Don’t Believe the Hedge Funds When it Comes to Aussie Housing

Australia now has one of the biggest housing bubbles in history, apparently.

That’s the word still doing the rounds after Jonathan Tepper’s forecast for a 50% drop in Australian house prices. Really?

If you’ve believed Tepper’s argument, then you’ve been had.

Big time. Here’s why…

Don’t trust the motives behind this call

All this involved trying to force the stock price of Australian banks lower and lower. The Australian banks have been sold down.

A big part of that move had to do with short sellers attacking the stocks. This is happening in anticipation of further share price falls.

The hedge funds think that the ‘bubble’ in Australian housing will take the banks down further. They were shorting in anticipation of this.

The Australian Financial Review reported on February 3 that short interest in the Commonwealth Bank [ASX: CBA] was as its highest level since 2012.

Beware. This will prove to be a ‘widow maker’ trade. This term comes from hedge funds and investors who continually tried to short Japanese government bonds.

They did so on the belief that the ‘inevitable’ rise of interest rates in Japan would cut the value of the bonds. That would have been a great trade, except for one small detail — rates didn’t rise.

These trades lost money year after year because Japanese rates never went back up. Investors lost millions. That’s why it was called the widow maker trade.

Shorting the Aussie banks has seen investors suffer the same fate here for a long time. At Cycles, Trends and Forecasts, we would not bet against the Aussie banks yet.

Don’t get me wrong. They’re hurting. But consider the wider macro landscape. Central banks around the world appear desperate to avoid a deflationary environment. So they drop interest rates lower and lower. To the point of negative rates even. Now here is where forecasting keeps one humble. This is something I never forecast, and would never have even believed 10 years ago.

I just didn’t think central bankers could ever be that stupid. How wrong can you be? So bank shares were going to go somewhat lower, since negative rates will lower their profits. As you’ve just seen.

Now there are two reasons why the Australian media has just been had…

Australia is going better thank you think

First, the Australian housing market is very definitely NOT in crisis. Despite what you may have read, Australians have a good history of keeping up on house payments; homes are exempt from capital gains tax; the majority of Australians do actually own their home outright, and have a very strong cultural desire to own it if they don’t.

And Aussie house prices simply cannot collapse if employment levels stay high. As they have done, despite all the prognostications to tell you otherwise (but not from us).

Nor will house prices collapse if Australia’s GDP figures keep coming in to the upside of analysts’ expectations. It happened yet again last month.

The second reason is a little more sinister. But I’ve been around markets long enough — and have been on the receiving end of similar campaigns — to know that something is afoot…

The short selling trade in Australian banks has about run its course. So what does a big fund do when they’re already short? Well now they need to get out and buy back the shares. To get out at good prices (as a short seller, that’s as low as possible), they want fewer buyers in the market.

Hence the all out effort to convince you (through a media campaign) either to ‘not buy’ Aussie bank shares — a scare campaign about how Aussie house prices will collapse 50% ‘imminently’ — or even get you to ‘short sell’ yourself at these lower levels.

Australia is NOT on the edge of recession. February was the half-year reporting season for many — but not all — manufacturing companies listed in Australia. Take Bluescope Steel.

Bluescope Steel is one of the few steel companies still profitable given the current China slowdown. They recently reported their best half-year profit this decade. The company cited the reasons for this as: cost cutting, the lower dollar, a focus on premium product and the improving Australian construction sector.

Australia’s recent GDP figures confirmed such an improvement. Australian supply chain logistics company Brambles reported an after tax underlying profit of AU$661 million for the six months ending December 2015. The shares jumped 9%. Brambles profits were driven higher by the US pallets business.

Brambles’ reusable plastic crate business grew 2%. These are not the figures of an impending downturn. The CEO, Tom Gorman, was quoted as saying he saw ‘considerable opportunities’ over the coming years and was excited for the company. Middle East, African and South American markets were growing ‘quickly,’ he said.

May I remind you too of the $11 billion Melbourne Metro subway project. This project will see the construction of two 29 km long tunnels and five new underground stations. More than 17 foreign firms have expressed interest to build it.

Granted, our eastern seaboard cities are certainly due for a pause, after a strong run in the last few years. A strong run, I might add, that Cycles, Trends and Forecasts predicted well in advance. Australian house prices are not going to collapse this year. Neither can they decline by much until our unemployment levels begin to increase.

Phil Anderson

Phillip J Anderson is an Australian academic, author and student of stock, commodity and real estate cycles. Drawing on the work of British economist Fred Harrison and American technical analyst WD Gann, Phil developed his own theory about 18-year real estate cycles in the early 1990s. Since then, Phil has been using cycle theory to guide his own investment decisions — crediting the phenomenon with his decision to move to a 100% cash position in July of 2007, just before the GFC wreaked havoc on the Australian stock market. He has also built up a lucrative property portfolio here and in the UK. Phil is currently predicting a 14-year boom in Australian house prices; an idea he expands on more in a brand new Fat Tail Investment Research film, ‘Remembering the Future’.

Money Morning Australia