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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puntpal…..”I suppose I get why you do it, if you can convince people to pile into gold, then it becomes self-fulfilling, but make sure you get out before it crashes…”
I wish I had such power!!!
Do you really think that a bunch of bloggers can influence the world into buying gold or even an ipod??
No puntpal, I’m with you all the way in real estate, but don’t underestimate the power of the REAL movers and shakers that are (and have been) destroying currency on a global basis.
My parents were a little younger than you when they had a lesson in the reality of the financial world in the 30′s. Think yourself just as privileged as you are witnessing history and may you live a long life to pass on your experiences to future generations.
Lol wolf that sounds great. Ever watched the movie “Shawshank Redemption”? If so I refer to the part right at the end were the black guy is guided to where his old cell mate has set up a little business south of the border and they lived happily ever after. Well, mate I may come and visit you in your Carribbean “fortress of solitude” one day and watch the world float by (probably the bodies of dead bankers).
Great film…that was the “tin under the oak tree” as well wasn’t it… have you The Miracle at Santa Anna ? A quality film too…
You and family will be most welcome to come put your feet up and live for a month without ever having to put on SOCKS !!!
Yeah, that’s the one!
The Miracle at Santa Anna? No haven’t seen it but now that you recommend it I’ll track it down.
There’s an old Greek saying, it rhymes in greek but not in English. It basically says that only mountains don’t ever “meet”. It implies that although mountains can never “meet”, people can. I look forward to that day.
By the way, while we have been typing, have you noticed the AUD???
.8315!!!!
Nick – I wasnt just talking about money morning bloggers – the ‘Get Into Gold’ buzz is everywhere, every subway in NY had adds for investing in gold. TV adds on bloomberg and Fox Business had people with vaults full of gold smiling and sitting on a beach – maybe that was just the Wolf ; )
…And now in Australia I have heard people talking in pubs about investing in gold. They dont understand why…they just see the price of it going up and want to get on board now that property and stocks seemed to have run out of steam. Everyone wants to make an easy buck, no one wants to invest in IT and Energy, in research and development, in medical science, in food and agriculture…these are what will CREATE wealth…not just preserve it
I think Sandra has played it better – silver seems to allude a lot of the dumb money, and is less vulnerable to a crash. I also think Governments could dump gold to cover up the currency depreication for a while.
I just dont like the recent gold fad, but I am not at all sure if I am right on my doubts. Maybe gold go to $2000 an ounce by 2012 and Oz property will never crash…geez, if that happens I doubt I will be posting here anymore ; )
puntpal…I hear what you are saying but don’t forget that these Bloomburgs and other talking heads were laughing at the very mention of gold only a year ago, now they are stating the obvious, that “gold has gone up”. Wow! how prophetic.
The trick is to have enough nouse to predict where it is heading and why. This can only be achieved by understanding “the trend”. Gold is not a “get rich quick scheme”. It’s a preservation of wealth, at a time when the vultures have your savings in their sights.
This has been covered here many times and cb has put it far more eloquently, and detailed terms, than I have the time, or capability, to do.
Although many are talking about gold, it doesn’t take much of an IQ to watch charts, very few have grasped the concept of what is really going on. So don’t be shock at what price gold will be in 12 months time. Learn from it.
As for money into R&D? puntpl, you rtalking to a guy who has been beating the wall of bureaucracy for years just to develop leading edge Australian products. Plus has had firsthand experience with the raw deal, the many friends on the land have been suffering. This must come from government and when people realise they have the power to pressure these clowns then something may change. However, until that time comes nothing will change.
As for real estate, I agree with you. I have kids that will be in the market in a few years and they will be saying the same as you if the situation doesn’t change. I have been selling because I feel there is no more “meat on the bone” for real estate. I believe that it has run it’s course.
Sure, I’m one of those “bastard” that made money out of it. I accept that. I just don’t want to be one of those “bastard” that loses money from it.
I admire you guts for wanting to take these clowns head on. I just say to you, don’t go at them with all guns blazing because they are too big and too cunning and you could get hurt. Rather, take the tact of a sniper and weaken them in your quest, one by one. It takes time, but you have plenty of it.
PuntPal – There is no bet, but we disagreed as to whether Sayce knows any better than anybody else whether there is going to be a property crash or not. In response to my challenge to nominate a deadline for proving himself right, you said that if by the end of this year prices do not fall by 20% from the high of 2007, then Sayce’s alarmism about an imminent property price crash will have had no predictive value, and that, in spite of being cock sure, his ignorance is no better than yours or mine.
CB: I do think Sayce and Keen know better than somebody else, yes.
They neglected to take into account the govt action, sure, and both copped a pasting. But the scenario now unfolding is eerily similar to what they forecast.
PP: Unfortunately investors would only invest in R&D if a) there are no “easy money” or simple speculation opportunities and b) there is stability in the rest of the economy. R&D is a high-risk thing.
This excludes Nick who is obviously acting in capacity of a business owner/manager, not a passive investor.
SV…R&D is only a “high risk thing” because of the bloody minded bureaucracy in Australia. Local innovation is stifled by Government, not encouraged but rather destroyed. If it was the reverse, I can guarantee you that the investment in Oz R&D would produce huge dividends in many arenas.
Time and time again, I have been a witness to seeing great minds, who own companies, give up the fight with bureaucracy in Oz and opted to go off-shore where their developments ultimately prosper. I have been offered similar” opportunities” abroad, but my stubborn streak always kicks in.
SV – I would say that they have worthwhile theories, which are brilliant in explaining post hoc, past events. But they all fall flat on their faces where reliable and accurate predictions are called for. They always overlook something, or discount it, or do not believe that it is possible, or whatever.
Keen, for example, expected the RBA to cut rates, and expected the government to kick in with stimulus, so it is quite wrong to say that he overlooked it, or that he did not expect it. He simply did not believe that these actions could have the intended effect, because his theory told him that, once an economy rolls over into a deleveraging mode, there is nothing anybody can do to arrest and reverse the process. The short and long of it is that he got it wrong. Moreover, no amount of tinkering and fiddling with his theory is going to make it any more reliable for future predictions. It is a good device for explaining things once they happened, but predicting the future with any degree of reliability is quite a different kettle of fish.
Same goes for Sayce, who jumped onto the Keen bandwagon. They are as brilliant about the past, as they are clueless about the future. What they are doing is making educated guesses, but like everybody else, when they claim to know what will happen, they are taking a punt, and no amount of bluff and bluster, or unshakable confidence will make up for the fact that they do not know any better than anybody else.
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