“Dude…those drugs are messing with your head. You should step away from the typewriter and get your mind right,” a friend told us last night. “You haven’t really been reckoning…you’ve just been kind of wandering. It’s sad to see. Take a nap.”
The “drugs” he’s talking about are antibiotics, and your editor choked down the last of them this morning. Hopefully, we’ll be less infected from now on. So we’re going to push on and hope our mind clears up enough to figure out if the easing of one emergency can actually cause another.
We’re talking about the total meltdown of the Aussie housing market, which is, after all, just a matter of time. Next Wednesday will see the release of the national accounts for June. Those figures will probably show the economy being less bad than previously expected. That might lead to the end of the “emergency setting” of the RBA cash rate at 3%, which will precipitate the decline and fall of ridiculously high Australian house prices (although this could be good for equities).
Hang on a second though. The GDP numbers will be tough to read because they’re distorted by government stimulus spending, which spits in the soup of the economy. In other words, it’ll be hard to tell at a glance how well the economy is really travelling on its own momentum versus how much of it is Kevin Rudd, Lindsay Tanner, and Wayne Swan with their hands on the boot of the economy pushing it down the road. Will the engine catch or sputter?
Right now, it’s coughing a bit. Figures yesterday from the Australian Bureau of Statistics showed that business investment was up 3.3% in the June quarter. Most of the increase came from a 5.3% rise in investment in machinery, plant and equipment. It looks like businesses are taking advantage of Federal tax break to front-load future investment now. Whether they really need it now, who knows?
For instance, we received this note yesterday from a reader who paints a different picture:
Good Afternoon. I am a subscriber to your Markets and Money newsletter and thank you for this great service. I subscribe to the Grays online website for their daily online auctions and lately I have noticed a substantial increase in the amount of capital equipment auctions and often for equipment that are still under service agreement.
Here is an example of one of today’s listings…
This might not be an accurate measure of what’s going on with business in Australia, however, I just wanted to bring to your attention for further investigation. Thank you again for your daily newsletter. Much appreciated.
You’re welcome M. And who knew it was a bull market in forklifts!? Maybe it’s not as surprising as you first think. You’d need a forklift to carry away the amount of BS being shovelled out by free-spending Keynesian politicians and the brainless economists who give them covering fire in the spineless media.
But we’ll have to take it is a given that the June quarter GDP figures are distorted in a way that makes it nearly impossible to find out how well the economy is doing. That uncertainty (government intervention diminishes the quality of our knowledge because it interferes with price signals) may prevent the RBA from raising the cash rate. Or it may not. We won’t know until the bank does something. Or nothing.
We’ve been saying all along, though, that the biggest threat to Aussie housing prices is the beginning of the tightening cycle in interest rates. The Aussie dollar was up overnight near 84 cents versus the greenback, partially in anticipation of the growing interest rate differential between the two countries. The U.S. dollar also fell against oil, which took a dip below US$70 on the front-month crude futures contract and then decided it liked it back above $70, which is just where it went.
You can take your pick of reasons for rising Aussie dollar strength…growing economy, yield difference versus the greenback…commodity currency benefitting from secular decline of the USD. But after you pick, you have to ask the next question: will the RBA raise rates because the economy here is healing? If it does, it will send the Aussie higher. But what will it do to house prices?
If you’re in the real estate industry, you’ll say “Nothing! House prices go up in all markets at all times regardless.” But if you have a brain and use it from time to time, you would have to at least entertain the possibility that climbing interest rates and the end of the first home buyers grant spell real trouble for the housing market and the marginal buyers who support it.
The housing market requires a constant stream of new buyers and a fresh supply of credit to keep demand for mortgage finance up. That’s the only way for new buyers to bridge the gap between stupidly high median house prices and real wages that are not keeping up with home price inflation. Yet as we pointed out yesterday, the government-backed mortgage finance operations are nearing the legislative limit on funding. Something is going to have to give.
Our guess is that it will be house prices. But you know that already since we’ve written in before. And besides, our main beat here is not property, but stocks. And it’s possible stocks – on the back of more energy deals and continue Chinese demand (see Baosteel’s prospective $300 million investment in coal and iron ore hopeful Aquila today) – could do a runner and sprint ahead of the property market (and bank stocks and listed property trusts at the end of their own little nice dead-cat bounce).
Don’t forget gold, either. It’s never far from our mind, nor our heart. Obviously the stronger Aussie dollar is bearish for Aussie gold bullion prices. On the share market side of the gold market, however, gold and explorers and producers may benefit from increased demand for ye olden yellow metal. Investment demand for gold stocks as U.S. dollar hedge is back.
Reuters is reporting that on Wednesday, ETF Securities, one of the backs of a gold metal exchange traded fund, saw its largest one-day inflow ever. The funds, “holdings jumped 7% or 211,500 ounces to 3.190 million ounces of bullion on Tuesday, from 2.978 million ounces the day before.” In the last week, the fund’s inflows are up 18%. Yowza.
And for those of you who began following (and suffering along with us) on the rare earth metals story, a new development today. Our story first began in June of last year when, writing a guest article at the Australian Small Cap Investigator, we tipped two Aussie rare earths shares. One was a producer, the other prospective.
Both got shellacked in the credit crunch, especially the more mature company that ran into a financing problem. But the underlying case for non-Chinese suppliers of some of the most essential and expensive elements for the modern technology and aerospace industries was still strong. Still is today, in fact. Even stronger, apparently.
The Times of London is reporting that China is ready to slap an export ban on rare earths in order to choke off any non-Chinese consumers of the elements. This affects Japanese, American, German, and South Korean companies to name a few. China has systematically and quite cleverly made itself the key global supplier of these elements. So what now?
For the consumers of rare earths, we have no idea. They are at the mercy of a limited supply. There’s no such thing as just in time lanthanides production. But for punters and strategic investors who have their eye on well-shaped rare earth ore bodies in Australia, or owned abroad by Aussie-listed companies, the story is playing out quite nicely, after a few bumps and bruises at the start.
Incidentally, ASI editor Kris Sayce is having lunch with the honchos of one of the rare earths shares he follows in the ASI portfolio. It’s not until the second week of September. But we’re keen to read his next report on the subject.
The China strategy on rare earths is still playing out. But you see another strategy playing out in solar cells. Today’s Australian reports that Chinese solar cell producers are selling their product into the global market at below the cost of production in order to gain market share and drive even low-cost producers in competitor countries out of business. Can it last?
You can sell your product below the cost of production for awhile, especially if the national government is subsidising the endeavour as part of a long-rate market strategy to own the bulk of the world’s manufacturing capacity. And for consumers – provided the product quality is good – it means low prices for awhile. But it’s also an unfair trade practice that could be taken up other countries with the World Trade Organisation, prior to resorting to less legalistic forms of conflict resolution.
Your editor got a note from an old friend who is running for Congress in the States. He asked, “With this current crisis and our long-term prospects bleak, why not move toward a more protectionist trade stance? Economically, what are the repercussions of attempting to level the playing field between America and countries that systematically under cut our workforce and product base? If Japan and china consistently strive to under bid is in all areas, why not close the gap at home through trade policies? Are we afraid they will call our loans?”
Our answer on Monday. Until then…we’re pleased to let you know our discussion of debt and what it does to a country – its economy, housing market, and stock market – is now available on DVD with a written transcript. There was quite a bit of discussion the Aussie property market that night. So if you’re interested in property, you’ll want to have a look.
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