It’s a public holiday in all Australian states except Western Australia. The offices of Port Phillip Publishing are closed. In today’s Markets and Money we look at the controversy generated by Remembering the Future, the property presentation we’ve jointly produced with economic forecaster Phil Anderson. We’ll also look at how technology improves life, and the difference between a good idea and a good business.
There’s been a flurry of feedback from Port Phillip Publishing readers. It’s all in response to Phil Anderson’s controversial presentation on Australian property prices, called Remembering the Future. Phil’s property forecast appears to fly in the face of some of the strongest views of Port Phillip’s own editors, as well as many readers.
It was bound to stir the pot. You see, Phil has spent his entire adult life studying cycles. And those cycles are telling him Australia is in for a 14 year bull market in property prices.
That’s slightly different to what readers are used to reading in our publications. So why would a bunch of property bears publish a bullish property presentation? It goes back to an on-camera conversation I had with Phil in March of this year. In that conversation, I raised some of my main objections to Phil’s argument.
The on-camera interview was one of our regular Strategy Sessions. These interviews are normally available to you if you have a subscription to any of our publications. But there’s been such a heavy volume of e-mail about Phil’s presentation that I decided to make his interview with me public. You can watch it here. If your Internet connection is slow and you can’t watch a streaming video, I’ve also included a copy of the transcript below the video.
For readers that are familiar with my position on property, that Strategy Session is a good place to start if you’re wondering why I’d publish a bullish DVD on Australian property. The short answer to that is, ‘because I can.’ I don’t’ mean to be flippant, so let me explain what I mean.
We’ve published plenty of controversial ideas in the last eight years. Controversy is not the issue. It’s the quality of the idea and whether it’s useful to investors. That’s what I worry about when deciding what to publish and whom to make business deals with. Having worked with Phil since 2009, I’m certain there is not a single Australian analyst who has the depth of research Phil has behind his property forecast.
That’s why I was completely comfortable collaborating on the project with him, even though his view on property is not my view. It’s one of the benefits of running an independent publishing house: you publish work you think is good and will give investors more useful insights into how the financial word works.
For the record, I brought up several objections with Phil during our initial discussion and he even added a third. Let me review them briefly:
- Bad debts in the last credit boom were never liquidated. First, Phil argues that real estate cycles bottom out with the liquidation of bad debts from the previous cycle. Then, the credit expansion begins again from a bigger base of collateral in the banking system (mostly residential, but also commercial real estate). I queried Phil on whether the Trouble Asset Relief Program (TARP) was really a liquidation of the bad debts in the banking system.
It amounted to a transfer of those debts. But on a balance sheet basis, I’m still not sure US (or Australian) are ready to finance another round of credit expansion which finds its way into house prices. Phil’s fundamental point is that the cycles have been getting larger for 200 years and that banks will create as much credit as society allows because that’s what banks do.
- China’s cycle could supersede the US cycle. An issue raised by Phil himself is the impact of China on the Australian property cycle. His data shows that the Aussie cycle follows the US cycle with a lag of about two years. The UK cycle trails the US by about a year.If Phil’s analysis is correct, this reflects the synchronisation of monetary and interest rate policies in English speaking countries. It also reflects the cycles of expansion in the world economy that culminated with the globalisation of the last twenty years.
All of those expansions have been driven by credit, which resulted in growing final demand, which itself led to demand for raw materials. This is why the commodity cycle is so important to Australia as well. And Phil’s point is that this is why the current property expansion could be the biggest of all—you have the commodity cycle—which he argues is half way through—coinciding with a rally in US stock prices and an apparent recovery in the US housing market.
His one worry is that China may have its own property cycle and that this cycle may change the way the Australian property cycle works. That’s a fascinating issue, but not one we can predict the resolution of. It’s also a threat to Phil’s forecast.
- Household deleveraging and psychology. My third objection was that far from being liquidated, the bad debts created during the housing bubble have simply moved on to the public sector balance sheet, which itself has deteriorated through debt growth in the last four years.
That would be fine if governments could avoid a debt crisis and prevent it from impacting households. Buy my own view is that large government debts (which will only be paid off through inflation) are net negatives for households, who end up paying higher taxes (directly) and are hurt by inflation (an indirect tax on purchasing power). Households will be more interested in de-leveraging, regardless of the price of credit, rather than in borrowing ever greater amounts to buy real estate.
Phil and I weren’t able to resolve all those objections in the Strategy Session. But anyone who thinks we took the decision to publish the research casually should be assured that there was a lot of thought put into it, and years of original research on Phil’s end. And ultimately, I agree with Phil one important point: new cycles of prosperity are almost always accompanied by breakthroughs in technology and energy.
That’s been the case, really, through the history of the industrial revolution, which can be more properly described as an energy revolution. As the guy who’s been pounding the table on the shale gas story for almost eight years, I think it’s a mistake to underestimate the transformative impact (also in geopolitical terms) of cheaper global energy.
Now…whether that translates into higher Australian property prices I don’t know. I have my doubts and they are significant. Phil’s presentation didn’t change my mind. But it made me think. And that’s what I value when looking for work to publish and pass on to you.
I have no doubt we’ve produced a quality presentation that has information and insight about Australian property prices and cycles that you can’t get anywhere else. It’s top notch material and I’m chuffed we were able to work with Phil on a great product. If you further questions for me on the project, send them my way.
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