Another weekend, another blabfest.

G20 finance ministers met in Paris.  It seems they’ve agreed to hold another blabfest in April in some other fancy hotel in a fancy city.

Meanwhile, according to The Guardian, just 1992.5 kilometres away:

“Libya is defying international condemnation of a bloody crackdown that saw troops and mercenaries shooting unarmed demonstrators as the crisis spread to Tripoli and the death toll rose to more than 200.”

At the same time we noted:

“The [US] Senate on Tuesday voted to extend for 90 days the legal life of three post-Sept. 11 terrorism-fighting measures, including the use of roving wiretaps, that are set to expire at the end of the month.”

In the Middle East individuals are dying in the streets as they try to fight against despotic rulers.  In the West individuals are told their rights must be infringed in order to protect their freedom!

It’s a funny old world.

Not that the West will worry too much about what’s happening in Libya.  As long as the trouble stays within its borders.  As The Guardian also notes:

“Libya, once treated as a pariah, has been embraced by western countries hungry for oil and lucrative investment opportunities since Gaddafi abandoned his support for terrorism, but there has been very little easing of domestic repression.”

But, the G20 had more important things to consider.

The finance ministers and central bankers needed to figure out how to prevent the next economic nightmare.

It looks as though they’ve just about got it nailed down… if you believe this communiqué that is:

“While not targets, these indicative guidelines will be used to assess the following indicators: (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, taking due consideration of exchange rate, fiscal, monetary and other policies.”

What?

Simply put it means the G20 is doing its darnedest to look as though it’s doing something.  To look as though it can do something.

Having blabbed on for months about developing indicators that will help signal a potential economic meltdown, it seems they’ve finally settled on the bunch of statistics they’ll use.

Trouble is, how are these supposed indicators going to work?  What will be the benchmarks?  What level of debt is good, bad and just fine?

A recent report in The Washington Times stated:

“President Obama projects that the gross federal debt will top $15 trillion this year, officially equalling the size of the entire U.S. economy, and will jump to nearly $21 trillion in five years’ time.”

We wonder where that will show up on the new G20 indicators – good, bad or just fine.

And what about American personal debt levels, which according to the US Debt Clock now stands at USD$16.2 trillion.  Although a survey by the Federal Reserve Bank of New York claims it’s really just a paltry USD$11.4 trillion.

Is that good, bad or just fine?

At the other end of the scale is Australia.  The Australian Office of Financial Management (AOFM) – the government’s money managers – states total Australian government bonds on issue are $180.5 billion.

That’s just a fraction of US debt.  So we’d have to think that’s good.  In fact it’s roughly 1% the size of US government debt.  So we’re OK.

Australia should be able to pass through the G20 financial body scanner clean as a whistle.

[Beeeeep!]

Oops!  What was that?

“Can you remove your belt, shoes and pants sir, you seem to have a personal debt problem secreted somewhere.”

Ah yes, Australian private debt.  The Reserve Bank of Australia (RBA) tells us that residential and personal debt totals $1.107 trillion…

Or, to put it another way, $49,064 per Australian citizen.  If you compare that to US personal debt levels, there’s not so much of a difference.  Personal debt per US citizen is $52,093.

So where’s that going to show up on these fancy new indicators?  Good, bad or just fine?

But back to public sector debt levels.  The following chart includes the debt levels of the four European members of the G20 – Italy, Germany, France and the UK:

Source: citizeneconomists.com

These levels are already above the maximum determined by the two-decade old Maastricht Treaty.  Exceeding the treaty is supposed to result in a fine for the EU member country.

In that case maybe they won’t worry about public sector debt levels after all.  No, much better to look at private sector debt where Germany, France and Italy appear to be much better off in comparison:

Source: Progressive-economy.ie

These are older numbers (2008).  But it shows you if Australia was on this chart, it would be on the left-hand side with the highest level of private sector debt as a proportion of GDP.

No wonder they’re waiting until April to decide how these supposed indicators will work.  And we haven’t even looked at government budget deficits and savings rates, and all the other mumbo-jumbo the G20 says will act as a warning sign to the next crisis.

As we’ve shown before, the more the policymakers claim they’re working to prevent another crisis, the greater the chances another one will occur.

It’s the meddling what does it.  The very idea that twenty nations – actually more than that when you consider the European Union representation on the G20 – can set aside their own agenda and objectively agree on independent indicators is ludicrous to start with.

I mean, let’s even play along and say that high public debt levels are a sign of a future crisis.  Can we really imagine the US, Italian, French, German and UK government’s agreeing to any level below their current levels of public debt?

Of course not.  It would be an admission of guilt.

By the same token, could we expect the Australian government to agree that personal debt above – for example – 70% of GDP is bad for an economy?  Again, of course not.  Not when it’s currently at 100% of GDP.

No, the blabbing will continue.  The pointy-headed finance ministers will strut around telling you everything is being fixed… that everything is under control.

Meanwhile, as they play with their new indicators they’re trying to hide away the two indicators that show the true state of the global economy and where it’s heading – interest rates and inflation.

Having fiddled with both of them for short-term political gain even they must realise the current financial system is broke.  But rather than admit it, they prefer to create another diversion.

They hope by the time the next crisis hits they’ll be out of office and living off a state pension.

Of course if things go really wrong, they may need to call in a favour from one of the despotic dictators they’ve helped prop-up for years.  Perhaps that’s why Western leaders have been so slow to criticise the Arab rulers.

After all, one day Obama, Gillard, Rudd and Cameron may need to give Gaddafi and his pals a call and ask him if he’s got a spare room available!

Regards,

Kris Sayce
for Money Morning Australia

Today is Australia Day and we’re taking the day off.  In fact, we’re taking a few days off.

While we’re away our hot-seat will be filled by a host of other characters.  We’ll be back next week sometime… Thursday if we remember rightly.  Until then…

A quick note on Australia’s overpriced housing.  Yesterday we wrote:

“In their world house prices either go up, plateau or become more affordable… but they never go down.”

Yesterday afternoon we noticed an article on The Age website headlined, “House prices to ease in 2011: NAB survey”.

In mainstream journalism speak, “ease” is another way of saying “faaaaaaaaaaaaaaall”

The banks are panicking.  The mainstream is on the ropes.  And Alan Oster, chief economist at NAB told the paper:

“There has… been a significant downward revision in house price expectations over the next 12 months.”

He goes on:

“The house price expectations of our survey respondents have been downgraded significantly from our previous survey.”

Didn’t you just say that Alan?  Oh well, never mind.  And what is the extent of this significant downgrade?

Reporter Chris Zappone reveals all:

“National house prices are likely to decline 0.5 per cent over the next 12 months.”

Is that all?  Are they kidding me?  Oh hang on.  Who did the NAB survey?  The Age says it’s “according to the poll of 237 property professionals.”

Of course.  Prices only ever go up, plateau or… ease.  They never go down.

But they’re an influential bunch are these spruikers.  Over at BusinessSpectator, Patrick Stafford writes:

“Demolishing pricey property claims”.

We wouldn’t say Mr. Stafford demolished the pricey property claims.  Rather he trots out the usual excuses:

“A new report has put Melbourne and Sydney at the bottom of a survey of the world’s most affordable property markets based on a ratio of median house prices to income levels, but experts say this method is faulty and doesn’t take into account factors such as interest rates and tax policy.

“The report also comes as a new piece of research from Fitch Ratings also shows Australian banks would be able to withstand a doomsday-scenario where house prices fall by 40 per cent and defaults skyrocket.”

… And Australia will destroy anyone who tries to mess with us using our supercomputer and powerful radar gun.

Ah yes.  Australia is different.  Australian banks can withstand anything… including radar guns.

As we pointed out recently, you can take all the stress test results you like and throw them away.  We don’t need them.  We’ve got what happened in real life to guide us.  And that’s the fact that Australia’s banks would have gone bust in 2008 if it wasn’t for the taxpayer bailouts.

They would have gone bust with low defaults and without house prices dropping.  But Fitch reckons the banks can withstand high defaults and prices dropping 40%… Jokers.

Expect the property gurus, spruikers and mainstream press to keep banging on about the resilience of the Aussie housing market… right until it crashes around their ankles.

Next…

Following Monday’s Money Morning we received this letter from reader Anthony:

“My Mortgage fund has been frozen for last 2 years I have been able to switch about 30% since then and they have always implied that at 65 it could be turned into a pension and my financial advisor assumed the same for information received.

“We have now been informed that it cannot be switched to pension phase! But must stay in the ‘Super-Rollover Fund’. What does this mean, well I am now 65 and I will have to pay 15% fund collected tax on the returns and I lose about $1500/yr in Centrelink Pension as I come under the income test.

“Total effective loss of around $2000/yr!

“If the redemptions continue at current rate then it may take 5-7 years to switch out. I think ‘we’ need some help here to get Centrelink and Tax department to re-assess frozen funds for retiree’s?

“I have also noticed that the fund has continued to invest in new mortgages since the freeze rather than turn into a cash fund as each Mortgage expires [Note: it is difficult to work out what they are doing due to lack of information]. I am with Colonial First State Super Rollover/Income fund. Information is hard to come by and months out of date by the time it is posted on their website.”

We remember writing about the Colonial First State mortgage funds at the time they were frozen.  They froze the funds because Colonial didn’t have enough spare cash in the fund to pay out investors.

So it must have come as a shock to those investors last year when Colonial found a spare $500 million under the sofa in order to buy property from the failing Direct Factory Outlets (DFO) business.

Meanwhile, investors in the mortgage funds are still waiting.  It makes you wonder why Colonial didn’t decide to invest the $500 million in buying out the mortgage fund investors… could it have anything to do with the quality of the investments?

We wonder.

So we looked at those mortgage funds to see how they’re performing.

The Colonial First State Mortgage Income Fund informs investors:

“Colonial First Sate has taken the decision to terminate this fund, effective 1 March 2010.  We have written to investors about this decision and what it means for them.  Our intention is to make regular payments to all investors every three months from the net proceeds of the fund’s assets.”

Hmm.  Nice.  CFS then asks itself a question, “Why take this action?”

It answers:

“In January 2010 we identified a small number of mortgages in this fund’s mortgage portfolio that have the potential to become bad debts.  Provisions taken within the fund to cover potential losses from these loans mean that the fund is unlikely to make income distributions for at least 18 months.  We believe it is in the best interests of investors as a whole to terminate this fund and return capital to investors.”

So, one year later let’s see how Colonial is getting on with returning capital to investors…

Um, it doesn’t appear they’re getting on with it at all.

According to newspaper reports at the time the fund was frozen:

“Colonial First State’s frozen mortgage income fund represents less than 1 per cent of its total funds under management.  We know this because Colonial made a point of telling us when it decided to terminate the $850 million fund this week.”

In January 2010, the mortgage income fund had $850 million of assets.  At the end of December 2010 it had…

$814.30 million of mortgages, and $4.96 million of “other”.

So according to Colonial’s own numbers, over the past year it has managed to pay out just $31 million… which is obviously in the best interests of investors.

But amazingly, the Colonial factsheet reveals more than the fund manager has publicly let on.  You’ll note in the above quote it says, “a small number of mortgages in this fund’s mortgage portfolio have the potential to become bad debts.”

Small eh?  Does 10.45% of the portfolio seem small to you?

I’ve underlined the offending number below:

Source: Colonial First State

Out of an $820 million portfolio, over 10% of the value is in default.

But that’s only half of it.  Colonial points out:

“The figures above do not include loans which are in long term work out, where we will generally have either sold or taken ownership of the property.  For loans in long term work out, specific provisions will generally be taken from within the fund’s investment returns to provide for potential losses on these loans.”

So the “small” number of bad debts are clearly much higher than 10.45%.  But the fund has fudged the numbers so investors don’t know the real story.  So much for these being sold as great investments for retirees.

We’d love to see the original brochures.  We’re sure they’d be full of “safe”, “secure”, “reliable”, blah, blah…

So it turns out that Colonial have bought out some of the mortgages and/or properties.  Not with the firm’s own money of course.  We dare say it’s just getting churned between funds like pass-the-parcel…

Only in this case you don’t want to be left holding the package when the music stops.

Cheers,

Kris Sayce
For Money Morning Australia

Before we get on to today’s Money Morning you may have noticed that over the weekend we disabled the Money Morning website comments.

You can click here for an explanation…

Now, on to today’s letter.

Money Morning reader Philip sent us a clipping from his local newspaper, the Sunday Mail. It read: “Super boomer threat”.

A shorter version of the article can be found online.  It has the headline: “Trouble ahead for your superannuation”.

According to the article:

“One of Australia’s leading demographic economists has warned a critical point will be reached in 15 years when there will be more people withdrawing cash from super funds than there are workers contributing to them.

“Brian Haratsis, chief executive of Macroplan Australia, says unless more money is pumped into the system by current workers, many funds may not have enough liquid assets to meet redemptions, forcing them to shut up shop.”

Mr Haratsis claims this is “the biggest problem that nobody is talking about.”

Who is Brian Haratsis?  And what is Macroplan Australia?

We had no idea.  We’d never heard of them.  Something to do with the superannuation industry was our first guess.

Our second guess was that it was a mouthpiece for fund managers.  That it was cajoling the government to bump up super payments to 15%.

We were wrong on both counts.  Although Mr. Haratsis is quoted in the Sunday Mail article as saying:

“While Mr Haratsis says the government will never actually allow the [superannuation] funds to freeze, it must act soon by increasing the super guarantee to 12 per cent as quickly as possible – and then to 15 per cent for a period to make sure that funds have enough money to meet the impending ‘hump’ in retiree numbers caused by the retiring baby boomers.”

Anyway, we checked out the MacroPlan Australia website.  Here’s what it states:

“As leaders in the property market, MacroPlan provides thought leadership to the industry, through regular presentations identifying future trends and scenarios, and strategic direction in relation to major industry trends, including planning advice for major industry participants.”

We’ve no idea what that means!

It’s a shame it doesn’t take some of its own advice, “We pride ourselves on keeping the message simple…”

[Cough!]

Using our powers of logic it seems the company is involved in the property game.  But, what MacroPlan does isn’t important.

We’ll leave them right there and won’t say another word about them.  But, Mr Haratsis has made a startling point.  Something even your editor hadn’t considered.

If you’ve been reading Money Morning for some time you’ll know we’ve had one or two things to say about the government stealing super.  We first wrote about it two years ago.

Back then we had 15,000 Money Morning readers.  Today there are over 60,000.  So if you’re a new reader there’s a chance you haven’t seen those articles.

To sum it up, politicians have realised the biggest political mistake of the twentieth century was giving individuals more control over their retirement savings.

Simply because there’s over $1.25 trillion that politicians can’t easily get hold of.  Although that doesn’t stop them trying.

The federal government started nationalising superannuation in 2009.  That’s when it stole foreign temporary workers’ superannuation funds.

Last year it took the next step.  It ordered private super funds to send all unclaimed funds to the Australian Taxation Office (ATO) – including those of Australian citizens and residents.  The ATO then handed the cash over to the federal government.

The cash was added to consolidated revenue and saved for the future… erm, sorry, that’s not right… consolidated revenue is the government’s spending money.  The government is potentially spending your retirement cash!

That my friend is how governments’ plan for your future.  They spend your money now and hope someone in the future will be prepared to pay for your retirement… good luck with that.

In our view, Australia’s private retirement system will go the same way as the private retirement schemes in Argentina, Hungary and Ireland – it’ll be nationalised.

But the point made by Mr. Haratsis is enlightened.

Here’s the key quote:

“[The government] must act soon by increasing the super guarantee to 12 per cent as quickly as possible – and then to 15 per cent for a period in order to make sure that funds have enough money to meet the impending ‘hump’ in retiree numbers caused by the retiring baby boomers.”

You probably think the money in your super fund will be given back to you to live off in retirement.

That’s what you’re told anyway.

What really happens is funds pool all the contributions.  They make an investment and then allocate a portion of that investment to an account in your name.

For instance, with shares, the fund doesn’t place separate orders for each account.  That would be unworkable.  The fund buys a whole bunch of stock and then allocates a portion to you.

Property investments are similar.  If you’ve allocated $5,000 of your super to property, the fund can’t do much with that.  Not unless it pools the money with others.

So, it takes the total sum allocated to property, which could be billions of dollars, and buys a big building.  It then allocates $5,000 worth of that building to your account.

Here’s the thing.  Properties, especially big buildings, aren’t liquid investments.  It’s hard to sell off small parts of a big building.  That’s not the same with shares which are liquid and can be sold and converted to cash in just three days.

The problem – which Mr. Haratsis has revealed – is as more people retire, more super funds will need to convert to shares and cash.

That means if there’s more cash withdrawn from super than deposited, there will be less demand for illiquid assets such as property and infrastructure.

That’s a problem… a big problem.  Go into any high rise building in the CBD and you’ll see a plaque somewhere that states the owner/manager of the building is one of Australia’s big fund managers.

Indirectly, you may be a part owner of one of those buildings.

So, the upshot is over the next 10-15 years there will be huge downward pressure on the commercial property market.  As funds look to downsize property holdings in favour of cash.  The question is who’s going to buy these buildings?

Not other superannuation funds.  That’s for sure.  They’ll all be in the same position.

If you think this is too far-fetched and couldn’t happen, think again.  A similar thing happened just two years ago.  In that case the problem was with the mortgage funds.

Mortgage funds had to freeze redemptions because they didn’t hold enough liquid assets.  Mortgage funds had a small stop-gap measure which was to borrow against the assets in the fund in order to meet redemptions.

But unfortunately for those invested in the funds, the borrowings dried up quite quickly too.

The result?  Retirees who were told to invest in mortgage funds for the higher income yield suddenly found their income had stopped.

The funds had to start liquidating assets.  In other words they sold commercial property.  If you’ve ever tried to sell a house you’ll know it can take months.  Try selling a 40-storey building and see how long that takes.

As a News Ltd report mentioned at the time:

“At last count, 56 funds from more than 15 companies had locked out investors, insisting they wait six months or more before withdrawing capital.  In most cases the money has been lent for investments such as commercial developments and infrastructure and other assets that can’t be sold quickly.”

That was round one.  Get ready for round two.

Superannuation is supposed to be about your money being kept in trust for you until you retire.  It’s not supposed to be a Ponzi scheme.

In contrast, state pension systems are Ponzi schemes.  You pay taxes today which are used to pay for someone else’s retirement today.  You then hope that by the time you retire in 10, 20 or 30 years that some other sucker is there to pay for your retirement with their tax dollars.

As Mr. Haratsis points out, odds are that over the next few years the number of retirees will explode.  And there will be fewer workers contributing to super and taxation.

That spells bad news for a Ponzi state pension and health schemes.

And it seems if Mr. Haratsis is right, the news for those in private retirement schemes may not be too good either.

Cheers,

Kris Sayce
For Money Morning Australia

PS. We’ve noticed the 7th Annual Demographia International Housing Affordability Survey has been released.  All 32 of the Australian towns and cities surveyed are now considered either ‘Seriously Unaffordable’ or ‘Severely Unaffordable’.  Tune into tomorrow’s Money Morning where we’ll have more to say on this remarkable survey…

It’s no surprise your editor copped some flak for yesterday’s Money Morning – The Cost of Meddling.

But that’s OK.  We’re a big lad.  We can take it [sniffle].

The gist of the comments was that we don’t know what we’re talking about.  And, besides, cloud seeding doesn’t work anyway.  So it couldn’t have made the floods worse, right?

What’s that?  Scientists get something wrong… surely not.

So, let’s see if we’ve got this right.  Scientists are 100% right when they warn you about climate change.  But they’re 100% wrong when they spruik the benefits of cloud seeding.  OK.  Got it.

But where does that leave the scientists who believe in climate change and cloud seeding?  Such as the one mentioned in this article from Physicsworld.com:

“It should be possible to counteract the global warming associated with a doubling of carbon dioxide levels by enhancing the reflectivity of low-lying clouds above the oceans, according to researchers in the US and UK.  John Latham of the National Center for Atmospheric Research in Boulder, US, and colleagues say that this can be done using a worldwide fleet of autonomous ships spraying salt water into the air.”

As we’ve said many times, we’ve no idea whether climate change is real or not.  By the way, we usually cop it from the anti-climate changers too whenever we write that.  But we do know not to take every statement from a supposed climate change expert at face value.

Just like any other scientist, they’ve got vested interests.  A scientist working for tobacco companies will play down the risks of smoking.  Just as a scientist who works for a government agency will play up the risks of climate change.

And a scientist who works for a food company will claim their foods are safe.  And a scientist who works for a beverage company will say their drinks aren’t unhealthy.

You shouldn’t think that just because someone has a Dr. of Prof. in front of their name that they can’t be influenced.  So to think that climate change scientists are unique individuals, somehow immune to the kind of influence experienced by other scientists is very, very naïve.

Make no mistake.  There’s a lot of money to be made from the climate change industry.  And if you can make money from it you’d be mad not to.

Those are the facts, like it or not.

And as for the Queensland government’s $7.6 million punt on cloud seeding technology…

What we should have shown you yesterday is proof of the inefficient government.  Even before it finished a four-year and $7.6 million study of cloud seeding, the rains arrive and the technology – even if it works, which we’re told it doesn’t – isn’t needed.

Anyway, we could go on.  But we won’t.  Because it’s too boring.  We’ve more important things to write about today…

“Winston Churchill’s gold dentures auctioned for $25,590”, reports News Ltd.

A strange way of buying gold… But nonetheless, it’s still gold.

Overnight the US dollar gold price got smashed, down USD$22.53 to USD$1,345.57:

Source: Goldprice.com.au

The Aussie dollar gold price has done better.  It’s only down two bucks to $1,362.52:

Source: Goldprice.com.au

The drop in the Aussie dollar against the US dollar explains the difference.  This morning the Aussie is trading at USD$0.9867 – nearly two cents lower than earlier this week.

You can bet your bottom dollar that newcomers to the gold market will flee in panic.  That’s why we suggest if you are new to gold you buy small chunks at a time.  That way you’ll be less likely to panic on pullbacks like this.

Frankly, a move down in the gold price is a red herring to the big picture.

The big picture is what’s happening in other markets.  And what’s happening with inflation… it’s going bonkers.

Yet most in the mainstream still refuse to accept it exists.

They see inflation as something to worry about in the future… in a year or two… even though they said the same thing two years ago!

They argue the last thing central bankers should worry about now is inflation.  Especially with the economy still at risk of going backwards.

Of course what they fail to understand is the economy needs to go backwards.  The artificially low interest rates have created more problems than they solve.

To use a tasteless analogy, the low interest rates are damming the flow of water.  The central bankers think they can gradually open the gates to release some of the flow.  Unfortunately, they haven’t accounted for the damage they’ve caused by holding back so much.

Eventually there’s so much of it that when the sluice gates open, they lose control and the flood wreaks havoc.

Low interest rates in the US and Europe are causing monetary and inflationary floods in other countries – Brazil is a classic example.

Thanks to inflationary policies by Western central bankers, cash is heading for emerging markets such as Brazil.

Since late last year, just before Federal Reserve chairman Ben Bernanke went on his money printing spree, the Brazilian Real has gained nearly 10% versus the US dollar:

Source: x-rates.com

It’s a similar trend to the Aussie dollar.

The effect has been an increase in inflation and in inflation expectations.  And for a country with recent experience of double-digit inflation, that’s sure to create concern amongst the public:

Source: Banco Central Do Brasil

The result of higher inflation?  Higher interest rates:

Source: Banco Central Do Brasil

Again, the central bank interest rate is a long way below previous highs.  But still, you’re looking at a country that’s recently had high interest rates.

And as the charts show, inflation and interest rates can take off quickly, before you know it.

If you compare the two charts you can see the central bank had to lift interest rates from 15% in 2000 to above 25% in 2003 in an attempt to control price inflation.

I’m sure you can see why Brazilians wouldn’t want that repeated.

But, that’s the impact of inflationary policies in the US and Europe.  Cheap money (low interest rates) in the US is causing investors to seek higher yields.  That’s luring them to higher yielding countries such as Brazil.  And that pushes the value of the local currency higher.

While an appreciating currency may sound good, that’s not always the case.

Because while one currency appreciates, the other (the US dollar) depreciates.  The depreciating US dollar is pushing up the price of commodities such as wheat and soy beans.

As you can see from the wheat price chart below, a 10% increase in the value of the Brazilian Real isn’t much comfort when wheat futures prices have increased by 76.8% in the last six months:

Source: tradingcharts.com

In other words, sure the Real has gained in value, but commodity prices have gained further.

That’s because inflation doesn’t impact goods and services evenly.  Price inflation takes time to filter through an economy.  It affects different industries and commodities at different times.

And it’s not just in Brazil where there are inflation fears.  According to the Sydney Morning Herald:

“Inflation fears soared to their highest level in two and a half years this month as food prices rose due to the flood crisis in eastern Australia.

“The Melbourne Institute consumer inflationary expectations survey, released on Thursday, showed the median expected inflation rate jumped to 4.6 per cent in January, following a decrease of 2.8 per cent in December.”

By the way, while we agree the floods will have an impact on consumer prices, it’s wrong to blame the floods for all rising prices.  Although we’re sure the central bankers will be quite happy to pin the blame there – it’s in their interests to.

The fact is the real cause of consumer price inflation is the monetary inflation from central bankers.  The weather and flooding is a minor detail compared to the damage caused by central bankers.

A quick look at the wheat price chart above shows you that… as will the price chart of most other commodities –

…Soybeans up 50%:

Source: tradingcharts.com

…Corn up 85%:

Source: tradingcharts.com

…Live Cattle up 37%:

Source: tradingcharts.com

…Cotton up 76%:

Source: tradingcharts.com

These are the results of central bank meddling… printing money to bail out banks in the West is causing price inflation in hard and soft commodities across the globe.  And where is it being felt most?

By the consumer.  Especially by the consumer who can least afford the price rises… hence civil unrest in developing nations.

But don’t think Australia or any other developed nation is immune from this.  Interest rates in Australia have already moved higher – just as in Brazil – and odds are, having neglected inflation for too long, the Reserve Bank of Australia will be forced to raise rates again before the year is out.

And that means the benefits of a higher Aussie dollar will be wiped out by the increased costs of living for the average Australian.

Cheers,

Kris Sayce
For Money Morning Australia

If you have energy stocks, or natural gas stocks, you’re probably aware that the world is currently facing a ‘gas glut’. A gas glut means that there’s more gas than we’re consuming.

That can’t be a good time to buy gas stocks then can it? Or could it?

In the latest issue of Australian Small-Cap Investigator, Kris went right ahead and tipped a natural gas play, crazy right?

Well, sort of.

Even though the world has more gas on its hands than it knows what to do with, Kris went ahead and tipped a potentially 1400% gainer because of the company and what he calls its ‘giant gas resource’.

However, while you might think that he’d been inhaling the same stuff he was tipping, he said this to his readers.

‘A gas glut is bad news for explorers and producers. But not for all explorers and producers mind you… Because those with a giant resource can afford to see through period of low commodity prices.’

You see, up until mid 2008 the price for gas was USD$19 per million British thermal units (mmBtu), which is equivalent to about 1 cubic foot of gas. And since then, the price has fallen 81% to a measly USD$4 mmBtu.

Do you see why some might think Sayce was crazy to suggest buying into this resource now?

Look, I’ll be honest, it would be quite easy for me to borrow his research and give his reasons for investing in this stock now. And that’s because there’s a chance it will bring in BIG returns.

But I won’t. Because that wouldn’t be fair to paid up subscribers.

Instead, let’s have a look at what’s going on with natural gas.

Russia is actually the world leader when it comes to proven gas reserves, holding over 47 trillion cubic metres of the stuff, or just over 23% of the world’s proven reserves. Australia on the other hand, has only 3 trillion cubic metres, which barely accounts for 2% of the known reserves.

However, despite Russia hogging all of the reserves, America still has a sizeable share of nearly 7 trillion cubic metres. And as you might expect, America is at present the biggest consumer in the world of natural gas.

But both Australia and Russia produce more natural gas than they consume, unlike America which needs an extra 100 billion cubic metres imported each year to meet its demand.

Yet, even though America can’t produce enough natural gas to meet its current needs, discovery, exploitation and technology advances in shale gas in America have actually added to an oversupply in the global markets.

And because there are many countries with gas reserves, it has added to this build up. But this is where it starts to get interesting…

While it’s widely accepted that the world has more gas than it knows what to do with right now, most market commentators all agree one thing: it’ll be short lived.

According to Kris’s pal, Chris Mayer, a prominent financial writer based in the U.S. he’s said ‘It’s quite possible that in the next decade, LNG [liquefied natural gas] will surpass coal as Australia’s most valuable export… Look at what oil did for the Middle East; the same kind of thing could well happen for Australia.’

In fact, the International Energy Agency (IEA) expects Australian gas production to grow at an average rate of 4.2% each year until 2035. This would make natural gas one of the fastest growing sectors in the world, and it’s happening in our own back yard.

It could mean that in less than ten years, along with coal, uranium and iron, natural gas could become a very significant and strategic commodity.

The IEA recently suggested that the gas demand will increase by over 44% by 2035, and guess who will account for most of it? Yup, you guessed it. Chinese demand alone is expected to account for about one fifth of that increase. With India coming a close second.

So, while some investors have been tempted to stay away from natural gas plays, others like Kris, have clearly seen the long term potential here.

It may take a few more years to clear the glut, but with China as our major export partner, and wanting to gobble up our energy resources, the IEA could be right when they say ‘China could lead us into a golden age for gas’.

Now let’s have a look what happened on the market’s yesterday…

The S&P/ASX 200 closed up by 8 points to 4,593.40.

The American market was closed yesterday for the Thanksgiving holiday.

Trading volume was thin, but the FTSE managed to add 41 points to close at 5,698.93

And finally the Nikkei ended the day higher by 49 points to 10,079.76. The index is up over 9.5% so far for the month of November.

The price of spot gold in Australian dollars is trading at $1,400.56 while in US Dollars it is trading $1,374.45. The price of silver in Aussie dollars is $28.06 and in US Dollars it is $27.54.

Copper is currently USD$3.74 a pound (AUD$3.82) Nickel is USD$10.19/lb (AUD$10.41) and Tin is USD$11.04/lb (AUD$11.28).

If this report is anything to go by, it seems that one analyst has suggested that commodity driven currencies, like the Aussie dollar will experience a sell-off before the end of the year as investor jump out of what are considered risky assets.

The report cites the main reason investors are shying away from risk is the Chinese market trying to slow down their economy and curbing inflation, which may lead to a drop in demand for commodities.

It’s expected that the Aussie could drop as low as 95 cents by the end of the 2010 but will jump again when normal trading volumes resume again next year.

The Aussie dollar versus the US dollar was USD$0.9808, and against the Japanese Yen JPY 82.00.

Crude Oil was higher overnight, closing at USD$84.18

For the biggest movers on the market yesterday click here…

That’s all I have you this Friday, have a great weekend.

Shae.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

52-Week Highs and Lows

Number of companies reaching a 52 week high previous day:  35
Number of companies reaching a 52 week low previous day: 19

I’ll get on to the latest development in the government pilfering of retirement money in a moment. But first…

Next week your editor will dip into the Money Morning mailbag and read out some readers’ letters.

What’s interesting since we called the beginning of the housing crash a week or so ago is, well, the lack of opposition from the property spruikers.

In fact we’ve received a bunch of letters retelling personal experiences of house prices falling over the years and recently, yet I’ve only come across one that’s given us a positive example of house prices rising in the last year or so.

And even those that have told us about the rubbish return they’ve made on a property have probably lost more than they think. Because like the bulls they’ve mostly – but not all – only taken into account the capital gain or loss, and not considered the interest expense.

But just as interesting is the number of letters we’ve received from readers telling us about massive losses that they or their friends made on property in the 1980s and 1990s – and I’m talking big losses.

Yet funnily enough none of the so-called leading property indices seem to show these losses. Funny that. As I mentioned last week, it wouldn’t surprise us if the indices failed to show the falls this time either.

Although given the fact that this downturn is likely to be ten-times worse than the last one, even the dodgy housing indices won’t be able to hide the truth of this housing crash.

Anyway, enough of the housing debacle for this week, there’s more important things to look at…

If you’ve been a Money Morning reader for some time you’ll know we’ve been keeping a close eye on what the Federal government is doing with your retirement money.

We’ve pointed out that in the long run the ultimate aim for any government, regardless of the colour, will want to get its dirty mitts on your retirement savings.

After all, we are looking at over $1 trillion which for the most part is currently just about out of its reach.

And once it manages to grab your super savings, well, they’ll be off to the races. Not literally of course, but with up to $1 trillion in the government’s pocket there’ll be no end of rubbish they’ll be able to waste it on – a national broadband network for starters, inefficient green energy for seconds… and pointless infrastructure for thirds.

In a nutshell, don’t bank on the super money that you see deducted from your salary each month being there for you when you retire.

Two news items within the last twenty-four hours highlight how retirement funds are just a convenient stash of cash for corrupted politicians. The first is a story from overseas, the second is much closer to home – actually, it is home if you’re a Queenslander.

Bloomberg News reported yesterday, “Hungary Follows Argentina in ‘Nightmare’ Pension-Fund Ultimatum”

The story explains:

“Hungary is giving its citizens an ultimatum: move your private-pension fund assets to the state or lose your state pension.”

It goes on:

“Economy Minister Gyorgy Matolcsy announced the policy yesterday, escalating a government drive to bring 3 trillion forint ($14.6 billion) of privately managed pension assets under state control to reduce the budget deficit and public debt. Workers who opt against returning to the state system stand to lose 70 percent of their pension claim.”

In other words, Hungary’s friendly government is expropriating by force the private property of private individuals.

The reference to Argentina is due to the fact the South American country did the same thing about two years ago.

In October 2008 Reuters reported:

“Argentina’s center-left President Cristina Fernandez on Tuesday signed a bill for a government takeover of the $30 billion private pension system…”

I’m afraid that’s what happens when governments are given too much control. It’s more important to them they retain their position of authority (to bully, harass and punish the individual) than it is to serve the individual’s interests.

Look no further than the power crazed fanatics in control of the European Union. It’s a classic example of bureaucrats and their mad obsession for power. Click here to watch this video of UK MEP Nigel Farage and his attack on the European Union.

So, could Australian retirement money be the next to get sucked up by a government?

Why not, of course it could. Actually, it’s already started.

The first phase was the expropriation of foreign temporary workers’ superannuation.

The second phase started recently where the government can now demand that unclaimed super must now be transferred to government consolidated revenue – so the government can spend it.

And now the sinister third phase. Yesterday’s The Australian contained this headline, “Bligh government scraps Queensland motorways sale”.

According to the article:

“Premier Anna Bligh today announced the government would transfer the ownership of Queensland Motorways… to the state’s investment arm Queensland Investment Corporation (QIC).”

It continues:

“QIC would have to pay the full market value of around $3 billion, which would see the toll road’s $2.9bn debt wiped from the budget balance sheet.”

Finally, Bligh made this extraordinary comment:

“It stays in public hands (and) it strengthens our superannuation scheme for 80,000 Queensland workers.”

What a load of crap.

But not surprisingly the mainstream hacks see no problem with this. Neither The Australian nor today’s Australian Financial Review expresses any concern about it. What do you expect?

As for Ms. Bligh’s claim that it will “strengthen our superannuation scheme”, well, we can only think she hasn’t looked at Queensland Motorways’ income statement and balance sheet lately. But more on that in a moment…

Make no mistake, the swiping of $3 billion of retirement money by the Queensland state government is no different to the actions of the Hungarian and Argentinian governments.

Let me put it this way. The Hungarians are forcing their citizens to hand over private assets and in return the citizen will receive an unguaranteed payment from the government in the future – if they’re lucky.

In Queensland the state government will force QIC to give it $3 billion of cash (private citizens’ cash remember), and in return the state government will give QIC a company valued at $3 billion… but which is actually in debt by $3 billion and which is also losing a lot of money.

The members who have money invested in QIC will get an unguaranteed payment from the government owned fund in the future – if they’re lucky.

There is so much wrong with this transaction it’s not funny. It’s proof governments see retirement funds as nothing more than another way of grabbing on to your private property – your retirement savings.

For a start, what does it say about the Trustees of the funds? Aren’t trustees supposed to act in the best interests of members?

The only upside to this is that apparently the asset will be parked in the defined benefit fund for Queensland’s public sector workers. Which means private sector workers won’t be lumped with this loss making and indebted “asset”.

Then again, considering it’s the private sector who ultimately guarantees these defined benefit schemes through taxation, the burden will always be worn by the private sector.

But we do wonder in what possible way is the trustee acting in the best interests of the members and the taxpayer when Queensland Motorways has an income statement that looks like this:

Source: Queensland Motorways

Finance costs of $102,210,000. It’s total income is only $222 million. And it’s racked up a loss of $85 million.

Then there’s the debt position:

Source: Queensland Motorways

Nearly $3 billion of long term debt, and accumulated losses of $714 million.

Now, just remind us again, what is the purpose of a retirement fund?

In our naivety, we thought it was to help you save for retirement.

If that isn’t asset theft we don’t know what is.

Because if it keeps making the kind of losses it has made then the taxpayer will be called on again to top up the shortfall.

So it’s no wonder the government pulled the pin on trying to sell it on the market. After the heat it copped from the QR National sale, trying to sell Queensland Motorways would have been a disaster.

As an aside, how is QR National [ASX: QRN] doing since your editor called it a “dog”? Quite nicely as it happens, up nearly 20%! It just shows no-one’s perfect, least of all your editor.

So, because the government figured that no-one in their right mind would buy a bunch of toll roads that few people appear to use, the only alternative was to take money from those that had no say in the matter – retirement fund members.

But don’t just laugh at the Queenslanders, because odds are this kind of action will spread.

This clearly shows that a government can get away with dictating the investment policy of a fund manager. It should be a warning to you about the future plans governments have for your super money.

If you think it’s being locked away and cared for until you retire, then think again. Governments of every colour around Australia are already working on ways that they can spend it.

The actions of the Queensland Bligh government are just the latest step in government plans to swipe even more of your wealth.

If it was just the public sector workers that were being penalised for this we wouldn’t worry so much, but as I mentioned above, the ultimate bill always ends up being delivered to the private sector worker.

Cheers.

Kris Sayce
For Money Morning Australia

…Or should that be Last Decade?

This morning’s decision by the US Federal Reserve’s Federal Open Market Committee (FOMC) is the final act in American global economic dominance.

If the US economy wasn’t already terminally ill, then this morning’s news from the FOMC has pushed it into terminal illness. But before I get onto that, more revelations on the Aussie housing bubble…

In yesterday’s Money Morning we wrote:

“I mean, hasn’t the Commonwealth Bank just completed a global tour spruiking the Aussie housing market, claiming that the income to house price ratios are nowhere near as bad as many claim?

“Seeing as the whole point of the tour was to get investors to buy the bank’s debt for as low an interest rate as possible, it must surely mean the bank has failed to convince those investors about the security of the Aussie housing market.

“Higher interest rates means higher risk. International investors clearly view Australian banks and the Australian housing market as being a higher risk than the banks and the RBA would have you believe.”

It turns out, as usual, we were spot on. Because Steven Munchenberg, chief of the Australian Bankers’ Association (ABA) admitted it.

The Commonwealth Bank (CBA) has had to increase interest rates higher than the Reserve Bank of Australia cash rate movement because international investors fear an Australian housing collapse.

Here’s what Steven “Baron” Munchenberg had to say as quoted by Chris Zappone at The Age:

“Over the last few weeks, we’ve had a lot of international investors asking very detailed and probing questions about why it is Australia thinks it doesn’t have a housing bubble. Bankers were grilled at length as to why investors should not be worried Australia has a housing bubble.”

We can only dream about what the bankers’ answer was. But I bet I can guess… OK, say it with me slowly, “Because… Australia… is… different!”

Whacko!

In fact we’re certain that’s what was said. You only need to look at the quote in the Wall Street Journal article titled “In Australia, Signs of Overheating in the Housing Market”, from Michael Blythe, chief economist at the CBA. He told the WSJ:

“It’s a legit concern [housing bubble] given what’s happened in other countries, but we just think…” wait for it… here it comes… “…Australia is a little different.”

Ha, ha, ha… what a clown!

And if you didn’t think the housing bust had started yet, think again. And if you’ve hung your hat on the idea that house prices won’t fall because Australians love their houses more than the foreign Hun, then, er, think again on that one too.

Today’s The Age runs the story that “Stressed home owners sell up”.

The article states:

“Matthew Tregent and Sarah Zajac are looking at selling their home in Deer Park. They are not suffering mortgage stress – far from it – but many of their neighbours are, and it is changing the character of their street.

“‘It looks like there is a bit of hardship in the area. There’s a lot of houses that are going up for sale,’ Mr Tregent said of their relatively new estate.”

“We’re pretty much surrounded by renters now. Other streets in the estate are as well.

“Why we’re planning on moving is because we’ve been taken over by investors predominantly. It’s becoming, I guess, less desirable to live here.”

The descent into slums and the rise of the slumlord is what you’re looking at here.

Look, as you know, with prices this high it makes sense to rent. But the fact is, renters will typically take less care of a home than owner-occupiers, for the simple fact that the property isn’t theirs.

A renter couldn’t give a stuff about maintaining the property. As long as it’s liveable they’ll be happy with it.

And as for the landlord, well, any landlord worth their salt knows that the building is a depreciating asset. Why spend money on maintenance when all they’re really interested in is collecting the rent money and hoping the land value increases.

If that happens they can eventually flog the thing to a developer and walk away with a tidy sum. That’s the theory anyway.

And if as we believe, house prices fall, then there will be even less incentive for landlords to maintain the buildings. If they’re getting a zero net income and zero growth how likely is it the landlord will scrub the place up or give it a new lick of paint?

That’s right, it’s not likely at all.

But, at least it’s pleasing to see another nonsensical Aussie housing myth is being bust in the mainstream press. We’ve argued for some time now that Australians have no greater attachment to a home than anyone else.

There’s no “love” for housing in Australia. Maybe there’s a love for a certain lifestyle, and in some cases that means having a certain kind of house in a certain area… but if the cost to maintain that lifestyle becomes excessive then tastes will soon change.

I know it’s not exactly the same, but think about how many people “loved” buying vinyl records thirty years ago… and how many people “loved” buying CDs ten years ago… “Oh, we could never give up our vinyl/CD collection, we love it…”

Now walk into anyone’s house and their record collection is stored in a machine five inches by three inches – an iPod or something similar – and there’s not a CD or vinyl record in sight.

As I say, it’s not the same, but it proves the point that people change their tastes and their habits over time to suit the circumstances.

Housing is no different. If it costs too much and the expected growth isn’t there, then guess what, people won’t buy, they’ll rent. And if enough people in a certain area rent, then you’ll soon see the place turn into a low-value ghetto… the South Bank area of Melbourne is one area to watch for this transformation. But nowhere will be immune to it.

Even the toffy areas will succumb to the same plague.

Just to repeat, we’re not having a crack at renters. We’re not saying they’re slobs or that they’re lazy. It’s just that they behave how they should behave towards property that isn’t theirs – they don’t care for it as much. It’s as simple as that.

The Aussie housing bubble deniers can carry on as much as they like, the fact remains Australian housing is overpriced and heading for a massive fall. The spruikers can scoff and gloat and claim that people such as your editor don’t know what we’re talking about, it doesn’t matter.

Ultimately, nothing the spruikers or bankers say will be enough to stop the housing market from collapsing once the fall gathers pace.

But that’s for all on housing today, back to the Fed and its dopey money printing scheme…

I tell you what, for a bunch of people who are supposedly super-bright, what they’ve done is nothing short of criminally comical.

Over the past few weeks the Fed has been grooming the markets. It has tried to find out what the market was expecting the Fed to do.

It has been like some sort of weird auction where there are no bids. Or like two shadow boxers not punching each brains out. Instead the buyers and sellers are just mingling around giving vague but obvious clues:

“Sooooo, just supposin’ we printed $500 billion what would you say to that? Not that we will mind you, I’m just like, kinda askin’… OK, what about, say, $600 billion, what would you say to that? Not that we will, I mean maybe it’ll be more, maybe it’ll be less…”

And so the sad comedy routine continued.

The upshot of the Fed’s ingenious cloak-and-dagger mind games was that according to Bloomberg News this week, “Fed Will Probably Start $500 Billion of Bond Buys, Survey Shows”.

This was from a survey Bloomberg had sent to a bunch of Wall Street economists. Funnily enough, the New York Federal Reserve had sent a similar survey to bond dealers and investors the week before.

So we can guess that the response the Fed received was pretty similar to the response Bloomberg got.

Armed with the results of this highly scientific and well-thought-out survey – remember that Fed chairman Ben S. Bernanke is a former “Princeton University economist who studied the Great Depression” – what did the Fed decide to do?

We can only imagine that they hunkered down, cracked open the sarsaparilla, turned on the popcorn machine and…

Knowing that the market was expecting the Fed to print $500 billion of lovely new cash, and knowing that anything less than this amount would disappoint the market, guess what they did… go on, have a guess…

That’s right, the Fed announced this this morning:

“The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

See, that’s the kind of tactic that only a Princeton edumacation can bring you.

The market expects $500 billion, here, we’ll give ‘em $600 billion.

That’s the extent of the brain power that’s gone into this. Trumping the market was the only goal.

If the market surveys had revealed expectations of $200 billion then the Fed would have given them $300 billion. If they’d expected $700 billion they would have given them $800 billion.

If the market had expected free cheeseburgers all-round the Fed would probably have given them two free cheeseburgers all-round.

So, what does this all mean? Are America and the rest of the world on the edge of a hyper-inflationary death-spin? Is it time to stock up on cans of baked beans and hotdogs?

Not so fast. That’s perhaps too obvious. Let’s pause and think about how this could all play out… I’ll get back to you with my thoughts on it tomorrow.

Cheers.

Kris Sayce
For Money Morning Australia

Poor old Paul Bloxham, chief economist at HSBC Australia.

In the space of a few days he’s gone from being premium foie gras to plain old chopped liver.

From being the toast of the town to just vegemite on toast.

Last month you could barely turn the pages of the business press or avoid an interview with him on business television shows as the mainstream press went gaga over Bloxham’s call that the Reserve Bank of Australia (RBA) wouldn’t lift interest rates.

This was a call against the consensus opinion among analysts that the RBA would lift rates.

As it happens, the RBA didn’t increase rates and the mainstream press had a new superstar interest rate predictor on their hands.

He even went out on a limb to say that the RBA would increase rates at the November meeting – which it did. The only trouble is that a couple of weeks ago Bloxham changed his mind.

He decided that the RBA would wait until December before raising rates.

And perhaps the market took notice of their new guru. According to yesterday’s Australian Financial Review (AFR) before the RBA announcement:

“Swaps traders are betting there is only a 23 per cent chance that the RBA will increase its overnight cash rate target to 4.75 per cent, compared with as much as 60 per cent before September-quarter inflation data was published last week…”

But then the RBA made the announcement that dashed the dreams of the mainstream press:

“At its meeting today, the Board decided to raise the cash rate by 25 basis points to 4.75 per cent.”

Drats! Despite being an ex-RBA drone, and who the mainstream thought would have a hotline to the RBA Board, it turns out that Bloxham has as much idea about interest rate movements as anyone else – ie. none.

Bloxham’s fifteen minutes of economic fame is over. Now he’ll be consigned back to the pack with the other analysts and commentators who singularly fail to wow the crowd with their interest rate predicting mumbo-jumbo.

But really, the monthly interest rate circus is just a farce. And it always will be when you’ve got a handful of bureaucrats and so-called business leaders deciding what the price of money should be.

Although one thing’s for sure. The RBA and the major banks are helping out with making our housing price crash prediction come true.

Borrowers that are geared up to the eyeballs, and who were suckered in by the Fairy Ruddfather’s bribes have seen their mortgage repayments increase by over $500 per month since the RBA started jacking up rates again.

Perhaps you don’t think that sounds like much.

But think of it this way. In annual terms it equals an extra $6,000.

And more importantly, for an average income earner with an average mortgage it means that an extra $8,571 of before tax income needs to be re-allocated from saving or spending into paying off the mortgage.

For the average income earner who earns around $65,000 who lives with a second income earner who earns around $48,000 that’s an extra 7.5% of their gross income they need to free up.

That would take their total annual repayments on a $350,000 mortgage (the average) to $30,264, or the equivalent of before tax income of $43,234.

In other words, nearly 40% of gross income.

But that’s if they’re lucky and didn’t take the advice of the property spruikers who told them property prices always go up and that interest rates would stay low.

Because according to the Commonwealth Bank home loan calculators, borrowers with the income levels I’ve mentioned above could now borrow up to $568,000 or an annual repayment of $49,116… or $70,000 of before tax income… or 62% of gross income.

In net income terms, it would work out around 76% of income!

Even more crucial than that is the obvious abject failure of Australia’s banks to convince overseas investors that the domestic banking sector and housing market are safe.

I mean, hasn’t the Commonwealth Bank just completed a global tour spruiking the Aussie housing market, claiming that the income to house price ratios are nowhere near as bad as many claim?

Seeing as the whole point of the tour was to get investors to buy the bank’s debt for as low an interest rate as possible, it must surely mean the bank has failed to convince those investors about the security of the Aussie housing market.

Higher interest rates means higher risk. International investors clearly view Australian banks and the Australian housing market as being a higher risk than the banks and the RBA would have you believe.

The fact that Commonwealth Bank has had to increase mortgage interests rates by more than the RBA cash rate is proof the bank is being forced to pay out more than it would like on the debt it issues.

Of course it’s not just CBA that’s in trouble on that score. If the report released by Westpac titled, “Australian housing: the bubble myth” is anything to go by, then Westpac is equally scared about what will happen when the supposedly mythical bubble pops.

The bubble denying is spreading from bank to bank. First CBA, now Westpac… we’ll wait for ANZ and NAB to take their turn…

Anyway, we took the opportunity of the Melbourne long weekend to read through Westpac’s report in full.

Several readers picked up on something we wrote in Friday’s Money Morning. We quoted from the report:

“There is little evidence of excessive speculative activity by investors in recent years and we see little risk of disruption from investors selling properties – residential property has outperformed other assets and continues to offer a stable, secure source of income.”

Our comment was that the bank’s economists must be mad if they think property offers a secure source of income. That hadn’t the bank realised that 70% of property investors were losing money on investment properties.

Some readers have claimed that the bank was commenting about the reliability of the income to the bank, not to investors. Not so. It’s clear Westpac is referring to the income earned by investors.

If you’re in any doubt you can read the full report by clicking here.

The point I’m making here by bringing this up is that you should be under no illusion about how desperate the Aussie banks are to spruik and cheerlead for the property market.

It’s not their own income that the bank is keen to talk up, if anything the banks are trying to talk it down, instead the banks need to keep the myth alive that housing is not gripped by a speculative bubble.

But aside from the usual bluff and bluster from the banks, there were a number of things that stood out from the report.

First, compare and contrast these two statements from the report:

“The notion that aggressive rate cuts and first home buyer incentives could have ‘rescued’ a falling market just as the bubble was bursting is not compelling. Speculative bubbles are famously resistant to policy moves both on the way up and on the way down.”

Now read this paragraph:

“Importantly policy is also well-placed to deal with any shock if it were to emerge. Low public debt levels mean there is ample scope for fiscal stimulus if required. In addition, with interest rates near historical averages there is plenty of capacity for the Reserve Bank of Australia to apply aggressive monetary stimulus if a threat emerges.”

Er, so even though bubbles are “famously resistant to policy moves”, don’t worry because “policy is… well-placed to deal with any shock if it were to emerge.”

So, what’s the difference between a “shock” and a bursting “bubble” then?

Nothing apparently. They are the same. As the report again points out later on:

“As such it is worth asking if there is a shock that could indirectly trigger a house price collapse?

“Domestic policy shocks are unlikely to trigger a housing collapse. The 2008 episode showed us that it is possible for the authorities to reverse policy mistakes rapidly. Rates can be cut and fiscal stimulus can be applied.”

Of course, Westpac insists Australia doesn’t have a speculative bubble, just high prices. Which the chart I’ll show you in a moment will disprove.

Every man and his dog knows that the banks and the housing market were bailed out in 2008 and 2009. And no amount of denial by Westpac can ignore the fact that Australian housing is in a speculative bubble… as evidenced by a chart Westpac uses in its own report:

Source: Westpac

Apparently the US and UK housing markets were in a bubble, but Aussie house prices (the dark line) aren’t. Even though Aussie house prices have continued to soar while US and UK prices have sunk.

But the best proof of the speculative nature of owner-occupiers and investors and their attitude towards price growth is the following amazing chart:

Source: Westpac

According to this chart, as of this year around 40% of loan applications for owner-occupiers are interest only, low doc or non-conforming. Low doc and non-conforming speak for themselves, but interest only provides more proof of the speculative nature of housing.

There’s no reason to take out an interest only loan unless the borrower either can’t afford the extra repayment for a principal and interest loan, or they’re banking on the value of the house increasing and either selling before the interest only period ends, or getting a re-valuation on the house and withdrawing equity (increasing debt).

But look at the right hand side of the chart… almost 50% of investor loans are interest only, and when you add in low doc and non-conforming you’re looking at 60%.

Again, why would you take out an interest only loan unless there was the belief that the value of the property would rise?

Whichever way you stack these numbers, and whatever spruikers claim, the simple fact is that Australia is mesmerised by the belief that property prices only ever go up. So much so that they’re prepared to pay thousands of dollars each year in interest on the punt that the house price will rise.

For an owner occupier taking out the average sized mortgage that means an interest bill over $27,000.

However things may not be looking so good for the ‘house prices always go up’ theory. According to our pals at RPData, “Affordability improves as Australian capital city dwelling values flat-line.”

We’ll try to remember to use that line the next time one of our share tips goes down, “Don’t worry about it, the affordability has improved!”

But in terms of trying to pull the wool over your eyes Westpac has come up trumps with the charts it has presented on page twenty-one of its report.

The bank goes to some lengths to claim that first home buyers are actually doing quite well out of their property purchases and that they’ve built up a nice bit of equity in their homes – equity that can only be released by selling the house or by borrowing it from the bank.

The chart we liked the most was this one:

Source: Westpac

The aim of this chart is to prove that thanks to rising house prices, FHBs that borrowed 90% of the house value now only have around an 81% debt compared to the higher valued home.

Talk about massaging the numbers. For a start, given the chances that FHBs are more likely to be the ones that take out an interest only loan, any “equity” they’ve supposedly built up will have been gorged by the interest repayments… interest payments to banks like Westpac.

But secondly, using an inflated house price to argue that LVRs are now lower because house prices have risen does nothing to counter the argument against a house price bubble. If anything it confirms the unsustainable growth of house prices, especially when you compared Aussie house prices to US and UK prices as shown on the previous chart.

Sure LVRs may be lower, but for most that’s only a paper profit – one they’ll never have the chance to cash-in on.

Once the FHBs start getting into trouble thanks to increased interest rates, that equity will soon prove to be worth nothing, and FHBs will find their first home buying experience to be the worst decision they’ve ever made.

Thanks to the RBA and CBA, the pin and the housing bubble have edged just a little bit closer.

Cheers.

Kris Sayce
For Money Morning Australia

Our portfolio CRC  – Bought at 0.14

Sold at – 0.26

The stock rose like crazy yesterday and  reached a peak of 0.28 before  going steady again at 0.21 close price. I was happy to  cash in at 0.26 with my sell order and rake in some $$$$$. Keep an eye out  for our current stock pick on the left side bar OBJ  which could also have a potential upside  at any time.

Visit  Australian Penny stocks for more information on the latest  australian small cap stocks and  asx penny stock  tips.

But in the US and the UK therehave been gains of 4-5%, while
even the Japanese Nikkei hasrisen by 2%.

We forecast significant medium and long-term order book growth and margin expansion acrossthe sector. As the Australian economy shifts gear post the pause in construction and mining during the GFC, CBA expects:revenue growth via a five year commodity boom, and margin growth, driven by demand outstripping supply, and labour and equipment shortages, shifting the balance of power back to contractors.

The general view is that the US dollar will lift later in 2010
when rates start rising. And in Australia investors are spoilt for choice with term deposits, property and shares all providing good returns.

Todays australian market wrap up

TALK OF A TAKEOVER BID FOR SANTOS - Sydney Morning Herald says there are strong rumours circulating that Woodside (WPL) is set to launch a $15bn bid forSantos(STO). STO up 3.41% to 1486c. WPL down 46c to 4696c.