Editor’s Note: The first part of this article was published in Friday’s Markets and Money. You’ll find it here.
Doc, I know markets were flat over the weekend. The Dow Jones moved a couple of points, and gold held steady.
But that’s not what has had me mumbling under my breath.
There it was, in bold type, on the front page of Friday’s The Australian:
‘House boom threat to economy’
… I told you I wasn’t going mad. The gist of the article centred on an OECD (Organisation for Economic Cooperation and Development) warning that Australian property prices have ‘…risen by 250 per cent over the past 20 years and there is a risk that rather than easing off, the market could “develop into a rout.”’
Doc, by my back-of-the-envelope calculations, 250% over 20 years is about 10% per annum compounded.
Only Australia Post’s CEO is getting a pay increase that could keep pace with that sort of growth.
So how do people do it?
According to The Australian: ‘Credit to buy houses and apartments has been growing up to seven times as fast as consumer prices and wages for five years in a row.’
See Doc, I told you so…
People are borrowing more and more as interest rates go lower and lower. They’re falling over themselves to get a loan to get on the property ladder.
The OECD warning is the latest in a conga line of overseas experts voicing concerns about a bubble in Australia’s property market.
For the locals, it’s a case of another boy crying wolf.
If I was selling real estate, and a prospective buyer raised this concern, it would be so easy to bat away with… ‘X, Y and Z have been forecasting the end is nigh for years. But property keeps going up. Don’t listen to those foreign naysayers who know diddly about our market. Trust in bricks and mortar. Trust me.’
At some point, no matter how low interest rates go, your income can only support so much debt. That’s logical, isn’t it Doc?
If that’s rational — and believe me, I’m seriously questioning my power of reasoning at present — then what happens if interest rates go up and/or household income stagnates or falls?
Surely this creates a certain amount of stress on the family budget? Oh wait, banks are going to hand out low-interest-rate credit cards to help people make ends meet. Phew, crisis averted…yeah, right.
Doc, the whole world is built on a mountain of credit. But this mountain is not rock solid. It’s more like sand. Grain after grain piling up on top of each other until there’s an avalanche.
At least that’s what history tells us.
But perhaps it’s different this time. Bloomberg’s Wall Street reporter tweeted this after Jamie Dimon, CEO of JPMorgan Chase, addressed investors last week:
[Click to open in a new window]
And apparently, just for effect, he was thumping the lectern every time he said ‘ever’.
Whenever something is the ‘best ever, ever, ever’…then it can only become the ‘worst ever, ever, ever’.
Sorry Doc, I didn’t mean to hit your leg every time I said ‘ever’.
Credit has never been better. Well, that explains why you’d pay US$34 billion for something that lost around US$600 million last year.
Snapchat’s initial public offering was a roaring success…the stock was up 44% on day one.
The company’s value is based on a multiple of revenue — NOT earnings. In case we forget, shares are valued on a price-to-earnings ratio (PE), and NOT a price-to-revenue (PR) ratio.
Although I think investors have bought the PR BS on these lossmaking tech darlings.
From a Bubble Comes a Bust
Doc, I was there in the late 1990s when the dotcom boom was taking place. All sorts of weird and wonderful ratios were dreamt up to rationalise the madness of men.
The only reason anyone would pony up billions of dollars for these cash-burning vehicles of self-indulgence is because credit has never been better…access to trillions of newly-minted dollars at the cheapest interest rates in 5,000 years.
Doc, I’m getting bitter and cynical, I can see it. Perhaps it is different this time. Perhaps the NASDAQ crash of 2000–03, when investors lost over 80% of their hard-earned money on these tech illusions, was the exception, and not the rule. That it’s ‘different this time’.
However, I’m sure it was billionaire Sir John Templeton —who in 1954 created the Templeton Growth Fund and in 1999 was named by Money magazine as ‘arguably the greatest global stock picker of the century’ — who said ‘The four most expensive words in the English language are “this time it’s different.”’
Do you think it could be that Sir John belonged to another era and that his prudence is no longer relevant in a world of never-ending credit? Or could we just be deluding ourselves?
A couple of weeks ago, I was reading an article in The Telegraph by Ambrose Evans-Pritchard titled: ‘Unpayable debts and an existential EU financial crisis — are Eurozone central banks still solvent?’
Doc, Ambrose is a pretty smart guy, and he’s worried that the European Central Bank (ECB) has made a rod for its own back by printing euros to buy back the bonds of technically-insolvent southern European countries:
‘Vast liabilities are being switched quietly from private banks and investment funds onto the shoulders of taxpayers across southern Europe. It is a variant of the tragic episode in Greece, but this time on a far larger scale, and with systemic global implications.
‘There has been no democratic decision by any parliament to take on these fiscal debts, rapidly approaching €1 trillion. They are the unintended
side-effect of quantitative easing by the European Central Bank, which has degenerated into a conduit for capital flight from the Club Med bloc to Germany, Luxembourg, and The Netherlands.’
The professionals — who do not want to be holding southern European debt in the event of political dislocation — are selling the ‘Club Med’ bonds at a profit to the ECB and running as fast as they can to the far safer investment options in the solvent European countries.
If the EU does fracture — Italy and/or France decide to do a Brexit — taxpayers will be on the hook to pay back the debt owed to the ECB. Ambrose continues:
‘Mario Draghi [President of ECB] wrote a letter to Italian Euro-MPs in January warning them that the debts would have to be “settled in full” if Italy left the euro and restored the lira.’
There you have it Doc: Credit has pushed Aussie home prices sky-high…well above wages growth. The best credit conditions ‘ever, ever, ever, ever’ have made billions for those whose companies lose money hand over fist. On the other hand, credit is being dumped by savvy European investors who know that if the proverbial hits the fan, it’ll get real ugly.
Doc, Sir John Templeton — who lived through the Great Depression — also said: ‘Those who spend too much will eventually be owned by those who are thrifty.’
That’s why I’m staying cashed-up Doc.
My reasoning is that, when those who’ve indulged in too much credit, believing ‘this time is different’, find out that it’s not, there’ll be plenty of bargains on offer from the worst investment conditions ever, ever, ever, ever.
Didn’t mean to hit you so hard.
Editor, Markets and Money