Dismal Economists and Spruikers

Dismal Economists and Spruikers

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“One final point, the reconstruction of Japan will economically help the country and provide more demand for resources. You can see why economics is described as the dismal science.” – Peter Switzer, switzer.com.au

We’re not quite sure what point Mr. Switzer is making.

Is he saying the tsunami and earthquake in Japan are good for the economy?

Or is he saying it’s crazy to think the tsunami and earthquake are good for the Japanese economy?

We don’t know for sure.  And we don’t want to put words into someone’s mouth.  So, we can only guess.

We think he’s saying that it’s economically good for Japan because money will be spent on construction and buying new things.  And that economics is sometimes a bit topsy-turvy.  But all up, bad things end up being good… economically.

As you know, the argument is nonsense.  And to simply blame it on economics is just as bad.

Let’s get one thing straight: economics isn’t a “dismal science”.  It’s not econo-mics claiming that destruction leads to a booming economy.  It’s the econo-mists who make that claim.

So rather than economics being a dismal science, it’s the 95% of economists who believe that sort of rubbish who are dismal.

In other words, don’t blame the science, blame the scientists.

If you study real economics, not the mumbo-jumbo variety, then everything makes perfect sense.  In reality economics is nothing more than sound common sense.

It’s about understanding an economy is made up of individuals who interact with each other.

Economics isn’t about placing bets on whether the unemployment rate will be 5.1% or 5.2%.  Economics isn’t about stiff-necked central bankers raising or dropping interest rates, or deciding how much new money to print.

And it isn’t about spreadsheets and ratios.

Once you figure that out, you’ll realise economics isn’t as hard as most will have you believe… then you’ll agree with me that economics isn’t a dismal science at all.

It you want proof, I suggest you check out the videos and information at the Mises Institute.  You’ll be enlightened by economics from the Austrian School.

If you’re not familiar with the Austrian School that’s not surprising.  It’s a school of economics that believes in free markets.  It believes in the evil of central bankers.  And it believes that governments can only ever hinder and distort an economy.

That’s why you may not have heard of it.  Because it opposes everything the mainstream believes in – government intervention and central bank omnipotence.

But check it out for yourself and make up your own mind.

Now, we won’t cover old ground again by explaining how the destruction of property and lives isn’t good for an economy.  I’d wager you’ve gotten the message on that by now.  So for today, we’ll look back at comments from our old pal, Reserve Bank of Australia (RBA) governor, Glenn Stevens…

He’s a bit of a wag you know is Glenn Stevens.

Answering questions from analysts in London, the RBA guv’nor said:

“I don’t think we have huge [house price] rises going on.  We don’t have a gearing up going on now.  We’ve got quite modest growth in housing credit now for the past year or more.  That all seems to me to be consistent with a household sector that’s being more careful.”

Your honour, could the witness please refer to chart ‘b02’ from the RBA.  The chart details total residential household loans made by Australians from 2000 until January 2011:


Source: RBA

You’ll note your honour, Australians have a cause for celebration.

During the month of January, in the year of our Lord 2011, the great people of Australia (otherwise known as the Children of the Lucky Country) amassed for the first time in history a total of $1,004,896,371,000 in residential housing debt with Australian banks.

Or to put it another way M’Lud, ONE TRILLION DOLLARS!

Not only that, but during the time of the supposed Great Deleveraging, household residential debt increased from $750 billion in September 2008 to over $1 trillion today.

That’s right it increased.  It went up.

Plus, during the time Mr. Stevens claims there has only been a modest growth in housing credit, the rate of increase quickened.

To the extent that housing credit has climbed 33%… in just two-and-a-half years!

And if we take all household debt – including unincorporated businesses such as sole traders, and personal loans – the total amount of household debt is nearly $1.5 trillion:


Source: RBA

Pardon us for mentioning it, but we fail to see any modest growth.  Over the period from late 2008 to September 2010, total household debt increased nearly 15%.  That’s 7.5% per year.

Including a 33% increase in housing debt.

Obviously your editor and Mr. Stevens have different ideas about what modest means.

So in the face of what the numbers show, Mr. Stevens insists there’s no housing bubble, and no credit-driven bubble.  Everything is fine with Australian house prices… there’s no need to panic.

Well, he may care to take a look at an article that appeared in The Australian over the weekend.  It’s titled “No Shore Thing”.

There’s only one word to describe the article – Amazing!

It’s the biggest, most bearish and most honest article on Australian housing we’ve ever seen in the Australian mainstream press.

In fact it’s so good I could easily quote the whole thing here.  But I won’t.  Instead I suggest you read it in full for yourself.

It’ll give you an idea of what can happen when property goes bad.  The great thing about it is that it’s describing people and properties in Australia.  Not in Detroit or Bristol or Phoenix or Liverpool… these are examples of prime Australian properties being sold at 30%, 50% and even 70% discounts!

Let me give you one cracking quote from the article:

“‘A couple of magnificent estates that would have fetched $8m to $10m during the good days were recently sold for $4.7m.’  He says apartments in the Peninsula Apartment complex near the Abel Point Marina, which originally cost more than $2m, including fittings, have been recently sold for less than $900,000.”

Wow!

Now, I know what the property bulls will say.  They’ll say these are holiday homes.  And holiday homes are different to city homes.

Our reply is this – and how do you think those holiday homes were financed?  That’s right, withdrawing so-called equity from the city home to buy the weekender.

Owners who are forced to sell these overpriced trinkets by the sea will now find themselves having to withdraw even more equity from their city home to pay off the negative equity on the weekender.

And they’ll be in competition to sell with those who just want to get out while they can.

That’s not all.  It’s a mistake to believe holiday homes are isolated from city homes.  That negative price action won’t impact the prices in metropolitan areas.

The fact is it will have a flow-on effect.

Already we can see the spruikers squirming.  Now they’ve got to change their argument.  The walls are closing in on them.

No longer can they say Australian house prices don’t fall, because here’s the proof.  The house price Armageddon from the US and Europe has finally touched Australian shores.

But onward they’ll go.  They’ll now claim that city house prices can’t and won’t fall – even though we know that’s happening already.  But when prices start falling in the suburbs, the next claim will be that they can’t and won’t fall in the inner-city areas…

So they’ll change their argument again.

It’ll be CBD properties that can’t and won’t fall… eventually they’ll have nowhere to go.  Except to admit they got it wrong – real wrong.

It’s quite sad really.  Why can’t they just admit prices can and will fall?  You know the answer to that, we explained it last week – Aussie housing is built on leverage and the belief prices always rise.

Take away that belief and you get the other side of leverage’s double edged sword… and that’s the bad side.  The side that’ll cut the market in half and make the debt position of over-leveraged Australians even worse.

Until then, keep saving.  Cheap, discounted property is coming to a suburb near you soon.

It seems it’s not just 95% of economists who are dismal, but 95% of property spruikers too.

Regards,

Kris Sayce
For Money Morning Australia

Kris Sayce

Kris Sayce

Publisher and Investment Director at Port Phillip Publishing

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Kris is also the editor of Tactical Wealth and Microcap Trader where he reveals the best opportunities he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here or Microcap Trader here.

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56 Comments on "Dismal Economists and Spruikers"

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michael francis
Guest
5 years 8 months ago

I can’t wait for the crash. I can’t wait to see all those f#cking arsehole property spruikers standing at road intersections cleaning f#cking windscreens. I can’t wait to see their f#cking arshole kids put in government schools and have the sh#t beaten out of them.
I can’t wait to see their f#cking botoxed wives with their Dow Corning tits dressed in trackie dacs and moccasins living in Doveton.
Anyway-that’s my beef for the day. Back to the grumpy pills.

Puntpal
Guest
5 years 8 months ago

Right with you MF…I hope it hurts the leaches in the FIRE economy. Once Japan is off the news people will start realizing we are in stage 1 of the great oz housing crash

Janet
Guest
Janet
5 years 8 months ago

The spruikers still have a lot of learning to do, judging by the linked story.
“PHILIP Lenehan could not believe his luck when he snapped up a beachfront…house at Forresters Beach …He and his wife Tiffany paid $810,000 ….He is not worried that prices of lifestyle properties may continue to fall .”.I intend to keep it as a family weekender for the long term”, he said…Lenehan, who manages properties under the Professional Real Estate banner, also owns several rental properties.”

Adrian Burchall
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Adrian Burchall
5 years 8 months ago
Kris, I’m sorry to say I think you’re whistling in the wind. For my part I would love to see a general significant house price correction but it is simply not going to happen. It’s not happened in Canada and it won’t happen here. Holiday homes are discretionary items bought generally by the better off. A large majority of Australians don’t own one. The number of these houses relative to the size of all residential dwellings is small. Hence no matter how far prices fall in this market, suburban prices will be relatively unaffected. It may make some urban buyers… Read more »
andy dufresne
Guest
andy dufresne
5 years 8 months ago

So ‘Banana’ Glen Stevens reckons we don’t have a problem. Not only does he have a loosening bias, he also has a bias towards short term memory.

http://www.dailytelegraph.com.au/money/money-matters/reserve-bank-governor-glenn-stevens-says-sydney-property-boom-will-make-it-hard-for-his-children-to-buy-home/story-fn300aev-1225847189843

JB
Guest
JB
5 years 8 months ago

Adrian

BUNKUM!

Greg
Guest
Greg
5 years 8 months ago

The price of property has got too far ahead of INCOME for there to be anything other than a crash. When people can no longer “flip” properties easily, then they can no longer rely on buying an asset with the proceeds of the sale of another asset. This is when the merry-go-round stops and buying power is once again determined by INCOME. It’s a better formula too, because it’s bubble-proof.

Manny
Guest
Manny
5 years 8 months ago
Kris I only half agree with you. I think your comment re Peter Switzer is a bit harsh. There is no doubt that rebuilding during and after wars etc helps to rebuild in times of loss and sometimes re establishes the economy for growth with new momentum. Of course there needs to be one other major factor to ensure you get growth and thats being at the end of a period of deleveraging when Debt to GDP is very low. Anyway my point being Peter was making a typical journo comment regarding the economy and yes although neo classical he… Read more »
J.C.
Guest
J.C.
5 years 8 months ago

Adrian@4,
Oh yes, the great planned economy of Australia with our omnipotent leaders; fail-safe financial institutions; and unified belief in our national superiority. With your entrenched faith and solidarity with middle Australia, what could possible go wrong?

the rat
Guest
the rat
5 years 8 months ago

MF @ 1 – I couldn’t have put it more eloquently myself.

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