Before we launch into this week’s reckoning, a quick note if you’re reading this in Western Australia. Your editor will be speaking Friday night at the second annual Freedom Factory conference, sponsored by Ron Manners and the Mannkal Economic Education Foundation. For more information on how to attend, go here. It should be a great afternoon of discussion and debate with good food and good people.
The theme of this year’s conference is a question: Where to From Here?: Economic Survival post-GFC: The Individual, the State and the Nation. Your editor is going to be speaking on the Nation, which is naturally a perfect topic for an ex-patriot American. And our first point is that we are not “post-GFC.” We are in a more advanced phase of it in which the disease of politics has infected the body economic via nationalisation. This grows the body politic itself (the Welfare/Warfare state) even though the way in which the State feeds/funds itself is clearly leading to cardiac arrest (via a sovereign debt crisis).
But really, isn’t that all so passe? Stock markets are fixing to make their highest highs since September of 2008. The Dow nearly closed at a post-Lehman high of 11,000 overnight in New York trading. And here in Australia, the ASX/200 looks to break out of a long channel of indecisiveness and close above 5,000.
Surely those numbers indicate that people feel good about the economy. And if people feel good about the economy, then the economy must be good itself, right? Isn’t this the power of the collective mind over the little matter of recession?
And speaking of matter, it’s not just stock indices that are screaming ahead. Crude oil futures made an 18-month high and closed at $86.82. Palladium cleared $500/oz for the first time since March 2008. Platinum was up to its highest level since August of ’08. Iron ore trades at $140/tonne in the spot market and coking coal at $250/tonne.
Happy days are definitely here again, if the headlines can be believed. And if you’re a resource speculator – it’s hard to be an investor at these valuations and with so much liquidity distorting underlying commodity prices – this is definitely time to make hay. But how much longer will the sun keep shining?
China’s State Council believes the nation is in a “race against time” to secure its natural resource needs, according to John Garnaut in today’s Age. The story quotes from a Chinese reports called How China Should Improve Its Overseas Resource Investments: Reflections on the Chinalco-Rio Tinto Deals. It reportedly concludes that, “With the recovery of the world economy, the opportunities [to cheaply secure overseas resources] are becoming less, so we should race against time.”
The race may already be lost, though. For one, take the example of rising iron ore and coking coal prices. These are great for Aussie exporters, but not so good for steel producers. Steel producers can either eat the higher cost or pass it on to customers. Markets being what they are, we’d expect the increase in raw commodity prices to make their way into higher construction material prices. That’s one self-regulating way of dealing with soaring prices: it reduces demand.
But remember those “red flags” we mentioned last week? In Edward Chancellor’s excellent article on China for GMO clients, his first two red flags were that “great investment debacles generally start out with a compelling growth story,” and that “A blind faith in the competence of the authorities is another typical feature of a classic mania.”
Call us paranoid and delusional, but there is an obstinate faith in the sustainability and inevitability of China’s resource-driven growth. Visible signs to the contrary – empty cities – are inconvenient and thus ignored. And here in Australia at least, everyone has faith that local political leaders “saved” the economy from the worst of the GFC and that China’s communist central planners will be able to keep the Big Red Machine rolling for years on end.
And those are just two of the signs that we are in the midst of an even bigger bubble! But that does not fit the current narrative. In fact, Australians are now so sanguine about their national prospects that one of the front page stories in today’s Australian Financial Review is about how to set aside superannuation money for infrastructure funds.
Rod Eddington, the government’s infrastructure adviser, told the paper that, “Given the infrastructure investment challenges we face and given the many calls on government capital, there is a real need for the private sector to increase investment in infrastructure. Superannuation funding is an obvious source but the construct has to be right if the people who manage superannuation funds are going to put those funds into infrastructure.
Hmm. “The many calls on government capital”? You got that right. The government is busy paying for everything these days with borrowed money and higher taxes. And what “construct” would a fund manager require in order to invest in an infrastructure fund? Granted, the super assets represent an irresistibly giant amount of capital that any number of people would like to get their hands on. But it’s there for a reason.
John Brodgen of the Investment and Financial Services Association is protecting his group’s turf. He says that, “Whilst I understand the pleas for more funding, the primary objective of superannuation trustees is to get the best return for their members. They make decisions based on returns. It’s pretty black and white. I don’t think members would thank super trustees for backing a tunnel that was a lousy investment but a good piece of infrastructure.”
He’s probably right. But that doesn’t mean it won’t happen anyway.
Meanwhile, while this great argument rages about how to fund Australia’s infrastructure needs AND provide for everyone’s comfortable retirement, house prices keep going up. “No ceiling to housing prices in sight yet,” reports Carolyn Cummins in the Age. Is it demand growing faster than supply? Is it foreign buying? Or is it just a classic bubble that begins with too much credit? Some reader mail on the subject below.
Why all the concern about the Chinese buying up units and houses?
You frequently write how money spent on Mc Mansions is dead capital but if we start selling to overseas customers, house building becomes an export (productive) industry!
Of course we not only sell the house but also the block of land on which it sits, so to some extent this export industry involves a bit of “selling the farm” too unfortunately. But, hey, we need to import capital and selling land may not be a bad way of doing it. Unlike selling coal or iron ore the sold goods cannot be taken out of the country and we do not lose dividends as we might do if we sell parts of our businesses to foreigners. Of course we may lose capital appreciation but isn’t it better that foreigners buy from us believing property prices will increase for ever than us believing it ourselves?
It sticks in our claw [sic] because it is pricing our young out of the property market. If we believe in free (international) markets we just have to wear this. If we are not prepared to wear it we must wear the alternative of government intervention (first home buyer’s grants, restrictions on imported capital etc).
When the government intervenes and sets the price of money, as the Reserve Bank is set to do today, somebody always “wears it.”
I have thoroughly enjoyed reading the DR and its sister (paid) publications. Good work. My family and I moved to Perth from Canada in 2002 to take up an employment opportunity.
We fell in love with the climate, the people and the lifestyle but we could never make sense of how people made ends meet with the cost of living being so high, especially the cost of property.
Having owned our house in Canada outright, it was (emotionally) difficult for us to take on a large mortgage for what appeared to us to be a pretty average property.
As we all know, property went up from there and for nearly 8 years we have rented. When the GFC hit, we decided to start looking at buying a property as we expected the prices to relax, even if only just a little. We soon realised that the government was working against us, and for good reason: the whole ‘miracle’ economy is dependent on ever increasing property prices.
To make a long story short, we have decided to ‘vote with our feet’ and move back to Canada. We have already purchased a property there which is far from average and will own it outright at far less than we would have paid here for a basic 4×2.
We love Australia and may even return one day but it seems that, at least for now, the property “crisis” has changed the course of our journey and has cost Australia an Oil & Gas Engineer/Project Manager, a Maths Teacher and three bright young kids with heaps of potential.
To have it attributed to a ‘land shortage’ is an assault on any form of intelligence, but anyone who subscribes to such rubbish will recognise that we have helped alleviate the shortfall in available properties by one!
for The Daily Reckoning Australia