The Reserve Bank of Australia does it again. Identifying the issue… brilliant analysis of it… pointing exactly to the crux of the problem…
Their topic this time was the Australian housing bubble. But before we quote Luci Ellis, head of financial stability at the RBA, you need to understand the way Central Bankers speak. They talk around issues, with hypotheticals used as metaphors, and metaphors used as hypotheticals. This way, they can rarely be pinned down as being wrong. (US central banker Ben Bernanke has broken rank on this particular side of things.)
Now the description of a central banker’s language may sound like a politician’s. But there is a crucial difference. A politician uses obfuscation to hide the emptiness in what they are saying. Central bankers use it to hide the elephant in the room. That’s why people spend so much time analysing each word of the board members of central banks.
When someone at a CPA conference asked Dr Ellis if the lower rental yields housing investors were getting had consequences for house prices, she began her groundbreaking admission with a straightforward answer:
“The short and simple answer is – yes. If rental yields are very low, investors are buying properties without really thinking about the rental yield.”
And this is where we go wishy washy:
“Buying an asset just because you are expecting the price to rise in the future, well that is actually the academic definition of a bubble. So that would be undesirable and be seen as a problem.”
Boom. There you have it, the Australian housing market is a bubble. The head of financial stability at the RBA says so. In as plain English as you will get. And if we’ve ever heard a central banker predicting a crisis, this is it.
Counterfeiters Counterfeit – Surprise!
Dan discussed the general nature of central banking on Thursday:
“What’s the difference between a thief and a counterfeiter? A thief takes what is not his without another’s consent. A counterfeiter passes off as genuine that which he knows to be a fraud. Or, in simpler terms, one is a politician and the other is a central banker.”
He was right in a surprising amount of ways. The RBA has actually managed to counterfeit, not only its own currency, but the currencies of other countries as well. Yes, money attracts certain types of people and central banking deals with money as its core business. What do you expect?
A Sovereign Enron
Well it looks like the Greeks didn’t get away with it after all. The European commission is onto them. Hiding your debt and deficit is only a temporary solution, as former Enron advisor Paul Krugman would know. He, of course, advocates turning debt and deficit to your advantage. Simply claim it’s beneficial. Keynesians across the board will no doubt rejoice that Greece’s 2006-7 debt and deficit figures were actually higher than official figures originally claimed. More stimulus!
To find out what the increased figures will actually be, we will have to wait a few more days. In the meantime, Greek bondholders should shake in their boots.
The Irish are shaking in their bhrógs. That’s one of three Gaelic words we remember from our Irish primary school. The country is up a proverbial creek without a paddle. And the only thing up for debate is in fact whether or not they do have a paddle. “We will paddle our own canoe” the Irish Finance Minister told The Independent. Again, where the country is paddling around everyone knows.
Even the ratings agencies are downgrading Irish bonds. They usually arrive at the party very, very late. Fitch was the latest to downgrade, changing its rating to A+. Yes, in sovereign debt world, A+ is bad. Go figure.
The reason for the recent turmoil is that Ireland has committed a rather large amount of money to bailing out its various banks. But now a rumour about retail investors leaving Irish banks has begun circulating. Those can of course be dismissed with some in depth statistical analysis done by our old friend from above, the able Finance Minister:
“Ireland is an island and in any island people tend to stay with their local bank.” Yes, what a brilliant analyst. We really love this guy. But he goes one better: “Ireland will do what it has been doing in recent years…”
Tasmanians to the Tea Party
As a Markets and Money reader, you’ve probably heard of the Tea Party in the US. Well it seems the media in Australia has taken the same disdain as the American media:
ABC (the Aussie one) reports that “Tea Party politics are the politics of paranoia, of distrust and constant fear.” The amusing side of this is that the media is usually perceived as the one who promotes those particular emotions. Without them, you wouldn’t need government to “protect” you.
In America, the media isn’t getting a free ride with their slanderous ways.
“Four billboard trucks bearing the message “Stop the Liberal Bias, Tell the Truth!” began circling the Manhattan headquarters of ABC, CBS, NBC, and the New York Times on Friday. The trucks will do so for eight hours every weekday for the next four week…”
And in a sad turn of events, it’s time to sympathise with Tasmanians. If you didn’t know, Tasmania is the atoll just south of Melbourne. More importantly, the Sydney Morning Herald reports “Tasmanians to be forced to connect to NBN under new laws.” The odd part is that the government still handed out consent forms to be returned to them.
A paranoid, distrustful and constantly fearing observer would point out that this is a rather intrusive display of force. The opposition recons the NBN “depends on compulsion and the elimination of competing technologies”. On radio, the Tasmanian Premier did a brilliant job of rebutting the opposition’s stance: “This certainly isn’t compulsion in fact it’s a benefit for householders.”
(Editors blood begins to boil.)
Yes, aboriginal children must be phased into white society for their benefit, heretics should be tortured to save their soul and “Broadband macht Frei”. It’s not compulsion. In fact it’s a benefit…
All across the world, trade disputes and currencies wars are being mentioned. But today, let’s focus on the Yuan.
China is an odd place. When you go, everything is backwards. The illegal markets are full of Chinese stall owners who speak every language fluently in several different accents. But try a conversation with the concierge at a hotel and you have no chance.
So conventional thinking doesn’t work. That’s why you should open your mind to the following hypothetical which Chinese Premier Wen Jiabao described in Brussels:
“If the yuan is not stable, it will bring disaster to China and the world… If we increase the yuan by 20% or 40%, as some people are calling for, many of our factories will shut down and society will be in turmoil.”
And turmoil ain’t good for a ruling party. So can you expect the Chinese to budge their currency any time soon? Nope. And like one of those Chinese finger traps, the harder you pull, the less they will give.
Keynes aging rapidly
Generational shifts dominate investing. But they happen so slowly it’s difficult to generate sizeable profits from them. In much of Asia, the concept is that the younger generations support the old. In the west, the young live off the old and the old live off their savings. But those savings are destined to come up short, which is why the young have to supplement them with taxes and contribute (involuntarily) to the pool of savings.
This has led to a strange situation in the west, where the economic system is based on future and past productivity instead of current income generation. This is a profound change. The intertemporal nature of the way the western world’s economic system is structured poses some serious issues, which have not been as relevant until now. Some basic assumptions of modern mainstream economics were not conceived with this economic structure in mind.
For example, consider the Keynesian assumption that lower interest rates spur consumption. With less interest earned on deposits, people will go out and spend, claims the theory. But what about those living off their savings, and those who intend to do so? (Just about everyone in the west.) If they see their retirement plans going up in smoke because the return on their savings is being diminished, what will they do?
You have seen what Europeans think of having to delay their retirement. It’s not an acceptable concept. This would imply that savers may be inclined to save more, not less, when interest rates fall. They would be willing to lower present consumption to make up for the shortfall in their retirement funding as a result of lower interest rates. Figures show savings rates rising across the western world despite rates on deposits at ridiculous lows.
That is why monetary policy has been so ineffective. But it hasn’t stopped Bernanke from trying. More on that below.
Schiff’s Humpy Portfolio
Congratulations to the world’s stock markets. As reported all across the media, markets had their best September in 71 years! At least the US did, with the Dow up 7.7% and the S&P 8.8% for September.
Now, a while back, Dan Denning floated the idea of a Humpy portfolio. Subscribers pitched in with what they thought should be added to the list of garden shed investments. Fuel, rice, toilet paper, tinned food and condoms* were favourites. The idea was that the humpy portfolio would be full of things with real value, as opposed to paper investments and cash.
So with markets posting a record performance, how would a humpy portfolio compare? US investment legend Peter Schiff reports on his improvised one, based on commodity markets:
Rice is up 10%. “That box of Uncle Ben’s [rice] in my cabinet,… beat the S&P for the month of September.”
Corn is up 12%. “A box of … popping corn beat the Dow in the month September.”
Soy beans are up 9.5%. “Beat the S&P and the Dow.”
Orange juice: 13%. “That Tropicana orange juice in my freezer did better than the Dow and S&P in September.”
Sugar is up 19.3%. “The sugar in my kitchen cabinet beat the S&P.”
Cotton is up 17.5%. “My jockey shorts outperformed the Dow in the month of September.”
Oil is up 11%. “That means that jar of motor oil in my garage did better than the Dow.”
Copper is up 10%. “The copper plumbing in my basement did better than the Dow, even though it was a record September.”
Silver is up 13%. “Those silver coins that are in a jar in my bedroom beat the Dow.”
“Now I ask you, given this, do you think stocks really went up in value in the month of September? Or is it more likely that the dollar lost value? And because the dollar lost value, the price of everything went up, including the price of stocks…”
Relating this to the Australian context, consider the Aussie Dollar is reportedly overvalued by 27%. Maybe you should brush the cobwebs off your humpy and start filling it.
Deflation, Inflation and Hyperinflation
Considering commodities and gold are on a roll, it pays to revisit the old inflation story. And let’s just put it out there: The US is in the exact scenario for hyperinflation, or at least high inflation, to develop. From what we recall, the following things point to hyperinflation. A structural and sizeable deficit, a nutter at the head of your central bank who is willing to print money, an economy reliant on government spending, foreign debt, rising prices and … did we miss anything?
* “humpy” is the Australian term for a garden shed and this is not a reference to the condoms
Until next week,
Markets and Money Week in Review