing its slow grind down. To my mind, any other interpretation is less than compelling, and would expose Keen to a charge rightly made against Sayce, that his housing price crash prediction is no better than a broken clock, which just so happens to show the correct time twice a day.
The standard of commitment and the specificity required for any meaningful prediction certainly has to be higher than Sayce is currently willing to provide. As things stand, his alarmism has scantly more solid footings than me warning the good people of Alice Springs that it is going to rain, and that they should prepare for a flood.
The fact that my warnings are going to come good one day merits little credit, I suggest. Worse, it would be foolish of the town to stop going about their daily lives and start raising all their furniture off the ground.
guys – the cumulative average gold price in USD’s was 972.35 in 2009. In 2010 so far it is 1130.79. An increase of just over 16%. The recent increase in AUD is basically the AUD going from 0.9305 to 0.81255 in a month. If the AUD held its 1215 compared to 1391 based on the 2010 ytd cumulative average. So all good on the gold front. This tanking of the AUD is GREAT! 14% IN A MONTH!
See what can be done with numbers, I have almost convinced myself.
Keep up the good work KRUDD. 2000 USD gold / 0.7186 AUD = 2783 AUD Gold. The 0.7186 is the average over the past 24 years. The 2000 gold is the question!
tel – Quite right. My thinking is that, just like you are not going to get out of debt by taking on even more debt, politicians and bankers are not going to destroy the gold price by printing more and more fiat money. The reasoning is simplistic, but nevertheless quite valid at that simplistic level of generality.
cb-are we simplifying something that is too simple? print – borrow – spend! at some stage somebody has to pay for something? its like a race between bolt and lewis, ie who starts first wins, who do you back, if they can run at the same speed, the one who starts first, (unless he is on PED’s) will win? see the ironry, there is no answer – but you can win a bet!
Looks as though it is going to be a rough start to the month following on from the mayhem in May.
http://www.igmarkets.com.au/cfd/market-commentary.html
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