There isn’t enough silver to go around

To date I haven’t posted much on gold and silver, a subject I intend to spend more time on in the near future (particularly on gold companies in Australia).

The following is extracts from one of the best silver articles I have read to date, from well-known silver commentator, Ted Butler. I encourage all to read the full article titled, A Presidential Bombshell.

Here is a quick summary of some of the points made in Ted’s article.

In the United States:
- In 1959, the US Treasury Department held approximately 2.1 billion ounces in silver bullion inventories plus 1.3 billion ounces in circulating coinage, for a total of 3.4 billion ounces of silver.
- By 1971, the Treasury held only 170 million ounces of silver bullion and most silver coins were removed by investors from circulating coinage and eventually melted into bullion.
- In only 12 years, the US Government transferred 94 percent of its holdings to the private sector (over 3.2 billion ounces).
- The US Government became a net buyer of silver again in 2001 to mint American Silver Eagles.

Silver per-capita

In the United States:
- In 1959, there was almost 19 ounces of silver for every person in the United States.
- Today the U.S. has no government reserves of silver.

Worldwide:
- in 1959 there were about 9 billion ounces of silver bullion in the world, with a population of 3 billion, there was a per-capita amount of 3 ounces for each of the world’s citizens.
- Today, there is a per-capita amount of silver of 0.15 of an ounce per person (1 billion ounces divided by 6.8 billion population).
- By way of comparison, the per-capita amount of gold bullion equivalent in the world has remained remarkably stable at around three-quarters of an ounce per person, for more than 100 years.

So if you hold just one 1-ounce silver bullion coin today, consider yourself wealthy. Likewise if you hold just 1 ounce of gold.

Further in Ted’s commentary on May 11, he quoted a speech from President Lyndon Johnson which was made on July 23, 1965. This is what President Johnson said:

"Now, all of you know these changes are necessary for a very simple reason--silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.
If we had not done so, we would have risked chronic coin shortages in the very near future.
Some have asked whether our silver coins will disappear. The answer is very definitely-no.
Our present silver coins won't disappear and they won't even become rarities. We estimate that there are now 12 billion--I repeat, more than 12 billion silver dimes and quarters and half dollars that are now outstanding. We will make another billion before we halt production. And they will be used side-by-side with our new coins.
Since the life of a silver coin is about 25 years, we expect our traditional silver coins to be with us in large numbers for a long, long time.
If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content."

Silver is rare. It's so rare, 99 out of 100 people wouldn't know about it. It’s a finite store of value with no debt or liability attached to it. Unlike gold it is also an industrial metal as well as a monetary metal. In 1959 President Johnson used the word’s “world shortage” and “silver is a scare material”. Less than 15 years after those worlds the price of silver rose from US$1.29 to more than US$50 in 1982. In 1959 there was 9 times more silver and 3.8 billion extra people than today! – so why don’t we hear stories of silver’s extreme rarity today? We only get a handful of gold reports on the news, and it will always be referred to in USD terms. Apparently the world is flat, not round.

Silver has become so rare for the first time in human monetary history there is more than four to five times more silver above ground than gold. Even more amazing is that silver has been manipulated so much by Governments, and commercial banks that it remains dramatically undervalued compared to gold. The silver market in dollar terms is one of the smallest and easiest commodity markets to manipulate. Total above ground silver is currently worth US$12 billion at current prices compared to almost US$4 trillion for gold. Keep in mind there is about 1 billion ounces of silver, and 4 to 5 billion ounces of gold. Something is not right here.

Gold-Silver Ratio

The historical gold/silver ratio (over many centuries) was around 15 to 1. The primary reason is that silver was around 15 times more abundant in the earth's crust than gold. Today the gold silver ratio is 80 to 1, almost double the average for the last 200 years of 33, and the average of 20th century average of 47.

Chart 1: Gold Silver Ratio over last 200 years
With available silver more rare than gold, silver has considerable gains to record. Gold will do very well, but silver should provide exceptional returns within the next decade. Another way to put it, the purchasing power of silver should rise greater than the purchasing power of gold. Some analysts believe silver will get to a gold/silver ratio of 1:1 within our lifetime. I think this is highly plausible and not out of the question.

Something has been keeping the silver price down for many years... It's Government, Central Bank and Commercial Bank manipulation... I will go into more depth another time, in the meantime Ted Butler's weekly commentary website is worth a bookmark.

- Scott

House Price Expectations – May 2009

The latest Westpac–Melbourne Institute Sentiment Survey asked an extra question this month on consumer expectations for house prices over the next 12 months.

All in all, across all categories consumers are currently balanced between those expecting a fall in price, those expecting a rise, and those who think prices will stay around the current levels.

What is most interesting from the survey:

Chart 1:
By State:
- Consumers in NSW and Vic were notably more bullish on prices with a net 6.9% and 2.1% expecting prices to rise respectively.
- Conversely the Resource rich states of Queensland and Western Australia were the most pessimistic. WA had the highest proportion of 'extreme' pessimists with 9.4% of respondents picking a decline of 10%+.


Chart 2:By household income:
- Those on low incomes ($21 to $30K p.a) were the most optimistic of house price increases, while those with an annual income of $81 000–$90 000 were the most pessimistic.


Chart 3:
By Age Group:
- Generation X and Y continue to be the most optimistic age group (those aged 18 to 34 in the survey) expecting house prices to rise.
- Those aged 45 to 54 on balance expect house prices to decline in the next 12 months.

Concluding statement from survey:

“Despite record low interest rates and rising rental yields, demand from investors has remained subdued to date. Price expectations appear to have been the crucial 'missing ingredient' with potential buyers in this segment still clearly very wary about the potential for significant price declines.”

What can be drawn from this?

This closing statement (above) from the Westpac–Melbourne Institute survey is spot on. I have been arguing about this “missing ingredient” for some time. It is the elephant in the room which many would-be home buyers have not been taking into consideration. More importantly, I would go further and say that purchasing power expectations is the missing ingredient with potential home buyers. I expect both price and purchasing power (relative to other investments) to continue to decrease for Australian houses.

Unsurprisingly the younger generations are those who continue to be most optimistic about future house prices. After all, we are the generation which has been offered free home owner grants on a platter from the Federal and State Governments. Most of us under 35 are too young to remember the last recession in the early 90s. Why would we expect the future to be worse? We have been conditioned to believe the economy will always get bigger and better.

The Baby Boomer generation, those who have a lot more of the property, have more buying power than the younger generations (due to nearing their working life as opposed to starting) and are more pessimistic about house prices. This should be of considerable concern. This demographic has a lot more financial leverage than the X & Y generations. When sellers outnumber buyers (just on demographics) there is a long-term problem for properties and business prices.

I also discussed previously on my blog in more depth on the great Australian housing bubble (see here). I stated that the resource states would be the first to really feel housing price pain. I used the example of a person earning over $100,000 per annum driving a truck at a fly-in fly-out iron ore mine in Western Australia. This person took on a large mortgage in inner Perth on the expectations that they would continue to work in the $100K job for many years to come. As expected, just like the mining bust, Perth is now out in front leading the housing crash (in both actual house price falls and future price fall expectatiosn). Over the longer term, I believe Canberra will be the last capital city to experience the worst of the falls due to it’s reliance on Government jobs, rather than business-oriented jobs, which is what the economy really needs. It is by no means immune. All house prices have a common denominator - debt.

- Scott

Accounting for deadwood

One of Australia’s great ponzi schemes is toppling. In the last two months, the two largest Managed Investment Schemes (MIS) have entered administration; Timbercorp (23 April 2009) and Great Southern Plantations (15 May 2009). Fortunately these companies have been allowed to fail. The market is accounting for deadwood in the system.

The MIS industry prospered over the last decade purely as more investment flows came into the companies each year by paying high short-term returns at the expense of long-term balance sheet sustainability (from future profits).

In many ways, the MIS industry is akin to the Babcock and Brown or Allco Finance model. Take low yielding assets that have a long investment time frame, sell the assets to investors on the sharemarket, inflate the yield numbers over the short term, and skim large amounts of fees off the top. This model worked brilliantly when the economy (and the money supply/credit/debt) grew consistently and individuals looked for investments to expand their wealth. Now the debt model is broken and the MIS industry has been exposed as a complete fraud.

However, the real fuel on the fire was the lure of a tax break. The tax rules on MIS schemes in the 1990s early 2000s made it ideal for investors who wanted both an investment and a way to minimize tax. In a way it was a voluntary savings scheme (similar to Superannuation), the scheme mangers were almost guaranteed to get a growing number of buyers for their schemes each year.

Like all ponzi schemes, the system starts to show huge cracks when the liquidity of buyers starts drying up.

The first major crack was an ATO crackdown in February 2007, which prevented non-forestry MIS (such as almonds, olives) from receiving upfront tax deductions. The increased uncertainty created from this no doubt have a significant impact on the financial sustainability of the MIS industry.

The second crack was under delivering investors. When the first timber projects were harvested, yields were well down on what investors were told a decade earlier. The assets (the trees) were considerably less valuable.

Third, both Great Southern and Timbercorp took on substantial debts to keep the schemes going. Taking on large debts (with less investor equity) in the boom times worked (ala B&B model). As we know with the Global Financial Crisis (GFC), debt-based models are no longer sustainable and companies are now rushing to raise equity at any cost. The MIS could no longer raise any credible equity or debt and the great ponzi scheme has been felled.

It turns out Timbercorp and Great Southern became the biggest of the MIS schemes because they were the best at selling schemes (with the tax break lure). As it turns out, they weren’t in the business of making fat profits via harvesting – ie. what investors were led to believe.

As an example of the largess of the industry, Great Southern spent $62.3 million on commissions, marketing and promotion of its products in the year to September 2008.

However, despite the commissions, fees, tax breaks and other incentives, lets not forget that the agriculture and forestry industry, like any investment, has risk.
The risk/reward relationship changed for the MIS industry substantially over the last 10 years. Risks were overlooked in the earlier years because of the lure of the tax break. Without the tax break, it is now known that TIM and GTP were high risk/low (no) reward investments.

Further, Agriculture and forestry is susceptible to serve weather conditions, particularly drought. This has no doubt impacted on expected yields and expected future profits. The 62,000 investors caught left holding worthless paper when the music stopped, like any investor, have to take personal responsibility for their investments. The financial/investment industry has its fair share of bad advisors who give bad advice on bad investments. Economists also don't have a crystal ball about he future on tax changes, climate influences etc. Investing is also about timing and discipline. Every investor must have an exit strategy for when things start to go wrong. As we now know the investment world no longer tolerates high debt companies. For instance, Timbercorp had debt gearing of 62.4 per cent in 2007. The charts of both Great Southern and Timbercorp show investors have been deserting the companies for the last 3 to 4 years.

All up over $10 billion in investment flows went into the MIS industry over the last decade, with and estimated $4.7 billion in tax breaks received.

As the following graphic details, Timbercorp fell with over $900 million in debts, while Great Southern owes around $700 million.

Chart 1: Total invested in MIS in last decade
source: Financial Review, 19/05/2009, page 61

Chart 2: Timbercorp’s investmentssource: Timbercorp website

Chart 3: Great Southern’s investmentssource: Great Southern website


Deflation to hit rural property prices

I’ve discussed a number of times that I believe there were continue to be deleveraging of debt across Australia and the world. All types of property in Australia are at high, immediate asset-deflation risk (commercial, industrial, residential and rural properties).

The collapse of the two largest MIS schemes should have a significant impact on rural land prices across Australia. During the last decade, MIS has been criticised by many rural communities for pushing up land prices (due to their investor and bank backed purchasing power) and accelerating the decline of many rural communities. Traditional farmers could not compete on land purchases, and many of the best grazing properties were turned into hardwood plantations.

Now with the collapse of Great Southern and Timbercorp there is talk of an immanent fire sale. Great Southern has 240,000 hectares, while Timbercorp has 120,000 hectares of property. Just like a bank taking back a default home mortgage, they will not be interested in holding onto all this surplus property. It will be dumped onto the market for whatever price they can get. We now have a reverse outcome to the last decade. The buying force of a the MIS industry pushed prices up dramatically, are now crossing over to the seller side. When administrators/banks are the sellers, lookout below… Severe asset-deflation is coming. The only hope is if a major foreign investor showed up to buy most of the assets.

Debt will continue to be the downfall for many individuals, businesses, and even Governments. Timing and discipline is key. We are no longer in a debt cycle.

- Scott

But house prices are supposed to always go up…

The latest ABS quarterly House Price Index (March 2009) for established houses show continued falls in five of Australia’s eight capital cities.

• The average decline across the eight cities for the 12 months till March 09 was – 6.7 per cent.
• The House Price Index has now fallen for the past four consecutive quarters.
• On an annual basis, only Darwin and Hobart prices have increased in price.
• Perth continues to be the worst performing market with a quarterly fall of – 3.6 per cent, with an annual fall of – 10.1 per cent.

Chart 1: Year on year and quarterly established house prices by capital city
The following graph gives a better picture of what has been happening to Australian house prices in the last 5 years.

Chart 2: Year on year Australian established House Prices
Source: ABS

But housing prices are always supposed to go up… right?
They said, "Buy now, or be priced out... FOREVER"

Cheers
Scott

The Inflation vs. Deflation Debate

There are a lot of articles going around about whether the world economy is facing Inflation or Deflation. Here is my take on the situation.

It’s asset-deflation

Deleveraging of financial assets worldwide has been driving short-term deflationary pressures on world money supply. I label this as asset-deflation or debt-deflation. Deflation has a snowballing effect. It comprises of:

a) Illiquidity. When buyers hit the sidelines on expectations that prices will fall lower in the future.

b) Spreads Widen. With buyers drying up, the difference between what the nearest buyer is willing to pay and what the seller expects to get paid widens. For example, someone may believe their house is worth $500K, but the nearest buyer is now at $400K, causing a spread of $100K. In other words, the house is only worth what the nearest buyer is willing to pay!

c) Many sellers exit the market at almost any cost. In a rising market, buyers out bid each other to acquire an asset. In a deflation environment, many sellers are forced into a position to sell to the nearest buyer (even though it may be vastly under what they believe their asset is worth). There doesn’t need to be many sellers in an illiquid market to make prices fall sharply (just like a lack of buyers). For example, if someone forecloses on their mortgage, the bank will offload the property back onto the market and get what ever it can. As unemployment rises, mortgage default rises, the quantity of surplus properties in bank hands rises. This causes more asset-deflation.

Baby Boomers

More so in the future, demographics will be a major influence on asset-deflation. The Baby Boomer generations is the largest living generation in the United States, Australia and many Western economies. As they move into retirement at the end of their working life, many will sell down their properties, businesses, and shares (held in the Superannuation accounts). However the following generations will be unable to match this selling pressure as they are starting our/half way into their working life. This factor alone will ensure the next 20 years will be vastly different to the last 20 years for financial (DEBT) driven assets.


Asset-deflation should be embraced

Prices have been lifted artificially high for too long, and now the market forces are accounting for misallocation of capital.

Governments, central banks, commercial banks and individuals fear asset-deflation. This is why the Australian Government is guaranteeing deposits, the States debt, forming a Rudd-bank (commercial property fund). The aim of the Federal Reserve (and central banks worldwide) is to ensure property has soft landing so people feel wealthy again. They now want to prevent massive asset bubbles from bursting as it will destroy the artificial wealth effect.

artificial wealth effect - the general population get angry when food prices, rent prices continually inflate (because of an expanding money supply), but also dislike when the sharemarket and property values fall in price (again, due to an expanding money supply). We can’t have it both ways.

Historically property prices are said to double every seven years. What is never mentioned is how much the money supply has grown every seven years, or how our purchasing power has decreased every seven years. For example, if you buy a property for $100K in 1988 and sell it for another house in the surrounding suburb, you would have to pay around $100k for a similar house. Come forward to 1998, that same house is now worth $200K, but if it were sold, you would still have to buy a similar house in that area for around $200K. House prices have doubled in this 10 year example, but overall purchasing power decreased as the M3 money supply more than doubled. This is an artificial wealth effect.

A couple more points. The 1970s and 1980s were ideal times to acquire and invest in property and the sharemarket. The market was in a Debt-cycle. From 1982 to 1999, commodities were largely lousy investment and lost purchasing power. The two cycles have an inverse relationship. We currently remain halfway through an average commodity cycle. The purchasing power gains will continue to occur for gold, silver and most commodities, while the purchasing power of investing in the sharemarket and property will continue to decrease.


By design the system must inflate

The monetary system is designed to inflate over time and reduce our purchasing power. The system is mathematically designed on an exponential growth curve.
These factors include: fractional reserve banking, mandatory savings scheme, government monetary/fiscal power.


i) fractional reserve banking.
Every time someone signs a new mortgage or a new bank loan, new money is created right there and then. Fractional reserve banking is at the heart of the flaws in today’s monetary system. By design, all debts can never be repaid. Exponential credit (debt) is guaranteed. Therefore many nations, businesses, individuals will remain in spirally debts and bankruptcies.

“The most powerful force in the universe is compound interest” - Albert Einstein

ii) mandatory savings scheme (Superannuation)
Superannuation, Government Funds (such as the Future Fund) artificially inflate asset prices over time as they provide excess liquidity to the market and a guaranteed source of continual investment. By design, these schemes also need asset prices to inflate in price.

iii) Government monetary and fiscal power
The reason we have such extreme volatility in the economy is that Governments central banks, commercial banks try to re-inflate bubbles whenever market forces try to account for bad debts through asset-deflation. Central banks (through monetary policy) around the world are currently lowering interest rates in a desperate attempt to manipulate investor decisions, to draw more financially able investors into the asset-deflation black hole. Central banks/Governments aren’t lowering interest rates so people buy more food or enter the rent market. The monetary framework today is all about saving the PRICE of financial assets (debt).

Through fiscal policy, Governments are giving financial incentives (free handouts - free as in using taxpayer money…), such as the first home owner grant to artificially keep house prices high. In the future (its already happening…), these insentives will be funded by Government-debt.

These actions ensure the longer-term money supply will inflate over time and that debts will become increasingly unsustainable.

iii) a) the US Government is insolvent

The US Government currently has a national debt of US$11.2 trillion. Right now the US Government is spending almost. In 2008, the interest repayments on the national debt is US$431 billion (around 14 percent of the annual budget). When you add future liabilities (of an aging 80 million US baby boomers) such as Medicare, Medicaid and social security – debt liabilities total over US$65 trillion.

The US Government cannot escape its debt situation without borrowing more debt. The Government will never consider reducing Medicare or pension liabilities. The result – more money has to be created, and purchasing power must continue to decrease.


Cause and Effect

Economics is all about cause and effect. Unfortunately many (including our current PM) do not understand both elements.

Fractional reserve banking, mandatory savings scheme and Government monetary and fiscal power are all causes. The consequence is Inflation (loss of purchasing power).

Likewise, many journalists continue to ignore the root causes of deflation, but are fixated on reporting the effects of (asset) deflation. For instance, many are now writing up articles about how wages are falling across many Western economies. Wages just don't fall on their own. Wages are falling as a consequence of something else happening. That is, businesses are collapsing due to DEBT, the drying up of liquidity in markets (including debt markets) and as a result, demand is collapsing. Consequently, as the number of unemployed rise, wages come under pressure as they should.


The CP”lie” – is money supply deflating?

Another mechanism now entrenched in today’s monetary system is the constant dilution (manipulation) of Government statistics. Unfortunately Governments and media are now fixed on the Consumer Price Index (CPI or CP-“lie”). It’s the intention of Governments (and thus the media) that it is possible to sell the idea of deflation through manipulated statistics (particularly CPI).

Currently in Australia, the official CPI rate is 2.5 per cent.


Australia’s money supply is still inflating

In the year to March 2009, Australia's money supply:

Broadmoney 12.4 per cent;
M3 increased by 15.1 per cent;
M1 increased by 8.1 per cent.

There is no deflation in the money supply numbers. It's all on the RBA website. It's the media's fixation on CPI that a drastically diluted scenario is continued to be created. We will never hear what real inflation is doing through the mainstream media.

Chart 1: Exponential curves keep expanding
source: Wikipedia

Chart 2: A chart from my second post last year.
The above chart shows the annual grow rates of Australia's M3 money supply. It's not a conincidence that both the sharemarket and property market continued to bubble in the last couple of years (as M3 grew at a faster rate). Expect M3 volatility like the 1970s over the next couple of years (at least).


Japan’s decade of deflation?

Money supply has consistently increased in Japan during the last couple of decades whilst it has experienced deflationary pressures. Asset prices (property, sharemarket remain well below the bubble levels of the 1980s). As the following chart shows, the inflator mechanisms of fractional reserve banking, monetary and fiscal policy etc have meant that Japan's money supply has continued to grow even those asset prices are still subdued.

Chart 3: But the money supply is still growing?
source: Wikipedia

Japan has already been through much of what the Western World is now facing: significant asset-deflation. (Obviously there were other issues going on such as the zombie banks, several stimulus measures etc which I will go into more depth another time).

Summary:

Assets worldwide are being deleveraged and revalued by the market. Asset-delfation is healthy and should be embraced by Governments, banks and individuals worldwide. The market is accounting for excess money and debt in the system.

In Australia the current CPI is 2.5 per cent p.a., banks are offering around 4 per cent interest for savings. Official M3 data shows overall money supply inflation is 15 per cent p.a.
- Aren’t our savings going dramatically backwards in the bank?
- The RBA shouldn’t be reducing interest rates!

Ultimately when it comes down to the inflation/deflation debate, ask yourself this:

* Will the Australian Dollar (or other fiat currency) increase or decrease its purchasing power in the next couple of years? (in this "deflationary" environment). How much stuff will it buy in the future compared to today. This is the crux of the issue.

Remember there is a huge difference between price and value.

- Scott

Australian house prices fall average $150K at auction

The strongest signs yet of the popping of the largest housing bubble in Australian history are gaining traction. The Australian reported yesterday (ABS data):

HOME prices have crashed across the country, with the number of properties sold at auction falling dramatically in the first three months of the year.

The Australian Property Monitors group says Sydney and Perth showed the sharpest falls, with average prices dropping by more than $150,000.

The top end of the market has been labelled as "dead".

The falls are based on 1st quarter 2009 vs. the 1st quarter 2008 and are based on auction values.

Average price changes by city (1st Qtr 2009)

Sydney – $616,237 (from $786,682),
Down 22%
(1742 homes sold vs. 2230)

Melbourne - $476,677 (from $513,304),
Down 8%
(2251 homes sold vs. 3211)

Brisbane - $439,000 (from $596,000),
Down 26%
(195 homes sold vs. 350)

Adelaide - $372,000 (from $452,000),
Down 18%
(123 homes sold vs. 598)

Perth - $372,000 (from almost $572,000),
Down 49%
(34 homes sold at auction over last 3 months)

The above figures are based on auctions. As the following numbers show, liquidity has fallen out of the auction market. The above data may not represent what many houses are selling for at the lower end of the market as they tend to be sold through private treaty.

Hello asset deflation!

Expectations have changed. Sellers are becoming more desperate. Buyers are drying up. This is asset deflation at its best. When the market is booming, buyers are in control and there is very small spreads (the difference between the buyers price and the sellers price). Indeed, buyers outbid each other which pushes the housing prices higher and higher each year. We have now hit reverse. The spreads have widened by $100,000s. People in Sydney may think their house is worth $800,000 – but the nearest buyer is around $600,000. Your house is only worth what the nearest buyer is willing to pay!

The lower end

The lower end of the housing market has also been very receptive to the extension of the first home owner grant in the last 12 months. Statistics show that first home buyers have been using the grant to lift their mortgage (DEBT) in many cases by more than the grant itself to secure the properties they really want. In a large amount of cases, over 90 to 95 percent of a purchase has been tied to a mortgage.

Chart 1: In February 2009, first home buyers accounted for 27 percent of all loans, with the average loan up 23 percent from a year ago.source: ABC News

Government Incompentance

Essentially the Government (Federal and States) and the banks have orchestrated a perfect storm. A sub-prime for young Australians. Young Australians who are at the start of their working life, have very little savings and tend to spend heavily on credit. It is also the generation more likely to be laid off in the current economic environment.

Wake up! About a month ago the Federal Labor Government shouted out across the chamber in Question Time preaching the success of the extension of the first home owners grant. The Prime Minister was first, followed by the Housing Minister, and the Treasurer. One by one they put on the record how proud they were at getting young Australians into the great Australian Dream. What they failed to mention was that added and abetted young Australians to acquire a life long debt burden. There are two tiers to the manipulation. A) let the RBA artificially lower interest rates (this is how the US got sub-prime remember?) B) Making the carrot bigger (First home grant). Governments worldwide are doing the same. In the end the market will win once again. Government's can't fight the market.

In addition, the May budget is almost here, and my bet is the first home owner grant will stay in place (possibly extended..) – just to try to keep the bubble going that little bit longer…

The Federal and State Governments will come to regret their words and actions. They have added more fuel onto Australia's largest housing bubble. Now the grants and the indebted mortgages will sink into the (asset) deflation black hole. There are lessons to be learnt here... Didn't anyone pay attention to the housing problems in the US, UK, European housing markets?

Australian media cover up?

Today and yesterday the media was more interested in a 27-year old entrepreneur from Melbourne who took on BrisConnections and gained a nice $4.5 million in only 5 months. However, there is next to nothing on this housing price/auction data in any of the major newspapers. It hasn't even made the top headlines in the evening news. What the hell is going on here? Auction prices have fallen 22% in Sydney in 12 months – and we've heard almost nothing… Is this selective censorship?

Regardless of the games of the Govt and media, the tide has well and truly turned on Australian property. Monetary policy and carrots have not and will not work this time.

~ Scott

Bull bounce in bear market

The Australian sharemarket is up almost 20 percent from the lows made just over a month ago chart. We've had a bull move in a bear market. More often then not referred to as a Bear Trap. Many market commentators are asking if this is the bottom? Whether it’s the bottom or not is trivial. Traders can make just as much money in a falling market than one which is rising. We should be more concerned about the fundamentals of the world economy. The structural problems of the broken world monetary system and the solvency of the United States and other countries.

Chart 1: The All Ords is up around 20 percent in the last month.

Chart 2: Longer-term, the 200 moving daily average provides a major resistance point.

Predictions

Short-term: If the All Ords can hold and stay above 3700, it will likely then push over 3900. Most likely, the All Ords will push back towards 3300 and resume its sideways channel.

Longer term: Expect the All Ords to push sub-3000 as the world economy slips closer to depression.

Longer-longer term: The printing presses are continuing to run hot and the paper will eventually find its way into the sharemarket (property market, commodities etc).


Some good news

Some of the best moves in the last month have come from the resources sector, in particular, copper companies. On the rocket list include: PNA, ABY, KZL, IVA.

If we examine the latest LME warehouse charts (below), its interesting to note that copper, zinc and lead have all made a plateau (in supply). Could it be that enough mines have closed to bring supply and demand into equilibrium? If so this could continue to be a short-term positive for the sector.

Chart 3:Copper, Lead and Zinc have plateau in stockpiles (for now) while nickel and aluminium are still in oversupply.

Some bad news

Much of the gains in the last month have come from stocks you wouldn't want to be holding in a bear market: the banks, property trusts, and other high debt or high liability companies (eg. RIO, OZL).

[As a rule of them, you need only look at what the top 4 banks, and BHP do on any given day, week or month to find out a general direction for the market. BHP alone makes up around 10 percent of the All Ordinaries Index)].


More bad news

We are now heading into the reporting season in the United States. There will be surprises. White elephants will continue to fall from the sky. Will the US actually let more big companies fail? Will they finally let GM die soon?


Add a little G20

The recent talkfest at the G20 nations meeting should provide little confidence to the world markets. The G20 is a farce. It's made up of debtor nations and printing presses. Their goal is to reinflate the world economy to create the next bubble, to create the next imaginary wealth effect. Instead of making structural adjustments to the monetary system, they think it will be easier to reinflate asset prices at the cost of taxpayers. Their actions will only worsen the current economic situation and intensify the structural problems of the world monetary system.

One of the outcomes of the G20 meeting:

use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries

In otherwords, continue to use IMF as a pawn (much like the World Bank) to provide more loans (debt) to poor nations, so that they remain in debt.

The other key point is that the G20 (particularly led by the US) need to keep the gold price down. A surging gold price threatens the viability of the current monetary system and purchasing power of the world's fiat currencies. The US, UK and many other G20 countries (including Australia) have already sold much of their gold reserve holdings over the last 20 years. The IMF must pull its weight… (the longer they can keep gold price down, the more time there is for private investors to accumulate).

Over $2 Trillion has been pledged by G20 nations in the last year! This does not include any additional 'quantitative easy' (printing money). What will the number be in a years time? (about $5 trillion perhaps..)

See this article on what each G20 nation has committed so far.


The Banks

The following chart visualises what has already happened to to some of the world's largest banks.

Chart 4:
Ausrtalian Banks

In contrast, the Australian banks have held up well, albeit they have fallen less than most banks worldwide and they are still alive and profitable. Indeed, the Australian banks may look tempting to an investor. The sector (XFJ.ax) has risen some 36 percent in the last month as the following chart illustrates.

Chart 5: Our banks are up, but still in a bear trend.
Australia's top four banks are now amongst the largest in the world. In late January 2009, the Australian reported that the big four were now in the top 20 banks world wide by market cap.

Westpac - 9th, worth of $US28.2 billion ($43.2 billion)
Commonwealth - 15th
NAB - 17th
ANZ - 19th

All four banks are ahead of previous mega-banks: Citigroup (US), Morgan Stanley (US), Barcalays (UK) and Deutsche Bank (Germany). It's almost the last man standing! Something is wrong... very wrong...


Lets say they got lucky

Former RBA Chairman Ian Macfarlane recently stated this about why the Autsralian banks are holding up so well (see the Business Spectator for full article).

the relative health of Australia’s banks is not much a result of their superior management, but pure luck: that they aren’t allowed to take each other over, and they haven’t had enough funds to invest in US sub-prime mortgages and CDOs.

There is probably a lot of truth to this statement. Australia and our banks have been somewhat lucky so far. I feel a lot more nasty surprises to come out in the next couple of years (B&B, Allco, ABC Learning types). The biggest ongoing concern by far is the property market (commercial, industrial and importantly, residential markets).

The Intelligent Investor has a great article which examines the balance sheet of Westpac in 2008 and compares it to 1989 (just before the last recession). Here are some of the key, concerning points.

1) Westpac no longer has any gold bullion
2) Is heavily exposed to the housing market. (54% of all loans in 2008 compared to 25% in 1989)
3) Now has tens of billions in Derivatives

Further:

The result would be devastating if Westpac were to write off 8.9% of its loan book over the next four years, as it did in the four financial years from 1990 to 1993 (see Table 3). Taking 8.9% of Westpac’s $313.5bn of loans and acceptances as at 30 September 2008 would imply $27.9bn of provisions.

Something smells funny

We can’t say categorically that Australia’s banks are making grave errors in their risk modelling. But we can say that something smells funny when the most a bank thinks it can lose on a $145bn mortgage portfolio in stress is $201m, or 0.14% of the portfolio. In fact, it sounds eerily similar to the thinking in North America before its real estate collapse.

At the least, it’s sensible to countenance the possibility that the banks have underestimated the risks, or perhaps the correlation of certain economic and financial factors under extreme scenarios. That being the case, the recent rally in bank stocks may provide a great opportunity to revisit your portfolio’s weighting in this sector.

Yes, I think Australia has been somewhat lucky so far, but its now starting to set in as the newspaper fill their front pages with job loss reports. Today it was Qantas (1,750 jobs gone). Just wait till the papers start reporting daily on the housing (price) crisis.

Cheers
Scott

Saving Printed Money

A couple of weeks ago Alan Kohler of BusinessSpectator.com.au wrote an article detailing a complete reversing in money habits of Australians. We are now net savers, the highest in nearly two decades.

Australians saved $15.1 billion in the December quarter, lifting the savings rate to 8.5 per cent, the highest in 18 years.

The amount saved during 2008, according to Westpac’s economists, was equal to all the savings of the previous 11 years combined, and it subtracted 5 per cent from demand – the largest drag on GDP from savings since 1960.

Saving used to be safe?

People always look to increase savings in uncertain times. Unfourtately, in my opinion only, most Australian's are saving the wrong type of money. Putting your dollars in the bank used to be a relatively safe, conservative investment a few decades ago, but no longer is for two main reasons.

#1) Our currency is backed by nothing
#2) You go backwards saving today due to inflation


Reason #1:

The Australian Dollar (and its physical coins) used to be backed by gold and silver. Well at least up until 1971, when U.S. President Richard Nixon closed the gold link, and in effect making all currencies around the world truely fiat, backed nothing more but our confidence in Government (whom prints the money). To best illustrate my point consider these two scenarios.

* If you put $1 dollar under your bed in the year 1801 and kept it there for 100 years, it would still be worth around $1. ie. It would still hold its purchasing power.

** However if you put $1 dollar under your bed in 1901 and kept it their again for 100 years, it would only be worth around 3 cents. The other 97 cents has been lost to inflationary (and we have had a massive decrease in purchasing power).

This is the first main reason why knowing the difference in money over time can mean a huge difference in your power to save. We currently live in a monetary environment which punishers savers and encourages inflation, debt and easy money.

So why the huge difference? A $1 coin 200 years ago was backed by gold and/or silver (gold standard). Today there is no link to gold, and through the printing presses and fractional reserve banking, the total supply of money grows by 1 or 2 digits each year. The more new money, the more inflation (decrease in purchasing power).

Australians are saving the wrong type of money

This is why I believe the bulk of Australians are saving the wrong type of money. There is a huge difference between currency and money.

Australian Dollars (currency), will be highly susceptible to future inflation (decrease in purchasing power).

Conversely, everyone should be saving “money” (gold and silver) which is finite in supply. Historically, gold and silver is the most sought after tangible form of money. Many monetary economists often refer to it as “real” money. It’s real, its finite and it becomes obvious if you try to manipulate and expand its supply.

Australia’s notes and coins

As stated previously, the notes and coins in Australia today are backed by nothing but our faith in Government. Today in Australia our coins have nickel, copper and other metals in them (see Trivia at bottom of post on the 1966 round 50 cent coin) – there is no monetary metals in them. There is really no tangible difference between a $5 note and a $100 note – except that the Government tells you one is more valuable than the other. In reality, our money today is backed by nothing. It hasn’t been backed since 1971, and right now it is being printed by the Government (including Australia) like there is no tomorrow.

So the “real” money Australians should be saving is gold, silver. Avoid cash. “cash is trash”. The importance of this difference should not be understated.


Reason #2:

Inflation statistics are manipulated (see a more detailed post I did >here<)

Last year in 2008, Australia’s M3 money supply (the broadest measure of money supply) grew by 15 percent. M1 money supply (notes and coins and short term deposits) grew by 12 percent.

So I ask why are official interest rates in Australia dropping like a falling knife in the last few months? (Ans: The central bank and Government is lowing interest rates because they want to manipulate investment decisions - get financially uneducated young people into the top of the largest property bubble in Australian history.)


If interest rates were left to the market (a scenario before we had central banks), interest rates would be climbing sharply right now into the double digits (and we wouldn’t have huge bubbles bursting in the sharemarket and property market). The market would actually be encouraging people to save (what should happen), and not encourage people to take on more bad debts.

So if money supply grew by 15% last year, why are term deposits paying 4.5 percent at the bank currently? Inflation is much worse than what the bank is paying out in interest!

It turns out Treasurer Wayne Swan was actually right! when he talked about the “Inflation Genie is coming out of the bottle” – but of course he no longer believes this.

Yes, money supply growth (inflation) will likely slow substantially in 2009, but “stimulus” actions taken so far, and the greater role of Government trying to centralise the economy will bring highly inflationary consequences in two to three years from now.

Don’t buy the statistics thrown willy nilly by the Government, by the ABS or by the media. Everybody knows that 78 percent of statistics are made up. The numbers being released are overwhelmingly and increasingly more un-believable.

(Refresher example: You only need to work 1 hour a week to not be included in the Unemployment Rate number. How many Australians have had their hours cut in half in the last 12 months, or working a lot less than they would like?)


Be concerned about inflation, not deflation!

In the last year many economists are talking about a deflationary depression. An important distinction must be made. The world, including Australia is experiencing asset deflation, all the while most economies are expanding their money supply (through printing, fractional reserve banking etc (measured via M0, M1, M2, M3 money supply)).

Ignore the advice the U.S. Government, the Treasury Secretary Timothy Geither or the Fed’s Ben Bernanke’s rhetoric (likewise the equivalent in Australia). Watch their actions instead. All signs point to more asset deflation and a huge amount of future inflation (of food, commodities, rents and other basics).

Asset deflation needs to happen. Bubbles must burst. Sharemarket bubbles are been bursting and we are already at pre-bubble levels in most major markets. Property markets are bursting as well and we are yet to see things really heat up in Australia yet.. It’s happening in commercial property already. Industrial, rural and residential will not be spared. Expect minimum 40 to 50 percent falls within the next few years.

Toxic Bank/Rudd Bank/Other Government-made institutions.

I will discuss these later this week, after the expected “big” news coming from Timothy Geither in the U.S. As i’ve said previously, no government-made institution or printed money can reverse the direction of the market. Expect news of more helicopter drops of money which will fall into the growing black hole (of debt deflation).

Part of the Govenrment response so far is the government guarantee of deposits in the major banks in Australia. Why would you want them guarantee dollars which are loosing purchasing power? If they had to save our banks the only way they could uphold their guarantee promise is to print hundreds of billions of dollars, thus lowering the purchasing power of your savings substantially.


Conclusions:

- Study basic monetary history
- Save some ‘real’ money, not fiat money
- Australia's money supply is growing at its fastest rate in 20 years, while Australia's gold production has been declining for over a decade. So which will increase its purchasing power in the next 10 years?
- Savings should be a core investment for anyone... but it depends what you save.
- Do you have trust in the bank guarantee to protect your inflated-dollars?
- If you could print your way out of trouble, Zimbabwe would be the richest nation on earth! (gold is worth Trillions of Dollars over there!)

Best,
Scott

--------------------------------------------
Trivia

Ever wondered why the 50 cent Australian coin is not round like the 20c, 10c and 5c? Well it used to be.

In 1966 the Canberra Mint released a round 50 cent coin (each round coin was progressively larger from 5c to 50c). The round 50 cent was 80 percent silver and 20 percent copper (containing 1/3 ounce of silver). Unfortunately for the Australian Government the price of silver appreciated some 60 percent for the year to the end of 1966. There was now more than 50 cents worth of silver in each 50 cent coin. As a result the coins were replaced the very next year with the 12-sided 50 cent coin.
The original 1966 round 50 cent coins now sell for over A$8 dollars each on eBay and are still seen as an (bullion) investment in physical silver. Around 14 million round-1966 50 cent coins were put into circulation.

Likewise the bronze 1 cent and 2 cent coins were removed from circulation in 1991 due to the metal (copper, zinc, tin) exceeding face value.
--------------------------------------------


--------------------------------------------
Trivial?

Recently I travelled on a holiday to Vietnam. The first question Vietnam’s Customs asks you on entry is:

“Are you bringing in more than 300 grams of gold?” ... now why is this?

A few years ago Vietnam had one of the lowest valued currencies in the world. It has been experiencing huge inflation. Last year the reported inflation rate of Vietnam was 26 percent. If this is the Government’s reported statistics – imagine what the real rate is....

Its a cash society. Everyone has little small bundles of cash hidden in their homes, but everyone knows that gold and silver is finite and that it has value.

It’s just that some countries understand the monetary significance of gold and silver. Australia is yet to learn this lesson.
--------------------------------------------

Beware Australian Housing - the debt bubble will burst

(*Note: this post is a rough draft and will be edited/added to in the coming weeks. More new posts will come around mid March)

Australian Housing Bubble?

Almost no other economic topic right now, is as hot and contentious as the direction of Australian housing.

I have come to the conclusion that Australian housing prices must fall, indeed all property prices (commercial, industrial, rural). Demographics, low interest rates, "a housing shortage", historically low interest rates, first home owner grants - cannot stop the direction of the market forces. Both debt and lending are now imploding.

Housing prices, just like the sharemarket go through cycles between boom and bust. However, in Australia I believe we have become very complacent. We think property is a sure fire way to wealth. We believe its normal for prices to increase 5 percent or 10 percent per annum (just like we believe we are recession proof because we haven't had one since 1991). Throughout history house prices have always busted after times of major credit (debt) expansion. A crash will come to Australia soon - its just a matter of timing. Timing is everything.

As Warren Buffett once said,

"You only find out who is swimming naked when the tide goes out."

The tide is well on its way out. Full employment is the key for most individuals on whether they can weather the storm. For others the size of total debts will prove the Achilles heal.


Unaffordable Housing

Australia right now has amongst the most expensive and unaffordable housing in the developed world. The reason it's so unaffordable is that four letter word, D-E-B-T. As we have had economic good times since the early 1990s, individuals and banks have felt more and more comfortable to take on my risk and more debt. With such a long period of job security (for most), we foresee our future to be bigger and better than the past.

As an example I once used, during the mining boom, Perth had a stella rise in housing prices. Miners were flying in and out of Perth and getting paid over $100,000 p.a. to drive a truck. With more and more people on higher incomes, inevitably the housing prices in Perth rose strongly against all the other major cities. To secure their dream home close to the city, buyers out bid each other and took on larger mortgages. Now that the mining boom has come crashing down, where is a mine truck driver going to find a $100K job to meet their mortgage repayments?

Right across Australia, how can the retrenched workers keep their mortgages?
Banks whom are tightening who they lend to... would they now give a mortgage to a low-wage metals factory worker in Western Sydney?
All of a sudden in the last 6 months, Australian individuals and banks have changed their outlook from that of increasing wealth to a complete reversal. Alarm bells are ringing. Some are asking questions about the future. Too many think things won't get bad here. Just like the patriotism we see on US news networks, many Australians think "everything will be different for this time, the Australian economy is strong and resilient!"...

As chart 1 shows below. Real house prices have vastly outrun real wages for the last 25 years. Even more startling is rental yields have just been so low. Negative gearing is one of the big reasons why rents have remained much lower than where they should be (but I will save rent discussion for another time).

Chart 1: Australian Real house prices, wages, construction costs and rents.

Australian housing vs the world

Australia has the most unaffordable housing – study confirms

A group called Demographia released a 'Performance Urban Planning' report ranking property affordability across various countries. The report concluded that Australia has the most unaffordable housing of all the nations surveyed. The report simply used a ratio of Median House Price to Median Household income. A house is "Affordable" if the ratio is 3.0 or less. It's "Moderately unaffordable" if the ratio is 3.1 to 4.0. It's "Seriously Unaffordable" if the ratio is 4.1 to 5.0. And it's "Severely Unaffordable" if the ratio is 5.1 or more.

Results: Australia sports a ratio of 6.3, which is both "Severely Unaffordable" and "Seriously Daloob." New Zealand comes in next t 5.7, followed by Ireland at 5.4 and the U.K. at 5.3. Owing to its large number of metropolitan areas in which there is a wide variety of median prices and incomes, the U.S. nationwide ratio is just 3.2.

On a city basis: The Sunshine Coast in Queensland is the least affordable. The Gold Coast came third, behind Honolulu, and Sydney was fifth, behind Vancouver. Melbourne and Adelaide were equal 12th and were still less affordable than New York (14th), London (16th) and Dublin (32nd).

(More on this survey, including a table of least affordable cities can be seen at Daily Reckoning)


Graphs of concern:

To put more of a perspective on Australia's housing bubble the following graphs compare Australia to some of the other developed countries, which have seen large declines in recent years.

Chart 2: Compared to the United States, Australian households are much more weighed down by household debt.

Chart 3: House Index - Aus, US, UK

Chart 4: Like Japan?


And the big daddy of all graphs (also seen on Chris Martenson's economic crash coarse series)

Chart 5: The history of US housing (in inlfatoin-adjusted terms) since 1890.
The picture speaks for itself. The recent housing boom and crash in the US has been like no other before it. Notice the 1970s and 1980s bubbles came back to pre-bubble levels when it burst. The US is in completely uncharted waters. A graph of Australian housing would look worse than this chart.
Chart 6: This is what WhoCrashedtheEconomy worked out
Australian household debt

If we think subprime was a mess in the US, things could potentially get much worse in Australia when housing prices come down. Indeed, a recession (an ultimately a depression) in Australia is tied to Australian housing (more than anything else). We just have too much debt tied to housing (inflated mortgages)!

Household debt as a percentage of disposable income

Household debt in Australia is alarmingly bad as Alan Kohler pointed out late last year.

In Australia the total debt to GDP ratio is at 160 percent, compared to 100 percent in 2000 and 50 percent in 1980. Household debt to disposable income is over 150 percent, compare to 50 percent in 1990.

Chart 7: Australian vs US household debt
The US reached a height of around 130. Australia has gone over 160. It doesn't matter if we don't have a high level of sub-prime loans in Australia - we are up to our ears in debt.

Once Australia's unemployment rate reverses from around 4% (if you believe that number) and heads towards 6 or 10 percent, housing prices will come down. Australian's are over leveraged to their houses, by taking out huge mortgages to pursue the Australian dream. Few people have taken into consideration that they may loose their job along the way. With no sound income, many Australian's will have no choice but to foreclose on their mortgage. Banks won’t want to hold empty houses, so an avalanche effect can take place when the banks flood the market with discounted homes.

Housing market tends to crash after the sharemarket.........

Sell the holiday house first?

Last year just before Xmas, I was holidaying on the southern coast of New South Wales. The town was, Tuross Heads, a small beach house/fishing town near Bateman's Bay with a population of about 2,000 people. I have never seen so many houses for sale in one spot. In some streets it was nearly every second or third home with a "For Sale" sign on the front lawn. If people expect house prices to come down, is it plausible that people will sell their beach house/investment property first? Is this a sign of the top of the bubble? With one in every 2 or 3 houses for sale in the street, the first couple of sales would impact the selling price for all the other houses in that street. Perhaps this is one reason why property prices (like shares) can fall so quickly if sellers are massing at the front gate. It's better to get out early, then to get out after everyone else.

Since this trip, 'For Sale' signs have become common place around many towns and suburbs. When I went home for Xmas, I noticed nearly 1 in 3 homes/BnB's/holiday houses along a river stretch was for sale. This is a visual sign that things are shifting...

But Australia has record demand for housing!

Some argue that Australian household prices will continue to hold its ground or gain in value in the coming years because we have record immigration levels and demand for housing.

Chart 8: Alan Kohler ABC News 28 November 2008

For a while I felt this argument had some traction. I've come to realise that this will probably not be. If anything, strong housing demand will mean much higher rent prices in Australia. Strong demand does not mean higher prices. For instance, world silver prices are falling right now, but there is now a 10 to 16 week wait to take delivery of silver from a bullion dealer. Silver demand has never been stronger. Prices can disguise real value. There are always market manipulators at play trying to influence under-educated investors, and one of the worst in the housing market is the Australian Government.

2007: The falls have started

Despite record high immigration levels and strong support from first home buyers, Australian housing prices fell in all states except South Australia and the NT.

Chart 9: House Prices 2008
Chart 10: Doesn't matter how you measured it - Australian housing prices will continue to fall.

Australian Government encouraging first home buyers

The Australian Government continues to encourage (through handouts and stimulus packages) Australians to jump into the property market. Buying a property is big investment decision, and unfortunately many buyers do very little due diligence.

I believe the first home buyers grant is extremely irresponsible. (Will add more on this soon)


Housing Deflation - The key ingredient is bank lending (more to come on this section)

There must be liquidity of buyers in the market who can absorb selling pressures. If buyers dry up and widen their spread, price deflation will take hold. Once buyers expect prices to come down $100,000 or so, they will sit back and not participate. In effect you get price deflation (prices fall quickly because you only need a few sellers in the market
without liquidity - home financing + willing buyers (who can absorb selling pressures) - the market falls

In a housing bull market, buyers compromise to the seller. For example is a home is advertised as $500,000, but the nearest buyer is at $490,000 (the spread is $10,000), the buyer is more likely going to raise their offer to $500,000 to get in before someone else.

However in a housing bear market, sellers start to outnumber buyers. Price spreads widen because buyers are no longer willing to take on increased amounts of debt because of uncertainty in the job market and wider economic conditions (ie. what we have today). But the key is expectations. If buyers and sellers start to expect prices to go down (such as selling lots of for sale signs and data which shows this), sellers start compromising and sell to the nearest buyer. eg. if the seller wanted to sell for $500,000, but the nearest buyer is $450,000 ($50,000 spread), they they are likely to do so, particularly if they are forced to because they have no job and the bank repossesses the house. In effect we end up with price deflation (asset destruction) - buyer liquidity dries up and prices fall rapidly (like in the US housing market today).

Price deflation has already hit the Australian sharemarket, with many small stocks registering very few trades now, because buyers feel safer to stay on the sideline. Those holding stock also want to exit the market and will sell at almost any cost to get out and switch to an alternate investment. In the housing market, more pressure will come onto the rental market. Rents will continue to inflate, while the underlying asset value of the house will fall. In effect rental yields will become more attractive over time (as they have been historically low).

Chart 11: Interbank Lending



The value of Australian housing prices in Gold and Silver

A few blog posts back I measured the All Ordinaries in terms of Gold and silver which showed that the Australian sharemarket actually peaked in 1999. It has only been going up in fiat currency terms (until the last year). The same applies to Australian housing. Australian housing has peaked and made plateau (stage 3 consolidation) between 2001 and 2005.

Chart 12: Just like the sharemarket, gold gave early warning signs a few years ago.


The data I have (till 2006) shows that Australian housing has fallen by 38 percent in terms of gold.

In 1986 you needed 208 ounces of gold to buy an average Australian home. At the peak of
the cycle, in 2004 you needed 923 ounces of gold to buy an average Australian home.

(silver chart to come shortly)


Conclusions:

- Debt, debt, debt. Australian's have way to much and its tied to our home prices. The world will continue to witness destruction (deflation) of debt ridden assets. We have seen it in the sharemarket. I will ultimately come to property.
- The ability of banks to lend (debt) is paramount.
- On the buyers side – liquidity (amount) of buyers must be outnumber sellers for prices to hold (and continue to go up). If buyers expect prices to fall, they will widen their spreads and price deflation will set in.
- On the sell side – Unemployment levels are the key, however the type of employment in the economy is critical. If people go from full-time to part-time or casual, or no employment whatsoever, they will be most vulnerable to defaulting on their mortgage. These sellers will sell to the nearest buyer regardless of price offered.
- Holiday houses and the most expensive houses in the cities will be most vulnerable.
- Many regional communities that rely heavily on commodities could face dramatic price declines if the commodity prices and shipping movements do not rebound very soon.
- Perth is the capital city most at risk. Canberra is probably the least at risk. In the long run, all areas in Australia are not immune.
- Above all, do not rely totally on what the Government says, the media, or myself. Everyone must do their own due diligence and come to their on conclusions and act accordingly. The free market is emotionless and does not care if you make money or loose money. Take responsibility into your own hands.

Cheers
Scott


[The 4 Corners program had a look at how the financial crisis has hit Australia so far on Monday night. Worth a look]