Stephen Leeb: The Real Threat to Europe, the US (and NZ)

This week in our musings, we have some thoughts of our own – and thoughts of others that we have found interesting….

The opening headline in this week’s NZ Sunday Star*Times Business section reads “Gold Production heads to $1b”. It seems that gold is starting to attract mainstream attention, even in New Zealand. Over the page, in Rod Oram’s piece, we find this fact reported:

The sum that we (NZ) owe the rest of the world – our net international liabilities – are now 90% of GDP, the third highest in the world after Iceland and Hungary - and are forecast to reach 100% of GDP by March 2014.

Finance minister Bill English correctly referred to this as “New Zealand’s largest vulnerability”.

I for one would like to know the ratio of our debt servicing costs to our income – this is actually a much more important number then the one above, for the simple reason that it defines our ability to pay our way. Suffice it to say that New Zealand’s vulnerability lies in its requirement to continually borrow from abroad, and therefore our interest rates are inescapably tied to overseas rates. The remarks I made last week about the effect on US debt repayments of rising interest rates apply to us in spades.

Now to some of the articles that have grabbed our attention this week…

• William Engdahl: Euro slump due to Attack from Wall St and Washington

• Stephen Leeb: The Real Threat to Europe, the US (Ed: and us)

• Jim Rickards: Financial Warfare, and More

• Mish Shedlock: New Proposals to keep Australia’s Housing Bubble from bursting

 

Euro slump due to planned Wall Street and Washington’s attack - William Engdahl

Germany’s Chancellor Merkel says the Euro currency is at risk and that Europe faces its greatest challenge since the EU was formed.

It comes as stock markets in Europe and Asia tumbled on the surprise news that Berlin was banning types of ’short selling’ – where investors profit by betting that shares will drop in value.

The euro is under pressure after nations using it had to pull together to bail out Greece, which is struggling under a massive debt and from strikes that are bringing the country to a halt.

Many say the aid package came too late and that the crisis in Athens may be a prelude to the currency crumbling.

William Engdahl, author and economic researcher, thinks it is the greatest challenge since 1999 when the euro was created.

He said the crisis is the result of an orchestrated attack by the U.S. on the dollar’s main rival.

“The whole attack on Greece and the attack on the euro originated from a concerted strategy of Wall Street and US Institutions to permanently cripple or try to cripple the only alternative reserve currency anywhere in the world that can challenge the dollar,” Engdahl told Russia Today.

 

Stephen Leeb: The Real Threat to Europe, the US (Ed: and NZ!)

Stephen Leeb was trained as a mathematician and psychologist, and I have found him to be right on the money on a number of occasions. He’s another guy I listen to carefully when he speaks… In these remarks he discusses the indirect taxes that increasing energy and commodity prices impose, and his view on gold.

Don’t mistake us: the euro will disappear in time. It’s just that, for now, European nations are taking some positive actions that the market sees as reducing the risk of economic Armageddon. France and Spain have decided to cut benefit packages for their civil servants to reduce their deficits. Germany has approved of the massive bailout package to help Greece, which amounts to de facto quantitative easing.

If there were no further problems down the road, we might expect the euro to eventually bottom out at around $1.10 – maybe a dollar. The EMU might eventually unwind the recent quantitative easing and come through the current crisis intact.

Unfortunately, the road ahead is far from smooth. And the problems that lie ahead have far more to do with resource scarcity than Western governments’ excessive debt levels.

Let’s take an example from the U.S. (just because the data is readily at hand).

While some people enjoyed the weather this past weekend, I confess I spent my time crunching numbers. By doing so, I came to some poignant conclusions regarding the average American family’s energy costs in recent years. Between 2000 and 2005 (the most recent year for which government stats are available), energy expenditures per U.S. household rose from an average of $2,200 (or 4% of expenses) to $5,000 or 10% of expenses.

Although more recent figures on energy expenditures are not yet available, we know that household incomes have fallen since 2005 while energy prices have risen. So it’s fair to say that the average household pays an equal or greater percentage of its income on energy today.

That’s a huge after-tax increase in Americans’ cost of living. It’s like paying nearly $3,000 more each year in taxes – after you have finished paying Uncle Sam. This money doesn’t go towards fixing potholes, making education affordable, or stimulating the economy. Instead, much of this money goes overseas to enrich the oil-exporting nations.

Naturally, the same is true of increases in the price of virtually every other raw material the U.S. imports. Copper, nickel, zinc, platinum, and many other commodities have gained substantially over the past 10 years. And every resulting increase in the cost of living suppresses consumer spending, much as a tax would, but without any redeeming side effects.

Naturally, Europe faces similar problems. (Ed: - and so do we here in NZ) Like the U.S., it imports a lot of oil and raw materials. Admittedly, it has been further ahead than the U.S. when it comes to developing alternative energies. But now that Europe faces pressure to cut government deficits, alternative energy projects may take a back seat for a few years. (Instead, the new world leader in alt. energy is China and it is widening its lead every day.)

Going forward, the combination of greater fiscal restraint and rising commodity prices will put a lot of strain on Europe. It will probably lead to a sustained period of quantitative easing, which will pit European nations against each other.

In the end, resource scarcity more than sovereign debt will cause the biggest problems in both Europe and the U.S. It will restrain people’s ability to send their kids to college, pay for healthcare, or retire while they’re still young enough to enjoy it.

As for gold, we remain confident that gold offers us long-term security against market declines.  Simply said it is the world’s strongest currency in times of uncertainty.

 

Jim Rickards: Financial Warfare, and more

Jim Rickards, Senior Managing Director of Omnis Inc, is interviewed often by Eric King of King World News. King World News is a very important site for followers of the precious metals markets to keep a close eye on. Nothing of importance to these markets escapes Eric’s eagle eye. The full interview is carried on the site, and I urge you to check it out; I attempt to paraphrase the important points below.

Financial warfare: it may not be obvious at the time it’s happening – there is a slippery slope from open markets to closed markets to adversarial markets. Now, while China may not be engaged in actual warfare at the present time, it is certainly wielding a huge deflationary hammer against the US - thus contributing to Ben Bernanke’s worst nightmare, because of the impact deflation has on banks and on debt. Currently, we have apparent price stability because the forces of deflation, coming from China and elsewhere are balanced by the forces of inflation i.e. money printing by the central banks. However this is an unstable equilibrium – the balance can easily tip from one side to the other or shift back and forth.

Interestingly, gold is an investment that does well under both inflation and deflation.

It is interesting to speculate who the buyers are, now that gold is undergoing a correction; in any case these short term fluctuations are not of concern. Jim still has a short term target of $2000 per oz, and $5000 per oz for the medium term.

Credit default swaps do not form part of the free market – they form part of a rigged game. To be clear, the fiscal situation in Europe is a mess. However, CDS make the situation many times worse. With derivatives, you can attack a country with no money down. The $1T rescue package will not work; GS could create  $5T worth of shorts in the form of credit default swaps, which they can do over the phone. Governments, led by Germany are fighting back, however. Jim makes the point that these countries are important Nato allies; the investment banks have been allowed to run riot, but this situation may not continue.

 

Mish Shedlock: New Proposals to keep Australia’s Housing Bubble from bursting

(Ed: wonder what Steve Keen will say about this…)

Insanity Down Under: ING Says Thanks to Capital Appreciation, Paying Principal on Mortgage Loans is Unnecessary

from Mish’s Global Economic Trend Analysis by Michael Shedlock

Myths that home prices rise forever and interest rates stay low forever are alive and well in Australia. Please consider this amazing story of corporate insanity as described in the Sunday Telegraph - Revealed: The home loan that could save you a fortune.

ING Direct, Australia’s fifth largest lender, is preparing to sell loans that have no fixed term and no requirement to repay any capital along the way.
 
At current rates, the interest-only loans would cut repayments on a $300,000 mortgage by $5000 a year.
 
“People are needlessly being denied the chance to buy a property while prices spiral rapidly out of their reach” ING Direct CEO Don Koch said. “There is an urgent need to provide more affordable options and borrowers should be able to choose whether they want to repay the capital, or not.”
 
Mr Koch wants to position the bank as a “mortgage partner for life”, with borrowers carrying the same interest-only loan from property to property for as long as they wish, accumulating equity from rising house prices as they go.
 
Then, as they near retirement, they could sell their property for a big enough profit to pay off the original loan and buy a smaller place outright, leaving them mortgage-free. Or, they could keep the mortgage going and repay the original capital from their estate, after death.
 
Banks already offer interest-only loans, but borrowers often are allowed to keep them only for five to 10 years. Then they must start paying the capital.
 
But ING says this preoccupation with paying off the loan is unnecessary.
 
“There is no economic reason for banks to insist on regular capital repayment,” Mr Koch said. “It just makes the loan more expensive for the borrower.
 
Financial comparison website InfoChoice CEO Shaun Cornelius said the move was a welcome innovation: “Depending on the size of the loan, it could add hundreds of thousands of dollars to a borrower’s cash flow over their lifetime.”

Economic Idiocy
 
Koch’s proposal, seconded by CEO Shaun Cornelius of InfoChoice, is economic idiocy at its finest. No one “saves” anything by not paying down mortgages, the money is simply spent (most likely wasted) elsewhere. Moreover, home prices do not perpetually go up.
 
The US housing market has without a doubt proven both statements.
 
Ask any homeowner in the US who is headed for retirement and severely underwater on their home what they think of Koch’s hypothesis.
 
With so many underwater mortgages, only a complete fool think estates would be in a position to repay the original capital from their estate, after death, especially in countries where the bubble has not yet popped, such as Australia, Canada, and China.
 
Of all the proposals to keep the housing bubble alive in Australia, especially in light of what has happened in the US, this idea from ING needs to go straight to the top of the idiotic ideas list.
 
ING Direct CEO Don Koch is testament to the idea “there is always the greater idiot who never learns a thing from history, who instead proposes to do something that the market has recently proven preposterous.”

Simple Questions
 
By the way Mr. Koch, I have a few simple questions for you:
 
Are you aware of what interest rates were in the 1970’s and 1980’s?
 
“What happens when interest rates rise, perhaps even double, and your borrowers struggle to make even the interest payments?”
 
Alternatively, “Are you dumb enough to offer low rates forever?”
 
Either way. Mr. Koch, you and your banks are screwed, and it should not take a genius to figure that out.
 
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Could NZ house values drop by 80%?

Past data shows they sure could when priced in gold.

As usual there’s plenty of discussion in the mainstream media about where house prices are going. Given New Zealanders predilection for property it’s no surprise. However the prices used are always and only the nominal NZ dollar prices. And as discussed in this previous article, The Current Stage of the New Zealand Real Estate Market, it’s important to take into account money supply inflation and its impact on the buying power of the dollars you hold, when looking at historical returns.

So we’ve gone to the trouble of plotting NZ house prices against NZ gold prices to hopefully show house prices in a new light….

The below graph depicts the commonly publicised median house price (orange line and right axis). But also the house price to gold price ratio (black line and left axis) since 1962. This is calculated by dividing the median house price by the monthly gold price in NZ dollars. We then arrive at the number of ounces of gold required to purchase the NZ median house.

As it’s difficult to get long range median house prices, the prices were calculated using RBNZ house price index data and extrapolated backwards using the current median house price. Note: the index is for detached houses only. So while not perfect it should give a general indication of the trend in NZ house prices.

We couldn’t find NZ house price data back to the 1930s and earlier like the US and UK graphs care of bullionvault below. (The accompanying articles for the US and UK graphs on bullionvault can be found here and here.)

And while the UK and US data refers to average (not median) house prices, ‎we think we can still use the data to draw some broad comparisons.  So ‎please forgive our mixing apples with oranges!  Hopefully the resulting fruit ‎salad still makes sense!

Comparing the UK (above) and US (below), notice how towards the end of the 2 biggest recessions of the previous century – one, the deflationary depression of the 1930’s and the other the inflationary 1970’s – the ratios both dipped below 100 oz to purchase the average house.

While our NZ data doesn’t go back that far, notice how similar the NZ graph is to the UK data since 1962. Both peaked around 1970 at near to 300 ounces. Both then fell to below 100 in 1980 and climbed steadily with a bit of a stumble in the 90’s, to peak in the mid 2000’s.

So we reckon it’s probably reasonable to assume that the trend was similar during the 1930’s depression era here too.

Now, referring back to the NZ graph (reproduced again below for ease of comparison), note how at the end of the 70’s the housing/gold ratio drops down to almost 50 oz of gold to buy the median house!

If history repeats and the trends in the US and UK are similar to NZ, could we in fact be heading down close to 50 ounces again by the end of the current financial crisis?

Also worth noting is that while house prices in NZD terms peaked in 2007, priced in gold they had already topped out in 2005. So, at first glance it may seem like you’ve “missed the boat” if you didn’t sell housing and buy gold in 2005 when the top was in at 500 oz. With the ratio currently standing at about 250 oz you would have been able to buy back the same house now and still have 250 ounces left over. Or put another way you could now buy 2 houses. That is, twice the buying power in real estate by holding gold for 4 years.

However if we consider that in the 70’s the ratio bottomed at 50, this is a further 80% drop in the ratio from today’s value!

Key point: It’s the proportional drop that is the key factor.

So an average house sold today would net you 250 oz of gold. If the past trends both here and in the US and UK hold true, we may see the ratio drop below 100 and here in NZ maybe even bottoming out as low as 50, by the end of this financial crisis. That would mean you could buy back the same house for 50 ounces of gold and still have 200 ounces left over. Or using the same analogy as above you could now buy 5 houses! Even if the ratio only dropped to 100 ounces you could still buy the same house back twice and have 50 oz of gold left over.

Bear in mind that this drop against gold could happen without house prices actually falling in nominal NZ dollar terms as well but merely just through expanded money supply holding house prices up – i.e. the kiwi dollar being devalued. For example, for the ratio to bottom out at 50 the median house price could remain at the current price of $360,000 and gold could rise to $7200NZ (i.e. $360,000 / 50 = $7200). Notice how in the 70’s housing actually went up for the whole decade in dollar terms (orange line) while falling for the decade in gold terms (black line).

Or you could have gold holding steady and nominal house prices dropping markedly. With NZ gold currently at $1,585, the current median house price would have to drop to $158,500 to return just to 100 ounces! Ouch!

But perhaps the more likely scenario is to have a combination of the nominal dollar price of housing falling and gold rising. For example, gold at $3000NZ and the NZ median house price dropping to $300,000 would result in a 100 oz ratio.

Anyway, if history at least rhymes a little bit, holding gold should result in improved buying power when it comes to real estate in the coming years, whichever of the above scenarios play out.

So to summarise:

1. When priced in gold the NZ median house peaked in 2005 at 500 ounces.
2. Since then it has fallen 50%
3. UK and US data shows the ratio dipped below 100 ounces after the 1930’s depression and 1970’s inflation.
4. Past NZ data shows the ratio reached a low at the end of the inflationary 1970’s of just over 50 ounces. This is a further 80% drop from today’s ratio of 250 ounces.
5. It might be hard to time exactly but when houses priced in gold are below 100 ounces it might be a good time to think about exchanging some gold for property.
6. Hint: To do step 5 you need to have some gold!

Note: We’ll be updating this data every few months and publishing the changes so if you want to stay informed about when NZ housing will again be good vaule, then sign up for our email article updates in the box at the top right of this page.

When will the Australian housing bubble burst?

We know we’re not part of Australia - even if the rest of the world doesn’t - but we’ve posted this article under the “New Zealand Articles” heading, as where the Aussie housing market goes generally so does ours.  It also discusses the NZ housing market in terms of affordability or rather it’s unaffordability.  NZ may not have risen to the (even) giddier heights the Australian market has in the last year or so, but house prices here are pretty much back to the highs of 2 years ago.  So we should have plenty of room to fall too.  The author, Mike “Mish” Shedlock writes regularly in his blog ”Mish’s Global Economic Trend Analysis” and is definitely worth keeping an eye on.

Pool of Greater Housing Fools in Australia Finally Runs Out; OZ Dollar, Where to From Here?

Today the Reserve Bank of Australia (RBA) unexpectedly held interest rates at 3.75%. No doubt this was in fear of the Australia’s enormous housing bubble that exceeds the height of the bubble that long ago burst in the US. 20 economists predicted the RBA would hike. Not a single one predicted anything else.

Fear in the board of governors over the pending crash is palpable. Prime Minister Kevin Rudd did not learn a single thing from the US and the disastrous policies of Greenspan. He gave one last goose to the housing market with $14,000 tax credits in a foolish attempt to stem the tide of the global recession that started two years ago.

Prime Minister Rudd brags about Australia’s ability to duck the recession. It did not work. All Rudd did was delay the inevitable, fueling an even bigger housing bubble. The bigger the bubble, the bigger the crash, and rest assured Australia is headed for a housing crash.

Here are a few snips from the Bloomberg article Australia Unexpectedly Keeps Interest Rate at 3.75%.

The Reserve Bank of Australia kept the overnight cash rate target at 3.75 percent after three increases, it said in Sydney today. The decision confounded the forecast of all 20 economists in a Bloomberg News survey for a quarter-point move, and futures contracts that signaled a 74 percent chance of an increase.

Australia’s dollar tumbled to a six-week low and Asian stocks pared gains after the announcement sparked concern at the economy’s ability to withstand higher borrowing costs. Business confidence fell to a six-month low, a report showed today, and Woolworths Ltd., the country’s biggest retailer, warned last week that rate increases would hurt consumers.

Business confidence fell in December to the lowest level in six months, a report by National Australia Bank Ltd. showed today. The bank’s sentiment index dropped 11 points to 8. Lending to companies “has continued to fall as companies have sought to reduce leverage, and lenders have imposed tighter lending standards,” Stevens said today. “Credit conditions remain difficult for many smaller businesses,” he said.

Here is a statement from the article that particularly caught my eye: Prasad Patkar, who helps manage about $1.5 billion at Platypus Asset Management in Sydney said “Today’s decision reduces the serious risk of a policy blunder.”

Serious Policy Blunder

Sorry Prasad, a serious policy error was made long ago, and there is not a damn thing the RBA or anyone else can do to stop the impending housing crash in Australia.

What follows is a post I actually wrote yesterday. I intended to post this before the rate decisions, but it never happened. I too, thought one more hike was coming. That it did not come is a sign of panic at the RBA.

First Time Buyers In Severe Stress

Just as happened in the United states with subprime borrowers, Australia’s first-home buyers struggle as interest rates rise.

Almost half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”.

“The dream of home ownership has turned sour for many thousands of first-home buyers now that the reality of rising interest rates is kicking in,” said Fujitsu Consulting managing director Martin North.

“Rising utility costs and school fees are also cited as reasons for hardship, and many first-home owners are living without proper furniture or carpets as they divert all their cash to their monthly repayments.”

During the past 18 months, more than 135,000 first-home buyers have entered the market, encouraged by the generous grants and stamp-duty relief.

As a result, more than 50 per cent of first-home owners are forecast to be in the “mortgage stress” category by the end of this year.

“This was a disaster waiting to happen,” Steve Keen, professor of economics at the University of NSW, said yesterday.

“The grant panicked first-home buyers to rush into the market, which pushed prices up by far more than the grant itself. Now we have buyers falling behind with their repayments as rates increase and thousands of owners exposed to the danger of bankruptcy as the situation deteriorates.”

No Lessons Learned

“LD”, a reader from Australia who sent me the link asked and answered his own question: “What have Australians learned from Americans over the last 2 years? Nothing!”

Credit Squeeze Coming Up

Craig, another reader from Australia writes …

Mish

I’ve been waiting a long time to buy a house in Australia. Looks like I may not have to wait too much longer for the Aussie bubble to burst. As always, love your blog. Cheers, Craig

Craig is referring to Tighter credit rules to halve home loans.

Last week Westpac cut its loan-to-value ratio (LVR) for new customers to just 87 per cent of the property’s value - a new low for a big bank. Although it may appear relatively small, such a cut has a disproportionate effect on how much people can borrow and can halve the value of the property they can afford to buy.

“If you have a $50,000 deposit and you can get a 95 per cent loan, you are able to bid on a property worth $1 million,” said Steve Keen, associate professor of economics at the University of Western Sydney. “But if the LVR is cut to 90 per cent, your $50,000 deposit is only equivalent to 10 per cent deposit on a $500,000 property, so the amount you can spend is halved.”

Westpac’s reduction from a maximum LVR of 92 per cent means that buyers with a $50,000 deposit will see the maximum that they can afford to pay for a property slashed from $625,000 to $384,615. Somebody with a $20,000 deposit would see the amount that they could spend reduced from $250,000 to $153,846, says Professor Keen.

Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse. According to research by broker Mortgage Choice, fewer than half of all new home buyers have a deposit of more than 10 per cent of the property’s value.

“Westpac’s move could affect many thousands of buyers and they will be forced to go to new lenders,” a spokesman said. “It’s a very worrying development because if others follow suit, we could see the majority of first-home buyers priced out of the market.”

Further restrictions now appear to be inevitable. “And banks can’t go on lending forever.”

Lenders have gradually been cutting back the size of loans that they are prepared to offer home buyers. Just over a year ago, 100 per cent - or even 105 per cent - loans were relatively common. But over the past 12 months, the LVR has fallen steadily to 95 per cent, then to 90 per cent, and now to 87 for new borrowers approaching Westpac.

It was this same tightening of credit that led to the collapse of property prices in the UK in 2008, even though the country was still suffering from a massive shortgage of homes at the time.

Deposit Math

Note the above paragraph in red by Steve Keen, one of few economists in the world who actually has a clue. His blog is Steve Keen’s Debtwatch.

Also note the worries of the so-called housing experts in the above article: Experts are worried that, if other banks follow suit, credit to the property market will be choked off and property prices could collapse.

If those “experts” had an ounce of common sense they would be worried the housing bubble would get bigger.

Indeed, housing prices are so stretched in Australia that the bubble will bust soon enough regardless of whether lenders tighten standards or not.

The US housing bubble burst with credit standards still getting looser a year or more later.

When Do Bubbles Burst?

Bubbles burst when the pool of greater fools runs out, and not before.

That is exactly why Economist Steve Keen lost housing bet against Rory Robertson.

AN ECONOMIST known as the “Merchant of Gloom” will have to walk from Canberra to the top of Australia’s highest mountain after losing a bet about the resiliency of Australian house prices.

Last November, University of Western Sydney associate professor of economics and finance Steve Keen made a high-profile bet with Macquarie Group interest rate strategist Rory Robertson.

The two parts of the bet were that house prices would tank by the end of 2009 and that house prices would fall 40 per cent from their all-time high within 15 years.

The loser of the bet would have to make the more than 200km trek from Canberra to the top of Mount Kosciuszko wearing a T-shirt that says “I was hopelessly wrong on house prices! Ask me how.”

Why The Bet Went Wrong

Keen’s mistake (miscalculation is a better word as I am positive he will ultimately be proven correct), was that he misjudged actions the Rudd administration might take to keep the bubble going.

Bear in mind that once the trend changes, it changes for good, but until the trend does change, efforts to keep bubbles alive frequently produce blowoff tops.

In Australia’s case I finally sense a blowoff top in fools. The US suffered the same fate in 2005 when the cover of Time Magazine went “gaga over real estate” and people were camping out overnight and entering lotteries for the right to buy Florida condos.

Inquiring minds might be interested in the following flashbacks, the first showing the funniest Time Magazine cover in history, the second shows approximately where we are today although I do have to move the arrow one notch closer to the bottom.

April 10, 2006: US vs. Japan Land Prices Pictorial Update

July 13, 2009: Housing Update - How Far To The Bottom?

How did Bernanke and other experts fair?
Let’s answer that with a few more flashbacks.

The initial data point on my chart came in the post It’s a Totally New Paradigm on March 26, 2005. Here are some excerpts from that post.

• Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors says that “South Florida is working off of a totally new economic model than any of us have ever experienced in the past.” He predicts that a limited supply of land coupled with demand from baby boomers and foreigners will prolong the boom indefinitely.
• “I just don’t think we have what it takes to prick the bubble,” said Diane C. Swonk, chief economist at Mesirow Financial in Chicago, who was an optimist during the 90’s. “I don’t think prices are going to fall, and I don’t think they’re even going to be flat.”
• Gregory J. Heym, the chief economist at Brown Harris Stevens, is not sold on the inevitability of a downturn. He bases his confidence in the market on things like continuing low mortgage rates, high Wall Street bonuses and the tax benefits of home ownership. “It is a new paradigm” he said.

Flashback October 27, 2005

Inquiring minds may wish to review Bernanke: There’s No Housing Bubble to Go Bust.

Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.

Flashback February 12, 2008

Bernanke Expects Housing Recovery by Year End

Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the downtrodden U.S. housing sector to improve by the end of the year, a senator who participated in the closed-door meeting said.

“He let us believe that the housing situation should begin to ameliorate by the end of the year,” said Sen. Pete Domenici, a New Mexico Republican, told reporters.

“He gave a very good, succinct, short overview of where he thought the economy was right now and how it might move forward,” said Sen. Jon Kyl of Arizona.

Bubbles and Humpty Dumpty

Bernanke has proven all the king’s horses and all the king’s men cannot put bubbles together again.

For further proof please see Bernanke’s Deflation Preventing Scorecard.

After bubbles burst, nothing matters including loose lending standards in the US that lasted long after the housing peak in summer of 2005.

Supply of Fools Exhausted

I am willing to bet that at long last, Australia’s pool of greater fools just ran out. Rudd’s ridiculous $14,000 grant and stamp-duty relief programs were likely enough to exhaust that pool.

The ultimate irony of Keen’s bet is that by the time he starts his hike in April he will likely be right.

Bear in mind however, that prices tend to fall slowly at first as inventory builds up. Then the losses accelerate quickly.

A Long Wait

By the way, Australia buyers might need to wait 5-7 years or more for reasonable valuations. Look how long it took for the US housing bubble to implode. We have not hit bottom yet after 5 years, and the Australia bubble has a bigger starting point.

 

Please see Housing Bubble Comparison: US, UK, Canada, Spain, Australia, Japan for a county by country comparison of housing bubbles from the Ecomomist.

Demographia International Housing Survey

Inquiring minds are reviewing the results of the 6th Annual Demographia International Housing Affordability Survey. Countries in the survey include Australia, Canada, Ireland, New Zealand, the United Kingdom, and the United States.

Least Affordable Cities

The article shows the top 58, I captured the top 20 above.

Congratulations To Canada And Australia

Congratulations go to Vancouver, Canada for being the least affordable city in the survey. Vancouver thus wins the gold medal in the individual competition.

 

Sydney Australia proudly wins the Silver medal and the Sunshine Coast Australia wins the bronze. It was close but no cigar for Australia’s Gold Coast. Honolulu Hawaii came in a respectable fifth place.

Most Affordable Cities

Detroit, South Bend, Youngstown, Flint, Toledo, Akron, Peoria, Cleveland, and many other “affordable” cities are not places where anyone would particularly want to live. Indeed many cities at the top of the affordability list are places that most would hope to escape from.

The high school graduation rate in Detroit is a mere 25%!

I am willing to bet that Detroit’s graduation rate is far and away the worst of any city in the survey. See Michigan Forces Business Owners Into Public Sector Unions; Detroit’s Aura of Hopelessness for more details.

Moreover, there are houses in Detroit, Cleveland, Flint, etc, that one could buy for $500 that have no takers. Unlivable houses no one wants at any price skew the results.

Demographia Summary by Nation

All of the affordable markets were located in Canada and the United States, while most markets in Australia, New Zealand and the United Kingdom were severely unaffordable.

Australia: House prices have continued to rise in Australia (Figure 2), which registered the worst housing affordability (the highest Median Multiple) in the
history of the Survey. Overall, housing in Australia is severely unaffordable, with a Median Multiple of 6.8, more than double the 3.0 historic maximum norm. Housing had been affordable in Australia in the late 1980s, with a Median Multiple of under
3.0. The Median Multiple remained at or under 3.5 until the late 1990s.

All of Australia‟s major markets were severely unaffordable (Median Multiple above 5.0). Moreover, all markets, including smaller markets were severely unaffordable except Ballarat (Victoria), which was seriously unaffordable (Median Multiple between 4.1 and 5.0).

Canada: Housing is moderately unaffordable, as in previous Surveys. Canada‟s Median Multiple is 3.7. Housing had been affordable in Canada in the late 1990s, with a Median Multiple of 3.0. Canada had 5 affordable markets, 13 moderately unaffordable markets, 5 seriously unaffordable markets and 5 severely unaffordable markets.

Vancouver remained the least affordable market of any size in the surveyed nations, at 9.3, worsening from 8.4 last year. Toronto joined Vancouver as severely unaffordable, with a Median Multiple of 5.2. However, Barrie, within the Toronto region was moderately unaffordable, at 3.4. Victoria, Abbotsford and Kelowna (all in British Columbia) were also severely unaffordable.

Ireland: Housing in Ireland has become moderately unaffordable with a Median Multiple of 3.7, showing a trend toward historic norm of 3.0.20 Housing had been affordable as late as the middle 1990s, with a Median Multiple below 3.0. The extent of Ireland‟s recent housing affordability improvement is illustrated by the EBS/DKB Affordability Index, which indicates that mortgage payments have been halved in Ireland since the peak of the bubble in relation to first home buyer incomes.

New Zealand: Housing in New Zealand was severely unaffordable, with a Median Multiple of 5.7, nearly double the historic maximum norm of 3.0. Housing had been affordable in the early 1990s, with a Median Multiple of under 3.0. Auckland is the least affordable larger market, with a Median Multiple of 6.7, while Christchurch (6.1) and Wellington (5.7) were also severely unaffordable.

Tauranga-Bay of Plenty was again the least affordable market, with a Median Multiple of 6.8. Five of the 8 New Zealand markets were severely unaffordable, while Palmerston North, Napier-Hastings and Hamilton were seriously unaffordable New Zealand had no affordable markets and no moderately unaffordable markets

United Kingdom: Housing in the United Kingdom remains severely unaffordable, with a Median Multiple of 5.1, well above the historic maximum norm of 3.0. Housing had been affordable in the late 1990s, with a Median Multiple of under 3.0. Less than one-half of the United Kingdom markets were severely unaffordable (14 of 33), while the other 19 markets were seriously unaffordable. The United Kingdom had no affordable markets and no moderately unaffordable markets.

United States: Housing in the United States is rated as affordable, with the Median Multiple of 2.9.The recent house price declines have restored U.S. housing affordability to the below 3.0 historic norm (last achieved in the early 2000s), as the price bubble burst in many plan-driven markets. The United States had 98 affordable markets, 58 moderately unaffordable markets, 8 seriously unaffordable markets and 11 severely unaffordable markets.

The most affordable major market (population over 1,000,000) was Detroit. Other affordable major markets were Atlanta, Buffalo, Cincinnati, Cleveland, Columbus (Ohio), Dallas-Fort Worth, Houston, Indianapolis, Kansas City, Las Vegas, Louisville, Memphis, Minneapolis-St. Paul, Oklahoma City, Phoenix, Riverside-San Bernardino, Rochester, Sacramento, St. Louis and Tampa-St. Petersburg.

Gold, Silver, Bronze Medals

In terms of national unaffordability (the team competition) Australia wins the gold medal, New Zealand, the silver medal, and the UK wins the bronze medal.

Because of a preponderance of “affordable” cities in the US and the way the national rankings are made, I question the results of the national survey although it likely did not affect the top three medal-winning rankings.

Email Exchange With Survey Developer

I had this exchange with Hugh Pavletich of Performance Urban Planning who helped develop the survey.

Mish: When you come up with “national affordability” are all the cities given equal weight? Does Detroit count as much as San Francisco?

Hugh: Yes.

Mish: In my opinion, a weighted average is what matters most (at least for the purpose of figuring out how big the bubble still is).

Hugh: We are NOT attempting to explain how big the bubble is on a country wide basis. We are simply illustrating what the Median Multiple is at the 3rd Qtr of each of the urban markets listed.

Other researchers are most welcome of course to take the next step and do a population weighting, if they wish to do so.

Our goal is simply to illustrate the degrees of housing stress of the urban markets listed.

Bear in mind my goal is quite different than Hugh Pavletich’s. He wants to show the role local planning rules have in affordability. Hugh makes a case that local zoning rules play a huge factor on a city by city affordability basis while I am concerned with “How Big Is The Bubble?”

From my perspective, the US and Canadian bubble problems are very understated, and the national affordability rankings of the US and Canada are thus overstated. To be certain, one would have to take a weighted average of populations and rankings. One would also need to take into consideration unlivable houses offered at $500 that no one would take. If one did that, we would see the bubbles are where the most people live.

There is much more in the survey. Please give it a look.

Mortgage Stress in Australia

If this chart does not scream “nationwide bubble”, nothing ever will.

Australian Interest Rate Hikes

On December 2, the Reserve Bank of Australia hiked rates to 3.75%.

At its meeting today, the Board decided to raise the cash rate by 25 basis points to 3.75 per cent, effective 2 December 2009.

With the risk of serious economic contraction in Australia having passed, the Board has moved at recent meetings to lessen gradually the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker. These material adjustments to the stance of monetary policy will, in the Board’s view, work to increase the sustainability of growth in economic activity and keep inflation consistent with the target over the years ahead.

Let’s come back to that last paragraph a year from now. Two years from now it is likely to look downright silly.

One more hike is in the cards, too, on February 2. Some will lay the blame on what is about to happen on these last couple hikes. The reality is the blame for the coming bust lay in the ridiculous expansion of credit that preceded it.

Australia’s problems have not yet started. Remember too, that commercial real estate follows residential with a lag. Australia can look forward to a bust in commercial real estate down the road as well.

Email From “Down Under”

Here is another email from Australia that readers may appreciate.

“Down Under” Writes …

Mish,

I actively watch this chart and a colleague of mine updated it today. RBA balance sheet collapsed in early part of 08 ahead of the debacle.

Add this to the recent report of Sydney being second most expensive city in the world. And add in likely tightening of bank prudential standards by our regulator APRA (extend liquidity requirements out to 21 days) and not looking so pretty. Deja vu all over again.

You can get the data straight from the RBA on the web: RBA Liabilities and Assets - Weekly

Kind regards,
“Down Under”

Australian Dollar Outlook

Two of the biggest factors affecting currency fluctuations are interest rate differentials between countries along with trends in interest rate differentials. The latter is more important. The Fed clearly is not going to cut rates (at zero bound it can’t).

The Australian dollar has strengthened vs. the US dollar on the back of rate hikes. If the RBA hikes once more and the Australian dollar sinks anyway, the top is likely in.

$XAD Australian Dollar vs. US Dollar Monthly

click on chart for sharper image

Déjà vu all over again?

At some point the RBA will stop hiking and start cutting. In turn, speculators in Australian dollars will start taking profits. At a bare minimum, at least a fair sized pullback in the Australian dollar vs. the US dollar is likely.

$USD - US Dollar Index Monthly Chart

click on chart for sharper image

Most underestimate how far the US dollar can strengthen. Another run at 90 is certainly not out of the question.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

What will 2010 bring for gold and the markets?

This week, along with almost everyone else, we surmise about what’s likely to come our way in 2010. ‎As usual, it’s reasonably clear what will happen, but who knows when?‎   We’ll cover…

• Grain shortages
• Nation state defaults
• Individual US state defaults
• Municipal defaults
• Mortgagee defaults
• Commercial real estate collapse?‎
• Rising interest rates?‎
• Terror 2010 – courtesy of Gerald Celente‎
• Whither the US dollar?‎
• Many more bank failures
• Gold and silver volatility

‎ First, a quote from Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University.‎

‎“Mr. Obama is slowly pushing America toward financial ruin. His $787 billion stimulus failed to ‎regenerate the economy. His health care reform bill will cost taxpayers nearly $2.5 trillion. He has ‎effectively nationalized the automakers, the financial sector and the banking system. His environmental ‎regulations will stifle industry and manufacturing. Unemployment is high. The housing market ‎continues to sag. Inflation is increasing. The dollar is plummeting. The nation’s infrastructure is ‎crumbling. ‎
The budget deficit for 2009 was over $1.4 trillion. It is scheduled to be $1.5 trillion in 2010. Under his ‎administration, the national debt is projected to explode by more than $10 trillion in 10 years. He is ‎burying America under a mountain of debt. We are becoming the United States of Argentina”. ‎

• Grain shortages

Some recent work of Eric de Carbonnel of Market Skeptics suggests that there could be widespread ‎grain and soybean shortages in 2010. World grain stocks are at multi-decade lows and the latest ‎harvests around the globe have been affected by bad weather and are patchy at best. Look for rising ‎grain and soybean prices and concomitant rises in the prices of downstream food products.‎

• Nation state defaults

Several European nations and indeed the entire European Union are at a crossroads. The EU is coming ‎under pressure as individual member states such as Greece become effectively bankrupt.  Look for a ‎wild ride in the value of the euro this year. The UK is also in a parlous financial condition. ‎

• Individual US state defaults

We know about California’s huge and ongoing budget shortfalls. Look for other states to follow in her ‎footsteps. More layoffs, cuts in services and increased taxes are coming.‎

• Municipal defaults

Ditto individual cities. ‎

• Mortgagee defaults

We’re not in subprime Kansas now, Dorothy. We’re in prime ARM-land.  The next big swathe of ‎ARMs (Adjustable Rate Mortgages) is coming up for resetting in 2010, in many cases resulting in doubling or more of monthly ‎repayments. If long term rates are forced to rise further as a result of the insatiable borrowing ‎requirements of the US government, the reset rates would become even more stringent, meaning more ‎mortgagee defaults would ensue.‎

• Commercial real estate collapse?‎

We expected a collapse in commercial real estate in 2009. I happened to be in St Louis from February ‎through June of 2009.  My local (39000 sq ft) Circuit City store became vacant in February. It was still ‎vacant when I left in June.  There is massive overcapacity across the US, and commercial real estate is ‎often more highly leveraged than residential property. The crash is coming – but this year? We can’t ‎say for certain, but we do assign a high probability to this event. ‎

• Rising interest rates?‎

As we noted above, there is likely to be upward pressure on long-term rates – but what about short-‎term rates? The Fed is between the proverbial rock and a hard place – raise rates and choke off a ‎nascent “recovery” – or keep rates low and watch incipient inflation or a renewed dollar decline. Our ‎guess is that they will keep rates near zero.‎

• Terror 2010 – Courtesy of Gerald Celente (Trends Research Institute)‎

Look for a follow up to 9/11 in 2010.  If this were to happen, it would almost certainly result in a Bank ‎Holiday, amongst other consequences. Make sure you are prepared for an extended period (weeks) of ‎bank closure.‎

• Strengthening, then weakening US dollar

The US dollar is currently strengthening against other fiat currencies. We view this as a temporary ‎phenomenon – look for a continuation of its secular decline later in the year.‎

• Gold and silver volatility

Well, is it gold $2000 and silver $50 in 2010? Or gold $800 and silver $10?  Who knows? We don’t. ‎But what we can say is that volatility in the precious metals markets is set to increase markedly this ‎year. We have seen signs of this in the latter part of 2009. In 2010 we could see both $800 and $2000 ‎for gold. Hold on to your hats. It’s going to be a wild ride! Don’t buy on margin and use price ‎decreases to dollar cost average your position in the physical metals.‎

And finally to finish is this brief comment from Mike “Mish” Shedlock which is a nice summary of just some of the global problems still to be resolved…

Global Imbalances Mount

• Global imbalances are cropping up like weeds in places like Greece, Spain, Vietnam, Iceland, Vietnam, Latvia, and Lithuania.
• There are massive property bubbles in China, Canada, the UK, and Australia.
• Japan is in a foolish fight against deflation and sinking further in debt
• Commercial real estate in the US is on the verge of bringing down hundreds of regional banks.
• Cities in the US are under massive pressure because of unsustainable pension plan promises.
• Global terrorism is on the rise

How long this mess hangs together without a huge crisis in a major currency is the question everyone should be asking. Sadly, most are oblivious to the widening structural cracks.

So be thankful that you are part of the well informed minority!

Best wishes to all for 2010. Live long and prosper!‎

The Current Stage of the New Zealand Real Estate Cycle

Today we have a very informative article from an aquaintance of ours who publishes some great information on “Crisis Investing”.  We follow J.S.’s thoughts closely and highly recommend his newsletter especially if you are interested in some very close guidance on investing in the stock market with far more detail that virtually any other newsletter around.  Read more about him at the end of the article…

The Current Stage of the New Zealand Real Estate Cycle

By JS Kim.

All real estate cycles, no matter in what country they occur, can be evaluated within the framework of the monetary policies undertaken by its Central Bank. By understanding a Central Bank’s monetary policies, one can understand the risk/reward setup of the real estate market in one’s country.

Today, I am going to evaluate New Zealand’s real estate market within the framework of the Reserve Bank of New Zealand’s monetary policies over the last decade or so. In recent years, the Reserve Bank of New Zealand (RBNZ) has drastically cut their interbank lending rates in line with other world leading central banks such as the Bank of England and the US Federal Reserve. Housing prices peaked in late 2007, spurred by cheap credit that the RBNZ had made available since December of 2001. In response to a growing housing bubble and in order to rein in malinvestment in the real estate market, the RBNZ pumped up interest rates to 8.28% in August 2007.  Housing prices dropped due to the RBNZ’s monetary policies, and from a high of 8.33% in November 2007, the RBNZ started slashing interest rates again - a whopping 15 times from the high watermark level just a couple of years ago to its current October 2009 interbank lending rate of 2.49%!

 Above, I’ve charted a history of the RBNZ’s monetary policy from February of 1994 to October of 2009 since understanding its monetary policy is often easier to do in a visual format. The RBNZ established interbank lending interest rates of 4.32% in February 1994, then increased this rate by more than 100% to 10.00% by October 1996, then slashed rates 67% to 3.30% by February 1999, then almost doubled them again to 6.50% by January 2001, then dropped them to 4.75% in December 2001, then tremendously hiked them to 8.33% by November 2007, and finally drastically slashing them again to a record low of 2.49% by October 2009.  These wild swings in interest rates are not healthy, not promotional of economic growth, and certainly not indicative of interest rate patterns that would predominate in a free market where supply and demand set interest rates. So why does the RBNZ engage in interest rate decisions that seem to be more the work of a madman than somebody interested in promoting sustainable growth?  

The answer is simple. Because the whole monetary system is fraudulent and unsound (a topic for another day), the RBNZ is forced to follow the lead of the European Central Bank and the US Federal Reserve or perhaps cause irreparable damage to the New Zealand economy. If these Central Banks act foolishly and irresponsibly, then often other Central Banks have no choice but to actively embrace similar policies. Former US Federal Reserve Chairman Alan Greenspan stated that the foolish actions of the US Federal Reserve in the 1920s almost caused the entire global economy to come crashing down. Today, the same shenanigans are once again occurring. If one can not see that the RBNZ is responsible for every real estate and stock market bubble and crash in New Zealand by way of their unnatural, interest-rate manipulations, one merely needs to study Austrian theories of money and credit to understand this process. In very simple terms, this is how the process works. 

When a flood of cheap credit is deliberately made available to investors by the RBNZ, as was the case from the beginning of 2002 through the end of 2004, this cheap credit creates much more liquidity than would be dictated by free market conditions. In turn, investors funnel this excess liquidity into real estate markets, thus creating massive distortions in prices above and beyond fair market values. In response, the RBNZ tightens interest rates (as happened from 2005-2007), causing malinvestment to cease and consequently, markets to correct or crash. Distortions are sold by Central Banks as “growth” and returns to fair market valuations are sold by Central Banks as “crashes” when neither explanation is honest or correct.  These are not mechanisms of a free market but mechanisms of interferences by Central Banks into free markets – a huge and very important distinction that is not understood nor appreciated by the great majority of investors. Central Banks also use this same free market manipulation and intervention scheme to manufacture artificial rallies in stock markets to sell the public on the idea of recovering economies when in essence, such “recoveries” are merely illusions that are destined to crumble.  

This cycle brings us to the present day situation in the New Zealand real estate market, where the following was reported in early November 2009: 

“New Zealand house prices advanced for the first time in 16 months in October, with a lack of houses for sale driving prices higher. Government agency Quotable Value’s residential house price index rose 0.2 percent in the year to October, compared with a 1.1 percent decline in September. It was the first increase in values since June 2008 but the trend in property values has been improving now for seventh straight months. The agency said market activity was well below spring levels, and the price was driven higher by buyers competing for a lower-than-usual number of listings.” 

In Auckland and Wellington, housing prices respectively increased 2.5% and 1.6% in October 2009 from the same period a year prior. In Auckland, average home sale prices reached a 22-month high in October 2009. In response to these “improving” signs, Peter Thompson, managing director of Barfoot & Thompson, stated: 

“It is a sure sign Aucklanders have shrugged off their concerns about the future, and are moving forward with their plans around home ownership. We’re seeing a slow, but steady, appreciation in sale values and we’re now back to the prices being fetched in the corresponding period in 2007 when the median was NZ$351,500.” 

However, one must always evaluate any rise in real estate prices within the framework of the purchasing power of the New Zealand dollar as the media always reports new highs erroneously in terms of absolute amounts of dollars but never in the context of inflation-adjusted dollars.  The RBNZ, from October 2007 to October 2009, dramatically slashed interest rates, thus deliberately weakening the New Zealand dollar by approximately 33% against gold (one of the only sound currencies in the world) in just two years time!   

Thus the “recovery” in New Zealand housing prices, due to the monetary policies of the RBNZ, ultimately created a loss in terms of real wealth for all New Zealanders and is merely an illusion. Remember, if “recoveries” are not a process of free markets, but are instead artificially manufactured by Central Banks by devaluing currencies, one can be left with MORE money that can purchase LESS – this is a loss, not a gain, in terms of real wealth.  In fact, when measured in terms of gold, even though Peter Thompson has claimed that the prices in October 2009 have now recovered to the equivalent median home prices of September 2007, it is not the amount of New Zealand dollars that you own that is important as I’ve just explained but it is what these dollars can buy. In terms of gold, in October 2009, these equivalent New Zealand dollars will now buy you 33% less gold than they would have in October of 2007. Consequently, a more accurate method of interpreting this recovery is in terms of gold and not in the absolute amount of New Zealand dollars. If one looks at this real estate recovery in terms of gold, one will realize a 33% loss of one’s wealth despite median real estate prices returning to their October 2007 levels.  

Currently, if the RBNZ keeps its word, interbank lending interest rates will remain at a record low 2.5% until the second half of 2010. Thus, given that this occurs, it would not be surprising to see property values in New Zealand continue to rise into the end of the year and the first half of 2010 and possibly throughout 2010 before the bubble bursts. However, much of the sustainability of the re-inflated New Zealand housing bubble will depend on the stock market bubbles in Europe, the US and China growing larger as well. If the illusion of these bubbles burst first, then the jig will be up. However, due to foolish and unsustainable monetary policies undertaken by the US Federal Reserve, there is a good chance that serious damage to the US stock market rally will not happen until sometime after this year. 

Because there are so many moving parts that determine daily price movements in real estate markets, I would have to follow New Zealand real estate markets daily and update my opinions daily about when I believe the New Zealand real estate market bubble is set to burst. However, I can tell you, beyond a shadow of a doubt, that the RBNZ’s monetary policies have created tremendous malinvestment in the New Zealand real estate markets (money inflow into real estate that would NOT happen under free market conditions). In turn, this malinvestment has created great distortion in real estate market prices. These distortions will also probably become greater before correcting back towards fair market valuations. 

This is not a knock against the RBNZ, but against ALL Central Banks. Central Banks never create any sustainable benefit to any party except the elite bankers of its nation. If you think this sounds conspiracy tinged, know that former Vice Chairman of the US Federal Reserve, Alan Blinder, in 1994, stated, “the last duty of a Central Banker is to tell the public the truth.” I think that the New Zealand real estate market has a little more wiggle room to move higher if one is already invested.  However, the risk-reward setup is terrible, in my estimation, for anyone seeking to enter real estate in New Zealand today. Understand the above artificial boom-bust cycle that Central Banks create as I have described it above, and you will understand, if you are currently invested, when to exit the New Zealand housing market in the future before it crashes. 

As you ponder the New Zealand real estate market’s future, always keep close to your heart and mind the following statement by John Maynard Keynes, the father of the modern day economic system instituted by all developed governments today: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (1919)”  

If you understand this concept that less than one in a million understand even today, you should be able to use the policy decisions of the RBNZ to avoid getting hurt by the inevitable real estate market fall that is likely to happen sometime in the next year or two.  

 

About the author: 

J.S. Kim is the Managing Director & Chief Investment Strategist of SmartKnowledgeU™, a financial and research consulting company that offers hard-hitting investment guidance to help investors prosper during the ongoing and continuing global financial meltdown. His investment newsletter, the Crisis Investment Opportunities newsletter, has not suffered a single down year since its launch, returning +23.78% in just six months in 2007, +3.21% in 2008 and returning 37.54% YTD as of the end of September 2009. For more information, please visit http://smartknowledgeu.com

Steve Keen: The Reserve Bank of Australia gets it wrong again

Is there an Australian in the house? 

Today, yes there is.  For any of our Australian brethren reading we feature some thoughts from one of your countrymen.  Steve Keen was one of the very few academic economists worldwide that predicted the current debt fueled financial crisis as far back as 2005.  He writes regularly on his blog here.

He gives his thoughts on why the Reserve Bank of Australia has likely made a mistake in calling the all clear and raising interest rates in Australia.  Going so far as to say they may finally prick the ever expanding Aussie housing bubble  (Aussie house prices are now virtually back to their all time highs). 

But for our New Zealand readers we think it’s also an important read as where Australia goes we usually follow not too far behind.  Especially when our main banks are all Australian owned - any trouble in their banking sector will be felt here too.  The fact that house prices have also been rising again in New Zealand and like Australia did not fall greatly means we should pay attention to the happenings across the ditch in Australia.  While Steve is firmly in the deflationist rather than inflationist camp and we are somewhat torn on the issue, it is always worth getting varied opinions.  So over to Mr Keen…

Oh yes, and we have featured a video of Steve Keen previously too which you can watch here.

 

Why you shouldn’t believe the Green Shoots Groupies

As we previously discussed in “Green Shoots? - Don’t believe the hype!”, U.S. Federal Reserve Chairman Ben Bernanke  coined the term “Green Shoots” back in March.  So far apart from a few wobbles everywhere you look in the mainstream media seems to support his statement worldwide.  And he backed it up again recently ‎in August saying that the U.S. Economy is on the Cusp of Recovery.

Here in New Zealand the property market appears suddenly ‎buoyant.  Sales are up month on month and year on year.  We have ‎heard a number of reports of houses selling in Auckland at auction ‎for 15% or more over the council valuations which were only ‎completed in late 2008.  Anecdotally there are also a high number ‎of Chinese bidding and buying currently.  We reckon this may be ‎due to Chinese investors flush with cash - the after effects of their government ‎instructing banks to lend to anyone with a pulse.  See this Wall Street Journal report.‎

While governments continue to proclaim all is well and the populace ‎continues to swallow it, this current uptick in most assets could well ‎last much longer than we expect.   However unlike Bernanke, we ‎still feel the global economy is instead on the cusp of the next ‎significant down phase of the financial crisis in what will be a ‎depression lasting many years yet.‎ 

Remember most government and mainstream financial economists ‎and commentators views are in close alignment with Bernanke’s.  ‎Pick up any newspaper or listen to any TV news bulletin and ‎recovery is the catch cry.  But this video should make you think ‎twice about believing anything that escapes from Bernanke’s lips ‎and by extension most other governments and their agents. 

‎‎‎

These are just some of the “visionary” (please note the thick coating of ‎sarcasm) comments from Bernanke over the last 4 years: ‎

• July 2005: Commented on the lack of a house bubble (yeah right)‎
• And how there won’t be a nationwide drop in house prices in the US ‎‎(there was), ‎
• November 2006: How consumer spending will continue to grow (it ‎didn’t)‎
• February 2007: The sub prime housing problem won’t spread into the ‎broader mortgage market (it has and will get worse over the next ‎‎18 months with more mortgage rate resets to hit the middle class in ‎the US)‎
• July 2007: Home sales should improve due to growth in ‎income and employment (They were almost 60% lower in March ‎‎2009) ‎

Why should we now suddenly believe someone who has been so ‎incredibly wrong over the past 4 years?  How anyone can even take ‎the slightest notice of this we find staggering.  ‎

If you spend what looks like amounting to $24 trillion on bailouts the odds are that this will cause some froth to appear, ‎but in the long run the same imbalances still exist and when the ‎froth settles the empty glass will be revealed.‎

We would urge caution before making any investment decisions based upon the propaganda of any government currently.

How high can the gold price rise ?

World renowned gold analyst Alf Fields explains that we are in the early stages of a massive rise in the price of gold.

Knowledge is power; knowledge is profit

“Manipulation can not last forever against the primary trend. It can happen in the short and medium term, but eventually the facts involved in the primary trend will overwhelm the manipulators” - Alf Fields

What are the reasons for analysts not promoting and advising their clients to buy gold?

Analysts have a low tolerance for conspiracy; analysts like transparency and clear cut facts and figures to determine what companies or products they invest in.  They do not like confusion.  Currently there are conspiracy theories about why gold remains so low on an inflation adjusted basis.

The gold price has been manipulated for ages.  This has been admitted by several monetary authorities.  Even mainstream commentary on CNBC (see video below) has discussed the ongoing manipulation of markets.

 And Goldman Sachs has admitted its software can manipulate markets in unfair ways. 

Why do central banks sell gold into the market? 

The simple answer is that they want to prolong the life of the irredeemable bits of paper that they issue as money.

Gold is produced for accumulation and not for consumption. This makes gold unique. The reason gold is accumulated and not consumed is that over time it retains its value, and historically, in times of trouble, people have used gold to preserve their wealth.  Because gold seems to have limited use - only a little is used industrially, and most consumption is in the form of jewellery, analysts don’t feel they need to be involved. 

Of course this is completely ignoring any investment demand. Most analysts today are young, and very few have been taught monetary history. Very few know the attributes of gold, and as such have no concept of its nature as a store of  value.  There is a huge education problem out there; an extremely widespread lack of financial knowledge, and this has led to a huge investment opportunity in gold.

What is the most important investment factor over the next 3 to 8 years that will create this huge opportunity in gold?

The most likely answer is that the US dollar is not going to be around in 5 years time. And there are several reasons why.  Most of the reasons start with the letter ‘D’ - as pointed out by Alf Fields in the accompanying video below, made in 2005, and starting now to look quite prescient.

• Deficits
• Debt
• Dollar
• Demographics
• Derivatives
• Devaluation
• Deflation
• Dwellings (as in Real Estate)

All of the above contain within them the seeds of an upcoming crisis. As each crisis comes to a head, the most likely response of the monetary authorities is to run the electronic money presses ever faster, thus increasing the money supply in an exponential fashion.

Will it be similar to the hyperinflation period of 1919 to 1923 in Germany?

It only took 4 years for the Germans to wipe out the Reichsmark, and they didn’t have an electronic printing press.

Well, if you follow what Alf Fields has to say, gold appears to be on its way to USD10,000 an ounce.  For gold to head towards USD10,000, the world would more than likely have to experience a systemic currency meltdown.  A systemic meltdown would come about by central banks around the world throwing money at the banks and corporations that are in deep trouble.

As a result of this massive increase in the money supply, currencies would experience destructive downtrends in their values.  Destruction of the value of paper currencies would result in a rapid increase in the gold price.

With gold at US$935 an ounce right now, we are in the early stages of what in technical analysis terms is called Major Wave Three which has an upside objective of $3500.

1. Major ONE up from $256 to $1,015 (actually 4 times the $255 low);
2. Major TWO down from $1015 to $699, say $700 (a decline of 31%);
3. Major THREE up from $700 to $3,500 (a Fibonacci 5 times the $500 low);
4. Major FOUR down from $3,500 to $2,500 (a 29% decline);
5. Major FIVE up from $2,500 to $10,000 (also a 4 fold increase, same as ONE)

While prognosticating on specific prices is a no win game, in the video below Alf has been “on the money” so far in many repsects about the overall themes of this crisis and so his price forecasts really do warrant  some close consideration.  And with the price per ounce still below $1000 it would seem that it is still a good time to buy gold.

http://video.google.com/videoplay?docid=-737911643773862674