“Consider a man and a woman each with a productivity of $10 per hour, and suppose, because of discrimination or whatever, that the man is paid $10 per hour and the woman is paid $8 per hour. It is as if the woman had a little sign on her forehead saying, ‘Hire me and earn an extra $2 an hour.’ This makes her a desirable employee even for a sexist boss. But when an equal-pay law stipulates that she must be paid the same as the man, the employer can indulge his discriminatory tendencies and not hire her at all, at no cost to himself.”

This example is applied to a comparison of male labour versus female labour. As was our article yesterday.

But in reality, it’s not even a Male v Female thing.

Because just take the same example and switch in ’skilled worker’ in place of ‘man’ and ‘unskilled worker’ in place of ‘woman’ – not that we’re saying all female employees are unskilled of course! – and the same principle applies.

Or interchange ‘experienced’ in place of ‘man’ and ‘inexperienced’ in place of ‘woman.’ Or any other example where wages are artificially manipulated by government decree.

You can use the same comparison to relate it to the minimum wage. In effect, pay equalisation is just another form of creating a minimum wage. It makes it illegal for an employer to employ someone for a lower wage than someone else.

And like the minimum wage, one consequence is that it creates unemployment.

Anyway, we just thought we’d drop that in. You can still leave comments on this article by going to the Money Morning website.

Back to today. We notice that even the mainstream commentary over at Business Spectator is starting to get a bit antsy with all this ‘economic recovery’ thing.

Two articles yesterday, one from Karen Maley and the other from Robert Gottliebsen clearly warn – as we have – that things aren’t as rosy as they seem.

Right now we’d say, hats off to these two mainstream commentators for saying it. However it’s too late, much too late for it to have any impact.

As the saying goes, the die is cast. The bubble has expanded. It’s like when you blow up a balloon. No-one likes having the thing pop right in their face, but there’s still the temptation to try and make it a little bigger, and that’s what’s happening with the Australian economy now.

The only problem is that in mainstream economics they either don’t believe that bubbles exist, or they believe they are caused by something else, or that even if bubbles do exist then they think they’re smart enough to manage them.

I mean, they’ll look at the last eighteen months and conclude they know the recipe for curing bubbles. So that even if another one is brewing, don’t worry about it, they’ve ‘fixed’ it before, they can do it again.

Look at all the economic data that’s been paraded before your eyes. As you know, we’ve been critical of the way the ANZ Job ad numbers have been reported.

Well, finally you could say the February job ads do look more impressive than some of the previous numbers. In February, ANZ Bank reports a total of 158,611 jobs advertised compared with just 109,177 in January.

You’d expect a pick-up in February, but still, it’s a 45% increase over the previous month. Although, compared to the same time last year, when the economy was on the verge of recession, job ads are still down by 3,723.

And remember, we’re using the original numbers, not the seasonally adjusted or trend numbers.

And then look at the other stats: “Australian economy continues to grow: ABS.”

According to the Australian Bureau of Statistics (ABS):

“Latest ABS figures show that GDP, in seasonally adjusted volume terms, grew 0.9% in the December quarter 2009, after growing 0.3% in the September quarter.”

The Australian economy continues to grow, grow, grow. That provides even more evidence to the mainstream that Australia has figured out how to perfectly direct and manipulate an economy to avoid collapse.

Although, the next paragraph from the ABS statement gave the real game away:

“Growth in the expenditure measure of GDP was driven by a 3.5% increase in private investment , a 10.2% increase in public investment and a 0.7% increase in household expenditure. Offsetting these increases was a fall in net exports. The fall in net exports was due to imports (up 7.7%) growing faster than exports (up 1.7%).”

Actually, we’ll rephrase that. We’re not sure it’s really given the game away as everyone knows public spending – or public ‘investment’ as the public sector drones prefer to call it – is going mental: money spent to ‘create’ jobs, then more money spent to ’save’ jobs, then another bunch of cash to compensate for jobs lost.

The madness never ends.

But that brings us back to the point we made above. While it’s good that some in the mainstream press are starting to whiff a bit of trouble, it’s all rather too late.

The time for warning about the nonsense idea that you can borrow to get yourself out of debt was a subject for twelve months or two years ago.

Yet at the time the mainstream press was too excited about making sure their elected representatives ‘did something.’ At the depths of the market meltdown, it wasn’t the time to ‘play politics’ or get bogged down in ‘economic theory.’ It was the time to ’save jobs’ and help those families who seemed to be constantly ’sat around the kitchen table.’

But the biggest problem right now is the sense of false security – or false sense of security, whichever you prefer.

We’ve noticed quite a bit of excitement about all the increased profits Australia’s robust and excellently run companies have made in 2009. Today’s Australian Financial Review (AFR) trumpets, “Earnings return, are shares next”, “Property turns the corner” and “How banks came out in front.”

According to the AFR, 80% of Australia’s companies reported profits in-line with expectations. It goes on, “Profits for industrial companies rose 3.8 per cent from a year earlier.”

But the AFR does point out, “Cost-cutting was an important driver of profits in the half. Some big companies reported falling revenue but were able to increase profits by reducing their spending on wages, property and technology.”

That’s something we noticed last week. This is what we wrote to Australian Wealth Gameplan subscribers last Friday:

“Last week we conducted a simple exercise. We looked at the company results for that week as reported in the Australian Financial Review (AFR). It printed the earnings results for 131 companies – large and small. As you’ll have read in the mainstream press, a lot of companies produced bumper profit results, such as Flight Centre [ASX: FLT]. What the mainstream press didn’t report was the less than exciting news on the revenue figures. Of the 131 companies detailed, just over half (66 of them) reported lower sales revenues than the previous corresponding half-year or full-year.”

It wasn’t just ’some big companies’ that reported falling revenue, it was half of those companies that reported during that one-week period.

What does that tell you? Well, as the AFR reports, many companies have slashed costs in order to beef up the bottom line. So the first question is whether they can keep doing that?

The other question is whether they can increase sales by as much as the market is now pricing in? Our guess is that will be much harder to achieve. And much of that is down to the sense of false security and the misplaced belief that the bright economists and central bankers have engineered Australia’s escape from the global meltdown.

The economy is growing, companies are hiring again, miners are mining stuff, credit is booming, and everything appears to be ticking along as though nothing has happened.

And as for that old subprime stuff, well surely that’s all fixed up, and no-one will make that mistake again. Trouble is, it’s often forgotten that subprime wasn’t the cause of the problem, it was the effect. The cause of the problem was excess credit and government interference.

Excessive credit simply manifested itself as subprime loans. Subprime borrowers were the means by which politicians could parade themselves as helping the poor, and by which bankers and young gun traders could earn themselves a bucket load of cash.

Therefore, solving the subprime problem will do no more than shift the excesses of credit elsewhere.

We’ve seen that before. Look at Enron. The trading guys at Enron weren’t specialists in electricity trading. They were young kid traders sat in front of six computer screens who just had to click ‘buy’ or ’sell’.

As soon as Enron collapsed they went off looking for other things to ‘buy’ and ’sell’. Many of them probably ended up trading credit default swaps and other such derivatives. Financial instruments that they were just as ignorant of as the electricity market.

Solving the global meltdown by blaming it all on subprime and removing that risk is like taking the keys from a youngster who’s been driving a sports car too fast, and instead handing him the keys to a 3000cc motorbike.

There will still be carnage it’s just that it will look different.

As much as the mainstream commentators may claim that lessons have been learned and that Australia didn’t have a subprime culture, it all misses the point. The old habits of excessive borrowing are still unchanged, and in fact are likely to get worse.

So the message is, if you’re looking for the next big economic meltdown to come from the US subprime housing market, odds are you’re looking in the wrong place. So where will it come from?

We’ll look at that another day. But our guess remains that you need to look north. Because China is brewing up quite nicely right now.

Cheers.
Kris.

Although we were a little worried as we asked her yesterday morning what she planned writing about…

“Can you take over the Money Morning reins this morning as I’ve got to get Australian Small Cap Investigator out the door today?”

“Yeah, sure,” Shae coolly replied.

“What do you think you’ll write about?”

“Property…”

*Needle scratches off record*

“Are you sure? You’ve seen some of the feedback we get from the property bulls. Ah well, if you’re brave enough, go for it!”

And so she did. And made a pretty good argument for the craziness that goes by the name of property investing if you ask me.

But it doesn’t end there. The property spruikers clearly have more stamina than Steve Monaghetti.

“House price build-up but no bubble” is the page three headline in today’s Australian Financial Review (AFR).

Not surprisingly it contains the usual suspects – RP Data, Rismark, Rory Robertson and an economist from one of the four banks. This time it’s Matthew Hassan’s turn from Westpac.

It’s must be like tag team wrestling, the heavyweights (by brain size, not girth of course) of property spruiking Christopher Joye and Rory Robertson enter the ring dressed in lycra, and then get one of their wimpy-looking bank economist buddies to join them.

Then it’s on for young and old as they sling the property bears across the ring and against the ropes. Body slams, Boston Crabs, Half Nelson’s, the lot…

But get this, here’s proof of the great property bull run. The Melbourne median house price has risen by, wait for it… $30,000 in just four days.

How about that?

As recently as, ooh Saturday, Melbourne’s median house price was a piddly $480,000. Today, according to The Age and – you guessed it – RP Data, the median house price for Melbourne is a whopping $510,000.

That’s an extraordinary 6.25% increase in just four days. If you annualize that, Melbourne’s median property price will be about $2.7 million by this time next year!

Fortunately, the property spruikers are much more conservative than that. Enzo Raimondo from the Real Estate Institute of Victoria (REIV) is only banking on prices reaching $530,000 next year.

But, don’t put down those property brochures just yet, because according to the Herald Sun, these price rises are just the beginning:

“By 2015, that figure [Melbourne median house price] would rise to $650,000 to $700,000 for an average house. And the median would hit $1 million by 2020.”

So strap yourself in. And look at that $1 million number again – 2020. Just about ten years for today’s house prices to double.

The symmetry is beautiful.

Anyway, we thought it would be worth taking a look at the data and methodology behind RP Data-Rismark’s numbers. I mean, a 15% increase in Melbourne’s property values since the beginning of the year is wonderful isn’t it.

Of course, we can’t see the raw numbers because from what we can gather RP Data-Rismark doesn’t publish those.

But it does publish the methodology.

This reader, is why Melbourne’s median house price has risen:

Oh, hang on, that’s only half the reason, I forgot the punchline…

It’s what Rismark Intenational calls a “Hedonic Calculation.”

To be honest, we don’t know much about “Hedonic Calculations.” So we did some digging around to see what it all means.

Here’s some of the definitions we came across…

First this one from RP Data-Rismark themselves:

“The hedonic-regression is a method that attempts to overcome the issue of compositional bias associated with median price measures. The premise for this lies in hedonic theory which suggests that the value of a composite good – such as a house – is the sum of its components. Thus, by decomposing the sample of houses into their various structural and location attributes, the differences in these qualitative factors across houses can be controlled.”

And then there’s this from the “Lazy Researcher’s Handbook”, otherwise known as Wikipedia:

“Hedonic index is any price index, which uses information from hedonic regression. Hedonic regression describes how product price could be explained by the product’s characteristics. Hedonic price indexes proved to be very useful when applied for information and communication products (e.g. personal computers) to calculate price indexes, because they can successfully mitigate such problems as new goods and rapid quality change.”

Finally we found this from Investopedia:

“The most common example of the hedonic pricing method is in the housing market: the price of a property is determined by the characteristics of the house (size, appearance, features, condition) as well as the characteristics of the surrounding neighborhood (accessibility to schools and shopping, level of water and air pollution, value of other homes, etc.) The hedonic pricing model is used to estimate the extent to which each factor affects the price.”

So, what have we learnt? We’ve learnt that the RP Data-Rismark house price index is no better or a worse a gauge of house prices than any other index.

It appears to us that these PhDs are making the same mistake that almost every other economist and analyst makes. And that is their belief that human behavior can be represented as a mathematical formula.

As you can see from the definitions above, such a formula as the “Hedonic Pricing” formula tries to value every single part of a house and its surroundings and then applies a value to it.

For instance – based on our basic understanding – it will compare a 200 square metre home with a 210 metre square home and calculate the value of one versus the other. Or it will measure the distance of a train station from two houses. Doubtless one that is 100 metres away is better than one 110 metres away.

All these cheeky numbers and calculations are then applied to sales of existing homes and then extrapolated across every other home in the area.

The problem that we can see with it, is that as a gauge of the direction of house prices or even historical prices, it’s useless. In fact, you’re probably just as well off listening to the spruikers at a property seminar or reading what Enzo Raimondo has to say.

Of course, we could have it all wrong about this hedonic pricing method, but we don’t think so.

It seems to us that this method all but guarantees results that show rising house prices. And it will do so until the market collapses. In fact, there’s just as much chance the index will show rising prices even when the market has collapsed.

Any method which merely takes the sales results of one bunch of houses and then subjectively applies that data to all other houses is painting a pretty inaccurate picture.

No mass formula can take into account the purchase price, the mortgage amount, the interest rate, the income levels of the borrowers, the family circumstances, the rising cost of bills, the loss of a job, the unexpected repair bills, the need for a new car, new tastes, high expectations, lower expectations, etc…

Of course that won’t stop them publishing the data, and it won’t stop the banks and the Reserve Bank of Australia and the mainstream press from blindly following the data as proof of the never-ending rise in property prices.

Let’s just state this quite simply. We can quite confidently state – even without fancy pants economic modeling – that the average person’s house in Melbourne has not risen by 15% since the start of this year.

Data and statistics by their very nature can be manipulated when subjectively programmed into a mathematical formula.

Formulas like these are little different to the formulas used by other ’smart’ guys at Long Term Capital Management or Enron. They predicted markets would behave in certain ways and made big bets on those predictions.

They were proven to be completely wrong.

Our belief is that the big predictions made by the property spruikers will be proven to be equally wrong. Except in the case of the property market, it’s the over-tended borrower that will suffer the most when the market collapses.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 gained back almost of all of the losses from Friday. The index was up 2.83% yesterday, closing to 4,701.30. The RBA will announce today at 2.30pm if they are going to raise interest rates. It is expected that rates will increase by 25 basis points, bringing the cash rate to 3.75%.

The Dow Jones Industrial Average finished up yesterday to 10,344.84, higher by 34 points. It’s the start of the spending season in the US, and reports show that while shopping activity is up in the States, the level of spending is down.

In the UK overnight, the FTSE dropped by 55 points to finish at 5,190.68.

The Nikkei ended the day higher by 264 points or 2.91% to 9,345.55. However last Friday was the fifth straight week of losses for the Nikkei, something that hasn’t occurred since July 2008. Overall the Nikkei was down 6.9% for November.

The price of spot gold in Australian dollars is trading at $1,287.26, while in US Dollars it is trading at $1,179.67. The price of silver in Aussie dollars is $20.17 and in US Dollars it is $18.49.

The Aussie dollar versus the US dollar is trading at USD$0.9166, and against the Japanese Yen JPY79.09

Crude oil closed at USD$77.28

For the biggest movers on the market yesterday click here…