“Frankston is dead” declared the missus to your editor yesterday afternoon.

Not literally of course.  We know the bayside suburb has a reputation for being a bit rough.

But the idea the whole suburb could have succumbed to a drug overdose or a drive-by shooting seemed extreme.

Anyway, we like Frankston.  We’ve lived in and around the area for the past twelve years.  And we’ve no intention of moving anywhere else.

Thankfully, the missus clarified her statement, “There was hardly anyone at the Bayside Shopping Centre.  The shops were empty.”

We’ll have to take her word for that.  Sure, it was later in the day – about 3pm on Sunday.  But you’d think that retailers would be doing a roaring trade on the last shopping weekend before Christmas.

You’d be wrong.

The retailers are copping it.

And who’s to blame?  Naturally it’s a combination of their lack of initiative, and government intervention.

We wrote a few weeks back suggesting you should boycott the Harvey Norman stores.   Company chairman Gerry Harvey had called for online shoppers to be slugged extra taxes.  For the crime of buying goods overseas.

Well now someone else has joined him.  Today’s The Age newspaper reports:

“Retail billionaires Solomon Lew and Gerry Harvey yesterday revealed that they are speaking with sector colleagues about mounting a campaign against the government over what they claim is an uneven playing field.”

Mr. Lew was quoted as saying:

“The fact that offshore online retailers aren’t required to levy duty or GST creates an enormous competitive advantage for foreign businesses selling into Australia.  These businesses don’t pay our taxes, employ our people or contribute to our economy.”

Do foreign retailers really have a competitive advantage over Australian retailers?

Foreign online retailers may have a price advantage, but not a competitive advantage.  I mean, online retail sales only accounts for 3% of all retail sales.

And surely Aussie retailers have a competitive advantage of being here, rather than being on the other side of the world.

But as I’ve pointed out before, it’s not all the fault of the lazy and arrogant retailers.  The government has a lot to answer for too – red tape, minimum wages, and import duties.

What the billionaire retailers Lew and Harvey should do is lobby the government to reduce or eliminate import duties.  That would be better than lobbying the government to increase your taxes.

Besides, in the end, asking the government to apply GST to overseas online sales will be a case of Australian retailers shooting themselves in the foot.

Consumers don’t buy stuff from overseas because it’s 10% cheaper.  It’s just not worth it.  Most wouldn’t bother buying something for $45 overseas and wait two weeks for delivery if they could buy the same item down the road for $50 and get it now.

The reason most buy online is because prices are 20%, 30% and even 50% cheaper.

The last time I wrote to you on this subject many Money Morning readers wrote in saying they bought all sorts from overseas – computers, bikes, fridges!

Anyway, as I say, slugging a 10% GST on online sales will do more harm to Aussie retailers than good.  If you’re able to buy an item for $25 overseas at a 50% discount to an Australian store, then a price increase to $27.50 isn’t going to stop you buying it.

But what it will do is leave you with $2.50 less in your pocket.  That’s $2.50 you’ve been forced to give to the government in tax rather than $2.50 that you could have spent at an Aussie retailer.

Even for bigger ticket items, if you buy something for $800 online, an extra $80 isn’t going to stop you buying it if the alternative is paying $1,500 or more at an Australian store.

All it means is $80 being transferred from the pocket of the consumer into the ravenous pocket of the government… and $80 less to be spent at a local retailer.

But according to News Ltd, “Debt binge is in the past for shoppers”.

The article claims:

“Australia’s retailers have been doing it rather tough.  Despite the spectacular growth in employment and strongly rising aggregate household income, retail sales have been surprisingly weak.

“While the retailers are screaming, in the longer term what has happened is something very positive for our economy.  There has been a very fundamental change in our economic behaviour.

“It is not so much that we have stopped shopping, rather it is all about our savings habits and use of debt.”

Of course, the article is relying on the Australian Bureau of Statistics (ABS) national accounts which supposedly show “we are back to saving 10c in the dollar of income.”

As we mentioned last week, the ABS advises caution when using the household savings rate.  Simply because it isn’t measured directly.  It’s only deduced by taking away total household consumption from total household income.

What remains is called savings.

We’re sceptical about this sudden supposed thriftiness.  If it’s true then it’s great news, but something doesn’t quite seem right… although to be fair we can’t quite put our finger on what it is.

We’ll keep thinking about it…

Until then, here’s a chart of lending commitments over the past twenty-odd years, shown in millions of dollars:

Source: RBA

Followed by a chart of bank liabilities since 1989, also in millions of dollars:

Source: RBA

And the supposed household saving rate since 1985, likewise in millions:

Source: RBA

So, are households really saving all this money?  Or is there something the figures aren’t showing?

I mean, take a look at the household consumption numbers covering the same period:

Source: RBA

The economy hasn’t seen an almighty drop off in consumption.  In fact, the level of consumption has remained reasonably constant.  Even during the global financial meltdown in 2008 and 2009.

But is it about to stall?  Is it about to fall off a cliff?

So, what can explain it?

Our initial guess – and it’s only a guess – is that what we’re seeing is the consequence of the lop-sided Australian economy.  Not that the charts above necessarily show this.  We’re just drawing a line (maybe a long bow if you want to be critical) from these two contradictory charts to consider what’s really happening in the economy.

Remember that an economy built on credit only appears to work.  It makes you believe the economy is growing.  But it’s only growing when credit grows.  It’s false growth.

This can flow across the entire economy because banks are willing to lend on the basis that the booming parts of the economy will subsidise the non-booming parts of the economy.

Businesses and households who benefit from being subsidised are able to meet their commitments thanks to the subsidies and continued lending by the banks.  Businesses make profits and people earn income.

But it’s all subsidised income.  Everyone is living off the subsidies of each other.  And of course, everyone is living off the wealth of the only truly profitable sector of the economy… at the moment that’s the resources sector.

Which, in itself is living off the subsidies from the Chinese economy and its bailouts.

Hence why many businesses continue to roll-over debt into the future rather than paying it off.

And why many households do the same.

Simply because they can’t afford to pay it off.  Not without downgrading the lifestyle or business revenues they’ve become accustomed to.

But when credit markets tighten – as they have – the growth in credit declines.  Even though in nominal terms it may still increase.  But the slowing growth of credit is bad news for a Ponzi economy.

A Ponzi economy needs to continue growing at a rapid rate.  Debt needs to be rolled over, plus those borrowers need to increase debt in order to make new purchases – to maintain their lifestyle, remember.

Finally, the Ponzi economy needs new borrowers to spend otherwise the growth rate drops.

But when banks are worried about the debt they’ve already got on their books, they might be reluctant to take on any more exposure.

So, perhaps it can be argued that the increase in the household savings rate is just a result of banks not lending as much of depositors’ money as it is to do with people saving more.

In other words, what we’re wondering is that perhaps the actual savings rates haven’t changed.  The genuine productive parts of the economy are still saving, but the unproductive – or subsidised – sector of the economy is no longer spending.

Australian’s haven’t become more frugal out of choice.  They’ve become more frugal – if at all – out of force.

Rather than the savings having increased maybe what’s happening on the other side of the ledger is what has changed.  The rate of credit growth has stalled.

Borrowing has ground to halt because of bank nervousness and because the debt binge was brought forward due to government incentives such as the first home buyers bribe.

In that case, savings will build up.  But only from those that were already saving.  Those that didn’t save because they were too busy borrowing are now finding it more difficult to finance their lifestyle.

They aren’t saving more.  They’re perhaps just not increasing their spending as much as before.  The Ponzi economy is slowing down.  The retail sales figures show you that.

Spending will slow not because they’ve chosen to, but because they’ve been forced to.  They’re being forced to downgrade their lifestyle.  Not because the economy is booming, but because they can’t get the finance to keep growing their spending forever and maintain their lifestyle.

The recent increases in interest rates wouldn’t have helped either.

But whereas the News Ltd article claims that savers are stocking up for future spending, if we’re right then that’s not the case at all.

It’s merely payback time for years of credit growth that’s grown on the back of a lopsided economy.

Does that make sense?

We could be wrong.  We’re only guessing.

But to us it looks as though the household saving rate is giving the market a false signal.  A red herring.  Savings haven’t increased, it’s just the supply for new borrowing has dropped thanks to the bringing forward of borrowing due to government incentives.

Cheers.

Kris Sayce
For Money Morning Australia

More annoying banter from your editor to the ASX:

“So when can we expect the ASX to make an announcement on this?

“I’m sorry, but this is a no-brainer. As I say, the ASX’s own website states: Timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and ASX have a legitimate interest.

“It’s no excuse to say that there wasn’t any price action therefore the ASX can’t investigate. You can’t know if the news will impact the price until after the news has been released. Under ASX rules the news must be released under the reasonable person test. If a reasonable person expects that it could impact the share price then the news must be released. There’s little doubt that if this information had been made public at the time it would have impacted the price and therefore it should have been made public. Or is the ASX’s view that it’s OK to keep some information secret because it may adversely impact the share price?

“The ASX is doing itself a major disservice by not immediately asking NAB and Westpac to explain their actions. More importantly, the ASX is doing investors a major disservice. We can only wonder what other information the ASX is conspiring to keep secret from investors!”

It’s no wonder your editor receives so few invitations to dinner parties. Considering how annoying we can be!

And thanks to Money Morning reader Dean for bringing our attention to this story, “Law Firm to Launch Class Action Against Aust Miner Oz Minerals”

According to the news report:

“Slater & Gordon practice group leader Van Moulis alleged OZ Minerals failed to release important financial information between February 29, 2008 and December 1.

“‘The market relies on being fully informed and with OZ Minerals, we believe, shareholders were sadly let down,’ Mr Moulis claimed in a statement

“Investors have alleged OZ Minerals breached its continuous disclosure obligations and understated its liabilities by about A$300 million.”

It makes you wonder if short-sellers in Australia’s banks could launch a class action against NAB and Westpac for non-disclosure of the Fed secret loans. I mean, there’s little doubt that if investors had been aware of these loans it would have had a further negative effect on the share price.

Short-sellers could have made a killing if NAB and Westpac had fully disclosed the secret loans.

In fact, non-disclosure of the loans could have resulted in many short-sellers losing a lot of money as bank share prices rallied. As investors were led to believe Australia’s banks were strong and secure.

As I’ve said before, I’m no legal eagle, but we’re sure investor protection goes both ways. If OZ Minerals can be sued for non-disclosure of negative information, why shouldn’t NAB and Westpac?

In both cases investors have been harmed. We’re struggling to see the difference. Perhaps if you’re a lawyer you could drop us a line to let us know.

On that subject we notice Reserve Bank of Australia (RBA) assistant governor Guy Debelle has made a half-baked attempt to justify the bailouts.

As you’d expect, he doesn’t mention NAB and Westpac specifically. In a speech to the 23rd Australasian Finance and Banking Conference, Mr. Debelle said:

“The RBA participated in the swap line [with the US Federal Reserve] to help distribute US dollars into this time zone… It did not reflect any issue with the Australian banking system’s own need for US dollars. The funds provided under the swap line were cheaper than the extremely wide market price at the time. As a result, Australian based banks availed themselves of this and in a number of cases on-lent the funds to banks in other jurisdictions.”

What utter nonsense.

You’d think an RBA assistant governor would understand how these things work.

On any given day a bank may need to roll over millions or billions of dollars’ worth of debt. If – as was the case in 2008 and 2009 – credit markets seize up, the bank still has to repay the loan. In normal circumstances it would simply take out a new loan to pay for it. But at that time it was much harder.

Mr. Debelle’s own chart proves that:

In a nutshell, it shows that debt became more expensive. It became more expensive for two reasons – first was the risk premium demanded by investors. And second was the drop in the supply of debt buyers.

It’s for these two reasons why the Aussie banks had to crawl to the US Federal Reserve and the RBA for emergency funding.

This whole idea that the Aussie banks were sitting back and licking their lips at getting hold of some cheap funding in order to earn a few dollars profit is just ridiculous. But, it’s the kind of excuse that the mainstream press will fall for.

Just remember what thin capital margins the banks run on. Failure to roll-over even a small amount of funding means that the banks’ capital levels slump.

The article of page 45 of today’s Australian Financial Review (AFR) shows you that. The margins are so tight that according to the AFR:

“If ANZ was forced to lift its risk weighting [on some corporate debt] from 65 per cent to 100 per cent, it would need to find enough capital to support an additional $50 billion of loans.”

In other words, according to analysis from Axiome Equities, ANZ is claiming certain assets on its books are less risky than they really are… just so the bank can hold less capital on its books.

Incidentally, we like the closing paragraph at the end of the article, “A spokesman for APRA declined to comment citing provisions under the APRA Act.”

That would be the Section 56 secrecy provisions of course. Since when was secrecy an investor’s best friend? We’ll ask ASX that question the next time we pester them…

Anyway, yesterday it was Commonwealth Bank of Australia’s [ASX: CBA] turn to have a [ahem!] so-called computer glitch.

Don’t panic, the bank said. Everything is under control. Today’s AFR quotes from the CBA media release, “At most, up to 5 per cent of CBA accounts were impacted.”

Well that’s alright then.

Computer glitch indeed. The fact is, it’s another sign of the systemic failure of the modern banking system. And even scarier is the fact that so few people are aware of it. In no small part thanks to the incompetent mainstream press.

As you know, they’ve been almost deathly silent on the National Australian Bank [ASX: NAB] and Westpac [ASX: WBC] Federal Reserve Bailouts. Aside from a half-baked article in the Fairfax papers – although bizarrely, not in the Australian Financial Review which didn’t cover it at all – and an even more bizarre attack on your editor by the same organisation’s CBD column.

Why the CBD column didn’t report the actual bailout instead of ridiculing your editor is something only it knows.

So ignorant (and we mean that kindly, not meanly) are most people about the secret loans that we noticed this comment by MrBungle in the comments section of an article in yesterday’s The Age about the Commonwealth Bank “glitch”:

“‘Are people aware that during the global financial crisis that two of our major banks borrowed $5b from the US Federal Reserve and the RBA borrowed $53b from the US Federal Reserve?’

“Ok, now that I’ve stopped laughing (after about 10 minutes) I’ll ask you this George…

Point me to some evidence of this mate, otherwise you’re obviously not wearing your tin-foil hat tightly enough…

“That is, they’ve got at you ! ;-D Seriously tho, a link to evidence of this would be appreciated…”

MrBungle – if that’s his real name – was having a pop at another reader who had mentioned the secret loans.

It gives you some insight into how uninformed the majority of the population is. Most people have been trained to believe everything they read in the mainstream press. And they’ve been trained to believe that the current banking system is normal.

That it’s the result of progress in banking. And that today’s system is obviously so much better than how things used to be because, well, it’s modern and we know better than all those clowns who used to carry gold and silver around in their pockets.

But take a look at the other news stories to fill page 45 of today’s AFR:

“ANZ slated for ‘inadequate’ capital holdings”

“CommBank abused franking credits, says ATO”

“Mortgages not retired”

The last story states, “Almost half of Australians won’t pay off their mortgages before they retire…”

So much for the dream of retiring at fifty and then playing golf non-stop for forty years.

And then look at this story from The Age:

“Property chiefs warn on units glut”

Don’t tell me there’s an oversupply of housing already. What happened to the “chronic housing shortage” the property spruikers have been banging on about for years?

I tell you what happened to it… it never existed.

It was just a beat-up by the vested interests. It was one of the many fraudulent excuses they used to cajole young and old into paying ever greater amounts for houses.

But as we’ve been writing for the past two years, the numbers never really stacked up.

Take these numbers as a perfect example of the joke that is the so-called housing shortage. According to the Australian Bureau of Statistics (ABS) in 1998 there were 7,015,200 occupied private dwellings.

At the same time, according to the World Bank, Australia had a population of 18,700,000.

That gives you an average of 2.66 people per private occupied dwelling.

Fast forward a few years to 2010, the ABS reckons there are 8,395,000 occupied private dwellings. And the ABS population clock claims there are 22,557,247 people living in Australia.

Now, remember that Australia has a “chronic housing shortage.” That there has been a massive underbuild of housing, especially over the past five years. All that said, what’s the average number of people per private occupied dwelling?

It’s, erm… 2.68.

We’re no statistician, but we’re pretty sure that at two decimal points your statistical chaps would call that a rounding error. The fact is, the number of people per dwelling hasn’t changed in twelve years.

Where’s the shortage of housing?

Yet somehow, despite that startling revelation, the mainstream press has been hoodwinked into believing the property spruiking spin – that Australia has a chronic housing shortage. When in reality it has nothing of the sort.

In fact, if we believe the property developers quoted in The Age, we’ve got the opposite of a shortage. We’ve got a glut.

But look, we’ll take The Age article with a grain of salt. It’s based on what two property developers are saying. They are clearly not impartial observers and likely have some reason for pointing out the lack of a shortage.

Besides, you don’t need to listen to them anyway. The numbers speak for themselves.

More shocking is the fact that more people are approaching retirement and old age still mired in debt.

And other numbers from the ABS show you what a difference it can make to an economy. And why it’s no surprise retailers are feeling the pinch. According to the ABS, in 2008 the mean weekly housing costs for a person without a mortgage was just $33.

That’s right, $33.

But for a person with a mortgage, the mean weekly housing costs were $384.

If more people are stitched up with a mortgage for longer, there’s no doubt that it means more money spent on servicing mortgages, and less money going towards savings or consumption.

And not only that, but thanks to the suckering in of first home buyers in recent years, they’ll have even less disposable income than if they’d remained in a rental property.

Occupiers of rental housing only have a mean weekly housing cost of $267 in 2008. That’s significantly less than the person with a mortgage.

As we see it, the poor sales and profits figures from retailers in recent months are set to continue into 2011. And the idea that Australia’s miracle economy will continue to prosper is likely to flounder in a sea of massive personal debt.

Oh, and as for the idea that Australia’s savings rate has increased. Take that with a grain of salt too… the ABS certainly does. The mainstream has lauded the 10.1% national savings rate as being a sign of lower debt.

This is what the ABS has to say about it’s own statistic:

“Household saving in not measured directly. It is calculated as a residual item by deducting Household final consumption expenditure from Household net disposable income. As the difference between the two aggregates is relatively small, caution should be exercised in interpreting the Household saving ratio in recent years, because major components of household income and expenditure may be subject to significant revisions.”

We’re wary about ABS data at the best of times. But when they tell us to be cautious about it themselves then that’s exactly what we do.

Cheers.

Kris Sayce
For Money Morning Australia

Seeing as we’re in the midst of witnessing the collapse of the Australian housing market, I thought it would be appropriate to stick with the subject for today.

But before I do, a quick note about the G20 meeting over the last few days.

You can read the full text of the Leaders’ Declaration here.

We got part of the way through it, but quite frankly they couldn’t have made it more boring and clichéd if they tried.

However, there was one point worthy of note. It was this rather long-winded passage:

“Persistently large imbalances, assessed against indicative guidelines to be agree by our Finance Ministers and Central Bank Governors, warrant an assessment of their nature and the root causes of impediments to adjustment as part of the MAP, recognizing the need to take into account national or regional circumstances, including large commodity producers. These indicative guidelines composed of a range of indicators would serve as a mechanism to facilitate timely identification of large imbalances that require preventive and corrective actions to be taken.”

Far out!

It’s funny, but as we read that statement we had the image of the Fairy Ruddfather in our mind. We wonder why!

Amongst the bureaucrat-speak, what the G20 is trying to say is this – it will devise some fancy indicators so it can identify and prevent the next financial meltdown.

Yeah right… they’re gonna figure that one out amongst themselves are they. We wonder which brains-trusts they’ll have on the job – the finance ministers, the banks and the mainstream economists we dare say.

But here’s some late breaking news for them. Some news that could save them the trouble of trying to create a fancy new indicator.

You see, little do they realize it, but such an indicator already exists.

That’s right, they don’t need to bash their half-a-dozen brain cells together to come up with a “range of indicators”. The one we’ve got is perfectly capable of identifying any problem you like in the market.

If you’re a long time reader of Money Morning you’ll know exactly what I’m talking about. If you’re a new reader then let me give you a clue… actually, blow that, I’ll just give you the answer – interest rates.

It’s the indicator that’s been used for at least hundreds, maybe even thousands of years to gauge risk. And it’s the best indicator there is to identify imbalances in an economy.

The trouble is, the very same politicians and central bankers who are looking for a new indicator are the ones that have helped try and destroy the current one – the interest rate indicator.

Rather than appreciating the purpose of interest rates as a measure of risk and the price of money, politicians and central bankers instead choose to use it as a way of expanding asset prices into asset bubbles.

Remove the distortion of the interest rate by the pollies and bankers, and voila, you’ll simultaneously remove almost all of the so-called imbalances in the global economy.

But, unfortunately, to do so would mean the pollies and bankers would have to admit that only the free market is best placed to set the level of interest rates. And for a breed of people whose sole purpose in life is to interfere and meddle, that would be impossible.

Anyway, we look forward to what they come up with. Whatever it is, it will only result in even greater levels of interference in the markets, and therefore even greater damage to domestic and international economies.

Now, back to our main subject…

The Real Estate Institute of Victoria (REIV) announced today:

“The Clearance rate this weekend is 61 per cent, compared to last weekends 59 per cent.

“There were 836 auctions reported this weekend, of which a total of 508 sold and 328 were passed in, 210 of those on a vendors bid.”

Funnily enough, last week the REIV said that “920 [auctions] expected next weekend…”

Which tells you that roughly 10% of the auctions that were supposed to take place this weekend didn’t. Or if they did, the real estate agents don’t want to tell you about them.

In other words, rather than a clearance rate of 61%, you’re looking at a clearance rate closer to 55%. And that’s for Melbourne which is supposed to be the housing auction capital of Australia.

And if you look at the handy chronology of auction results and previews on the Castran Gilbert Real Estate website, you can see how the number of actual auctions taking place each weekend is becoming significantly less than the number predicted the week before.

The trend is telling you that more and more properties are going up for sale, but fewer and fewer are being sold.

You can expect this to get worse as sellers become ever more desperate to flog off their over-leveraged properties… and so much for the property shortage, the REIV says, “over 1000 auctions expected for each of the next three weekends and buyers are more cautious in light of the banks decisions to increase rates above the decision of the RBA.”

The spruikers wouldn’t be worried would they? Of course they are. They’re petrified in fact.

Our old pal Michael Pascoe over at The Age is clearly on edge at the number of housing bubble stories doing the rounds. For instance, he makes the typical mainstream mistake of assuming higher income earners are safe from mortgage stress. He writes:

“As for the National Centre for Social and Economic Modelling’s ‘mortgage pressure tipping point’ of 30 per cent of disposable income going on repayments, it means little without consideration of how large that disposable income might be and the other demands on income. If a household takes home $150,000 and chooses to spend $50,000 of it on buying a roof, living on $100,000 is hardly any form of absolute ‘pressure’.”

Really? Obviously Mr. Pascoe doesn’t appreciate that most people tend to live up to and even beyond their means. Which is rather the point about why excessive borrowing is having the impact it is.

Those with $150,000 of disposable income are likely to have the lifestyle of someone with a $200,000 income, just as a $50,000 income lives the life of someone with a $70,000 income – hence the reliance on debt Michael!

Besides, he shouldn’t forget that most of the newbie borrowers, sucked in by the first home buyers bribe are forking out 50%, 60% or more of their income on mortgage repayments.

But perhaps the best way of showing the impact of what’s happening is a chart we came across when we were fiddling around on the Interweb at the weekend. We thought we’d pay a visit to the website of our old pal, Prof. Steve Keen.

Last week the prof wrote an article saying that Australia has already experienced competition in the banking sector, and that further competition wasn’t necessary. Instead of competition:

“What we need are methods to regulate the volumes of debt offered by the banks to stop this happening again, without putting upward pressure on the cost of households have to pay for it. That may sound like an economic impossibility, and it would be if ‘free competition’ between banks were expanded.”

As you know, we believe regulating something is a waste of time. The banks are supposed to be regulated already, but that doesn’t stop them from issuing ever greater amounts of debt so that now the banks have little more than a few cents out of every dollar of depositors’ money on hand to meet their obligations.

This has been the result of manipulation of interest rates which has kept the rate artificially low and encouraged more people to borrow. As Prof Keen notes:

“Be careful also about wanting a lower price – in terms of the margin between the RBA’s base rate and the variable mortgage rate. One way price can be driven down in competition is by offering a lower quality product…”

We couldn’t agree more. But we wouldn’t say that it’s competition that’s to blame. Competition in any part of an economy is always good for the consumer, even in banking.

But it’s the manipulation of the interest rate plus other forms of government interference that is the main cause of excessive borrowing rather than competition.

Anyway, here’s the chart from the Prof that caught our eye:

Source: Debt Deflation

As you can see, since the early 1990’s the value of mortgage debt as a percentage of gross domestic product (GDP) has gone through the roof.

The Prof states:

“Back when ‘the recession we had to have’ began, mortgage debt was a mere 17% of GDP.”

Now, if you look at the chart, it’s hit almost 90% of GDP. In other words, over a four-fold increase in mortgage debt exposure during the last twenty years.

But the thing that really interested us the most was the comparison with unemployment that the Prof used on the chart. If you put them in a ratio, then in 1990, the amount of mortgage debt against the unemployment rate was about 3:1.

Today, the ratio is around 16:1.

But what does that mean? Is it a valid ratio or is it just comparing two numbers that have no correlation?

Well, for the period 1975 to 1995, the ratio fluctuated roughly between 1.5:1 and 3:1. In other words, it was in a fairly constant range. But again, that doesn’t mean to say there’s a connection between the two. So, just to check, we turned the unemployment number around to look at employment instead.

We produced our own chart looking at the amount of household debt and compared it to the workforce participation rate. This is what we came up with:

Source: RBA, ABS

The red line charts the rise in household debt, and the blue line indicates the total workforce participation rate for males and females.

The chart actually paints a broadly similar picture to the chart Steve Keen came up with.

But two other things stand out. First, and most striking is the almost complete debunking of the myth that an increase in the number of females in the workforce has caused house prices to rise.

We’re sure you’ve seen that argument time and time again, “Oh, didn’t you know there are more women working now, there are more two-income households therefore it’s reasonable to expect house prices have gone up by a gazillion per cent.”

Well, according to the numbers from the Australian Bureau of Statistics (ABS), the workforce participation rate has remained remarkably steady over the last thirty-odd years. From 57.1% in 1978 to 62.5% today.

Yeah sure, female participation has increased, but male participation has decreased. So that over that period the overall change is almost negligible – as you can see from the blue line on the chart.

Yet, the household debt level has increased from 24% of disposable income in 1978 to a whopping 141% today!

Got that? Total workforce participation has barely changed, yet household debt levels as a percentage of income has increase five-fold.

The point is, you’ve got roughly the same proportion of the population in the workforce, yet the debt per person working has gone through the roof.

The spruikers and our banking friends will naturally come out and say that interest rates are structurally lower and that explains it, well, we put that little theory to rest last week.

We highlighted that with another chart from the RBA that showed household interest payments had more than doubled since the 1990s:

Source: RBA

It can’t be claimed that borrowers have just compensated for lower interest rates by borrowing more, because if that was the case then the proportion of interest payments to household income would have remained constant.

The fact that interest payments have more than doubled tells you that borrowers are borrowing an even greater amount than the previous generation even when lower interest rates are factored in.

So the argument that households were borrowing more because interest rates are lower is clearly false.

Both charts show you clearly that high house prices are a result of high debt levels which has been stoked by a speculative boom in house prices.

It’s a circular phenomenon. Higher house prices increases the amount of debt required to buy a house which increases the house prices which increases the debt required…

And on it goes. Until… it pops.

Make no mistake, the house price bubble has already popped. It’s no longer a case of when it will happen, because it already has. We’re now past that stage. What you’re watching now is the deflation of the house price bubble.

And unfortunately, because the spruikers and bankers refuse to accept that the house price bubble existed to begin with, they’re way too late to do anything to prevent prices from crashing.

Right now, we wouldn’t want to be on the wrong side of a bet against house prices plummeting.

Cheers.
Kris Sayce
For Money Morning Australia

But when I saw the mainstream property bulls going cock-a-hoop over the latest discussion paper put out by the Reserve Bank of Australia (RBA), I just couldn’t let them get away with it.

Someone had to pull them down a peg or two…

We mentioned the discussion paper here last week. We also mentioned that we hadn’t had time to read it yet.

Well, over the weekend, while taking breaks from researching and writing the September issue of Australian Small-Cap Investigator, we did manage to flick through the paper.

It’s titled, “Asset Prices, Credit Growth, Monetary and Other Policies: An Australian Case Study”.

You can click here to download the report for yourself.

As you’ve probably figured out by now, your editor is no fan of the RBA. Or any central bank for that matter.

Like any taxpayer funded organisation it’s full of academics and power trippers who wouldn’t last a second in the private sector.

Yet like anyone who relies on the taxpayer for their wages they constantly insist they “Could make so much more in the private sector, but I chose to work for the betterment of society.”

Rubbish.

If they really wanted to help society they wouldn’t rob it by aiding and abetting the government to forcibly and violently swipes 20%, 30% or 50% of your wages before you even manage to get your hands on it.

However, in this instance, we’ll cut the RBA boffins a little bit of slack.

To be honest we’re not quite sure what the point is of the discussion paper mentioned above.

As the abstract mentions, it describes “the Australian experience of a cycle in house prices and credit from 2002 to 2004.”

OK, great. But so what? Well, it’s enough for Craig James at Commsec to squawk:

“Finally one of the great myths has been debunked. The Reserve Bank has finally acknowledged that housing affordability is not a major problem in Australia. Neither is it worsening dramatically, or alternatively going through the floor. Actually it has been going sideways for the last 5 or 6 years.”

Squawking even louder is David Airey at the Real Estate Institute of Australia (REIA):

“REIA supports RBA’s rejection of a housing bubble”

And that was just the headline to the press release. The non-bubble babble continues:

“Today’s comments in the Australian Financial Review are in line with evidence REIA has continuously provided on this issue. While the doomsayers continue to put a negative spin on Australia’s property market, REIA has continued to explain that what we are experiencing in the housing market is normal growth for house prices.”

And so on it goes… babble, babble, babble.

But it’s funny that Mr. Airey should claim current price growth is “normal”. Because surely if it was “normal” then Mr. Airey wouldn’t be so concerned about housing affordability. Something Mr. Airey was very concerned with back in May:

“It is extremely disappointing that the Government has not realised the value of implementing long-term solutions to address housing affordability. The FHOG Boost was a great initiative but we need to look at longer term measures to give first home buyers the opportunity to realise the dream of owning their own home.”

Surely if we’re going through “normal” growth then the current levels of housing affordability would be normal too. Wouldn’t they?

Back in May Mr. Airey was even good enough to provide a chart showing that the percentage of the FHOG as a proportion of median house prices has “more than halved from 3.2 per cent to 1.4 per cent.”

Here’s the chart:

Perhaps unwittingly Mr. Airey has proved the opposite of the argument he’s trying to make.

If the value of the first home owners grant is only worth half – in real terms – of what it was ten years previously, then surely the deposit amount is also half of what it was.

In other words, buyers who saved a $30,000 deposit in 2009 would only have half the required deposit compared to a buyer who saved a $30,000 deposit in 2000.

Even if we take into account the approximate 50% increase in the gross median household income over the same period, you’re still looking at the equivalent buyer in 2009/2010 having to save a greater portion of their income than the buyer in 2000.

Surely if the growth rate was “normal” then there wouldn’t be this distortion.

Even if you look at the period from 2006 when Airey and James claim price-to-income ratios have flat lined, you can see on Airey’s chart that the proportion of the FHOG to house prices has fallen from around 1.75% to less than 1.5% in late 2009.

That’s almost a 15% change. By that measure it tells you prices have continued to spiral out of control.

Yet that’s not the only instance where the REIA puts its own massive foot in its massive mouth. It printed the following chart which it claims reinforces its case:

We’re pretty sure we’ve shown you that chart before. Rather than showing how house price to median family income has steadied, it actually shows you how the gap has widened.

The difference may not look that big in the table represented by the RBA. But if you spend less than five minutes transferring that data into a spreadsheet, you get the following chart which paints the real picture:

In other words, house prices have more than tripled in fourteen years, yet incomes have less than doubled.

What does that mean? It means that credit has expanded out of control pushing up house prices. And that’s exactly the reason why house prices are in an unsustainable bubble.

Australia isn’t different. It’s the same. Unsustainable credit bubbles, whether they are in Australia, the US, UK, Spain or Greece will result in a massive sustainable collapse.

But the REIA even admits house prices have gone ballistic. Here’s what the same press release claimed:

“Over the period Dec 96 – Dec 09, median house prices in Australia increased from around $160k to around $500k; a trebling in thirteen years steadily.”

Oh Lordy! A steady “trebling” eh?

That’s “normal” growth apparently.

So what was it that caused Craig James and David Airey to yell “vindication” by the RBA? As we say, we’ve read the discussion paper, and the only part of it that even vaguely addresses the question of affordability and bubbles are pages 13 through to 16.

In particular it’s this line:

“Thereafter, nationwide dwelling prices grew at about the same pace as disposable income, with the price-to-income ratio trending down slightly before dipping during the financial crisis and rebounding more recently. The household debt-to-income ratio has also been broadly stable since 2006.”

The RBA then prints the following charts:

This supposedly proves that income to house price and debt ratios have remained steady for the last four or five years.

While that may be the case with the debt-to-income ratio, it’s certainly not the case with the dwelling-price-to-income ratio, which while it may have eased off, has now soared again, just as rapidly as during the last run up leading in to 2003/2004.

But even the debt-to-income ratio doesn’t prove the absence of a bubble. The “steady” four year period can just as easily be interpreted to show that more households have increased their debt levels to that level.

Don’t forget, one of the big beneficiaries of the housing bubble have been the baby boomers. As they sell out and cash in, their debt to income ratio falls – perhaps to zero – while those buying into the market see their debt to income ratio fly through the roof.

In other words, far from proving that a bubble doesn’t exist, what the RBA has actually shown is that the bubble is alive and well. And that according to the top chart, real dwelling prices haven’t softened at all.

But we really do have to take exception to the dwelling-price-to-income ratio.

If the RBA is correct, then based on its numbers, capital city dwelling prices are roughly five times the median income for capital cities.

Well, according to the Australian Bureau of Statistics (ABS) numbers for 2007/2008 – granted it’s nearly three years old – the gross household median income for Australian capital cities was $1,410 per week, or $73,320 per year.

Now, let’s add a fairly generous 3% per year pay rise since 2007 – much less than what the REIA claims – which takes the approximate gross household median income to just over $80,000.

Now if we look at the most recent RPData numbers for all dwellings, it has a figure of $465,000 for capital cities… which is a full $65,000 above the five-times ratio stated by the RBA.

Even worse, the RBA quotes disposable income, which as it points out is, “income after tax.” Gross income is before tax, so if we generously deduct about $10,000 in taxes, that would take the disposable income – based on the ABS numbers – down to around $70,000 and make the capital city dwelling-price-to-income ratio to around 6.6.

That’s a far cry from the 4.5 many of the property bulls try to claim as being the real house price to income ratio.

But look, don’t take my word for any of this. Take a look at the numbers for yourself.

Click here to see the ABS stats. And go here to look at the most recent property data according to RPData.

The fact is, while Commsec and the REIA are shouting from the rooftops that the RBA has “debunked” the housing bubble “myth”, the reality is that the RBA has actually proven that the housing bubble not only exists, but that it hasn’t yet popped.

Just because a certain ratio has remained steady for one, two or four years doesn’t nullify the existence of a bubble. It merely means that prices have been artificially supported thanks to government, central bank and retail bank intervention.

Ultimately this bubble will pop, and nothing that the RBA has included in its discussion paper does anything to change the fact that that will happen.

Cheers.
Kris Sayce
For Money Morning Australia

Yesterday I mentioned that the Australian Securities Exchange (ASX) is considering offering an index based on residential house prices.

The index – from what we can gather – will allow investors to bet, gamble or punt on the direction of the residential housing market.

In a moment I’ll begin to explain why this could be either a completely meaningless index, or why it could be really quite useful… depending on how it’s structured.

But first, I want to invite you inside the mind of a Keynesian economist. Don’t worry, I know it’s scary, but I’m here with you.

In all seriousness, we do wonder what planet Keynesian economists come from. Planet Keynes perhaps?

Last week we wrote to you about the bizarre mentality of the mainstream economists. How they fear the unemployment rate going too low because of the impact on inflation.

Apparently the mainstream economists consider full employment to be based on an arbitrary number. Somewhere around 5%. Once it reaches that point then that’s enough. No more employment please.

Even if there are people still unemployed who would like work.

Naturally enough when yesterday’s unemployment numbers were released by the Australian Bureau of Statistics (ABS) Comsec’s Craig James was eager to see a silver lining in the increased unemployment rate:

“Secretly the Reserve Bank wouldn’t be disappointed that the jobless rate has troughed for the time being.”

Wouldn’t want more people getting a job would we? Of course that’s easy to say when you’re a mainstream economist at a big comfy bank. Much better to keep that 5.3% of unemployed on welfare payments and have the taxpayer fund them rather than having someone in work and being able to fend for themselves.

But Mr. James also says, “It’s important not to over-react to one month’s set of figures”… but then that’s exactly what he does.

He goes on:

“Effectively the Reserve Bank lifted rates too far, too fast, robbing the economy of momentum at a time when the US and Europe continued to meander along…

Yet it was only two weeks ago on August 3rd that Mr. James wrote:

“Reserve Bank policymakers could indulge in some well deserved boasting. The Australian economy avoided recession, growth is ‘near normal’, emergency rate settings have been removed and inflation is back in the target band…

“While CommSec believes that it is more likely that rates will rise rather than fall in the future, the next move could very be in 2011 if the mixed domestic and global readings persist… We are pencilling in a 25 basis point rate hike late in 2010…”

And of course he finished off with, “property is still fundamentally attractive…”

It’s important to get at least one spruik of the property market in!

Now, the reason I’ve shown you these comments is not to play a game of Harry Hindsight, but rather to show you how 99% of mainstream economists – and Craig James is as mainstream as they come – have no clue about how an economy works.

That’s why they are unable to provide a consistent and logical message. It’s why their opinion flim-flams and flip-flops from one week to the next.

One week they’re praising the RBA for the great work it’s doing in manipulating interest rates, the next week they’re accusing the RBA of getting it wrong because the unemployment rate has moved higher.

You’d think they would have figured out by now that it isn’t possible to micro-manage an economy.

You can’t pull levers and push buttons in order to accurately predict and influence the actions of 22 million people. But still they carry on with their futile little game.

But anyway, we’ve strayed well off course here. Back to the housing index that the ASX is apparently looking at.

First off we’ll say that the ASX has a terrible record in the area of new product development. If it’s dealing in shares then it’s fine. It may not be perfect, but it seems to do a relatively decent job.

When it comes to the exchange traded options market, well, we’d give it no more than a C grade. It does its job, but once you get outside the top twenty or so stocks, the liquidity on the options market is pretty slim. But that’s not entirely the ASXs fault, hence why it still gets a C grade.

As for Index futures (SPI) on the S&P/ASX 200 it seems to do a decent enough job there as well. There’s plenty of liquidity and we dare say most futures traders are probably happy with what they get.

But anything outside of that, the ASX is hopeless.

Take a look at the trading volume for anything outside the major bond and index futures. There’s nothing traded. You can see for yourself here.

Then there’s the ASX listed contracts for difference (CFD) market that was marketed in a blaze of glory about three years ago but which has never risen above the level of also-ran.

The ASX thought it could get in on the CFD craze and make a killing, winning back some of the trading revenue it had lost to the over the counter (OTC) CFD providers. But they haven’t and it’s been a flop.

At some point the ASX will give up and ASX CFDs will likely go the same way as the International trading service the ASX quietly closed down about four years ago.

You probably don’t even remember it, it was so unmemorable. We think – from memory – it was called Trade Link, or something like that. The idea was that you could buy shares in international companies such as Microsoft and IBM through an Australian broker.

An added benefit was that the trades would be settled in Australian dollars and would appear on your CHESS holding statement so that you wouldn’t have to fuss around with foreign exchange, separate accounts, and all sorts of other nonsense.

To be fair, it was a nice idea, but as is usually the case when a monopoly organisation tries to innovate, the service went nowhere. Brokers weren’t interested, nor were their clients and so the ASX closed it down.

Now they’re looking at operating a housing index.

Our first bet is that it’ll never happen. We could be wrong of course, but that’s just our take on it.

Our second bet is that even if it does get off the ground it’ll be a complete waste of time. The ASX makes it’s money from the stock market. From people trading shares.

Anything outside of that, forget it.

Think about it, most of the trading volume on the ASX goes into trading the top fifty stocks on the market. Why? There are many reasons, but mostly because they’re the most well known and biggest companies. It’s only natural that most investors would tuck into those stocks.

But it’s also the impact of the funds’ management industry too and their desire not to underperform their peers. Therefore they will all tend to hold similar portfolios.

In that case, what are the odds of big and small investors having any interest in a property index?

That’s where it comes down to how the index is measured. Done right and there could be a lot of interest. Only ‘could’ mind you.

Share indices for instance are based on the value of shares that comprise the index – no points for getting that right. It’s pretty simple and reasonably transparent. You know that the biggest companies in the index will have the biggest impact on the performance of the index.

In other words, not only can investors see the price action of the index but they can see the price action of the stocks that comprise the index.

Of course there’s already one property index on the ASX. It’s the SPDR S&P/ASX 200 Listed Property Fund [ASX: SLF]. Subscribers to Australian Small-Cap Investigator will recall we tipped that index as a buy recommendation early last year, right near the depths of the market downturn:

We tipped it at $6.41 in March 2009 and then sold at $8.00 in November 2009 for a 24.8% return.

As it happens it was nowhere near as big a return as we had banked on. Unless there’s the prospect of a triple-digit percentage gain we don’t even consider tipping a stock.

However, we saw it as the ultimate contrarian play. Buying into the property market right at the point where property bulls and bears – including your editor – were most bearish (until now) on the housing market.

Of course, that particular index is an index of commercial property trusts, so it can’t be directly compared to the housing market.

But take another look at the chart above. This time the volume bars. Each bar represents the volume traded during one week. And this is where the problem lies for any potential housing index.

Even the most voluminous week – during March this year – there was still only two million shares traded. That works out as around $3.2 million worth of shares each day during that week.

Yet in recent weeks the volume has struggled to get even to $800,000 per day. Compare that to the blue-chips where already this morning ANZ Bank [ASX: ANZ] has traded more than $17 million worth, and it’s not even 11am!

So this particular index has low volume and quite frankly low interest among investors. But importantly, and in its favour, this index has component stocks. In other words you can check out which property trusts comprise the index.

You can choose to either invest in those components or in the index depending on whether you want to spread your risk or not. And just like a share index you can see the impact that the price movement of the underlying stocks has on the level of the index.

What I’m saying is that any housing index operated by the ASX must have the same level of transparency. Anything less than that and investors just won’t be interested.

If the index is just based on a theoretical price level of housing or a mathematical calculation of house prices, our guess is that it would become nothing more than an interesting novelty.

The question you’d need to ask is whether investors would trust punting big money on something that was a computer model driven rather than something based on the actual price and income stream from real houses? Some would, but we’ll guess the majority wouldn’t.

And that’s why we doubt the index will even get off the ground.

But there are two other points we do want to cover off. The main one being how a housing index could work. If done properly. It would involve residential rental properties as the underlying asset.

As far as we can see it shouldn’t be that difficult, and thinking about it, we’re rather surprised it hasn’t already been tried.

The other point we’ll cover is that the high price of housing could actually be a bar that prevents making an investable housing index a success.

But more on that on Monday…

Cheers.
Kris Sayce
For Money Morning Australia

“[C]ut carbon dioxide emissions by 1 million tonnes and save $344 million in fuel costs in the next 10 years”.

We then wrote, “But when you compare it to Australia’s total CO2 emissions as of 2007 of 374 million tonnes, the amount saved isn’t even a drop in the ocean. In fact it’s a paltry one quarter of one per cent.”

Of course our error was that we didn’t divide the supposed CO2 savings over the ten year period. So as a proportion of Australia’s total annual CO2 emissions, the dopey cash for clunkers scheme will actually reduce CO2 by even less than we claimed.

It will be a miniscule one-tenth of one quarter of one percent each year. Or to put it another way, 0.025%.

Not only that, but according to Michael Green at The Age:

“EcoBoost-Hybrid – wow! That sounds green, right? But it neglected to mention those other – ahem – icons of fuel efficiency, the Toyota Prado 4WD, or the Hilux 4X4 ute, which are also eligible. In fact, more than half of the 1800 new models sold in this country will qualify. Far from being an ambitious target, a greenhouse rating of six equates to the average performance of the entire Australian fleet, as it stands.”

We can imagine it now, “Save the planet, buy a 4-wheel drive truck!”

Furthermore, Green confirms our thoughts that buyers of new cars tend to drive their cars more, hence cancelling out supposed ‘green savings’:

“There’s some research to suggest that scrappage schemes increase greenhouse gas emissions overall. A Dutch study, published in the journal Transportation Research in 2000, concluded that “reducing the age of the current car fleet may result in an increase of life-cycle carbon dioxide emissions”.

As your editor mentioned yesterday, from personal experience we increased our driving distance nearly ten-fold once we replaced our clunker with a shiny new car.

But anyway, onto today…

The mainstream financial journos and economists have gone jargon crazy over the past week.

All in anticipation of the latest consumer price index (CPI) number.

But they aren’t content with just saying what they think the CPI number will be. They have to tell you what it will “print”.

We have to say that it’s an even more annoying bit of jargon than the urge for financial commentators to insist on rate “hikes” rather than rate increases.

To be honest, we’ve got no idea what “print” means or where it comes from in relation to the CPI. But they’re all at it. They’re printing faster than a central bank can print money…

“There would prima facie be some downside risk to our forecast for headline CPI to print at +1.1 per cent [for the June quarter],” – Michael Turner, RBC Capital Markets

“The highlight of the week will no doubt be the eagerly awaited CPI print on Wednesday… the CPI print would be key in determining whether they looked to raise rates by 25 basis points in August.” – Ben Potter, IG Markets

“I think that offers a pretext to duck an unusually high inflation print next week” – Ray Attrill, 4Cast Capital Markets

“It maybe will take three CPI prints to get there, though.” – Stephen Roberts, Nomura Australia

“We believe an elevated print on the upcoming second quarter CPI on both the headline and core measures will be enough to trigger another rate move” – Helen Kevans, JPMorgan

In the same article, David de Garis from National Australia Bank was guilty of cliché abuse when he spoke of a “rate hike”. But back to the prints…

“That’s because Stevens has signalled he will be unflinching in jacking up rates again if underlying inflation comes in at above 3 per cent in next week’s CPI print.” – Rob Burgess, Business Spectator

But Bill Evans at Westpac wins the gold medal for Financial Clichés by using “print” seven times in one article for Business Spectator:

“It now appears likely that a 0.7 per cent quarterly print for core inflation would see policy unchanged at the August meeting… we think that a print of 0.8 per cent quarterly on underlying inflation…”

Including three times in one sentence: “If this forecast prints on the day then the annual increase in the trimmed mean will print 3 per cent – the same print as the annual rate to the March quarter.”

He rounds off with, “Despite 10 of the last 12 prints of the trimmed mean being 0.8 per cent for the quarter or higher… the possibility that the trimmed mean could print ‘only’ 0.8 per cent quarterly”

Lovely.

In case you’ve missed it, the Australian Bureau of Statistics (ABS) will announce (print) the latest quarterly CPI number (print) at 11.30am today – about the same time you receive (print) this letter.

What will the CPI number be? We’ve got no idea.

The so-called experts however, have busied themselves by not just predicting the CPI but they’ve decided to put their money on a Double by predicting what the Reserve Bank of Australia will do with interest rates next week.

But whatever the number is, the universal message from the mainstream commentators is that they’re happy with price inflation running at around the 3% level.

Remember, in Mainstreamland, rising prices good, falling prices bad. Only in the world of mainstream economists and mainstream financial commentators is it a good thing to pay higher prices for goods.

But more to the point, what we’d like to know is what are these pointy-headed economists going to do about it?

Don’t forget that the rise in prices is a direct result of the monetary inflation wrought by governments and central banks over the last eighteen months.

You’ll recall that at the time when financial markets and economies were crumbling, the universal phrase was that you shouldn’t worry about inflation. It was more important that the economy was saved – by any means necessary.

There were those that claimed inflation was dead. Some – as we recall – seemed to think it was dead forever, never to return.

Others said that inflation wasn’t a problem because there was an Output Gap. If you’re not sure what that is, it’s a completely discredited economic theory that claims inflation isn’t possible as long as actual GDP is below potential GDP.

Oh yeah, then why is inflation currently running at 3%?

We won’t go into the full details here, but you can read our debunking of the hare-brained theory here and here.

So, they thought, because there was an Output Gap, inflation wasn’t something to be concerned about.

Finally there was the argument that, well yes inflation could be a problem, but that’s something for the future. Worry about it then…

We don’t want to sound too melodramatic, but the future is here. Now it’s time for the smart guys to put their anti-inflationary plan into action. So far we’re completely underwhelmed by their response.

It seems they’ve decided that interest rates are the way to go. Well really, how ingenious. We never would have suspected.

Of course it might have been nice if they’d mentioned that a bit more while they were telling everyone to spend every dollar they owned.

What about other plans? It seems their other hope is that the unemployment rate doesn’t fall any further! That’s a bizarre one.

We’ve seen and heard several references to how the Australian unemployment rate is so low it’s creating inflationary pressures. That any unemployment rate below 5% is considered to be full employment and therefore inflationary.

I don’t know about you, but surely full employment is where everyone who wants to work can work. Surely full employment is something to strive for, not to fear. Anyway, full employment most certainly isn’t the situation now.

Just ask the 341,602 Australians that are receiving the Newstart allowance as reported by Ben Schneiders in The Age at the weekend. Although a word of warning, keep the sound down on your computer because a video of Michael Pascoe babbling on automatically starts when you load up the page.

According to the article, the number of people claiming the Newstart allowance of up to $462.80 per fortnight for a single person, has increased by 36% since November 2008.

Yet according to the financial boffins, these 341,602 people are already employed… theoretically anyway, because we are at full employment. Apparently the Treasury considers it a “long standing practice” to effectively count these people as employed when they’re not.

That’s nice of them.

So because the Australian economy is hitting on a couple of theoretical numbers – CPI at 3% and unemployment near 5% – the financial manipulators are ready to meddle again, banking on the RBA increasing interest rates.

An increase that will obviously lead to higher costs to businesses and individuals and potentially lead to higher unemployment, or greater financial hardship.

Yes, that’s right, here’s the financial consequences of the borrow-and-spend it mania. Supposedly smart men and women armed with crazy economic theories such as the Output Gap, encouraging financial novices to spend and borrow like crazy and not to worry about the consequences.

Now the same pointy-headed economists see fit to apply more of their theories, only this time they’re spreading bad news. All that money you borrowed from the bank and then spent? Well, it’s got to be repaid, and if you can’t afford to repay it they’re going to need to charge you more.

Look, as we’ve pointed out before, interest rates were manipulated to artificially low levels. Levels which they never should have gone.

All the while the central bankers and their buddies at the banks spun the line that it was crucial to save the economy. Now the central banks and their banker pals are manipulating the interest rates higher.

Not because they necessarily want to, but because they have to. They have to because higher interest rates are a direct consequence of their previous low interest rate policies.

Not that they’ll admit that. You’ll just hear the rubbish about interest rates returning to “normal” levels.

Free market economists and thinkers get plenty of flak from the mainstream for being heartless and not thinking about others. As is usually the case, the opposite is true.

Supporters of free markets oppose government intervention and central bank manipulation because we know exactly what the consequences of those actions are.

One of those consequences are 341,602 unemployed who the Keynesian economists ignore because statistically there is full employment.

And soon enough, the ranks are likely to swell as their economic plans “work” causing even higher interest rates, higher inflation, and higher unemployment.

Cheers.
Kris Sayce
For Money Morning Australia

Overnight, the Dow Jones Industrial Average closed at 10,216.27, up by 18 points. Volume in the US was pretty light as investors seemed keen to sit the trading session out and see if the earnings coming out this week could support last week’s rally.

The FTSE was up 34 points to 5,167.02. BP [LON: BP] was up by 9.4% on hopes that the oil leak in the Gulf of Mexico will soon be plugged.

However the market optimism could be short lived, as Adam Posen of the Bank of England has warned in an interview that the UK could return to a recession.

‘There’s going to be a lot of drag on the economy, with the problems of the Eurozone and the public sector contraction in the UK,’ he said.

The Nikkei dropped off 37 points to 9,548.11.

The price of spot gold in Australian dollars is $1,368.26, while in US dollars it’s $1,199.64. The price of silver in Australian dollars is $20.44 and in US dollars it’s $17.93.

The Aussie dollar versus US dollar is AUDUSD 0.8772 and against the Japanese Yen it’s AUDJPY 77.50.

Oil was down overnight, but investors have been taking profits to take advantage of the past three days of gains. Crude Oil closed at USD$75.30.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

Today’s Australian Financial Review (AFR) mentions it but sees it as a positive.

Typical.

You’ve read and heard all the nonsense about the strength of the Australian economy. Just yesterday the ABC reports Kevin1807 as saying:

“Today we have revealed and released the national accounts. They point to a strong performance for the Australian economy. Australia’s GDP has grown by a solid 0.5 per cent in the March quarter. We are proud of the fact the Australian economy has emerged as the only major economy which has not gone into recession. Only two economies of the 30-plus economies across the OECD [Organisation for Economic Cooperation and Development] did not to go into recession.”

Hats off. No recession for Australia. A “strong performance for the Australian economy.”

If only it was true. Only it isn’t is it?

Actually, that’s a rhetorical question. I’m telling you it isn’t true. But before I get into that, a quick diversion [Reader's voice: your diversions are never quick!]

Emperor Ken Henry claimed in a Senate hearing last week – you can read it here – that the resources sector didn’t save the Australian economy from oblivion. Well, if it didn’t what did?

(By the way, he said something else in his comments which I’ll mention another day).

Unfortunately, His Excellency doesn’t reveal the details of what did save it. Only that it wasn’t the resources sector. So there.

So we rummaged around to find some clues from previous comments made by the Emperor. As we rummaged we stumbled across the Money Morning we wrote on August 18th last year.

In that article we quoted the Emperor saying:

“My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities – of governance and flexibility – of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds.”

The gist of Emperor Henry’s argument is that it was governance (bureaucracy) and regulation that saved the Australian economy from a recession. In that article we argued that wasn’t the case.

Our belief then – and still – is that it was the Australian resources sector that saved the Australian economy. That Australia has a get-out-of-jail-free card thanks to China. But we will concede one thing. And that is the other thing that ’saved’ the economy was all the taxpayer funded bailouts.

The bailouts to the banks, the property sector and the retail sector.

In fact, from what we can see, the resources sector is the only sector that didn’t need an Australian taxpayer funded bailout to stop it from collapsing. Whereas the banks, property sector and retailers did.

However, I’m not saying that the resources sector didn’t go into the doldrums, because they did. You only have to look at the share prices through 2008 and early 2009 to see that.

But look at what’s happened since then. They’ve recovered. Now, granted, that’s been helped by external stimulus programmes in China and elsewhere, but the cost to the Australian taxpayer of ’saving’ the resources sector was virtually zero.

In contrast, the cost to the Australian taxpayer to save banking, property and retailing has been in the billions. And despite those billions all three are still on the precipice of a collapse.

That’s simply because the bailout billions have done nothing more than postpone the recession or depression. The taxpayer bailout didn’t really save anything, it has just ensured it will happen this year or next, rather than last year.

But as we looked at that article, we noticed something else we’d written. It was this:

“Henry’s claim that ‘governance’ is responsible for future Australian economic growth is a warning sign to prepare for the worst. Clearly it will embolden policy makers to become even more interventionist… The problem is the resources industry is perfect cover for meddling bureaucrats. The ‘guaranteed’ demand from China and the flow-on effect this has on the Australian economy enables bureaucrats to constantly raid the cupboards whether it’s through taxes or royalties. These taxes and royalties are then used on pet projects – roads, hospitals, schools, bribes, etc… This necessitates more spending to create bigger and better projects.”

See, we do get some things right! But look, you don’t need to be a fortune teller to have worked that out. It’s just plain old common sense. Take from the profitable and give to the unprofitable.

Anyway, let’s get back to where we started. The news is, Australia’s private sector is in recession. The proof is below. But how can that be true if as Kevin1807 says, Australia’s economy is strong?

We say “balderdash” and “bunkum” to Kevin1807s claim.

Take a look at the numbers from the Australian Bureau of Statistics (ABS) released yesterday:

You’ll see the number I’ve highlighted is the 0.7% contribution to the gross domestic product (GDP) by the public sector.

And if you look at the column to the left, you’ll see that’s a 39.5% increase in public sector fixed capital spending since March last year.

And for further evidence of how terrible things are for the private sector, the GDP numbers show non-dwelling construction is down 8% over the last year and machinery and equipment investment has only risen 0.2%.

In other words, the Australian private sector has actually contracted by 0.2% over the last quarter, and would have shrunk a whole lot more over the last year without the government spending away taxpayer dollars on wasteful projects such as buildings and housing insulation.

Of course the Keynesian economists and interventionists will say, “Aha! You see, this is exactly why the government had to step in. It had to save the economy because the private sector wasn’t up to the job.”

The truth is the opposite.

Let’s look at it this way. How has all the taxpayer dollars been spent? As I’ve mentioned it’s gone on school buildings, insulation schemes, make-work projects, and other pointless activities.

Now, you’ve seen the result of these things. Billions spent on housing insulation which no-one really needed. Billions spent on school gyms which no school really wanted.

How has it been financed? It’s been financed through debt and taxation. That means taxpayers have already paid for these projects or you will pay for them in future taxes.

How can it be logical to say that spending money on things you don’t need is a good idea? Again it’s the old issue of observing what isn’t seen.

And these GDP numbers show you what isn’t seen – if you get what I mean.

You can see the school buildings going up as you drive through any suburb in Australia. They’re real. You can see builders taking a smoko, er, I mean, building stuff. You can see the activity of people installing insulation, or repairs made to a road which seemed fine anyway.

But what about what you can’t see?

Stimulus spending money has to come from somewhere. It comes from either taxes or government borrowing. Either way, it comes from your pocket today or from your pocket in the near future.

That means less money for you. And it means less money for the private sector that also pays taxes.

So, while you can see the building and the working and the whatever-else it is the government is blowing money on, what you can’t see is what isn’t happening.

What you can’t see is the $100 you may have spent on a new shirt. $100 that you can’t spend because the government has decided to take it, combine it with $100 from ten million other taxpayers and spend it on a $1 billion do-something project.

But it’s not just you that’s punished by not being able to afford the new shirt. There’s the shirt seller who’s missed out on a potential $100 sale.

Or what about the $1,000 that you may have invested in shares? Well, you can’t do that either, because the government has kept that money by not cutting taxes, or will take the money by taking taxes in the future. The $1,000 you may have spent has been combined with the $1,000 of say another one million potential investors and has been spent on a $1 billion do-something-else project.

Not only have you missed the opportunity to invest $1,000 in something that may actually make money, but there’s also a small company – or a large company – that is unable to raise $1 billion to expand or start a business because instead the money has been blown on a few new school gyms.

In fact, that company may have only needed a quarter of that amount in order to provide ten times the benefit to the economy. But because the government has taken it and thrown it away, private enterprise misses out.

You see, the government spending money for the sake of spending money doesn’t actually help an economy. It harms the economy. In the long term it can actually destroy an economy.

You can see that clearly in the GDP numbers which show government spending going through the roof, while the private sector stagnates.

And also don’t forget that not only does the government spend your money but it overspends. I’m sure you’ve heard the stories of school buildings costing $1 million when an equivalent building in the private sector would cost $250,000.

That’s simply because of the lack of profit motive that we’ve written about before. Government agencies are given a budget and it’s their job to spend up to that budget. Contractors know that and will therefore quote top-dollar, plus add-ons which are approved after the contract is won.

And if they overspend, guess what, they tax or borrow more.

The problem for the Australian economy now is that with all the money and savings that have been wasted by the government, how can the private sector recover? Businesses have been unable to invest because they’ve been starved of capital.

Individuals have been encouraged to keep spending in order to save the economy, so they haven’t saved either.

In other words, the Australian economy will have to try and grow despite a higher tax and debt burden, and despite the consumer already being maxed out with over $1 trillion of household debt.

That means there are only two options left. Both of them bad. And perhaps you’ll suffer from both. That is, a continuation of government spending, or an increase in inflation.

Or both.

Both give the immediate impression of prosperity – new buildings, higher prices, higher asset values – while in reality the wealth of the nation is shrinking and suffocating under the burden of higher taxes, higher debt and of course, higher inflation.

Nothing good can come from government and bureaucratic meddling. The latest GDP numbers are to be mourned, not celebrated.

Cheers

Kris

“What would you prefer, a corporate giant who is answerable to no one and motivated solely by profit making the rules on the internet, or a democratically elected government with all the checks and balances in place?”

I’d have thought that’s obvious. The lesser of the two evils is the “corporate giant.” As I wrote last week, what’s the worst a private company can do with your personal information? Try and sell you something.

From what we’ve heard, Facebook has gotten itself into bother for giving access to private information to advertisers. We’ll agree that’s a bit naughty, but so what. Try and sell me something advertisers, I dare ya.

In contrast what does a government do with your private information? First of all, it compels you to provide your private information to the government, something Facebook doesn’t do. Whether that’s in a tax return or government mandated census such as that being carried out by the Australian Bureau of Statistics (ABS).

And if you don’t comply then you’re fined or thrown in jail, again, something Facebook doesn’t have the power to do. Even if you do comply odds are the government will want something else from you such as money, and again, if you don’t comply you’ll be fined or thrown in jail.

Whereas the last we heard, no one forced anyone to put their private information or photos on Facebook or Myspace or any other new-fangled social networking website.

Chances are Facebook isn’t going to fine you $110 for each day that you don’t make friends with someone.

Facebook doesn’t force you to hand over 30% of your income every month.

Perhaps if you get a call from the ABS telling you that you’ve been selected for the compulsory medical testing study you could let them know that complying would be, in Conroy’s words, “complete disregard” for your privacy.

Who’s abusing your private information more? A private company that naughtily gives advertisers access to your details, or a government bureaucracy using your private information in order to force you into doing something against your will.

As I’ve said before, governments are not to be trusted. They are the ultimate abusers of power.

Cheers,

Kris Sayce

The way I look at it, backing small-cap stocks can be like punting.  It’s one of the riskiest share investments you can make.  And that’s even when the market is going in your favour.

But when the market has tumbled by 16% in just a few weeks then you can ratchet up the risk five-fold.

However, considering we’re looking to make big returns from small-cap punts it would be odd if we just turned on our heels and ran away.  Instead, for high-risk punters we’ve been running over the numbers of a small handful of stocks for possible inclusion in the May issue of Australian Small-Cap Investigator when it’s released next Monday or Tuesday.

If you haven’t subscribed yet, you can do so by clicking here…

Anyway, let’s have another look at the Australian economy shall we?

As we’ve warned for many, many months, the so-called economic recovery was a sham.  An illusion.  A mirage.  A charade.  Use any other word you like, the economic recovery wasn’t real and as we told you it would, it’s being revealed for all to see.

Last week we wrote how quiet the property spruikers had been recently.  To be fair, we shouldn’t have singled them out.  After all, the stock market cheerleaders have gone pretty quiet too.

As have the “Australia-avoided-the-global-meltdown-aren’t-we-great” crowd.

But first, many times over the last couple of years we’ve received several emails suggesting our call on the popping of the housing bubble is akin to a broken clock being right twice a day.

In other words, if we keep saying something, we’re bound to be right eventually.

It’s a clever little analogy.  And maybe it’s right.  But without being a joke killer, we’ll make the point that we’re not saying the housing market will pop because we’ve some kind of hatred of housing – such a stance would be weird if nothing else.

And we don’t say it because we’re playing the odds, hoping we get it right at some point.

And we don’t say that it’ll pop just so people will sell their house or investment property and buy shares instead.

No, the simple reason we say that the housing market will pop is that it’s illogical to claim otherwise.

That may sound very simplistic and uncomplicated, but here’s a newsflash for the dudes that like to make things complicated… it is simple and uncomplicated.

We could use as many charts and graphs and numbers as we like, and from time to time we do.  But the easiest way to counter a ridiculous argument is to simply point out how ridiculous the argument is, rather than trying to prove they’re wrong.

The simple and undeniable fact – yes F-A-C-T, fact – is that prices of anything cannot possibly continue to rise forever.

The government and central bankers like to make you think it’s complicated so you lose interest and place your trust in them.  The mainstream press like to make it sound complicated so they can show-off how smart they are.

Only the past few weeks have shown just how dumb they are.

As I say, it’s not complicated.  The mainstream commentators will try and fool you by writing about the velocity of money, or the paradox of this, or the paradigm of that.  It’s all rubbish.

What they really need to explain – and can’t – is how it’s possible to improve an economy by printing money?  Or how it’s possible to solve a debt problem by borrowing more?

It’s not hard.  You can’t spend what you don’t earn.  Unless you’re spending on credit.  Even so, you still have to pay it back, and that involves earning money.  I can’t say this enough times, it’s not a difficult concept to understand.

Yet the mainstream and Keynesian commentators are full to the eyeballs of crummy theories such as the Output Gap.  Theories that are worth less than the paper they’re written on.

Quite frankly they should hang their heads in shame for feeding lies to the public about the benefits of stimulus spending, inflation and government intervention.

But they won’t.  They’ll fall back on the old chestnut that the stimulus wasn’t big enough, inflation wasn’t high enough, and the government should have done more.

They’re schmucks, the lot of ‘em.

You see, the housing crash will come.  There’s no question of it not happening.  Is this the moment when it starts?  Look, I’ve no idea.  Predicting precise time frames is pretty hard.

But the fact is, we don’t need to predict the timeframe, all we need is to know it’s going to happen and therefore prepare for it when it does.

The property spruikers are yet to provide any evidence for the continual never-ending increase in property prices.  They’ve tried of course: population growth, housing shortage, Australians love their homes, banks are strong, blah, blah, blah…

Even if just one of those were true it still doesn’t explain how anything can continue upwards forever.

But what about the stock market?  Don’t forget, it was only just over three months ago that Investor Daily told readers:

“Financial services firm UBS has boosted its year-end target for the S&P/ASX 200 index from 5300 to 5450 points as Australia’s economic and profit recovery continues to unfold.”

The article headlined with: “UBS has said… it was overweight banks and miners.”

Oops!

Today the S&P/ASX 200 is 4,183.20.  In order for the index to get to 5,450 it would need to rise by 30%.  Is that possible?  Anything’s possible in the short term, but we doubt it.  Not unless the government and central banks unveil another smoke-and-mirrors scam.

Anyway, I’m not only giving UBS a tickle, because they’re not the only ones to say it.  Every mainstream Muppet in the Australian financial services industry has been banging on about the miracle Australian economy, and that the “economic and profit recovery continues to unfold.”

Really?  What recovery is that then?  Is it the same economic recovery where Clive Peeters has just gone bust owing $160 million?

Is it the same recovery where David Jones reported a, erm, third quarter increase in sales of… wait for it… 1.4%!

Which, adjusted for real inflation, not the rubbishy stats the Australian Bureau of Statistics (ABS) come up with, David Jones’ sales would have actually declined during the third quarter, thanks to the continued increase in the money supply.

For instance, M3 has increased by 5.74% over the same period.

In other words, the $417.4 million of sales recorded by David Jones in the last quarter was actually worth less to the company than the $411.6 million of sales made in the same quarter last year.

That, my friend, is not an economic recovery by any stretch of the imagination.

It’s an economic bloomin’ disaster, that’s what it is.

Then you’ve got this dumb news: “Average earnings on the rise”.

Yippee!  The article in The Age lets you in on what great news this is for workers:

“Average weekly ordinary time earnings for adult full-time employees rose 1.1 per cent in the three months to February, taking the annual rate of growth to 5.8 per cent, the Australian Bureau of Statistics said. A separate report showed people are trimming their view of future price rises.”

The economic recovery lives on.  [Cough], we haven’t finished yet.  Get this:

“Private sector AWOTE [average weekly ordinary time earnings] was up 0.9 per cent in the quarter at $1217.80, seasonally adjusted, for an annual rise of 5.6 per cent.  Public sector AWOTE rose 1.9 per cent to $1,327.40, seasonally adjusted, in the same period for an annual rise of 6.3 per cent.”

How about that?  Of course, what The Age should have explained is that the AWOTE has increased by just 0.9%.  The pay of public servants is irrelevant.  The pay of public servants is a cost to the economy.  It’s a negative for the economy.

An increase in public servant pay is just a reflection of the extra burden put on the private sector.

So while you could say that nominally private sector wages have risen by 0.9%, you have to subtract inflation, and subtract the increase in public sector wages.  Then you figure out you’ve most likely got a fall in private sector incomes.  Not the 5.8% annualised increase The Age claims.

All the info from the ABS proves is how much taxpayer money has been wasted through the stimulus programmes.  The greatest beneficiary has been the coercive sector, probably more so than the housing and building sector.

The public sector – a cost to the economy – grows, while the private sector shrinks.

The easiest way to look at the private sector versus the public sector is to imagine a profit and loss statement.  The private sector is the revenue, it’s creating new products, it’s innovating, it’s trying to drive down prices through competition.

The private sector is doing all that’s good for you – or trying to anyway.

On the other hand the public sector is the expenses.  It’s a drain on your profits and your income.  Every extra dollar earned by the parasitic public sector is a dollar taken from you and others in the private sector.

As we pointed out in our presentation to the Adam Smith Club on Monday, back in 2008 the free market appeared for a fleeting moment, through the stink and stench of a government and central bank manipulated economy.

The free market looked at the excessive debt levels and the crappy derivatives and it announced proudly that those debts were dangerous and the assets were, well, not assets at all, they were worthless.

That’s why the market didn’t want to buy them.

The politicians and central bankers thought they knew better.  They blamed it all on the free market.  They thought those assets were worth something, and decided to buy them.

But not with their own money of course.  Instead they used taxpayer money to pay 100 cents on the dollar for assets that were worthless.  What geniuses these chumps are.

They thought they knew better and decided to go into more debt in order to pay off the old debt.

The cover-up couldn’t last.  And now the free market is trying to burst through and punish the corrupt and immoral politicians and central bankers.  But again they’re trying to fight against the free market.

Whether they’ll succeed in postponing the economic endgame again is unknown.  But what should be obvious is that a small group of men and women are no match for the power, wonder and beauty of the free market.

The free market will prevail, I guarantee it.  The only problem is that the meddling by governments and central bankers will ensure that you have to suffer for longer rather than allowing the market to cure the problem with a short and sharp shock.

But before I go, back to the clock analogy.  If your editor is like a broken clock where we’re right at least twice a day, we must say that the mainstream Muppets are also like a broken clock.

However, in their case, rather than the hands being fixed at a set time, their clock has no hands.  In other words, they aren’t even capable of getting the time right at least twice each day.

Time and again, the mainstream has gotten it wrong, and time and again the mainstream press goes back to them for advice on the solution.  We’re seeing that happen again even now.  It would be funny if it wasn’t for the fact they’ve helped so many people lose so much money.

Cheers.
Kris.