The Energy Powerhouse

Oh boy, has Christmas come early for the cashed up types around the world! Australian real estate is getting cheaper every time the Aussie dollar drops another cent. It’s now trading at 87 US cents. It bounced a little higher yesterday, but the trend looks down.

This is how we put it in Cycles, Trends and Forecasts back in early October. ‘A lower Australian dollar will make Australian property look even cheaper to overseas interests who will keep buying.’ Events in the short term seem to be playing out that way.

As The Australian Financial Review reported yesterday, ‘The sliding Aussie dollar has trigged a new wave of interest from Chinese property buyers, with the fall in the currency making Australian property up to one-fifth cheaper from currency highs.

We can expect this trend to continue. But let’s not pin it all on the Chinese. The article goes on to suggest the recent buying may even be more due to expatriates taking the opportunity to convert some of their overseas cash to real estate back home. Regardless, a lower dollar will keep drawing money into the country. It also makes overseas buying less compelling for home based investors. Take that Harry Dent!


Australia is not alone. Fully convertible currencies allow worldwide investing (speculation). US dollar millionaires around the globe can have a field day buying up property. When the restrictions on the Chinese currency, the renminbi, lift (whenever that day may be) and the currency truly floats freely, the sheer weight of Chinese money could send this right over the top.

Of course, it works both ways. In 2010, when the British pound dropped, property in the UK became cheap by Australian dollar standards. It remained horribly expensive for the locals, whose wages stagnated, if they even still had jobs. Such is life in our economy. It’s not going to change anytime soon. You get slaughtered as a simple wage earner. If you don’t own your own business, you need to put the property clock to work.

This trend of overseas buyers looks like a major driver of the next real estate cycle in the Western economies. You can see it play out on the ASX too. The Australian Financial Review reports that in the first week of December, the $60 million dollar US Residential Fund is due to list.

The fund’s existing portfolio consists of single family homes in Atlanta, Cleveland, Dallas and Houston. It’s going to use the money raised to go shopping for more. In the context of the US real estate, $60 million is chicken feed. But there’ll be more listings like this, in time. A global real estate cycle is building. Stick it on your watchlist.

Of course, there are plenty of people who will tell you US real estate won’t rise (and the world’s stuffed, they’ll probably add). If you’re inclined to believe them, a new book called Smaller Faster Lighter Denser Cheaper might be worth your time. The author is a man called Robert Bryce.

The thesis of the book is ‘don’t count out entrepreneurial capitalism to solve problems’. The world might be full of them, but the ongoing innovations make the picture as bright as it’s ever been. After all, history shows humans constantly predict terminal decline and resource depletion, only to be astonished by the next inventions and discoveries that change the old paradigms.

Bryce begins with a whirlwind tour of products like the diesel engine, printing press, drill bit and the internet. He’s pointing out that innovation, technology and ingenuity have always driven change (mostly for the better) to rebut the general sense of ‘collapse anxiety’, scarcity and shortage pervading the world.

In fact, there’s an interesting sidebar in the book that includes the following dates: 1914, 1939, 1946, 1951, 1972, and 1974. Those were years when oil was projected in run out within at most 25 years. Here we are in 2014, and there’s no shortage of oil in the world.

In fact, the energy analysis is probably worth the price of the book alone, though not everyone’s going to like the conclusions. It’s a reminder that there are few other countries as blessed as the United States when it comes to energy reserves. The important point is that energy is the lifeblood of any economy. This is how Bryce puts the US position, as of 2012:

  • First in natural gas production
  • First in nuclear production
  • First in refined oil product output
  • Second in coal production
  • Second in electricity production
  • Second in refined-product exports
  • Third in oil production
  • Fourth in hydro production

The US is an energy powerhouse. And the picture has only gotten better with the time. You only have to take a look at this chart below on the cost of natural gas to see the cost advantage America enjoys over Germany, Japan and the UK.

Competitive advantage: low US gas price

Source: BP Statistical Review of World Energy 2014
That’s not going to change anytime soon, and it will allow huge wealth to be produced. A lower oil price makes this argument even more compelling. Then all you need to know is where these gains ultimately end up. Unlike a drill bit or the printing press, under the present system, that isn’t going to change.

Keep your eye on the land market and the credit creation of the banks. The cycle continues.

Callum Newman+
For Markets and Money


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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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