In response to a query by the Australian Stock Exchange in relation to the change in price of Cerro Resources NL, the Company responded as follows:
The Company is not aware of any information concerning it that has not been announced which, if known, could be an explanation for recent trading in the securities of the [...]

Your editor made a big call last week by claiming the Australian housing bubble had already popped.

Some thought our claim was reckless. Others thought we were grossly misinformed.

But based on everything we’ve seen since (and before), our bet is we’re right on the money.

The Australian housing market has started on a death spiral that could see home prices fall by 20%-40% within months. Or a year or so at most.

Now, whether the rigged house price indices ever show this decline or not is another thing. But our guess is that regardless of attempts by the spruikers to hide the facts about the Aussie house price crunch, even the house price indices will show the fatal decline.

But more on this in a moment. First, QR National Ltd [ASX: QRN] lists on the Australian Securities Exchange this morning.

We advised avoiding this stock like the plague. And it seems most institutions and retail investors did.

Institutions would only buy the stock at the lower end of the range – $2.55. While retail investors only had to stump up $2.45. Our bet is that long term even that’ll be more than it’s worth.

But heck, what do we know. As I mentioned when reviewing the stock a couple of weeks ago, we’d only done a cursory analysis of the company’s income statement and balance sheet. Maybe it is a winner, but we wouldn’t bet on it.

Although one thing’s for certain, it’s not a winner for the Queensland taxpayer.

Over the weekend Queensland Premier Anna Bligh told reporters:

“These proceeds will now be used to pay off debt and establish a stronger balance sheet.”

Really? Is she sure about that?

According to Bloomberg, the proceeds from selling about 60% of QR National will total $4.63 billion.

But as we noted in our review of QR National, the Queensland government assumed debt from QR National of $4.3 billion prior to the privatisation. Page 103 of the share offer document (8.2.5) reads:

“a restructure of borrowings under which $4.3bn of borrowings from QTC will be transferred to the State under Transfer Notice for nil consideration prior to Settlement.”

In other words, the $4.63 billion the government has raised from the privatisation will go towards paying off government debt which has increased by $4.3 billion!

What a joke.

All they’ve done is re-finance the debt. They’ve done the government equivalent of paying off one credit card balance using another credit card. The Queensland taxpayer is no better off today than they were on Friday in terms of the government’s debt position.

We can only think the Queensland government has been getting tips from the investment bankers and infrastructure guys on how to cook the books.

For years your editor has written about the smoke and mirrors created by infrastructure investments. Personally we’ve never invested in one, and unless we see a big change in how they’re structured we never will.

Although we will admit to tipping a small infrastructure stock in Australian Wealth Gameplan last year. But that was one of the few instances we could find of a profitable infrastructure stock that was not only earning money but which was paying off its relatively small debt too. As we recall, it planned on being debt free by the end of 2011.

But anyway, a classic example of the unsustainability of the infrastructure model is the announcement by Transurban Group [ASX: TCL].

Last week the company announced, “Transurban has completed a financing of $740 million of non-recourse project debt for its 100% owned Hills M2 Motorway Project. The $740 million comprises: a re-financing of $465 million of existing debt; and raising of $275 million of additional financing to fund the debt component of the recently announced M2 Upgrade Project.”

Remember, these are the type of projects the government and vested interest groups want your taxpayer and retirement funds to be invested in. Yet if it wasn’t for financial trickery every single one of these infrastructure investments would have gone belly up years ago.

As an example, take a look at the historical income statement for Transurban:

Source: CMC Markets Stockbroking

I’ve highlighted the three key areas: revenues, net profit and long term debt.

At first glance, just looking at the revenues, you’d think you’re onto a winner. Revenue has soared from $150.9 million in 2001 to $817.2 million this year.

Yet look at the net profit. One profitable year in ten! And look at the long term debt – it’s tripled over the same period, and has just gotten higher to the tune of $275 million.

Yet extraordinarily enough, despite not making money, Transurban has been able to pay out a dividend:

Source: CMC Markets Stockbroking

The company earns 4.6 cents per share, yet pays out a 24 cent dividend! Look, we know these things are structured so they can pay out returns to shareholders, but the fact is, as an investment, it’s an absolute dog and it’s not sustainable.

Sure, good luck to you if you’ve been invested and skimmed off the cream, you would have done quite nicely from it.

But the last thing you want is to be invested in a stock like Transurban when the debt circus suddenly stops – which could be at any time. Because it’s clear that without the re-financing of old debt and the raising of new debts, companies such as Transurban couldn’t operate.

It’s simply borrowing cash from the likes of Commonwealth Bank and National Australia Bank in order to pay out dividends and to finance the upkeep of its roads.

As the balance sheet shows you, it’s getting further and further into debt and consequently digging the company into a bigger hole. It has to maintain the roads otherwise traffic volumes could fall, and we dare say it would incur fines from State governments.

And it has to keep paying out dividends otherwise investors will walk away – and doubtless there is some form of caveat with the loans that the share price can’t fall below a certain price.

And the banks won’t stop lending because they know if they do they can kiss goodbye to the existing debt which they’d then have to write-off as a loss. Much better to keep the zombie infrastructure funds going… and let them collapse years in the future.

I mean seriously, forget about the fancy financial chicanery that goes along with these infrastructure stocks, and think about it logically… do you really want to invest in a so-called blue-chip stock that isn’t profitable and which has to borrow billions of dollars in order to bribe investors to stay on board?

Maybe you would, but I know I wouldn’t. This is the kind of balance sheet you’d expect from one of the small-caps I look at in Australian Small-Cap Investigator, not the kind of stock most retirement funds are chock-a-block with.

The last couple of years has seen several infrastructure stocks go pear-shaped due to high debt levels, and I’ve got little doubt that more will go under during the next credit shock.

But, back to housing…

The silence from the real estate spruikers over the weekend was deafening. The Real Estate Institute of Victoria (REIV) quietly informed those who could be bothered to look that:

“The clearance rate this weekend is 59 per cent, a result that is consistent with the market’s performance since the latest interest rate increase.”

Ha, ha, ha… the press release continues:

“There was a total of 893 auctions reported this weekend of which 531 sold and 362 were passed in, 234 of those on a vendors bid.”

Good grief! In other words, out of the 893 reported auctions, 234 of them could only muster a bid from the person selling the house! By our rough estimate, that makes over one-quarter of houses up for auction where the only “buyer” was the seller!

What a joke. But it’s no less of a joke than the fact that over 10% of the auctions just go unreported.

As the REIV wrote a week ago:

“Stock levels will remain high with over 1000 auctions expected for each of the next three weekends…”

Yet the REIV only reports on 893 of those auctions. So, to do the maths properly, the actual clearance rate at best was only 53.1%. And that’s assuming that only 1,000 homes were up for auction. Assuming there were more – as the REIV admitted last week – then the clearance rate was even worse than that.

Not only that, but you’re likely to see more of these comments from the mainstream press as the housing glut gains pace:

“A California bungalow at 1 Beech Street, Camberwell, which had been purchased for $85,000 in 1985, fetched $1.04 million at Saturday’s auction.”

This is the kind of price appreciation the property bulls go weak at the knees over. The problem is, that kind of price move is all in the past. It’s on the back of the Great Inflation I wrote to you about last week.

You’re kidding yourself if you think you’ll see that kind of price move again without prices crashing first.

More and more of these properties will be coming on to the market, and they’ll be competing against sellers who have purchased their homes more recently. The effect will cause an even bigger decline in house prices.

Simply because the seller who bought for what now seems to be peanuts 25 years ago will be much more willing to accept lower offers than a seller who bought for a grossly inflated price more recently.

It’s only one example, but we note that the price range for the Camberwell property was quoted at $950,000 to $1,100,000 on realestate.com.au… the final selling price was roughly half way between the two numbers.

Baby boomers nearing retirement will be keen to sell out near the top of the housing bull market. The last thing they’ll want to do is lose the chance to lock in their retirement funds at an elevated price.

In Money Weekend we commented on a truly amazing article by Robert Gottliebsen over at Business Spectator. Gottliebsen wrote this:

“It might not be intentional, but in Australia banks have developed a unique system to keep dwelling prices high. They are liberal in granting housing loans…

“By restricting the supply and boosting the demand, banks keep dwelling prices high…

“Most likely the Greens have no idea of the effect of their proposals… I am delighted that neither the government nor the opposition are going down that path.”

The proposals Gottliebsen doesn’t like is the idea that banks wouldn’t be able to increase interest rates higher than the Reserve Bank of Australia (RBA) increase. Such a policy Gottliebsen believes would result in house prices heading lower – and we couldn’t have that could we.

Look, we’d go further than the Greens and advocate for the abolition of the RBA. That way, under a free-banking system banks can decide on their own interest rates without the manipulation of a state-sponsored manipulative bureaucracy.

Instead Gottliebsen much prefers the current set up where buyers hock themselves up to the eyeballs on cheap debt from the banks. And heaven forbid should we go back to how things were in the 1970s where Bendigo and Adelaide Bank chairman Rob Johanson told Gottliebsen that:

“Getting a housing loan from the bank was extremely difficult and as a result house prices were very low because you had to assemble deposits many times current requirements.”

Oh how terrible. Anyway, we’ve already critiqued the article in Money Weekend, click here to read it in full.

Although we see this morning that Gottliebsen has followed up on his article to try and calm down the crowd. His declaration that keeping house prices high on cheap credit and “liberal” lending from the banks to the detriment of those that go into debt wasn’t the kind of thing most Business Spectator readers wanted to read.

And now we note that even the Australian Treasury is fearful about the already started Australian house price collapse. According to a report of the content of emails between two Treasury officials in the Weekend Australian:

“(I) know there are very supportive fundamentals, but prices rose by 50-60 per cent in three to four years in the early part of this decade, with largely unchanged fundamentals, so they can have a life of their own.

“And given what’s happened elsewhere I’m far less sanguine about this – and the interplay with debt – than in the past.”

Finally the goons in government seem to have gotten the picture. But again, as we wrote last week, they’re too late – as usual. The slump has started and overpriced houses are set to go onto the chopping block in their thousands.

The much trumpeted housing shortage – which never existed anyway – will soon be proven to have been nothing more than an elaborate hoax designed to sucker in vulnerable young buyers.

But clearly our take on the housing collapse doesn’t impress everyone. We received the following email over the weekend:

“Obviously you are spreading Doom and Gloom about Australian Property so that you can sell your so called RESEARCH on stock and shares or whatever.

“You are not only talking down Australian Property values, you are also SLANDERING all the Real Estate selling agents in Australia. You ignore all the nations positive economic data, and make it sound like the whole industry is all about scam and deception. Shame on you.

“I will be consulting a lawyer as sending your report to all Real Estate agents in Australia to see if they could take a class action against you and your company.

“Would you like the industry to start a similar scare campaign about your “RESEARCH” on Doom and Gloom about Australian Property?”

What we’d really like to see is a class action by first home buyers who were suckered into buying houses at the top of the market. All on the promise that house prices always go up, that house prices always double every 7-10 years, and that at current growth rates the Housing Industry Association and Westpac seems to believe there will be 35 million too few homes by 2050!

But we will say we’ve always found it amusing that our detractors claim we talk down housing just so people will buy my research report instead of a house.

Just remember that the research report I write each month is on Australian small-cap shares. The last time we looked very few investors were caught in a bind about a choice between buying a $500,000 house or… buying $500 worth of a penny stock!

The fact is, Australian housing is overpriced. We decided of our own free will to share that revelation with you. We looked at the argument used by the spruikers and came to the conclusion that it was nothing more than spruiking and lies.  So as plainly as I could I told you about it.

The rest was up to you. It’s up to you to decide whether our argument makes sense or not. We certainly haven’t hoodwinked and cajoled readers into taking out a massive loan many times their income to buy a house in the belief that house prices always go up.

Can the real estate spruikers (not necessarily all real estate agents mind you) confidently say the same thing? Thought not.

Because of that, aside from the cranky emails from the property bulls we also receive emails such as this one that arrived in the Money Morning mailbag this morning:

“Nice words Kris! I just like to say that if I had not come across The Daily Reckoning and Money Morning, I would have been one of those ‘youngsters’ to have bought into the bullshit of the mainstream media and would have bought a house! Thank you so much! I have saved thousands through your free words!”

Remember, first home buyer debt equals baby boomer retirement fund…

That’s right, whether you like it or not, that’s the equation.

So, if you’re a baby boomer please show some gratitude towards those that are paying for your retirement by getting themselves into life-destroying amounts of debt!

One last note, in recent weeks we’ve also receive a number of questions from people asking whether they should sell their house and get out while they can before the housing slump really starts to bite.

Hold fire on that, I’ll have something to say on that in tomorrow’s Money Morning.

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

Strap yourself in reader. Today’s episode is a long one…

Ah, we love the quote from ANZ Bank [ASX: ANZ] chief Mike Smith in today’s Australian Financial Review (AFR):

“It would appear he’s [Shadow Treasurer, Joe Hockey] been taking economics lessons from Hugo Chavez and I don’t really see there’s much future in Australia for this type of policy; it’s crazy.”

We’ve got no time for Joe Hockey. He’s – as is the case with any politician – like a field of corn as far as economics and markets go. He’ll sway whichever way the wind blows.

But we’ve got no time for Mike Smith either.

Remember that this was the guy who claimed Australia’s banks hadn’t received even $1 of government support during the financial meltdown in 2008.

Of course he obviously forgot the taxpayer funded underwriting of taxpayer’s own bank accounts, and the taxpayer funded underwriting of the banks’ wholesale debt issues. You remember the ones. That’s where the banks get to flog their debt to overseas investors and you… that’s right, little old you picks up the tab if the bank goes bust.

If that doesn’t sound Hugo Chavez like then I don’t know what does.

So we wonder who Smith has been taking economics lessons from… Castro maybe. We think we’ve just about had all we can take from whinging chief execs who were happy to beg for the security of the taxpayer dollar in 2008 but now decry government interference after the taxpayer saved their bacon.

Don’t get us wrong, we want government to stay out of business too. But unlike Smith and the other banking cronies we want them to stay out of business all the time, not just when it suits them.

We would have liked the government to tell Smith and the rest of ‘em to shove it when they went begging for taxpayer bailouts. But as you now know, the government and bureaucrats were cowards and instead opted to put your taxpayer dollars on the hook instead.

If you missed it, Smith was responding to calls for a Parliamentary inquiry into banking competition. Don’t hold your breath. As if the pollies are going to do anything to expose the inherently fraudulent fractional reserve banking system.

I mean if they want to really question the banking execs, that should be the first thing they ask them to explain. We’d love to see a banker put on the spot and asked to explain how the banking Ponzi scheme really works.

But is there any chance of that question being asked at any inquiry? Of course not.

But the banks and their spruiking buddies have been in overdrive this week. Westpac [ASX: WBC] has produced a report titled: “Australian housing: the bubble myth”.

The Westpac report states that:

“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.”

What? This was written by Westpac chief economist Bill Evans and senior economist Matthew Hassan.

“[S]ecure source of income.” Where on earth did they get that from? Maybe it does provide an income but only a gross income. It certainly doesn’t provide a net income, not once you factor in the 80%, 90% or 100% investment mortgage.

And what was the stat released by the tax office a few months back about 70% of all property investors losing money. Blimey, the other assets must have done pretty poorly if a 70% loss rate is an outperformance!

But it was the following line that really cracked us up:

“Most recent first home buyers that have entered the market since 2008 have already built up a sizeable equity buffer – those with the lowest buffers are in the ‘resource’ states of Queensland and WA and as such have a very positive outlook for incomes and job security. The average first home buyer in 2008-09 has accumulated estimated equity of 18.8% from house price gains alone.”

Seriously, this is coming from a chief economist and a senior economist.

For a start, job security in the resources sector. Since when. Maybe for the moment, but as Evans and Hassan should know, past performance is not necessarily an indicator of future performance.

Anyway, what is equity? Equity in housing is the estimated value of the house today minus the purchase price of the house, or perhaps more accurately, minus the debt obligation. If you reckon the house is valued at $500,000 and you bought it for $400,000 then that gives you equity in the home of $100,000.

Great. But what our chief economist and senior economist friends seem to forget is that until a house is sold, equity is nothing more than a paper gain.

So we’re not exactly sure what point they’re trying to make. The only thing we can imagine they’re suggesting is that if a householder has difficulties keeping up with the mortgage then they can sell the house and walk away with an 18.8% profit.

Of course, that’s assuming a buyer is willing to pay the amount the seller is asking. Which, come the mega Australian housing crash will be hard to achieve.

Believe me, householders overseas soon realised how quickly housing equity can disappear in a distressed market.

But what we really think they’re getting at is that with an 18.8% buffer it means the borrower can just approach the bank and withdraw the equity as a loan and – perversely – use that to, erm, pay the mortgage if they get stuck.

That’s only a guess. As I say, we’ve got no idea what they’re trying to say. It just seems to be the same old head-in-the-sand argument that things are different here, house prices always go up, so there will always be equity, and, well, everything will be fine.

However, the timing of the report’s release was coincidental with another announcement concerning Westpac. It was made by FSA Group Ltd [ASX: FSA]. The announcement was headlined:

“FSA Group Announces Westpac Renews $235m Home Loan Facility For 2 Years”

The entire press release states:

“On the 6 May 2010 FSA Group announced its non-recourse non-conforming home loan funding facility had been increased to $235 million and renewed until 15 July 2011 by Westpac Banking Corporation.

“FSA Group is pleased to announce Westpac Banking Corporation has extended the renewal date of the facility until 15 October 2012.”

Non-recourse and non-conforming, that wouldn’t be anything like subprime would it? Would it?

You may know FSA Group from the TV ads. It’s otherwise known as Fox Symes & Associates. FSA Group is “the largest provider of debt solutions to individuals and businesses in Australia.”

Look, we’ve got no problem at all with firms like this providing loan consolidation deals. We don’t even have a problem with payday lenders or loan sharks.

The reason we don’t have a problem with them is that typically these people have been forced into using payday lenders or loan sharks thanks ultimately to inflationary central bank policies.

Those that are least able to cope with inflation because they are always the last to get hold of the inflated dollars always find it the hardest to keep pace with ever rising prices. Therefore they find themselves resorting to high interest lenders as they metaphorically try to run to stand still.

Naturally, governments see these lenders as loan sharks and immoral and so try to close them down or put limits on the interest rate. Which of course just makes it even harder for those desperate enough to need the loans.

In reality, far from being immoral, payday lenders and loan sharks are providing a needed service to those that have been penalised by central bankers and the economic-terrorism of inflation.

But it’s clear that Westpac is keen to keep the property bubble expanding, and what better way than keeping the subprime market bubbling along. Even though of course, they deny the existence of any bubble. There’s no bubble here, move along…

Which is pretty much the same approach taken by Frank Gelber, chief economist for BIS Shrapnel. He argues, in The Australian:

“If you think this is a bubble, then you don’t know what a bubble is.”

OK Frank, we’re obviously not as bright as a chief economist. We’re sitting comfortably. School us in bubbles please…

“A bubble is a buying frenzy built on a psychology of expectation, where capital gain becomes self-fulfilling. Usually, a rush of money underwrites the over-building, sowing the seeds of destruction.”

Right. We’ve got that. Anything else?

“In Australia, unlike the US, there is a shortage, not a surplus, of housing. Prices will go up, not down. And the shortage of stock will drive rents higher.”

Whoa there old boy. Sounds like you’re getting yourself into a frenzy! Deep breaths… right, carry on:

“Our estimate of the Australia-wide underlying demand for housing is an average of 180,000 a year over the next five years. In the global financial crisis-affected 2008-09 year, we built just over 130,000 homes.”

He goes on:

“The second problem is affordability, both in terms of the cost of servicing the debt used to finance owner-occupied housing and in terms of the shortage of stock on rents, making housing rentals unaffordable for some parts of the community.”

So let’s get this right. Due to a housing shortage house prices have gone so high that there is an affordability problem. In other words, it’s much harder for people to afford the high prices. And that the debt required to afford the high prices would make it expensive for people to take out that debt.

Could that also be a definition of a bubble? One where prices increase so much that the ability of people to afford the high prices is less. Or where they have to borrow excessive amounts to buy in. Which many are happy to do because they believe the price will keep rising.

Of course Gelber argues that the bubble won’t pop because Australia hasn’t had an increase in supply.

Here he’s wrong. The supply is already there. It didn’t and doesn’t need to increase for the bubble to pop. But more important is this – the level of supply isn’t actually that important for prices to pop. Although the mainstream commentators would have you believe it is.

In fact, all that’s required is a change in buyer psychology. Again, you can look at the stock market for a perfect example. Let me explain…

Look at the BHP Billiton Ltd [ASX: BHP] share price chart:

Source: CMC Markets Stockbroking

Nice isn’t it?

Most would agree that the period between 2003 and mid 2008 was a commodity-driven price bubble. The BHP share price more than quadrupled from under $10 to nearly $50.

During that time investor psychology was that the Chinese commodity boom would last for like, yar, forever… totally dude.

And therefore investors and traders were prepared to keep buying BHP Billiton shares. This was in the belief that the price would go up and they could sell them for a higher price in the future.

Now, according to the Gelber bubble argument, the only way the BHP share price could fall would be if there was an increase in the supply of stock (shares) during this boom.

That an increase in the BHP share price would be accompanied by an increase in the number of BHP shares on issue, and so when the crunch came in 2007 and 2008 the increase in supply (increased number of shares) would weigh heavily on the price and force the price down.

By the same token – again using Gelber’s argument – if there was no increase in the number of shares on issue then the share price couldn’t fall because there was no frenzied increase in supply.

Let’s look at the price chart again… yep, the share price fell. Therefore there surely must have been an increase in the stock on issue.

Well, you may be interested to know that according to the 2003 BHP Billiton Ltd annual report there were 3.75 billion shares on issue at the end of that financial year.

Clearly, what we’re looking for now is for the number of shares to balloon in a frenzy of seed-sowing destruction by the time we get to 2008.

So, what does the 2008 annual report tell you? According to the 2008 BHP Billiton Ltd annual report at the end of that financial year there were, ahem, 3.35 billion BHP Billiton Ltd shares on issue.

Or to put it another way, during a period of the biggest bull market in commodities, when the share price of BHP Billiton shares climbed from $10 to nearly $50, the number of BHP Billiton shares on issue actually dropped by about 400 million.

Despite the increased demand, BHP didn’t issue extra shares, in fact it contracted the number of shares on issue. That means – using all the housing arguments – there was a pent up demand for BHP shares which therefore caused the share price to sky-rocket.

But importantly, in terms of bubble theories, despite the contraction in the supply, the share price still got creamed. As you can see from the chart it fell from nearly $50 to $20 in a matter of months.

Why? Investor psychology. It had nothing to do with the supply and demand of stock (shares).

It was all to do with what investors thought would happen to the earnings of BHP and therefore what they thought would happen to the share price of BHP.

And it’s the same psychology which will play out in the housing market. For owner-occupiers and investors alike.

If buyers start to question the theory about house prices always going up – as they have in the UK and the US – then buyers will think twice about paying over the odds for a house: “Do we really want to spend $500,000 for this house and pay 50% of our income on a mortgage when there’s no guarantee the house will be worth any more in five years when we’ll need something bigger for our new family?”

And investors will also consider whether it’s worth receiving a negative income on a rental property when there’s no guarantee the price will increase to offset the negative income.

So Gelber is partially right. He’s right when he says, “A bubble is a buying frenzy built on a psychology of expectation, where capital gain becomes self-fulfilling.”

In fact, that’s the argument we’ve made all along.

But he’s wrong when he claims that a house price bubble needs an oversupply of stock (houses) to be created during the bubble period in order for it to crash.

The stock is already there. And it’s huge.

What it all comes down to is the psychology. And it’s the investor psychology that will ultimately lead to the catastrophic collapse of the Australian housing market – however much the spruikers and property cheerleaders try to deny it.

Cheers.

Kris Sayce
For Money Morning Australia

Still no word back from the Reserve Bank of Australia (RBA) explaining why the Three Cobbers – Corbett, Kraehe and McKibbin were unable to attend one of only eleven meetings the RBA holds each year.

We’ll pester the RBA again later today.

But until we get a reply, we thought we’d print an attendance record. It’s the sort of thing you see in company annual reports – among the 200 pages of other fluff and irrelevance.

Companies prints details of how many board meetings were held during the financial year and how many meetings each of the board members attended.

So, here’s the RBA board members’ record based on details published in the RBA board minutes each month:

Source: Reserve Bank of Australia

The overall average is a pathetic 85%. Mr. McGauchie even managed to miss two meetings in a row during the middle of this year.

But we’ll bet each board member still picked up 100% of their pay packet from the RBA.

For all the damage central bankers do to the economy, it’s astounding they’re still employed. Quite frankly, the best thing that could happen would be for the central bank to be shut down, for these clowns to be put out of a job, and for interest rate markets to be allowed to function free of interference from meddling bureaucrats.

On another point we received an email from one Money Morning reader last week on a different subject.

The intrepid reader had contacted the Australian Securities Exchange (ASX) questioning the clearly misleading and deceptive content of the Australian housing presentation Commonwealth Bank of Australia (CBA) executives were spruiking to international investors.

It seems the ASX has other things on its mind though. Such as filling its boots with cash from the proposed takeover by the Singapore Exchange, and sending out pointless ‘speeding tickets’ to listed companies asking them if they know why the company’s stock price has moved.

That can only be the reason, because this is the response received by the Money Morning reader following his letter:

In a nutshell it seems the CBA can say what it likes about the Australian housing market and can fudge as many numbers as it likes because “the Company has confirmed to ASX Compliance that the information contained within the Presentation, including the table produced on slide 4, is not material to the Company for listing rule purposes.”

So that’s alright then.

Apparently it’s now OK for a company to use cherry-picked and misleading data to make the argument that it’s multi-billion loan book isn’t over-valued.

That should come as good news for Australia’s resources companies who use JORC (Joint Ore Reserves Committee) guidelines when estimating the size of a given resource.

As shareholders in copper company Cudeco Ltd [ASX: CDU] would well know, if a resources company overestimates the value of a resource the ASX demands and enforces the company changes the estimate.

Maybe these resources companies can now just cherry-pick the best drill hole from exploration results and extrapolate that across the entire tenement!

Because make no mistake, that’s exactly what the CBA has done by publishing data from one source for international house prices and publishing data from another source for Australian house prices… whether or not the CBA intended to deceive is irrelevant, the fact that it has deceived the market is what’s important.

Furthermore, that the mainstream press and mainstream analysts took the CBA’s “facts” as gospel without recognising that the Australian house to income ratio didn’t come from the Demographia report only helped with the deception.

It’s pretty sad when the only person to pick up the dodgy numbers was your editor. Someone who specialises in tipping high-risk small-cap stocks, whereas the full-time economists and journalists just parroted the CBA presentation and press release in full… pathetic.

Something else that was pathetic was the supposed show of unity at the G20 finance ministers meeting in South Korea over the weekend.

According to a guy from Thomson Reuters on Sky Business Channel this morning, the outcome of the G-20 meeting is that it could mean the US Federal Reserve splashes less new cash around when it next meets in November.

In other words, the scale of the so-called QEII – quantitative easing – could be less than some traders had expected.

Maybe he’s right. We’re not so sure. I’m tempted to say that it’ll be bigger than most traders expect. For the simple reason that quantitative easing won’t work as the Fed expects and therefore rather than admitting their mistake they’ll be more inclined to pump more fresh cash into the market.

Not unlike how a sad gambler at the casino chases his or her losses, believing that the next bet will bring the big win they’ve been punting on… trouble is, for the most part it never comes.

Besides, you only have to read the communiqué from the G20 meeting to see that it’s written in typical bureaucratic double-speak. On the one hand they agree to:

“[C]ontinue with monetary policy which is appropriate to achieve price stability and thereby contributes to the recovery”.

While on the other hand they agree to:

“[M]ove towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies.”

We’d argue that the US Fed seems to genuinely believe that its actions are helping to “achieve price stability”. And that it believes money-printing will contribute “to the recovery”.

After all, the Fed is intent on fighting off the supposed demon of deflation. And that means inflicting a torrent of cash on the financial system to drive up inflation.

In that case, you can’t have “market determined exchange rate systems”. Because fiddling with the interest rate – which is what every central bank does – has a direct impact on the exchange rate.

Besides, it’s hard to see how the Fed can stop, considering the impact it has already had on the financial markets.

Take a look at the chart below:

Source: US Treasury

The interesting line to consider is the green line which has risen from USD$100 billion in August 2009, to USD$448 billion in August 2010.

It indicates UK registered owners of US treasuries has increased by around 350% in the past year.

It’s the biggest increase in both percentage and dollar terms for any country.

As we mentioned a few weeks ago when we first brought this to your attention, it’s no coincidence that the numbers for the UK include the Channel Islands of Jersey and Guernsey.

And it’s also no coincidence that these islands are home to billions of dollars of funds held under management by hedge funds and private equity funds.

Just to be clear, our beef isn’t with the hedge funds. If they’ve got the brains and the know-how to be able to take advantage and profit from central bank interference then good luck to them I say.

Just as long as they don’t go kicking and screaming for a taxpayer bailout when their super-leveraged billion dollar bets go belly up.

But then again, maybe it doesn’t need that much brain power at all to make a squillion. All you need are good connections. And there’s no bank with better connections than Goldman Sachs.

According to the guys at Zerohedge, Goldman Sachs wrote this is a letter to clients:

“On the interplay between the FED and STOCKS: Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%. in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%. the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market’s performance on the 19 non-OMO days: +70bps.”

What the guys at Goldman’s are saying is that if you can front-run the Fed then a profit is guaranteed. A big profit at that.

All you have to do is buy stocks on the days that the Fed buys treasuries and you’re looking at an 11% return.

That’s pretty good considering if you were trading on days when the Fed didn’t act to buy treasuries you would have picked up a return of just… 0.7%. Coincidence? Or proof that central bank intervention is pushing up asset prices and creating bigger bubbles?

It’s clearly the latter.

But of course, the hedge fund guys in the UK that are buying up US Treasury Bonds are more interested in flipping treasuries rather than buying stocks. They’re loading up on treasuries purely in anticipation that the Fed will buy them at a later date at a higher price.

It’s the only way of explaining why UK investors would be so interested in loading up on bonds that are paying such a low yield.

What it all goes to show is the massive and destabilising influence central bank intervention is having on global markets. And odds are it’ll only get worse as governments and central banks insist on meddling even further with the markets.

As this line from the G20 communiqué states:

“Yet, given the high interdependence among our countries in the global economic and financial system, uncoordinated responses will lead to worse outcomes for everyone. Our cooperation is essential. We are all committed to play our part in achieving strong, sustainable and balanced growth in a collaborative and coordinated way.”

A coordinated approach is the last thing markets need. Have they learnt nothing about the disastrous effects of central planning? Clearly not.

The US Federal Reserve Federal Open Market Committee is next due to meet on 2-3 November. It’s at that meeting traders and analysts are expecting the full details of the quantitative easing policy to be announced.

Whatever happens – our bet is that it’ll end up being bigger than the market expects – it will have a massive impact on the direction of financial markets for the foreseeable future…

And unfortunately it won’t be a positive impact either, not in the long run anyway. In the short-term the impact on the markets could be different, but don’t be fooled into thinking that any gains will be long-lasting.

Cheers.
Kris Sayce
For Money Morning Australia

But before you get to that, this…

The Super Theft rolls on. A $10 billion Super Theft no less.

The front page of today’s Australian Financial Review (AFR) announces: “Labor to reap $10bn in lost super”.

It explains:

“The federal government is set to collect a $10 billion windfall from unclaimed superannuation as industry executives admit it is almost impossible to track down the owners of the lost accounts.”

Yeah, it’s impossible if you don’t try. Or if you don’t plan for it in advance.

The government is doing exactly as we predicted it would. Last year we revealed that the government was expropriating the super funds of temporary foreign workers. It was set to deliver the government an $800 million windfall.

That’s a lot of money. But clearly not enough.

At the time we warned:

“The next logical step is for the government to grab the superannuation balances of all working Australians. Don’t forget, the government is about to embark on a massive $200 billion spending spree and it’s got to pay for it somehow.”

While the government hasn’t gone the whole hog just yet, it’s edged its way closer.

You see, what will happen is that the $10 billion in unclaimed superannuation will be swept up by the Australian Taxation Office (ATO). In effect it will be taxed at a 100% tax rate.

What happens with it then? Is it stored in lost property next to umbrellas and overcoats?

No, it’s swept from the ATO into the federal government’s consolidated revenue where it can spend it. Naturally enough there will still be a book entry stating that $10 billion of superannuation is owed to around 3.8 million people, but the money won’t actually be there.

It won’t even be earning a miserly 5% interest. Of course the book entry will say the money is there. And the book entry will say it’s earning interest, but the reality is it won’t.

The money will be spirited away and spent.

What the government is banking on is that those 3.8 million people never get round to claiming back their lost property. If they do then the government will need to claw the money back from the taxpayer or through debt.

But look, if you’re a long time Money Morning reader this shouldn’t come as any surprise to you. As I say, it’s something we’ve warned of for some time.

We’ve pointed out that superannuation is really just another tax. That it isn’t really your money, it’s just made to look as though it’s yours.

And that viewpoint was confirmed in an article we read in the Herald Sun this week. The quote was from Stuart Forsyth, assistant commissioner at the ATO. He told the Herald Sun:

“Some people just seem to want the money. They think it’s theirs and they can have it now.”

Says it all really doesn’t it? It isn’t your money. It’s merely being held in your name in trust for future spending by the government.

$800 million last year. $10 billion this year. What’s next? There’s still $1 trillion left for the government to try and get its greasy hands on. Look out!

Anyway, onto the feedback from yesterday’s Money Morning…

We don’t need to delve into the Money Morning mailbag today, we can just pick a few off the top of the huge pile.

To start off I’ll give you the general gist of the responses. This letter from Bill pretty much sums up most of the responses we received. It’s short and to the point:

“You are an absolute idiot!”

However, Money Morning reader Ian put it much nicer. Or should that be nicerer:

“Which of the pantheon of gods inspired this vacuous piece of fluffy nonsense?”

Then there was this from Greg:

“As much I enjoy your forthright writing there are times when you venture into the realm of the absurd. In your article about “blameless BP” you not only entered the realm but you occupied the throne.”

King at last! Although we’d be happy to settle for a Lordship.

While Steve wrote:

“I could not possibly agree less. Disgraceful.”

And John wrote:

“The ocean belongs to the whales and dolphins. The oceans can’t be owned by any person any more than can a slave. To assume that humans rule over other intelligent life through manifest destiny is to retrospectively validate the previous centuries of slavery by the same reasoning.”

Er, owning a fish equals slavery! No it doesn’t. No more than owning a dog or a budgie equals slavery.

It always amuses us how many people take your editors views on liberty and free markets and then twist it around to accuse us of being a Nazi-lover and slavery advocate! The reality is the opposite.

It is the social engineers and power-trippers in government that advocate slavery. Only it’s a more palatable form of slavery because the masses don’t realise what it is. It’s slavery to the government. A government that forcibly takes around 50% of your money in various taxes. You work a full week for your employer but only get to keep half the money because the government takes the rest.

But anyway, there were plenty of other letters, but as usual, this is a family newsletter so we’ll keep it clean.

As it happens, John sent us a second email stating:

“BP is not responsible because it was implicitly assumed by everyone that the government could respond to an emergency and plug a leak. The government was the regulator. The government was happy to sell drilling leases and levy taxes and royalties.”

That’s our point.

However, we’ve got the feeling that this point has been lost.

The point is that due to government manipulation and meddling the result is exactly as Money Morning reader John explains, that “it was implicitly assumed by everyone that the government could respond to an emergency and plug a leak.”

Yeah, and governments have got such a good record of responding to emergencies.

The US government under George W “Gomer Pyle” Bush did such a terrific job of responding to Hurricane Katrina in New Orleans. A response that resulted in around 2,000 people dying.

If you’re from Victoria you’re probably aware about the fabulous response of the government to last year’s bush fires. A response that involved police commissioner Christine Nixon telling the commission into the fires that:

“I went home and then I went and had a meal with two friends, I left very capable people at the centre knowing that the (Emergency Services) minister was arriving. I went home, I watched the news, listened to the radio and checked the internet.”

What a heroic response. In other words she did exactly the same thing that five million other Victorians were doing that evening. You’d have thought that when you’re supposed to be in charge of something like preventing fires from killing people, you’d put in just a teeny bit of extra effort.

And what about the response of government to the economic meltdown in 2008 and 2009? How did they handle that? Like uneducated chimps they thought – “I know, if we print a lot of money and give it to all the crooks that caused this mess then that should solve everything.”

Moral hazard my friend, moral hazard.

The implicit guarantee that Freddie Mac, Fannie Mae, the US banks, the UK banks and, yes, the Australian banks were given encouraged excessive risk taking.

That I’m afraid is absolutely no different to the situation with BP.

And aside from the abuse in the emails we’ve received, nothing, not one email has been able to argue that the ultimate fault is BP’s.

Sure, the oil may be coming from their well. And the oil may be killing animals and washing up on beaches, but BP’s lax practices are merely the effect. The cause is the actions of governments and the lack of property rights.

Just as the banks were prepared to push the boundaries as far as possible in order to make a buck, so is the same for BP. In both cases they believed there would be a bail out.

In the case of the banks they knew they were too big to fail. The banks knew that the Federal Reserve and governments would create money from thin air to stop the whole financial market from crashing.

And in the case of BP, it has known all along that its liabilities would be capped at $75 million. It made a business judgement that it could take more risks knowing that the most it would pay is $75 million.

Unfortunately for BP it seems that the rules are going to be changed. The company has already committed USD$20 billion towards a clean-up fund. $20 billion that will doubtless be nowhere near enough once the government and its agencies start getting involved and overpaying the contractors.

In other words, BP rolled the dice on what it thought the maximum liability would be – USD$75 million. It turns out the dice didn’t fall its way. It turns out that oil companies don’t have as many cheerleaders in Congress as the banks do.

It turns out that pictures of cute rocks covered in oil is just too much for a US congressman to cope with. BP can’t be allowed to get away with it.

But let’s get another thing straight. Drilling for oil offshore is both risky and expensive. Money Morning reader Owen sent us a copy of the letter sent by Congress to BP CEO Tony Hayward.

Amongst other things in the letter it’s pointed out that:

“The Deepwater Horizon rig was expensive. Transocean charged BP approximately $500,000 per day to lease the rig, plus contractors’ fees. BP targeted drilling the well to take 51 days and cost approximately $96 million.”

It goes on:

“The Deepwater Horizon was supposed to be drilling at a new location as early as March 8, 2010. In fact, the Macondo well took considerably longer than planned to complete. By April 20, 2010, the day of the blowout, the rig was 43 days late for its next drilling location, which may have cost BP as much as $21 million in leasing fees alone. It also may have set the context for the series of decisions that BP made in the days and hours before the blowout.”

The Congressmen and women seem incredulous that BP should be thinking about the profitability of the well in making decisions about which processes to use.

That’s natural for a body of people who don’t need to concern themselves with profitability. They can just take money from the taxpayers or increase the national debt to pay for whatever they want.

BP and other private companies don’t have the same luxury. Private businesses need to think about making a profit. Because remember this, and this is important, if private businesses didn’t consider the profitability of their actions then the economy would be a mess.

In fact, if private enterprises didn’t think about or care about whether they were profitable or not there would be no private enterprise. There would be no economy as we know it. Businesses would be unable to survive.

Think about it, if there are no profits there is no enterprise. You’d be whisked back to subsistence living. You’d be back to the days which the environmentalists crave for – a pre-industrial economy where we’re all crawling around in the mud and picking lice from each other’s hair.

As I say, drilling for oil is risky stuff. In our opinion it’s more amazing that there aren’t more oil spills or oil rig explosions.

I mean, for goodness sake look at how deep these guys have to drill. Your editor is barely capable of drilling a hole in the wall to put up shelves let alone sending a drill two kilometres to the bottom of the sea and then another two kilometres through rock.

The last time we looked the longest drill bit Bunnings stocked was about 10 centimetres!

Look, oil companies make decisions based on profitability every day. They have to otherwise they’d go out of business. In 99.9% of cases this crusade for profitability results in oil spills not happening and oil rigs not exploding.

It’s the drive for profitability that encourages oil companies not to spill oil into the ocean. It encourages them to try and prevent an oil rig from blowing up.

For every barrel of oil that goes in the ocean that’s a barrel of oil it can’t sell. That means less revenue and less profit.

And most importantly to you, it’s the drive for profitability that ensures you’re able to drive your car to work, heat your home and that industry can power its machines.

But if you’ve got government interference that creates a moral hazard then you’re bound to see private enterprise taking advantage of it. They’d be crazy not to. Just like property investors can’t help themselves but take advantage of negative gearing.

Or share investors who take advantage of franking credits.

There’s no difference in that they are all instances of government interference and manipulation.

The only difference is that when the stock market bubble or housing bubble pops because of this interference, it doesn’t leave everyone covered in oil.

Make no mistake, it is the desire for profitability that keeps the economy ticking over. Any measures by government to stymie that is bad for you and bad for the economy. And it should be resisted at all costs.

It is government interference (including lack of private property rights) that is the ultimate causes of the problem, not the search for profits.

Cheers.

Kris

“Super profit tax calls industry’s bluff”

And on the front page the AFR leads with:

“Henry ramps up pressure on miners”

With the subheading, “Claims tax will boost growth.”

To back up the arguments the AFR reproduced a chart and pie chart which I’m pointing at with a red pen while Diggers & Drillers editor Dr. Alex Cowie cleverly took a photo with his fancy iPhone:

In a wonderful piece of casual/causal flummery, the chart on the left shows how oil exports went ballistic after the petroleum resource rent tax was introduced.

Thanks to that piece of, erm, evidence, treasury secretary, emperor Ken Henry believes:

“It is the strong and clearly stated view of Treasury that the resource super profit tax [RSPT] will grow the mining sector and the economy.”

The two pie charts to the right provide more, [hehem], proof that the mining companies are ripping off ordinary Australians.

In case you can’t see it clearly, the pie chart shows how the government swiped an average of 55% of mining profits between 1999-2004, but merely 27% in 2009. Obviously something must be done to redress this heinous crime of profitability.

Fancy making a profit eh? Mining companies should take a leaf out of the government’s book and not make a profit. That’s how it’s done.

But do you see the problem with these claims by the Treasury? I’ll explain in a moment. Before I do, there’s other comments made by the deputy drones at the Reserve Bank of Australia (RBA).

As reported in Tuesday’s AFR, deputy drone Ric Battellino said:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

Then there’s the comment from deputy drone Phillip Lowe, sorry, Dr. Phillip Lowe:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Perhaps we’ve gone over the top on the quotes this morning, but I’ve included them all for a reason. Because they have one thing in common…

The overwhelming belief by the bureaucracy that it can manipulate an economy at will. That it can decide which resources companies will prevail and which won’t. It’s megalomaniacal bureaucratic interfering at its worst.

Anyway, let’s work through these kindergarten-grade arguments put forward by the bureaucrats who seem to be long on qualifications but short on logic.

First up, let’s look at the case that the super profits tax will be great because it will only cream off extra tax from the big profitable companies, but at the same time “smaller and more marginal projects would become more viable.”

This must be true because it’s all according to “modelling” undertaken by KPMG Econtech.

Now, as you’re probably aware, the recent record of “modelling” by the financial industry whizz-kids hasn’t been too good. Remember all those models that said a subprime property crisis wouldn’t spread to other investments?

But don’t take my word for it, just type “KPMG auditing scandal” into your favourite search engine and you’ll get a bunch of records returned. We picked out this one from the Irish Independent: “Were the bank auditors conflicted?”

According to the article, “Irish Nationwide, which last week revealed a loss of €2.5bn for 2009, was also a customer of KPMG… AIB paid KPMG a whopping €11m over nine years for services outside its audit…”

KPMG aren’t the only ones, PricewaterhouseCoopers and Ernst & Young get dishonourable mentions too.

Let’s put it this way, just as the auditors felt compelled to give their banking clients the news they wanted, KPMG has given the Treasury the news it wanted – something to justify the imposition of a new tax.

I mean, how likely is it that KPMG would return a report saying the Super Profits Tax will be bad for the industry?

Not very likely considering KPMG is paid a fee by the government in return for providing the report. You couldn’t imagine KPMG getting asked back again if it proposed something against the government’s intentions.

But look, as with all modelling it can only produce a result based on the parameters it’s given. And just wait until you read what those parameters are. You’ll be flabbergasted…

Take this assumption made by KPMG in its report to the government:

“In the model, this implies a zero economic cost for the new RSPT, since it will simply be a transfer of a portion of the surplus (over and above the required return on capital) from these industries to the government sector.”

Got that? A “transfer of a portion of the surplus from these industries to the government sector.” That’s mindboggling in itself. We do like how they’ve used the word ’surplus’ rather than profit.

What chumps.

Anyway, it goes on:

“In KPMG Econtech’s MM900 model, the RSPT has an excess burden of zero. This outcome rests on the modelling assumption that the RSPT only taxes the economic rents earned from immobile factors, in this case mineral reserves. If only these rents are taxed, then the investment decisions of mining companies will not be distorted. Since the tax base in the RSPT will not shrink in response to the tax, activity in the mining industry will not be distorted, and there will be no economic costs associated with the RSPT in MM900.”

It sums up with:

“The incidence of the RSPT is also a result of the immobile nature of the natural resources on which it is levied. Since there is no change in the supply of mineral resources, their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

Phew! I don’t know about you, but I’m out of breath after that…

OK, now I’ll try to paraphrase that junk into plain English. In other words, what our friends at KPMG Econtech are saying is that – because the government is just creaming off profits then it won’t impact either the cost of the resource in the ground, nor will it put miners off from exploring because the tax will come from the profits.

Correct me if I’m wrong but I’d say that’s the gist of it.

It goes without saying that the “brains” behind KPMG Econtech are clearly professional academics or professional number crunchers or wet-behind-the-ears university graduates with no idea about the concept of risk versus return.

It appears to your editor that the fatal flaw in the KPMG Econtech modelling is that because the model doesn’t see the Super Profits Tax as a cost it assumes that the Super Profits Tax has “zero economic cost.”

What a ridiculous claim.

Think of it this way. Let’s say mining plant equipment company Caterpillar changed its terms for providing big trucks to the mining sector. Let’s say that instead of miners buying or leasing the equipment Caterpillar decided to take 5% of the mining company profits instead, and that this 5% would lead to an increase in the money paid by the miner to Caterpillar.

Now, under that circumstance, would you say that there was now a “zero economic cost” to the mining company for plant and equipment? Would you now say that the mining company was now getting its mining equipment for free because the “cost” was only coming from profits?

Anyone claiming that would be mad.

To claim that something isn’t a cost because it comes from after-profits rather than before-profits is accounting chicanery of the highest order.

It’s no wonder the Irish banking system went to the wall, if this is the kind of auditing those banks were subjected to – “Yeah, don’t worry about those collateralised debt obligations, our modelling says they’re fine!”

As I’ve pointed out before, the bureaucracy and now clearly the auditors, have no concept of profits. And they’ve no concept of the difference a lower anticipated profit has on the willingness of an investor to invest.

I mean, if we tipped a stock in Australian Small-Cap Investigator that was super-high risk but which only offered the prospect of a 9% return would you back it? Probably not. But if it offered a high risk potential of a 286% return then maybe you would.

Then again, maybe you wouldn’t. Maybe you’d want an even bigger potential return.

The point is, the risk to Australian mining companies hasn’t changed one jot. But what has changed is the potential return. In other words, same risk but lower return. Seriously, we’re talking Investing 101 here. It’s not some abstract concept we’re trying to get to the bottom of.

You don’t need a Certificate IV in accounting from Chisholm TAFE to work out that if the potential return is lower, investors will reconsider making the investment.

But it doesn’t end there, KPMG makes another terrible blunder. And it’s this. It assumes that because the minerals are immobile it will have no change on the supply. What?! How does that work. Ah yes, that’s right, “their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

I’ll be straight up with you, this is perhaps the most ludicrous statement we’ve ever seen. It’s claiming that because the Super Profits Tax is being taken out of profits then it will not impact the investment decisions of miners.

Not only that, but according to the pen-pushers and tax-stealers in the Treasury, increasing taxes will not only be a zero cost to the mining industry, but it will actually increase growth… Hahahahahahahaha, stop it guys, seriously.

The evidence? The chart faithfully reproduced by the AFR which shows the CASUAL relationship between the introduction of the petroleum resource rent tax and the increase in oil exports.

For Treasury to claim that the introduction of a tax will actually increase production is absurd. But if it is true then maybe the Treasury should reconsider the tax increase on cigarettes. After all, going by their logic increasing the taxes will increase the supply of cigarettes and most likely increase the number of cigarettes smoked!

Nuff said. Clowns.

Finally there’s the statements from Tweedle-Battellino and Tweedle-Lowe. If you thought the comments from KPMG Econtech and Ken Henry were ridiculous then the comments from the RBA drones really do take the cake.

Their statements that:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

And:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Have you ever come across anything so weird as for a bureaucrat to wish that Australia’s most productive industry suffers the collapse of a big mining project. Is he serious?

We’re talking about something that provides a genuine benefit to the economy. We’re not talking about the Ponzi banks and housing sector that are a drag on the economy. We’re talking about an industry that is the sole reason for the Australian economy not collapsing in 2009.

But then again, these are the same guys who are keen to argue that the property market isn’t in a bubble.

Ah, but now the penny’s dropped. Actually their thinking on the resources sector and the housing market is exactly the same now we think about it.

In both cases they want to see “a gradual and sustained increase in investment over time for the economy to benefit.”

In other words, just as the RBA is keen to keep house prices sky high in order to try to avoid a bursting of the property bubble, it is equally keen to see commodity exploration fall so that prices remain high.

It goes to show you how much the Australian economy relies on the resources sector for economic growth. The obvious fear is that if too many miners extract too much of the natural resources it could push commodity prices lower and therefore have a negative impact on the value Australian exports.

Or, to put it another way, a potential commodity price crash.

You can hardly blame them for being worried. After all, the RBA and the bureaucracy have succeeded in driving all other productive industries offshore or into oblivion.

It figures it can manipulate the resources bubble by increasing taxes and therefore putting a brake on supply.

Talk about playing with fire.

The trouble is that rather than protecting the resources industry, these tax-grabbing measures are more likely to destroy the industry than save it. While it’s true that these resources aren’t movable it’s also true that they are available elsewhere.

Look, I’m not saying that the entire resources sector will collapse, but what I am saying is that in many cases – as we’ve seen already – the Super Profits Tax will be the difference between whether a company explores here or whether it targets projects in countries with a less burdensome taxation regime.

But as usual, what it all really comes down to is the fact that a handful of power-hungry bureaucrats believe that they can manipulate an economy to suit their purpose. That by pushing and pulling levers they can get the economy to move exactly as they planned.

Soon enough they’ll work out it’s not possible. In the short term these things can give the impression of working, but in the long term all it does is increase the distortions in an economy and create a huge mess with massive unexpected (for them) consequences.

It’s proof that bureaucrats and number-crunchers don’t have a clue about how an economy functions.

Cheers,
Kris.

Some things are just not meant to be.

Yet even so, the fascination with and the desire for some investors to buy Telstra [ASX: TLS] shares is unwavering.

Personally we don’t get it. If Telstra was the only share listed on the Australian Stock Exchange, we still wouldn’t touch it. In fact, I think I’d rather buy an over-priced property with a 100% mortgage and negative gearing than buy Telstra shares.

That’s how bad an investment in Telstra is.

Given where the share price is, we’d say that most investors agree:

But amazingly, there’s still a bunch of investors out there who keep lapping it up. They keep believe it can’t possibly get any cheaper.

Remember the scam last year with the sale of Telstra shares by the Future Fund? The fund managers and brokers were falling over themselves to grab a piece of the action.

So excited were they, that as we recall, the Future Fund ended up flogging more shares to meet the demand.

Yet still the share price has done nothing. And odds are it never will do anything.

But that doesn’t stop the brokers from trying to hoodwink their clients into the stock. Look at the chart below that we got from the CMC Markets Stockbroking website:

Of the five analysts surveyed – which granted, isn’t many – all five of them reckon Telstra is a cracking buy right now.

Then there’s the broker consensus on the Investsmart website. Seven buys and three holds. The analysts obviously reckon they’ve picked the bottom of the market for this dog:

Click Telstra Corp Broker History table to enlarge

But when I look at Telstra I just think, “Why would you bother?”

It’s not as though Telstra is the only share available to buy on the ASX. At the last count there was something like 1,800 listed stocks.

And not only that, it’s got so much going against it only a mentallist would consider the stock a good buy.

Think about it. Do you really want to buy or own a stock that owns and maintains technology that is up to 100 years old? And which faces stiff competition from better companies in the new technology areas.

Do you really want to buy or own a stock that has a quasi-government department in control of a big stake in the company?

Do you really want to own a stock where the government could destroy it at the single stroke of a pen? And where the same government is plotting to establish a taxpayer funded competitor?

We don’t. But plenty do.

But then we always hear this one, “Oh, but it pays a good dividend.”

Really? If you’d bought Telstra shares back in 1997 and held on, you would have picked up $2.98 of dividends.

Right now, Telstra is trading at roughly the same level as the initial float price of $3.30. So, taking the dividends into account you’ve almost doubled your money in thirteen years.

Factor in the real cost of inflation and your investment would be well under water.

And if you were unlucky enough to pay $6, $7 or $9 then you’re seeing on a fat loss right now.

We like dividend paying stocks, but that doesn’t mean you should forgo capital value.

The dividend with Telstra just isn’t good enough to justify holding it. There are plenty of other stocks on the market that will give you a decent dividend yield, plus the potential for some conservative growth as well.

But, I’m sure you know why nearly all the brokers and analysts have a buy recommendation on Telstra. The simple fact is, they’re keen to get their snout in the trough the next time the Future Fund decides it wants to flog some stock.

The millions in fees that UBS earned from the last sale is evidence of that. And as for the fund managers, well, it’s not their money anyway, and they’re always keen to do a favour for their broker mates, and vice versa – “You scratch my back…”

Look, maybe we’re wrong and maybe the Telstra share price could double or triple from here. But so what? Who cares? There are so many other opportunities on the market that staying with Telstra is just a monumental waste of your capital.

Our advice to anyone that’ll listen is to just sell the thing and be done with it.

Buy something else. Heck, I’d rather tell you to buy bank shares than Telstra shares – and that’s saying something!

Cheers.
Kris.

Platinum has the makings of being the commodity story of 2010. Right now, the stars are aligned for this super rare metal, and this year I expect it will even outperform gold and silver.

Over the last three months Platinum prices have already risen 15.8%. And that’s set to continue.

So why are investors worldwide getting so excited about platinum? Let me tell you.

First of all, the supply of platinum is really tight.

When the world asks for more of the stuff, the industry is stuck in first gear and just can’t increase the supply. For instance, it’s taken the industry thirty years to just double production.

This is partly because it’s so rare. For every trillion particles in the earth’s crust, just three parts of them are platinum. Last year the entire industry managed to squeeze out just six million ounces, which would fit in a box measuring two metres on each side!

Second, demand is rising fast.

The four main groups of users take everything the industry can provide already. With demand rising, a global platinum deficit is on the way.

Autocatalyst manufacturers are the most notorious users of platinum, but last year they used just over a quarter of the supply. Between them and other industrial users, such as computer hard disk manufacturers, they bought about half of global platinum supply last year.

If the global economy continues to recover, these two groups will need more platinum.

Funnily enough, the biggest users of platinum were jewellery manufacturers. They took up 42% of supply last year.

They mopped up what other industries didn’t need that year.

And now the world has got an increasing taste for platinum jewellery. The Chinese platinum market is in its early days but is taking off fast. This has the scope to be a huge destination for the world’s platinum.

But the most exciting source of platinum demand by a mile is the new kid on the block – the Exchange Traded Funds (ETFs).

Between 2006 and 2009 they have gone from zero, to ten per cent of the market. They buy the metal and hold it on behalf of investors. The Investors can then buy a portion of the platinum, like they were buying a share in a company. It’s an easy way to invest directly in the metal.

For example, Gold ETFs do this and have been a massive winner. The one on the New York Stock Exchange has now got the sixth largest gold holdings in the world.

And platinum ETFs are also growing rapidly. A new platinum ETF (ETFS Physical Platinum shares) listed on the New York Stock Exchange earlier this month.

Investors buy in for one reason – they expect future price rises. This new ETF has been given a whopping seven percent allocation of the world’s platinum supply.

This is game-changing news for two reasons.

Firstly there isn’t a spare seven percent to go around. It’s just not there.

Secondly the ETF puts a massive investor base in front of the platinum market which is basically miniscule. It’s just a tenth of the size of the gold market which in the big picture is also tiny.

So ETFs will mop up at least 17% of the market this year. If the new ETF is a success, it will grow and others may follow its footsteps.

Make no mistake; demand for platinum is on the rise.

So we have the makings of a perfect storm:

• Super-tight supply.
• Rising demand from multiple users.

This is exactly what I’m always searching and hoping to uncover for Diggers and Drillers readers: A commodity right in the centre of a perfect storm.

In mid-December, platinum was ticking all the boxes and then some. So, I tipped a stock that was well placed to reap the benefits. Already, Diggers & Drillers readers that acted on the tip are already enjoying fifty percent gains on their investment within a month.

From where I’m sitting, platinum looks like it is going to have a great ride well beyond the end of this year as well. Even before the new ETF burst onto the scene, there was already a forecast platinum shortage for the next few years. The ETF will only multiply this shortage.

And where there’s a shortage there’s a price rise.

Regards,

Alex Cowie
Editor, Diggers & Drillers

60-Second Market Round Up
by Shae Smith

The S&P/ASX 200 was boosted after the announcement of a lower than expected unemployment rate. Unemployment was down to 5.5%. The index closed up 29 points to finish at 4,898.00.

The Dow Jones Industrial Average had a shaky start based on disappointing December retail results. The market was expecting a 0.50 increase and instead the results showed a 0.3 decrease in spending. Thanks to the technology sector, the Dow managed to close up 0.28% and finish at 10,710.55. Read more here.

Overnight in the UK, the FTSE added 0.45% to close at 5,492.20 despite a weak retail sector. Mining companies, like Xstrata [FTSE: XTA] ended the day 4% higher which helped the index finish in the black.

The Nikkei posted its highest close in 15 months, ending the trading session at 10,907.68, up by 1.61%. Panasonic Corp [T: 6752] was up yesterday by 6.10%, based on hopes of a positive earnings season in the US. Find out what else drove the Nikkei here.

The price of spot gold in Australian dollars is trading at $1,225.87 while in US Dollars it is trading at $1,141.90. The price of silver in Aussie dollars is $20.05 and in US Dollars it is $18.67.

The Aussie dollar versus the US dollar is trading at USD$0.9316, and against the Japanese Yen JPY84.96

Crude Oil has continued its yo-yo like pattern. High stock levels and a sharp decrease in demand are the drivers behind the overnight decline. Crude Oil closed at USD$79.19

For the biggest movers on the market yesterday click here…

2009 was a year of wild market movements. It was a year of nonsense winning out over common sense. And it was a year of old mistakes being dressed up as new solutions – only for the disguise to slip revealing what lay underneath…

Trouble is, no-one’s noticed yet because they’re all off partying like it’s December 2006.

On top of that, it hasn’t taken long for the funds’ management fraternity to rear their head and spout the usual rubbish. Such as this from CommSec chief cheerleader Craig James:

“What this year (2009) highlights is the value of the old adage that it’s time in the market rather than the market timing.”

He goes on to explain:

“Because if you decided to exit at the worst and then get back, arguably you wouldn’t have shared the performance of somebody who has just constantly maintained their investments.”

Except he forgot to mention that the very same buy and holder would still be minus 30% on their portfolio since the market topped out in 2007. And what he’s also forgotten to mention is that it was the ‘experts’ who were telling investors to bail out just as the market hit rock bottom.

But there was another story that we cast our eyes across yesterday morning. We spotted it as we ate breakfast with the rest of the Sayce family in McDonald’s on Golf Links Road in Frankston.

“Performers of the decade” revealed the Melbourne Herald Sun.

The article revealed which investments did best, and which did worst over the past ten years.

So, what’s been the best performer? Gold of course. Up 284% in US dollar terms since 2000.

According to the Herald Sun “a rising Aussie dollar rubbed off some of the shine.” No argument there. But obviously journalist Karina Barrymore found it just that little bit too hard to work out the Aussie dollar performance of gold over the last ten years.

If she’d bothered she would know that despite some of the “shine” being “rubbed off”, gold priced in Aussie dollars is up 195% over the same period.

This still puts it in the number one spot for Australia’s best performing asset class.

Importantly, for most gold investors it’s a zero leveraged investment. That means no interest costs. Of course, it also means most gold investors have missed out on the opportunity to magnify their gains, but that’s not important.

Because for most gold buyers the yellow metal is a hedge or insurance policy to cover other investments.

Anyway, a 195% return isn’t bad. But what about second spot? Well, that wasn’t a bad return either.

Residential property. The median Australian house price is up a whacking great 127% since 2000. That, for you maths fans, is a doubling in price in ten years.

Not bad. Although not quite as good as it sounds. Unless you paid the full purchase price in cash of course, then we’ll admit you’ve ‘done good.’

But for most people, they don’t pay cash for a house. They take out a loan. And loans cost money, even when interest rates are low.

So if we assume a $150,000 loan on say a $160,000 house, then according to website yourmortgage.com.au, the average annual cost of ‘owning’ that $160,000 house is…

$13,672. Or, $136,720 over the last ten years. And that’s not including the one-off costs for the initial purchase of $18,458.

Sooooo, the real return on that median Australian house – which is now supposedly worth $363,200 – over the last ten years is a not so impressive sounding 30%. Or 2.6% per annum.

It’s no wonder the property spruikers are so keen for house prices to double every 7-10 years. When you’re leveraged up to that extent, house prices have to double just for you to break even on your ‘investment.’

If Christopher Joye and his cronies are fair dinkum about house prices they’d scrap their useless and unfathomable hedonic index and give us an index that takes into account the cost of carrying a property.

Fat chance of that happening. Because if they did produce such an index it would reveal the lie about property being a great investment.

As we’ve pointed out ad nauseam, an investment is supposed to make you money not cost you money. If it costs you money then it’s a liability not an asset.

Make no mistake, for the average ‘Joe’, residential property is unarguably a liability not an asset.

But let’s not just poke a stick at the property spruikers. The share spruikers need a slap around the chops as well.

According to the Herald Sun, “The All Ordinaries index of 500 companies is up 49 per cent over the past 10 years.”

Whoopee! That’s the result of Craig James’ buy and hold strategy for you. A 49% gain over ten years.

Or to put it another way, that’s a 4% return per annum.

But let’s put it in a different way. In a way that emphasises how disastrous the buy and hold strategy is for investors.

Funnily enough, the Herald Sun article doesn’t mention what your return would be over the last ten years if you had just invested in cash. We wondered why. And then we did the numbers and worked out exactly why…

The second best performing investment – after gold – over the last ten years wasn’t really property. And it wasn’t even shares. It was… CASH.

The Herald Sun tells us the average annual return for cash has been 5.3%. That’s better than the 4% per annum from shares, and it’s double the 2.6% per annum net return from residential property.

We can only think that the Herald Sun didn’t want to embarrass its paymasters – property and investment advertisers – by pointing out that you’d have been better off sticking your hard earned dollars in a high interest savings account for the last ten years.

After reading that you could be forgiven for thinking that buying gold and sticking the rest in a savings account is the way to go.

Well, that’s only partly right…

As I wrote in the December issue of Australian Wealth Gameplan – “Buy Gold.”

Sure, gold is near its all time peak. But if you view it as an insurance policy then – within reason – it doesn’t matter what price you pay for it.

But my general advice is to average in to the yellow metal. Set an aim to buy even just one or two ounces a year. Few people would blink at spending $1,200 on a plasma TV that has already been superseded by an improved model.

A plasma TV that you’d be lucky to recover half the value if you immediately tried to sell it on eBay. A plasma TV that will lose 90% of its purchase price ‘value’ within two years.

Conversely, the vast majority of investors won’t touch gold with a bargepole for fear that it’s overpriced. For fear that the price could fall by 30% or even 50% within the next couple of years.

But what if gold does fall back from its peak, so what? When you’re unleveraged, a 30% or 50% fall in the gold price means nothing more than the opportunity to buy more of an insurance policy on the cheap. And it would most likely mean that your other investments have performed well – hopefully neutralising any fall in the gold price.

That’s why it should be viewed as a hedge or insurance policy.

But whatever you do, you shouldn’t hold more than you need to in cash.

Sure, if you need cash in the short term then take out the odd term deposit here and there. But if you’re looking at 20, 30 or 40 years until retirement then cash is the worst investment – aside from residential property and buy & hold shares – you could make.

What that survey in the Herald Sun shows you isn’t that cash is a good investment, it shows you that the professional investment experts are crap at their job.

That’s why you must take more control over your investments.

You see, the real key to any investing gameplan is to, well, have a gameplan.

It’s something I’ve tried to impress upon Australian Wealth Gameplan subscribers during 2009 [Publishers note: if you aren't receiving Kris's Australian Wealth Gameplan newsletter you can join up by clicking here].

Although the main focus of Australian Wealth Gameplan is investing for income, it most definitely is not a ‘buy and hold’ portfolio of shares. It’s about buying into investments that show the potential to pay out a consistent and sustainable income.

But if I believe there’s an opportunity to take some short term capital gains off the table, or if I believe there is a better income opportunity elsewhere then I won’t hesitate to tell Australian Wealth Gameplan subscribers to bail out.

Saps like Craig James at CommSec will have you believe that a buy and hold strategy has proven to be a winner. When you look at the ten year performance of the index which would be reflective of most shareholder’s portfolios, then you can see the buy and hold claim is nothing short of a lie.

What sort of an investment strategy returns you 4% per year? A rubbish one!

The buy and hold approach is a joke not even worthy of a place inside a Christmas Cracker.

And if you consider the real rate of inflation is much higher than 4% then a buy and hold investment strategy over the last ten years will have seen your wealth drop in value.

I’ve got absolutely no doubt that the mainstream brokers, commentators and analysts are ready to push out the buy and hold nonsense to investors again.

Over the next few months you’ll see a ramping up in the advertising budgets of the big fund managers, and yet again, the retail investor will be sucked in to putting all their money into the hands of commission and fee-driven corporate leaches.

Hopefully, this will be a warning to put you off making that mistake.

Because if you approach 2010 like it’s the start of 2007, then I can guarantee you one thing, it won’t be long before you’re cursing the pinstripes on Collins Street and Martin Place, just like you were twelve months ago.

Get yourself an investing gameplan to avoid disappointment by this time next year.

Cheers.
Kris.