The Sharks Amongst the School

We live in one of those houses that shares a wall with its neighbour. When it’s quiet at night, you can hear them walking down the hallway. It’s a bit weird, but not life threatening. A few weeks ago we had a visit from a property valuer. Apparently our landlord wanted to refinance a loan. To do so, the bank requires a valuer to snoop around and guess what the property might be worth.

Clearly, the income derived from the property wasn’t a major factor in determining its value. It was only ‘out of interest’ that the valuer wanted to know how much rent we were paying. When we asked how much he thought it was worth, he responded by saying the landlord ‘thinks it’s worth a million dollars, but it’s probably less than that.’

In our opinion, it’s much less than that.

And today we’d knock another $50,000 off the asking price. That’s because our neighbours alarm woke us at precisely 4.30am this morning, blaring horrendous avant garde piano jazz. If it was Miles Davis’ ‘Kind of Blue’ or something similarly chilled out, it would’ve been rather pleasant…still weird, but pleasant.

After banging on the neighbours door, it turns out the person responsible wasn’t there, and the alarm had gone off by mistake.

Moral of the story, sort of, is don’t overpay for a house with a shared wall. Or better still, rent.

We raise the point about house prices because we’ve spent all week investigating where phase two of the China bust will hit the Aussie economy. It’s old news now that commodity producers, and the companies that service them, will suffer heavily as China endures a structural change in its economic growth patterns.

The question is, what’s next? Does it stop at the commodity sector or roll through into other parts of the economy…like housing? We’re just putting the finishing touches on a report for subscribers of Sound Money. Sound Investments that investigates the issue. We’ll have it published this afternoon.

Housing and house prices are at the top of our mind this week for another reason. We have our mother-in-law visiting from Adelaide. She wants to know why we’re ‘wasting’ our money renting. Why don’t we buy something? Over the long term, house prices always go up.

‘Like in Japan?’ we responded. ‘Or the US?’

Or any other number of countries, to be honest. But we are forgetting one thing…it’s different in Australia!

Having been up since before dawn even cracked, we’re feeling a bit mellow and philosophical today.

Why do we care about markets, politicians and central bankers? What’s complaining about their idiocy going to do? It won’t change anything. They’ll just stumble from one disaster to another, telling us they’re doing a great job and it would be so much worse if they hadn’t acted at all.

As my wife likes to say, people are just going around doing whatever the hell they want, with no regard for anyone else. It’s the age of the narcissist, the psychopath…or the narcissistic psychopath.

When did it all get like this?

Hmmm, could it be the result of an inordinately large amount of central bank induced credit flowing throughout the global economy? Credit money is really just a financial innovation away from being ‘real’ money that you can spend and buy social status with.

Financial innovation turned mortgage debt (a very long term, illiquid asset) into ‘money’ through the magic of securitisation. Easy money attracts all sorts of crazies in a suit. It’s just hard to tell who’s who. It’s why out of all occupations, it is nearly always bankers (and politicians for that matter) that don a conservative coloured suit before going about their ‘business’. A suit creates a disarming façade. It allows the shark to swim amongst the school, undetected.

If money is the root of all evil (apparently mentioned somewhere in the New Testament, so it must be true) then central banks are responsible for growing a forest of evil trees. And they’ve certainly got the watering can out. The strategy is to keep printing. Whatever we say is just screaming into the wind.

Our old, long-dead mate, Ludwig von Mises used to say something to the effect that ‘it doesn’t matter what you do after the boom, there is no way to avoid the final bust. The bust comes either via inflation and a currency system breakdown or via deflation.’

The world got a dose of the deflationary resolution in 2008/09 and didn’t like it one little bit. So it decided on taking the inflationary path. It will eventually lead to a broken currency system, and a reordering of the existing financial architecture. That is almost certain.

What’s not is the timing. The West is happy to take such a crazy path because most of those calling the shots will be out of power in a few years’ time. As long as they can prop the system up they’re happy. ‘Not on my watch’ is their motto. Narcissists.

So if you enjoy our whinging and finger pointing, please keep reading. But don’t expect it to change anything. As Mises noted, the bust is already a forgone conclusion. And after the Fed showed its true colours last week, that it will happen via a currency system breakdown is almost certain.

So sit back and enjoy the ride. Buy some shares in the hope the inflation will send some credit money your way before taking it all back in the collapse. If you’ve lent any of your savings to the government, get it back, quick smart.

And buy some gold; if you own a decent amount, it should look after you through the bust, and ensure you live to fight another day.

On that front, Diggers and Drillers editor Dr Alex Cowie included a nice looking chart in his update to subscribers last night. It points out that gold is about to enjoy a ‘golden cross’. That’s when the 50-day moving average crosses the 200-day moving average to the upside. Alex points out that the last time this happened, gold had a short correction followed by a 3 year bull market move.

Judging from the recent surge in the gold price, a correction is in order. But we think it’s a dip to buy.

Source: Diggers & Drillers



Greg Canavan
for Markets and Money

From the Archives…

Be Very, Very Scared
14-09-2012 – Greg Canavan

How QE Favours the Rich
13-09-2012 – Bill Bonner

To the Barricades!
12-09-2012 – Dan Denning

The Power of Pork
11-09-2012 – Dan Denning

Waiting on Beijing
10-09-2012 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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5 Comments on "The Sharks Amongst the School"

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Good article Greg. Narcissistic psychopaths are hard wired and programed by lack of insight and totally devoid of conscience this traps them into trading and selling their souls to the devil. In the work place they are the ideal bully. In the social setting they are invariablly the life and soul of the party. Manipulation of others is their craft. Always hard to spot they are like a chameleon. One dominant trait is the endless sense of entitlement at the expense of others. You can always hear them. Conversations start and finish with I. You good wife is definately on… Read more »
Claude Memma
Great Article. Just one small correction: It is not “money” that is the root of all evil, but “the love” of money that is the root of all evil. Chasing money for money’s sake is the root of all evil. Many people overlook that critically important distinction. It is OK to have and use money especially when it is made up of just/honest weights and measures rather than the fiat money we use today which in one sense, is not money at all but merely promissory notes or instruments. The other is that there is both a righteous Mammon (a… Read more »
@ Claude Memma. As in Teddy Roosevelt’s day, Mugwumps and Goo Goo’s just ended up lamenting the fact that they, and their kin, were to end up being the cannon fodder of war mongers and ticket clippers design. While reading Evan Thomas’ book The Warmongers we find ourselves beseeching Reed, from our contemporary readers’ station, to have had more prescience than he did and to have done more than her did with his soft and ample frame. After WWII the nasty’s kids have never even gone to war. In order not to revisit the 1916 past (a comment made on… Read more »
Mr. Canavan, Sir: You describe central bank induced credit and inflation, and predict an “almost certain” inflationary end in a broken currency system. The policies that you criticize are often characterized by other sources in the last few days as “uncharted territory,” implying that these policies are new untried tools. But the inflation and credit effects to which you refer are only Point 2 of a 3 pronged “uncharted” policy: 1) denigrate gold as money, praise currency and Govt paper as money, (remember the Bernanke/Ron Paul encounter) 2) the belief that inflation will lead to prosperity, by lowering the burden… Read more »

You are right Claude. Very insightful critical importance distinction which escapes the majority including my self, until now. Ivor NZ

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