HOBART TASMANIA – It’s a sleepy week, although not so sleepy that the ASX hasn’t managed to slip into record territory in lazy trading. Oil is down, gold is up, and shares just keep chugging along.
What else? Did you notice that globally listed property securities returned 36% in 2006, as an asset class? Listed property trusts chipped in 25%. “Property continues to be the major contributor to returns, with almost 3 per cent being added in the month of November alone,” says Jeff Brensahan of SuperRatings in today’s Financial Review.
And here we thought it was the resource boom and the share market boosting super returns. It turns out property has been the outperformer. How long can it last? Will the property market get dis-masted in 2007? “The property trust sector is looking expensive…If you go back over a long period of time, you’ll find that it never traded for any length of time at the sort of price to earnings ratio it is trading at today,” says Crispin Murray of BT Financial Group.
And if you were looking for signs of the end times for property, there would be the matter of a Manhattan skyscraper, at 666 Park avenue, selling for US$1.8 billion. Repent, property buyers! The end must surely be near.
But even if you don’t believe in divine omens and the end of the world, it’s worth noting that the avant garde investors of the world are not making their most outrageous money in property. They’re making money…in money. “Kerry Packer once said the way to make money was to change the use of money and this is what these new capitalists are doing,” says Bernard Salt in today’s AFR.
The “new capitalists” are the same old money shufflers. Today, their favourite tool is private equity. “There are different centres of wealth creation,” writes Andrew Cornell. “In New York, London, and even Sydney, money is being made from money…In Shanghai or Dubai, money is still being made from resources and property.”
How old fashioned of the Chinese and the Arabs to make money in yesterday’s asset bubbles. Under the doctrine of “new monetarism” (a phrase which we’ve only just become familiar with) the real money in today’s market is made by creating new kinds of assets and selling them to Baby Boomers who are hungry for oversized returns to pay for retirement.
Cornell writes that, “Almost everything today can become an asset class, whether a freeway, an aircraft lease, or royalties from David Bowie’s back catalogue. All that is needed for someone to work out the rocket science of how to construct a security and convince investors to buy it. Recent history shows investors will buy almost anything.”
Income is income, we’ll grant that, whether you’re getting it from a stream of interest payments from a sovereign government, a corporation, or even a home owner paying his mortgage. But not all assets are created equal. The difference is in the risk. And in normal markets, the risk premia tell you which assets are high-yielding and high risk, and which assets, with lower yields, are safer, long-term risks.
That’s all a bit academic today, though, isn’t it? Risk premia are low across the board. With money cheap, everything goes up, and everything appears safe.
But debt is a little like cheap perfume on a working girl, it can deceive your eyes by overpowering your nose, but it’s all cosmetic either way. And buying someone else’s promise to pay has never been a long-term, wealth-building strategy for serious people. My friend Michael Checkan sent a Christmas card recently with his latest letter, confirming my suspicion.
“I entered the world of precious metals and foreign currencies in the 1960s,” Michael writes. “It wasn’t unusual for my customers [generally not Americans], who experienced economic, political, and social upheaval outside the US, to know more about my chosen area of specialization than me. They had lived through periods of devaluation of their currencies. However in the 1970s it was my turn to personally experience the devaluation of the US dollar and the appreciation of the only ‘real money’ in the world, gold.”
“As for the outlook for gold in 2007, I expect the all time high for gold of $850 to be exceeded in 2007. The trend for gold’s continued rise remains in place. The trend for gold’s continued rise remains in place. Typically, these moves are in a 13-15 year cycle, and we are now only in year six of the cycle.”
“Electricity,” according the U.S. Department of Energy, “is the flow of electrical power or charge. It is a secondary energy source which means that we get it from the conversion of other sources of energy, like coal, natural gas, oil, nuclear power and other natural sources, which are called primary sources. The energy sources we use to make electricity can be renewable or non-renewable, but electricity itself is neither renewable or non-renewable.”
“Despite its great importance in our daily lives, most of us rarely stop to think what life would be like without electricity. Yet like air and water, we tend to take electricity for granted. Everyday, we use electricity to do many jobs for us from lighting and heating/cooling our homes, to powering our televisions and computers. Electricity is a controllable and convenient form of energy used in the applications of heat, light and power.”
We stopped to think about electricity the other night when the electricity cut out. To get electricity you need fuel. You can get it from traditional sources, or, as those get more expensive, from replacements. And all of that is based on the traditional model of power generation, transmission, and distribution.
It’s more than a hunch, but we think the increasing price of fuel for generating electricity will lead, yes, to greater efficiencies in the existing model. But we think it’s going to lead to a new model altogether, one where the power is generated closer to its ultimate destination, otherwise known as distributed generation. More on this in the new year.
We don’t have much else to report from Hobart. The yachts are on their way. But it’s pretty quiet around these parts, and we’re going to enjoy it while it lasts. And by the way, we are often asked why we don’t spend more time criticizing the bad currency management practices of other governments. We concede the point that currencies the world over are badly managed. But this doesn’t argue in favour of the dollar. And as the dollar is the centre of the world’s currency system, it’s got the most riding on its shoulders.