China Property Boom is Over

US stocks hit another record high overnight as traders salivated over the prospect of easy money for *just a little bit longer*. Apparently, some worse than expected employment data was the reason for the jump in stock prices.

Well, that’s good to see. At least you know things are back to normal. Bad news is good news and all that…

Aussie stocks are up today too. If you’re keen to have a punt on the rebound, check out this stock sniper alert for ideas.

Meanwhile, over in China, bad news is not really good news at all. Yesterday saw the release of national house price data. In the month of August, prices fell in 68 of the 70 cities surveyed.

In the year to August, average price growth was just 0.5%, but month-on-month prices fell 1.1%. That’s the fourth month of consecutive price falls. Yes folks, the China property boom is well and truly over.

It’s not a bust yet, but it’s fast shaping up that way. If you recall, a few months ago, the government relaxed buying restrictions in most cities. But that’s done little to stem the price declines.

As I’ve written previously, when the mood towards an asset changes, ‘stimulus’ no longer has it’s intended effect…it only works to offset the fallout.

The response from the People’s Bank of China (PBoC) was to cut the 14-day repurchase rate 20 basis points to 3.5%, which is a form of monetary easing.

That will have minimal impact, especially as it concerns Australia. There is a massive oversupply of property in China, and developers are now cutting back. They’re stuck with excess inventory, and no matter how easy monetary policy becomes, they’ll not invest in new capacity until existing inventory moves.

That’s why the iron ore price continues to fall (down 1.4% yesterday to US$83/tonne). Stimulus is no longer about increasing demand; it’s about managing the coming bust.

You can see the China slowdown in the price action of the world’s most important commodity… oil. See the chart below. Brent crude peaked in mid-June at just under US$116 a barrel. It is now just under US$98 a barrel, for a price decline of around 16%.

Given the US’ growing energy independence, China is the marginal buyer of oil and has an increasing influence on the global price. The price decline mirrors the recent deterioration in China’s growth prospects.

Oil price follows China down

Of course, the weakness in oil and just about every other commodity is also about US dollar strength. But that in turn is a result of global risk aversion and capital moving back from the periphery (China and emerging markets) to the core (US).

Here’s a report on this issue from the Financial times:

‘Investment to China from abroad reached $7.2bn in August, the lowest monthly total since July 2010, according to Chinese Ministry of Commerce figures released on Tuesday and FT calculations based on data from the National Bureau of Statistics.

‘That was 14 per cent lower than a year earlier, following a 17 per cent drop in July from the same month a year earlier.

‘That marked the first time that FDI [foreign direct investment] has dropped by more than 10 per cent in two consecutive months since 2009, in the midst of the global financial crisis.

‘Declining interest in China comes as the world’s second-largest economy continues to show signs of a sharp slowdown, particularly in its enormous real estate sector, the main driver of growth in the country for years.’

By the way, the rally in the US dollar looks a little tired, so keep your eye out for a relief rally in all things non-USD over the next week or so. That includes commodities and gold, which is more or less a commodity these days…it’s certainly not trading with any type of premium that a ‘monetary metal’ should command.

That’s because Western ‘investors’ have dropped the metal like a hot potato, as they run off after Janet Yellen and the Fed in search of imaginary riches. Meanwhile, China continues its gradual attempt to wrest control of the gold market from the West.

From Bloomberg:

‘China will give foreign investors direct access to its gold market for the first time today as the biggest-consuming nation seeks to exert more influence over prices while boosting the yuan’s global use.

‘The Shanghai Gold Exchange will start trading contracts in the city’s free-trade zone that will be linked to its domestic spot market and available to about 40 international members including Goldman Sachs Group Inc. and UBS AG. Access was previously limited to some Chinese units. Gold in China this year cost as much as $31 an ounce more and $42 less than the London spot price, according to data compiled by Bloomberg.’

The key to any successful exchange is liquidity, and it will take China years to achieve adequate liquidity to challenge London and New York. But in the meantime, any gain for the Shanghai exchange is a loss for the West.

And as more gold flows east, it will make it harder for London and New York (which are dominated by paper gold trading) to maintain their price discovery role.

So if you’re a wounded gold bull, keep in mind wealth preservation is a long game, and China knows how to play it.

Just in case you missed it earlier this week, click here if you’re in Sydney in early October and interested in checking out Australia’s best and biggest gold gathering. It’s the annual Gold Symposium and has a whole bunch of international and local speakers. I’ll be around on day two, throwing my two fiat cents into the mix.

If you add ‘reckoning2014’ into the promo code, you can secure an extra 10% off ticket prices.

You usually get the most out of any investment conference when the topic is out of favour. I don’t know about you, but as a long term investment, I’d much rather be thinking about gold right now than how to leverage returns on the S&P 500 or some other nonsense.

We’ll sign off this week with commiserations to the Scots, who came close to taking control of their own destiny last night. While the counting is still going, the currency markets tell you that the ‘NO’ vote got up. The ‘British’ pound soared overnight, confirming the Union will remain so for a little longer.

But as the saying goes, if at first you don’t succeed, try and try again. You can bet that the Scots will be back in a few years…maybe after another wealth draining bailout to the bankers in London and ever greater deficits from those in charge at Downing Street.

The fear campaign won out in the end, and you can’t blame people for succumbing. Fear is a powerful emotion.

Russell Brand does a brilliant job here destroying the fear campaign driven by David Cameron and the political class. While it’s well worth watching, he sprinkles a few swear words around, so be warned.

After showing a clip of Cameron inciting fear and appealing to emotion, Brand comes out with the following truth bomb:

‘These people…like David Cameron, like George Osborne…they don’t understand emotion in the way that we do because they are institutionalized…deeply in privilege for their entire lives. They are not people, such as we understand them. They are tools of corporate apparatus…tools of state apparatus.

‘The reason Scottish people are so galvanized and excited by this election is because democracy is typically meaningless. Here, for once, is a referendum where the outcome will affect people’s lives, and people are interested. They’re not apathetic….and therein lies the excitement around this referendum.’

He’s exactly right. Democracy in the West is farcical…more so than it’s been for many years. At election time, we get a choice between the lesser of two idiots. There are no longer visionaries or leaders…only puppets of a modern day aristocracy.

The financialisation of the West is the driving force behind this. As often happens in history and nature, it will create a counter-trend. Scotland’s desire for independence from the most financialised economy in the world is just the beginning of this trend.

Expect to see more of it in the years ahead.


Greg Canavan+
For Markets and Money

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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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