“The 2010 Walkley Award goes to… Jason Clout, for the Australian Financial Review’s ‘Rear Window’ column.”

That would be the result if your editor had, a) any influence over the award, and b) any interest in having any influence over the award.

In last Friday’s Money Morning we wrote:

“Let’s see if Peter Martin and the other mainstream journos have balls big enough to take on the might of Christopher Joye. Rather than just fawning at every word he says and reprinting verbatim whatever he writes in the press releases, ask him some hard questions.”

Not surprisingly Peter Martin didn’t take up the challenge. But then again we didn’t expect much, considering the roll call of commentators Martin links to on his blog:

There he is, in all his glory.

But, where Peter Martin failed, Jason Clout reigned supreme. On page 38 of yesterday’s Australian Financial Review (AFR), Clout wrote what can only be described as a… cynical review of El Joye’s claims.

I know, I could barely believe it either.

Of course, we should also point out that your editor received an honourable mention in the same article, but we’ll assure you that hasn’t clouded our judgement of Clout’s wonderful and poetical writing style!

Take this snippet from the last couple of paragraphs of the article:

“And Rear Window notes today’s figure of 9.8 per cent has also fallen sharply from the 13.8 per cent result Joye would have found if he had made the comparison a year ago. But that average includes the income of people who aren’t paying off a mortgage – and there wouldn’t be too many mum-and-dad home owners who are only paying 10 per cent of their disposable income on loan repayments. If the average couple was earning $100,000 between them, that would only be possible on a house worth about $150,000.”

Hats off to Jason Clout. We can’t say we know him from a bar of soap. But what we can say is that he’s done something no other mainstream journalist has ever done – question the claims of Christopher Joye.

So, that’s one mainstream journo who’s risen to the challenge. We think we’ll create an honour roll for all those young journos out there who are prepared to stick up for common sense and argue that property prices can’t rise forever and that taking out a massive mortgage to support the price bubble isn’t a positive for the economy.

But if the Sunday Telegraph is to be believed, then for some home buyers, the price crash has already started:

“Our real estate losers – a quarter of Sydney homeowners have lost money”

According to the weekend’s article:

“Despite a broadly rising market, property analyst Residex has revealed 24 per cent of properties bought and sold between January 2005 and January 2010 fetched less than the vendors had paid.”

That’s no surprise to us. And that’s only the half of it. Because if you factor in the transaction and financing costs, we’ll bet that over half the properties bought and sold between 2005 and 2010 were sold for a loss.

The sad thing is, most of those sellers won’t even realise it.

When sellers whoop and cheer after they’ve sold their house for a $50,000 “profit” they rarely remember to deduct the thousands they paid in stamp duty and the thousands more they’ve paid in interest charges.

And not forgetting the devaluation of their money through inflation.

It’s not dissimilar to the gambler who celebrates a $10,000 win at the casino but forgets to mention the $20,000 he or she lost the night before.

Which all makes a mockery of the claims that house prices can keep on rising.

And just remember, this is during a period when house price growth was supposed to be, at the worst, stable. Think about what will happen when the bubble really bursts.

Already the banks have started to tighten their lending ratios. That’s not good for an asset class that’s dead without credit. And believe it or not, credit is hard to get if there’s less saving.

You see, it’s saving which provides the best source of credit. In an ideal world there wouldn’t be any funny business with banks creating money out of thin air, or banks getting their funding for loans using debt securities – just remember the $13 trillion of off-balance sheet debt Australian (yes, Australian) banks are holding.

But we’re not going to focus so much on the off-balance sheet debt. Instead, there’s another set of tables from the RBA that’s worth paying attention to.

As much as we’re not a fan of the Reserve Bank of Australia (RBA), their statistical tables can make for some pretty interesting reading.

This morning we stumbled across the ‘Gross Domestic Product – Income Components’ set of numbers.

We picked that set of numbers for a reason. Let’s be honest, the whole ‘debt to income’ and ‘debt to assets’ ratios have been used to death in the last couple of weeks. Not just by us, but by everyone it seems.

But a set of numbers of equal importance – maybe more so – are the income comparisons between today and fifty years ago.

These numbers highlight that it’s not just the property spruikers and the bankers that are to blame for the rising credit bubble, it’s that the government is right at the heart of the problem.

The same government that the naive look to for help and support. Yet it’s the very same government that has contributed to drop in the savings rate and the increase in credit.

Anyway, we ran through the numbers and come up with some fairly interesting outcomes. And I’ll admit, the first surprised us…

Let me ask you this: Would you agree with the statement that today we live in much more of a consumer driven economy than fifty years ago?

Most people would answer ‘Yes.’

Well, it turns out that ‘consumption’ spending as defined by the RBA has barely changed in the last fifty years. In 1959/60, households on average spent 68.2% of their total before tax income on consumption.

In 2009, the figure is… 66.5%. In other words, as a percentage of before tax income, consumer spending is actually slightly less than it was fifty years ago. We don’t live in the age of the consumer after all. Or do we?

Unfortunately, nothing is ever that simple.

Because over the last fifty years, that’s pretty much all that has stayed the same. Every other statistic highlights not only the fact of increasing debt, but decreasing real income, and also the main reason for it.

Here’s a rundown of the key points:

• Percentage of total household income taken in income tax: 6.28% in 1959/60, 12.79% in 2009

• Saving as a percentage of consumption: 15.58% in 1959/60, 5.73% in 2009
• Percentage of income used on saving: 10.63% in 1959/60, 3.81% in 2009
• Percentage of ‘other outlays’ against income: 4.05% in 1959/60, 10.26% in 2009
• Disposable income as a percentage of household income: 89.67% in 1959/60, 76.95% in 2009

That’s a lot of numbers to digest. So let me put it simply for you, whichever number you compare between 1959/60 and 2009, Australians are in a worse position financially.

And this is just looking at income. As I say, we haven’t even considered debt levels. Besides, we all know that measure is off the scale.

But what these numbers really show is that behind the facade of technological advancement – iPods, mobile phones, plasma TVs – from an income perspective, Australians are poorer today than they were fifty years ago.

I know, we’ll hear the argument that we now have nicer and bigger houses. That cars are better. That you can fly to London in 21 hours rather than a six week boat trip.

But that’s got nothing to do with wealth. People in the 1950’s and 1960’s would have looked back at the 1910’s with similar amazement at their lack of technological advancement.

So, what’s the reason for today’s comparative lower standard of wealth?

The obvious starting point is the level of taxation. Remember, these numbers are based across the entire population so it also includes those with no or very low incomes which will tend to distort the percentages lower.

Even so, on a comparative basis it’s still useful to see how much the wealth of Australians has gone down the toilet in the last fifty years…

And as I mentioned, the starting point is tax. The numbers clearly show that the tax burden has doubled since 1959. And that’s just income taxes. Never mind the other taxes you get stung with such as GST.

But it’s interesting to see the knock-on effect. It’s interesting to note it isn’t consumption that’s suffered since 1959. As we’ve seen, consumption levels as a percentage of total household income are almost exactly the same.

However, if you compare the amount of consumption spending against disposable income then it’s a different story – in 1959/60 consumption accounted for 76.07% of disposable income, yet in 2009 this had increased to 86.48%.

What does that tell you? It tells you that Australians have been able or have had to maintain consumption levels. Food and clothing are obvious necessities and we would think the demand for which are less likely to change over time.

But it also tells you that Australians now have to devote a much larger amount of their disposable income towards those necessities. The increased tax burden has forced that.

And the increased tax burden has meant a sacrifice elsewhere. That’s right, increased taxes have led to a direct decrease in the amount of savings.

You can see that in two stats: saving as a percentage of consumption has fallen to 5.73% from 15.58%, and the percentage of income allocated to saving has fallen from 10.63% to just 3.81%.

It’s therefore no surprise that individuals have found it either necessary or possible to increase their debt levels without reducing their consumption. On one level it’s something they’ve had to do in order to just maintain the same standard of living as before.

And on another level it’s something they’ve been forced to do as more credit has devalued their dollars and led to an increase in prices.

Hence the property and banking ponzi scheme we’re experiencing now. The more credit that’s available, the less valuable your dollars become and therefore the more credit you need to afford things. It’s the proverbial vicious cycle.

That’s evidenced by the stat our pal Chris Joye has focused on to claim there is no debt bubble. Fifty years ago only 4.05% of total household income went towards ‘other outlays’ – this includes interest repayments.

Today it’s 10.26%. That’s more than double. And if you compare ‘other outlays’ as a percentage of disposable income then interest repayments have tripled – 13.33% compared to 4.52%.

And even worse than that, over the last thirty years Australian investors have been conned into believing that the only way to build wealth is to go into debt – and the more debt the better.

The reality is that the opposite is the case. That’s perfectly clear when you look at the income levels over the last fifty years.

Financial advisers and spruikers – share spruikers too – have brainwashed Australians into believing that the ‘balance sheet’ is the most important part of household and company finances.

They’ve used rising house prices and rising share markets to back their claims.

They claim that leverage increases the returns, but then forget to mention both the increased costs and also the increased potential for losses.

The reality is that the ‘Income Statement’ is the most important aspect to both individuals and companies. It’s income that provides the long term support for the balance sheet.

Without income – as many companies and individuals have experienced – an illiquid balance sheet is next to useless. And a balance sheet loaded with debt is a death trap if the source of income is lost.

Just think of all the companies that went bust and which had so-called ’strong fundamental assets.’ The reason they went bust is because they lost their income stream, and because the assets were revealed as a sham.

The numbers from the RBA show just how much the income wealth of Australians has dropped thanks to excessive taxation and the burden of debt. Don’t believe the spruikers who claim you’re sitting on a property goldmine that’s making you money every day.

Because in the long run, it isn’t. It’s just funny money that will soon evaporate as soon as the income stream is gone.

As the numbers prove, you can’t improve your income by increasing your debt. All you end up doing is going further into debt and reducing both your savings and your standard of living.

Cheers.
Kris.

If you happen to be a subscriber to Australian Small-Cap Investigator I should let you know that the February issue will be released on Monday. If you’re not a subscriber then click here to subscribe.

Anyway, back to Money Morning…

Yesterday I wrote to you about mailbags bulging at the seams. After yesterday’s Money Morning went out, the mailbag started to bulge with responses.

To paraphrase most of the responses we received, “How would the free market work if an uninsured person was murdered/injured/unable to afford schooling? Who would pay for the investigation/medical bills/school fees?”

As we’re in a rush today we’ll hold some of those excellent questions over until next week. We’re glad some readers have asked them. As we’ve noted before the approach we take when reading anything in the news is to immediately disbelieve it and then work through the argument to see if it’s correct.

We do that even with people we know we generally agree with.

As a reader of Money Morning it’s something you should also do with these newsletters.

But quickly getting back to the question above, what I will say is that it isn’t as complicated as it seems. All it requires is to set aside the conventional thinking and then consider how markets really work.

Look, I’m not surprised free markets get a bad press. Governments and special interest groups have done a pretty good job of demonising the free market. So it’s not surprising that we received this comment yesterday as part of a longer email to the Money Morning mailbag:

“In Britain there was pretty much a free market for slaves for sugar production that only started to succumb to ethical pressure when the economics started to look shaky in the face of improved growing and processing methods.”

You can see how much the idea of free markets and freedom (it’s the same thing by the way) has been so misrepresented by governments that people assume that free markets equal slavery!

We think the term a “free market for slaves” could be an oxymoron, but we’ll let those that are more educated than your editor work that one out.

The very essence of free markets and freedom is that enforced slavery would be illegal as it is an infringement on individual freedom. Forcing someone to do something against their will is the realm of governments (compulsory voting, taxation, private health insurance, etc) not the free market.

Anyway, as I say we’ll cover all of that in more detail next week…

Your editor almost had a coronary yesterday afternoon as we belatedly flicked through the tiresome Australian Financial Review (AFR), “‘Home loan bias bad for economy’”.

And it was in quotes which indicated the headline was a direct quote from someone. Sure enough it was. But the real surprise was who it was that said it – Joseph Healy, National Australia Bank’s (NAB) head of business banking.

He was quoted as saying:

“A banking system which allocates capital away from the most productive areas of the economy – business – is ultimately bad for growth, bad for competition, bad for jobs, bad for business and in the end bad for Australia.”

Gadzooks! We think we’ve just found a hero in banking. Although he’ll need to keep his head down. Because we’re sure NAB’s head of home lending (if such a position exists) will be throwing spears and tomatoes at Healy for daring to say such a thing.

Doesn’t Healy realise that it’s too late to issue the warning? All we can really do now is cover our ears. Like the kid in the background in the cafe scene in North By Northwest, who knows the loud bang is coming just before Eva Marie Saint pulls the trigger on Cary Grant, so he sticks his fingers in his ears to soften the noise.

The trouble is, the shot is still fired, that can’t be stopped – it’s in the script after all! And it’s the same with the housing bust. The script is written, all you can do is cover your ears and hope the shot misses you.

But it’s good to see a mainstream banker tell the world what we’ve said all along, most houses are not productive for the economy.

Sure, to a degree they are, in that they provide a roof over someone’s head. But there’s a limit to how much of a house is productive and how much of a house is unproductive and a waste.

We’ll be honest, we’re still inclined to think that 100% of a house in unproductive in terms of its usefulness to an economy. Once it’s built it’s built. That’s it. It doesn’t contribute anything else to the economy apart from providing shelter.

That’s what makes it a consumer item.

But let’s for a moment concede that a house is always productive – as the property spruikers claim. If you’re looking at a one-bedroom house that has one occupant, and the house also has a kitchen, bathroom, and lounge room, it could be argued that house is productive as it provides shelter for the resident.

But how about if you add another bedroom? There’s still only one person living there. And what about a second lounge room? A third bedroom? A fourth bedroom? A second bathroom? A third lounge room? A third bathroom? A laundry? Etc…

Yet there is still only one person living in the house. Is that house still productive? Is it still a useful allocation of resources?

If the house was at its most productive when it was a one bedroom home, then surely it has become less productive the more rooms are added, unless there is an increase in occupants.

Look, we’ve taken an extreme example there. But our guess is that well over 50% of the homes in Australia our underutilised. In other words they have more capacity than they use. Which means they’ve sucked resources away from other areas of the economy.

Let’s use a business as a comparison. According to Mr. Healy businesses are productive. We’re sure that’s the case for most of them. But some are not.

Would we consider a business to be productive or fully utilising its capacity if it had invested $1 million in machinery that could make 1,000 grommets each day, when the machine was only actually making 300 grommets each day?

A rational person would rightly consider that the business had overcapitalised. They don’t need a 1,000 a day grommet making machine when a 500 a day grommet making machine that was half the cost would have sufficed.

So, we ask, how is it any different for housing? Yet when a homeowner buys a bigger home than they need, only using half of the rooms, that’s somehow seen as a good investment.

The key is in Healy’s other comment:

“I think that one of the little focused-on but absolutely critical questions for our industry and Australia’s policymakers is the extent to which the Basel II capital rules create an economically unhealthy bias towards residential lending and distort capital allocation away from more entrepreneurial and productive sectors of the economy.”

Double Gadzooks! Looks like we need to drop Mr. Healy a line to see if he’d like to make some freelance contributions to Money Morning – for a fee of course.

In other words, yet again, banking regulations that are spruiked as making banks safer are in fact doing the exact opposite. The Basel II rules are helping our dear friends at the Australian banks to pump, pump, pump that housing bubble.

We always hear the argument that housing is productive. Because you can buy it today and sell it at a profit in a few years time. And therefore because it can be resold for a profit, housing is an investment, not a consumer item.

Well, a more convincing argument is that housing is most definitely a consumer item. Because once you’ve bought a house you ‘consume’ it. The house that you re-sell in the future is not the same house that you bought. [Readers voice: What the heck are you talking about?]

Simply put, let’s say you build a house today. You have paid X dollars for a brand new house. However, if you were to sell the house in ten years you aren’t selling a brand new house.

The house you’re selling in ten years is a ten year old house. It isn’t the same as when you bought it. Therefore the house you buy today isn’t the same item that you’re selling in ten years.

That’s what makes it a consumer item and not an investment. Just like the new jumper you buy today isn’t the same as when you sell the jumper on eBay in two years time. No one will pay you the same for it then as you paid for it today.

That’s because you’ve ‘consumed’ it. No one can claim jumpers are an investment.

“Ah, but the land value appreciates,” is the usual response. Maybe it does, maybe it doesn’t. But that doesn’t make housing any less of a consumer item. Furthermore, demolishing a house in order to build a new one is a further misallocation of resources.

The idea that building things to destroy them and then build new things is somehow economic growth is bizarre.

But that is what’s happening in housing. The mindset is that house prices always rise. And that they rise so much you can get away with buying something, destroying it, and building something new and you’ll make even more money.

House prices have only risen in value due to the excessive issuing of credit by the banks. More and more resources and credit is flowing through to an industry that makes hugely expensive consumer items.

While there is nothing inherently wrong with producing consumer items, the problem is that Australians don’t realise they are buying a consumer item. Thanks to the spruikers they are under the false impression that they’re buying an investment.

Hence the housing price bubble. Like the young lad in the movie, we’re waiting with our fingers in our ears. Any moment now…

Cheers.
Kris.

But before I do, a quick note on today’s front page of the Australian Financial Review (AFR).

There’s a saying that “The pen is mightier than the sword.” In other words, the written word can be more powerful in its effectiveness than, we assume, stabbing someone.

It’s a nice phrase, but even so I’d rather someone wrote something mean about us than shoved a nine inch blade in our guts.

Anyway, it’s a phrase that should be embraced by the newspaper industry. In fact we’ve a vague recollection that one of the daily UK papers used to use the phrase in its advertising.

The papers should use it to signify the power of the press. How they will show neither fear nor favour to those in authority…

A free press should be something to be feared by those in power.

Well, that’s how we always thought it was supposed to be. Clearly our expectations about the mainstream press are way above anything they can possibly deliver.

As we noted in yesterday’s Money Morning, Communications Minister Stephen Conroy will make internet filtering compulsory. A top secret list of banned websites will be provided to internet service providers, and it will be up to them to guarantee no one can access them.

The list will be compiled and maintained by a supposedly independent body that’s, erm, appointed by the government. There will be no way of knowing what websites are on the list, and it will be at the discretion of the government appointed body as to what websites are added to the list.

You’d think this blatant attack on freedom would be grist to the mill for our merry band of journalists.

After all, surely freedom of information is vital if you’re in the business of newspapers.

So how does the Australian Financial Review respond? As I mentioned yesterday, in Wednesday’s paper it took pride of place in the technology section on page 47.

Today the AFR goes one step further by putting Stephen Conroy on the front page. Holding him to account? Scrutinising his proposal? Hmm, I’ll let you decide.

Here’s the opening paragraph to the hard hitting investigative story by Pamela Williams:

“Stephen Conroy is a speed freak. He likes to go flat out downhill. On a snowboard. The skiing fraternity might hold snowboarders in contempt for lacking finesse and a complete absence of any fancy moves, but don’t try telling Conroy. ‘All that matters is getting to the bottom as fast as you can,’ he says.”

We had to pinch ourselves. Were we reading Australia’s premium financial newspaper, or were we reading a celebrity interview in Hello! magazine?

We were hoping to see some soft focus pictures of the Conroy family draping themselves across a chaise longue. But then again, that would probably fall foul of the internet filter anyway!

And not surprisingly, not a single mention of the internet filter. Instead the article should have been accompanied by the word ‘Advertisement’ above it. It’s nothing more than a promotional puff piece for the national broadband network (NBN).

And the mainstream press continues to wonder why no one’s prepared to pay for their online content.

Anyway, back to our original question. You may think we’re mad for asking it, but we have wondered over the last few days whether a plasma or LCD television is a better investment than gold.

For a start, our chum at The Age, Michael Pascoe thinks gold is a load of old rubbish:

“The gold bugs’ faith has taken a little beating lately when a [sic] just a tiny stir by the US dollar has been enough to halt the yellow metal’s rally. But wait, there’s more – much more. Gold that is. Part of the dogma of the less rational gold bugs is that the world is running out of the stuff. As an article of faith, it makes a pleasant change from the idea that fiat money is about to be exposed as huge confidence trick and we’re heading back to the caves. (Why you’d bother with gold in that scenario is beyond me – I’d figure tomato seeds, chooks and possum skins would be the new wealth if civilisation crumbled.)”

I won’t go into a full scale rebuttal of Pascoe’s one-eyed denunciation of gold. Our publisher Dan Denning did a pretty good job of doing that yesterday over at the Daily Reckoning.

But we will make one comment. Sure, tomato seeds, chooks and possum skins probably would be handy if “civilisation crumbled”, but if it was a choice between having a few ounces of gold or having a few grand in paper/plastic money I know which I’d rather have.

Obviously Pascoe would opt for the brightly coloured $20 and $50 notes. Not that they’d be worth anything at that stage, but never mind.

Anyway, we’ve digressed again. We’re slightly baffled by the way the mainstream press is quick to claim gold is in a price bubble after a 36% jump in the US dollar price this year and a zero price gain in Aussie dollar terms.

Yet we still see headlines such as that in yesterday’s AFR, “Real estate set for another big year.” That’s for an asset class which has risen virtually without break for the last twenty years.

And so, after gold has fallen by nearly USD$100 per ounce in the last week or so, the likes of Pascoe have been quick to jump up and claim gold is in a price bubble and that it’s a ridiculous investment.

But maybe he’s right. Certainly if you gauge the willingness of people to buy gold compared to the willingness of people to buy a plasma television.

The comparison between gold and TVs isn’t as daft as you’d think. We’ll guess most gold investors pay cash for gold. And we’ll also guess that most people pay cash for a Plasma TV. Discounting those that use credit cards or interest free deals at Harvey Norman.

Even so, plasma TVs aren’t a big expense (although your editor thinks the Sayce family could be the only household in the country without a plasma/LCD TV!), from what we’ve seen you can pick one up for well under a couple of grand.

People seem more than happy to spend a grand or two on a big TV. And why not, you get to see a big TV picture, and apparently the picture quality is ‘amazing.’

But the point is the general public spends that amount in full knowledge that it’s a depreciating purchase, like a car. The value of your plasma TV isn’t going to rise at any time, regardless of how long you own it.

Keep it for five years and you might be lucky to get back one-tenth your purchase price if you flog it on eBay. Adjusted for inflation it would probably be closer to one-twentieth the purchase price.

So why is there such a fuss about gold being in a price bubble? Sure, you can’t watch your favourite soap opera on a bar of gold, but even if we look at gold as a consumer item rather than an investment item it doesn’t make sense that so many professional investors and analysts and even the general public would rather not buy the stuff.

I mean, let’s imagine you buy an ounce of gold at the current price of AUD$1,264.29, what do you think the worst possible outcome could be?

Could it fall to AUD$1,000? Sure it could. Could it fall to AUD$800? Why not.

And could it even fall to AUD$500? Of course it could. But we know the price of a TV is going to fall much more than that over the next five years. We know that as a fact.

Yet that doesn’t stop consumers from splashing out a couple of grand on the latest 600 inch plasma.

Let’s look at it another way. Last week we came across a news item from The Australian newspaper. It was headlined, “Golden parties as people cash in on price boom.”

The article explained that Australian housewives were cashing in their old gold jewellery in exchange for cash. These savvy punters were taking advantage of the high gold price.

The article quoted gold dealer Roy Cohen who had bought 572 grams of gold from the grateful punters:

“More women are realizing gold is money. These women realize their old gold jewellery is now too old-fashioned to wear. If you pay hundreds of dollars for a designer bag or sunglasses, you will get hardly anything back if you sell it on eBay.”

He goes on to say:

“With their children not interested in inheriting these pieces, many are selling off their gold pieces for cash.”

Undoubtedly the cash will then be used to buy a depreciating designer bag or sunglasses! Or maybe even a plasma TV.

See what I mean. The punters are happy to sell something that holds its value in exchange for items that become almost worthless – in dollar terms – the moment they are bought.

It hardly strikes your editor that gold is in a bubble when housewives are selling gold.

Look, as I’ve mentioned before, your editor isn’t a diehard gold bug. We don’t sleep with a few ounces tucked away under the pillow. But we do appreciate its value as a long term store of value.

While many – such as Pascoe – may see the gold bug argument as irrational and weird, we see the anti-gold position as much more irrational and weird.

So what if the price of gold falls in the next few months or years. It certainly wouldn’t hurt the household balance sheet by as much as when the property market falls in a heap.

Like I mentioned above, most private investors pay for gold in cash. How many private investors pay cash for a house?

Buy five ounces of gold in cash for less than $10,000, or use the $10,000 to take out an investment property loan leveraged up twenty times. I think I know which one is more likely to be a bubble than the other.

The argument that gold is in an unsustainable price bubble just looks ridiculous when you compare it to the debt fuelled credit bubble of the housing market.

The way I look at it is, if you’ve got a few grand laying around which you don’t need immediate access to, then rather than keeping it for ’safety’ with one of the ‘ponzi’ banks, why not buy a few ounces of gold instead.

We know for a fact that it will be worth more than your plasma TV in thirty years’ time. If buying that plasma was an easy choice, then it seems a no-brainer to buy something that will most likely appreciate in value in thirty years.

So, in a roundabout way, the answer to our question is, “No.”

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 was down slightly by 11 points, ending the day at 4,661.90. Another batch of reports are coming out today and an interesting one will be the RBA’s monthly bulletin, which will include figures on credit card spending.

The Dow Jones Industrial Average finished the day down by 10 points, closing at 10,441.12. It was no surprise to anyone, but the Fed has confirmed that it has no intentions to raise interest rates anytime soon. Read more here.

In the UK, the FTSE ended the day at 5,320.26, up by 34 points.

The Nikkei finished the higher by 93 points to 10,177.44.

The price of spot gold in Australian dollars is trading at $1,264.29 while in US Dollars it is trading at $1,137.95. The price of silver in Aussie dollars is $19.68 and in US Dollars it is $17.72.

The Aussie dollar versus the US dollar is trading at USD$0.9005, and against the Japanese Yen JPY80.85

Crude oil closed at USD$72.81.

For the biggest movers on the market yesterday click here…

They aren’t alone of course. After all, much of the time the mainstream press only writes what it does because it is fed with drivel by mainstream Keynesian economists.

The headline in yesterday’s Australian Financial Review (AFR) was a perfect example of the press getting things round the wrong way.

The headline was, “Strong jobs growth to fuel recovery.”

No, no, no, no, no. Wrong again.

It’s not a growth in jobs that fuels a recovery. It is an improving economy that fuels job growth.

We’re not talking some abstract chicken and egg scenario here. This one is simple. In order for there to be a growth in jobs, there either has to be an actual improvement in the economy, or the belief that the economy will improve.

The very act of hiring someone does not lead to economic growth.

Think about it, employment is a cost to a business. A business doesn’t hire someone because the act of hiring them causes the business to grow. The business hires new staff because they believe their business will grow.

It’s just the same as claiming that if you spend more money you’ll become richer. The illogicality of these claims is mindblowing.

The growth or the perception of growth must come before the hiring can begin.

In fact, it’s equally possible that strong jobs growth will harm the economy. How so?

Well, if the economic recovery isn’t genuine then businesses will increase their costs without increasing their revenues and profits.

The economy is currently being propped up by government stimulus spending. Not just here but overseas too. You’ve heard all the talk by the likes of the Fairy Ruddfather and others claiming that stimulus spending shouldn’t be withdrawn too quickly.

There’s a simple reason they’re saying that. Because they know the recovery is a fraud.

Without the billions of dollars of taxpayer money and borrowings being spent, economies worldwide would still be in a hole. All this money has to be paid back at some point. And when that starts that’s when the economic growth will be seen as a charade.

Of course, they’ll make the argument that if a business hires a salesperson then that will increase the sales to the business and the business will therefore make more money.

That, they will tell you, is an example of increased employment fuelling economic growth.

It’s a nice neat little story isn’t it?

It’s just a shame that it’s completely and utterly wrong. Utterly wrong.

Such an analysis no more indicates growth in the economy than you buying a hotdog at a football game indicates a growth in the economy.

Let me explain what I mean…

If you take the mainstream analysis to this example, then buying a hotdog at the football is proof of economic growth. But it isn’t is it. All it means is that you’ve chosen to buy the hotdog at the football rather than buying food at the supermarket to prepare your own meal.

The same goes with the hiring of a salesperson. Sure the salesperson may have increased sales for that particular company, but perhaps this has been the result of a sale lost by another company.

In that case there is no economic growth at all.

The cost to businesses has increased – one extra salesperson – but the total size of the economy has remained the same. And unless the businesses are able to reduce costs or actually increase sales, then the economy will be worse off.

But it’s typical of the way the mainstream press reports on the economy. They look at everything at face value and are too lazy or ignorant to look below the surface.

Then again, we now expect nothing more from them.

Cheers.
Kris.

Over the last twenty-odd years there have been a few so we should all have got used to the noise by now.

The warning signs are unmistakable. Lots of frenzy and excitement. Lots of claims that the market can never fall because of, well any number of reasons. Most of them emotional rather than logical.

Heck, your editor even fell for it. We thought the ‘China effect’ would provide some cushion for the resources market over the last year. We were wrong. The transition from the US economy dominating consumer spending to Asia taking over clearly isn’t a seamless transition.

Despite that, if it was possible to buy or sell shares in an entire economy, right now we’d be ’short’ USA and ‘long’ China.

And Australia? That’s much harder to work out. For the entire economy we’d have to say it’s no better than neutral.

And it gets that rating for one reason only – China.

If we’re wrong about the ability of the Chinese economy to become the global consumer spending machine then the whole global economy will be stuffed for a long time.

But the short term problem is making sure the policies knuckleheads in Canberra don’t stuff things up. China is Australia’s ‘Get-Out-Of-Jail-Free’ card. It’s the single reason why – so far – the Australian economy has weathered the global financial storm better than other countries.

Take a look at the chart on page five of today’s Australian Financial Review. It highlights that coal and iron ore comprise nearly 40% of all Australia’s exports. We think in the next few years, LNG (liquefied natural gas) will be prominent on that chart.

The fact is, if government’s want to make other Australian industries uncompetitive, then it can’t afford to do the same with the resources sector. Fortunately, as luck would have it, resources companies don’t have to worry so much about being priced out of a market by cheaper foreign suppliers.

That is the one and only reason why Australia is doing OK at the moment. Forget all the rubbish you read in the mainstream press about it being down to the stability of our banks, or the tighter regulatory rules.

That has nothing to do with it. The guys at ASIC, APRA and the RBA are no better or worse than the guys at the SEC in the US. And as for the banks. Well, you know your editor’s views on them, so we’ll leave it at that.

But in recent weeks the stockmarket cheerleaders have gone over the top. They’ve started to spruik their belief that the worst economic downturn since the Great Depression is over, and that the ‘green shoots’ of recovery have appeared.

As Peter Schiff told CNBC the other day, “there’s so much talk about ‘green shoots’ on CNBC it’s like I’m watching the gardening channel.”

On June 24th, after the S&P/ASX200 dumped by 3% the previous day, we told Money Morning readers to “buy on market weakness.” If the Aussie market follows the US market lower today then it’ll give you another opportunity to pick some good dividend payers at a discount.

But is the market in danger of re-testing the March lows? Anything’s possible. But just as the market always goes higher than some people think, but not as high as others think, the same goes for the downside.

Buying blue-chip income stocks (not the banks) that have the potential for dividend growth over the next twelve to twenty-four months makes sense right now.

So the trade for the Aussie market is: ‘long’ dividend payers, ’short’ blue-chip growth.

Other Stuff on the Markets

The S&P/ASX200 fell 3 points yesterday, while there was yucky news overnight on Wall Street with the Dow Jones Industrial Average dropping 223 points. In Europe the FTSE100 lost 2.45% and the CAC40 flopped 3.13%.

The price of gold in Australian dollars is trading at $1,172.68, while in US Dollars it trading at $928.52.

The Aussie dollar lost ground versus the US dollar and Japanese Yen, trading at USD$0.7913, and JPY75.89.

Crude oil closed overnight at USD$66.54.

For the biggest movers on the market yesterday click here…