You Snooze, You’ll Lose

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–Sometimes you have to wonder if the giant rally in stocks since 2009 has all been engineered by insiders in the financial world to boost stock prices so they can sell into a rally…and then head for the hills with their diesel generations, tinned food, and stash of gold. Financial historians might describe the last few years as a world-wide asset pump and dump scheme led by the Fed (the pumper) and designed to benefit the financial industry (the dumpers).

–It’s a thought.

–The big news yesterday was what didn’t happen: China did not raise interest rates (although bank reserve requirements were raised late last week). Inflation in food prices has scared the Chinese monetary authorities/price fixers. In response, they’ve announced possible wage and price controls, which have worked so well everywhere else money supply and credit creation has run amok, from Latin America to Africa.

–China’s inflation problems stems from its dollar-peg and the creation of massive amounts of domestic credit (another $1 this year on top of $1 trillion last year). Since the developing world-and China in particular-are generating most of the global growth (while Europe and America struggle) investors were worried last week that China’s efforts to cool domestic inflation would slow everyone down.

–When China sneezes, everyone else shivers. Maybe that’s the new 21st century normal. So come on China! Do your part for the planet and keep those factories belching out gewgaws and knick knacks! It’s your solemn duty to the global system of debt-based consumption. Don’t shirk it.

–With no rate rise coming this week, Shanghai stocks zoomed up nearly 3% yesterday. Gold, palladium, silver, and oil were all up. Even U.S. bonds reversed themselves. Ten-year yields fell yesterday and prices recovered a bit. Good times are here again, for a few days.

–The chart below-with special seasonal colours-shows that the All Ords beat Shanghai’s rally to the punch by rallying first. December has been good to the Aussie market so far. And since July the All Ords (green line) and The Shanghai Composite (red line) have tracked each other fairly closely. Shanghai is fixing to cross its 50-day moving average. That would be technically bullish.

shanghai.png

–Yesterday’s big Aussie winners were the Big Four banks. That tells you pretty much everything you need to know about what the big banking reforms will do: they’ll lower funding costs for the big four and produce big profit margins. It’s an even bigger bonus that ultimate liability for paying off depositors in a calamity can be fobbed off on the government via the Financial Claims Scheme.

–The financialisation of Australian life continues.

–You’d think investors would be a bit more worried, given how unsettled affairs are in every other part of the planet. And even here. The mining tax isn’t done and dusted yet. A China credit bubble crash would be bearish for the big miners (which make up a large part of the ASX/200 in a market-cap weighted index). And the banks have had to offer up their depositors as collateral to secure funding in preparation/anticipation of another global liquidity crunch. Yet the chart below tells you no one is losing any sleep over any of this.

Zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz
vix_chart.gif
Source: www.asx.com

–The ASX began publishing the VIX locally in the last few months, although it back-filled the data to 2008. In complicated terms, the VIX is a weighted average of implied volatility on widely traded options contracts. When premiums are large on options contracts, it tells you that investors are willing to pay more for insurance against an unexpected outcome (a big rise or fall in stock prices).

–It’s kind of an interesting question whether VIX is a leading or lagging indicator. When it rises, fear rises with it. Investors are uncertain of what investment outcomes to expect in the near future. Uncertainty and the possibility of losing money produces fear.

–But is fear a reliable indicator that stocks are over-priced? Is it a self-fulfilling emotion? Or are investors fearful when they should be brave and bored when they should be fearful? A low reading on the VIX usually tells you that people are not particularly worried about anything in the future interrupting a very pleasant present.

–This is when you should be most worried; when no one is especially worried. That’s a one sided trade in favour of the lazy people.

–Lazy, comfortable, complacent investors never see it coming. They don’t see it coming because they aren’t looking. They are too busy eating hot dogs and guzzling beer. To be fair, sometimes the blood-curdling, portfolio destroying event hits you from straight out of the blue like a cricket bat. With the VIX approaching a 52-week low, we’d be looking into the deep blue and watching for cricket bats to the head. We’d also be reluctant to be long over long weekends or the Christmas break.

–By the way, a very good Chanticleer article in the weekend Australian Financial Review made the mistake of calling a China credit bubble a Black Swan. Why is that a mistake? As Nassim Taleb points out in The Black Swan, banking accidents are not a mystery at all and therefore not Black Swans, which by definition, are not events you can model for.

–By contrast, you can be pretty certain that when a bank levers up and relies on an expanding balance sheet for growth, it’s going to blow up eventually. For a bank to make more money, it has to take more risks. Profitable banks are risk-taking banks. And extremely profitable banks are usually the by-product of enormous leverage and even bigger risk-taking/speculation/bad lending/greed/theft/deception.

–Maybe instead of finding ways for Australia’s banks to secure more funding so they can put more Australians deep into housing debt which they’ll never repay, the regulators could have a discussion about how to return banking to a boring, low-risk, business that serves the interest of depositors. And then the centre of gravity could be refocused on productive enterprise, rather than money shuffling.

–This might prevent the banking sector from creating massive bubbles in the economy, hi-jacking public policy so the interest of financiers are put ahead of savers, and the general despondent financialisation of modern life that means perpetual debt for all of us as we chase house prices that are growing many times faster than incomes…until they crash.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Hi Dan

    I am wondering about covered bonds. If a bank collapse what exactly happens to the people who have assets in the covered bonds. I know the investors get a claim on it but do mortgage holders have their houses sold out from under them? Do they loose all their equity. What other assets could be used by covered bonds? Savings, Term Deposits, Managed Funds, Super. There does not seem to be a lot of information about this out there. There is lots on how good it is for banks and investors but it is mainly rethoric about how well protected by the government we are when it comes to what happens to the averge Joe when a bank goes bust.

    Surely this goes against every property rights law in Australia.

    Reply
  2. It must be the mum and dad investors pushing up stock prices because directors have been bailing out of the stockmarket ‘en-masse’ over the past few months.

    Lehman Sisters
    December 14, 2010
    Reply
  3. If you’re talking Oz stocks LS, our Superannuation system ensures that money pit keeps getting well fed.

    Reply
  4. I must say I agree with the following. http://www.market-ticker.org/akcs-www?post=174941

    Hard money does have a poor record, especially when viewed in terms of inflation, and you can speculate on the net worth of the two flies crawling up the wall as much as betting on who will win the race. What you speculate with in terms of leverage and collateral will also remain open no matter a gold standard, so there is only a pretend hard money base with the gold standard anyway.

    Don’t want to promote Denninger too far, he is Jeckyl and Hyde. If he opens his mouth on foreign policy or political history outside the US you get reckless brinkmanship and bile.

    Reply
  5. I see a great deal of editing has occurred overnight, Ned.

    Y’know you’re hitting the target when so many points are filtered off the record, mate!

    Chances are you’ve also copped a lot of little nasties in your system.
    So much for Prozak’s Free Speech comment. Cheers, Ned!~ :D

    Reply
  6. Another demonstration of your God-like power(s) Keeng of the Trolls?
    Erase any legitimate response to your ludicrous divine claims?
    Wipe what you can’t answer? Typical. :D

    Reply
  7. Dare say the techies got a few laughs out of it all though Biker – I know I did! :D

    Reply
  8. Yes, at the end of the day (or night) it’s fun rattlin’ a few cages, mate.
    Good to see you’re still online.

    Noted that port special. Thanks! :)

    Reply
  9. “Good to see you’re still online” – At the end of the day commonsense prevailed obviously – Though anyone who is still suggesting that you and I are the same person obviously doesn’t have much sense of any kind!

    They don’t like Biker because he’s a bit bullish maybe? They don’t like Ned because despite the fact he’s a bit bearish, he’s perfectly happy to accept Biker’s right to be a bit bullish maybe? – And remains interested in why. With Biker also remaining happy to accept the fact that Ned’s a bit bearish. Which is a way more important underpinning of free speech than any damn silly attempts to imply we are one and the same which quickly degenerate into personal attacks (aka: “Ned S .. You certainly are a piece of work?”) when they realise they really HAVE hit an environment where THAT sort of free speech is valued – By lots of the bloggers anyway.

    As to ‘Biker and Ned drown out everyone else’ type comments – That’s nonsense! Only the last 10 comments show in the “Easy to Access List” in top right anyway – In a site that had any spirited discussion those would roll over every hour minimum anyway. With anyone who is seriously interested in the articles (and ISN’T lazy), having to go to the actual article to see the comments anyway. (And it’s NOT like the articles TYPICALLY get locked for comment after a certain number of comments have been made or days have elapsed is it!)

    Nope, some people just try to shut free speech down by complaining that others’ right to free speech somehow or other interferes with theirs – Twaddle!

    They make me think of an of a Aussie who worked in a Third World country where lots of his employees weren’t very sophisticated but were still inclined to have a go at “bunging one on” – With that being a common enough failing in the species globally. When asked incredulously “Boss, how come you KNOW what I am doing???”, his typical answer went along the lines “Oh, I was seven years old once too …” Which while typically lost on them, was still true! :D

    Reply
  10. Going to repost this one, though, retaliating for the very nasty worm downloaded on us last night.

    http://www.perthnow.com.au/business/news/construction-slowdown-to-pause-rate-rise/comments-e6frg2qu-1225960148535

    It’s this kind of no-comeback which illuminates the bigger picture…

    Reply
  11. “They don’t like Biker because he’s a bit bullish maybe? They don’t like Ned because despite the fact he’s a bit bearish”

    Perhaps a private chat room is in order. You two generate half of the comments on this board and are rarely discussing anything related to the content.

    Reply
  12. “Going to repost this one, though, retaliating for the very nasty worm downloaded on us last night.”

    Mate, hate to say it but if you have a hardware firewall(built in to adsl and cable routers), then it’s pretty certain the cause of the virus is on your side of the firewall. (I’ve been in datacentre side of IT for 19 years btw…so I’m not full of it :) )

    A worm can only enter your network if you have firewall ports open and listening sockets with an exploitable vulnerability. Since you don’t sound technical enough to open your own firewall ports then line up a running service on a socket, chances are you were the cause. Most vial infestations I see come from people connecting to 3g networks, as there is nothing but the ineffective windows firewall to protect you. Or you have somehow worked out how to turn your firewall of on the router..

    Why are you posting as Travs BTW? As a matter of interest, despite the heretical rantings, that ‘Not fooled’ guy has most of the bases covered, though, his sense of doom is not as keen as mine :). Plus he misses most of the more likely inputs of a crash, such as far higher over leverage(over 1990) lower discretionary spending and far higher rates of fair weather investors.

    Reply
  13. Yes, thanks for that, Chris. You’re right, that ‘vial’ infestation probably came in through my port (glass)! :D Explains why a dozen posts, where he got _hammered_ were deleted, too. My guess is that his boss told him not to ship so close to the nest and, for damage control, reduced corporate embarrassment by deleting his rants.

    This loon is sociopathic. Here’s one day of his stuff. Now multiply it by thirty per day…

    http://www.perthnow.com.au/business/a-tale-of-two-booms-as-city-blooms/comments-e6frg2ru-1225970115985

    It’s his _business_ to create anxiety and undermine WA home owners’ confidence. His cut-and-paste is primitive. You can see that for yourself.
    He just spits it out like a US printing press. Most of the time we just ignore him, as we did in his previous Prozak incarnation… . ;)

    Reply
  14. admin: “Perhaps a private chat room is in order. You two generate half of the comments on this board and are rarely discussing anything related to the content.”

    Last 20 articles (dated back to 7 Dec) have a total of 33 comments against them. (An average of less than 2 comments per article.)

    Never more than three comments per article with 7 articles (ie over one third) having no comment against them – Except one article where Biker made 6 comments and I made 6 – Only a few of which were relevant to the article; BUT, with the ones that weren’t relevant to the article being aimed at ‘educating and informing’ on a scam that cost a fellow Aussie $600K. So, at least in keeping with part of the general spirit of what DRA is about I would have thought?

    REAL nice of you to clear up that from admin’s perspective, there really does appear to be two of us! – I assume you did do your homework and checked before making that comment? That bit of info in itself should be handy for rendering some comments unnecessary – Namely the stuff where people decide to bung on the ‘Biker and Ned’ are the same beast routine.

    But yep, a chat room could also be handy.

    Reply
  15. “You two generate half of the comments on this board…”

    Note to Admin. Feel free to continue the massive deletion of the other evening. It’s your board. I’ll continue to comment on the reason for deletion. And, as demonstrated here…

    http://www.perthnow.com.au/business/a-tale-of-two-booms-as-city-blooms/comments-e6frg2ru-1225970115985

    …your Melbourne mate utterly and completely dominates our WA discussion sites. Time you reeled the little pr*ck in.

    Reply
  16. @ Admin … you are right Ned & Biker spoil this site with irrelevant chatted & frankly do you want to encourage this type of tone? …. Time you reeled the little pr*ck in…… clearly the intent is to offend?
    Discourages serious comments that would be of interest

    Not Fooled By property Spruikers Hype
    December 16, 2010
    Reply
  17. @ Chris It … No I have got that covered …. Interesting why someone on one site calls himself Travs & on another site Biker Pete …. Perth folk got bored of Biker Pete a few years ago then up pops Round The World Traveller (RTW) & now Travs of WA …. Biker Pete throw back to the Leatherman in Village People no doubt …..

    FYI …. a 7% interest rate today is E_Q_U_A_L to a 22.5% Rate in 1990 ……The 1990 Median house price was $100K with a 20% deposit & a loan of $80K payments @17% interest over 30 yrs would be $1140 pm or 32% of wages with average family wage of $42K pa…so in 1990 @ 17% the worst interest rates in Aust history payments only ever got to 32% of average family income…Fast Fwd to 2010 Median price is $500K less 20% deposit & a loan of $400K payments @ 7% interest over 30 years are $2661 pm or 43% of wages with average family wage of $75K…in 2008 interest rates were 9.5% this would work out to payments of $3365 or 54% of current wages …. Now historically for the last 30 years interest rates have averaged 10.11% this would works out to payments of $3545 pm or 57% of wages going to mortgage payments ….So summing up current housing mortgage payments @ 7% is still worse than when rates were at 17% but just imagine what will happen when rates rise? AFFORDABILITY will not allow future CAPITAL GROWTH …..

    In Dec 2008 the AU / US exchange rate was around 65 cents & the median house price was $420K in Perth a Chinese investor (Remember their currency is locked to US Dollar) buying a house in Australia would pay $273K US in Dec 2008 for a Perth median house. Today the Median price is currently $490K ? which at todays exchange rate is $482K US so a foreign buyer SELLING today in US Dollars has made a profit of $215K or nearly 75% in under two years….GO YOU GOOD THING…. I can hear them shout in their best Aussie accents as they pick up their phones to call their agents to list their houses & lock in their profits as the likely chances of property going any higher is EXTREMELY REMOTE & why not cash it all in at these incredible once in a lifetime rates? After all that is why they bought in the first place to make money (WHO WANTS TO WAIT 30 Year Long Term like these CRAZY AUSSIES?) Two things are going to happen in the Aussie housing market 1) There will be Fewer Buyers buying further lowering DEMAND for houses & 2) Foreign Buyers selling out in droves increasing SUPPLY. A Double Whammy & not good for prices ?

    ….Jan 2009 the AU dollar was 65 cents to the US, today it is around 95cents – 97 cents a jump of around 50% Student accommodation rented out at $200 pw or $11K pa will now cost overseas families $300/ $16K …. on top of this Uni fees have also jumped 50% with the rise in the AU. Dont forget other costs have also risen significantly (Bus / Food / Power etc etc etc) All major Universities were reporting a decline in overseas student numbers for this alone….. Now recent changes to Student Migration rules earlier this year closing the loophole allowing students to automatically qualify for Australian residency in the future simply by virtue of having studying in OZ were already forecast to cut student numbers by 30,000 now add the affects of currency movements & you will have a lot of empty student accommodation units around the country. Landlords will have to slash rents (YIELDS) to attract or keep students just when thousands of speculative units come on the market. Landlords of student accom will now target the general rental market to fill this void further compounding the already high levels of vacancies in the Perth rental market

    ….Borrowers that are geared up to the eyeballs, and who were suckered in by the Fairy Ruddfather’s bribes have seen their mortgage repayments increase by over $500 per month since the RBA started jacking up rates again. In annual terms it equals an extra $6,000. That would take their total annual repayments on a $350,000 mortgage (the average) to $30,264, or the equivalent of before tax income of $43,234. Now the ABS says the average GROSS household income is under $75K . But lets just assume this couple are on a good wicket & earn 30% abover average incomes this would make their joint GROSS income $100K so 43% off their G*R*O*S*S incomes will go to servicing the loan. BTW the Nett after tax income ratio is over 54.35% this is at $100K joint income!!!! Now something else you may wish to keep at the back of your mind is the number of first home owners who signed up to 2 year fixed loans in Jan / Feb / March 2009 that will all convert early next year to a Std Variable around 8% …. These people are already listing to sell to get out before it is too late. It will certainly get interesting to say the least when they do next year switch to the variable rate

    …. Australia is one of few countries to have negative gearing. Figures from the Australian Taxation Office earlier this year showed Australia had 1.2 million loss making property investors in 2008, losing collectively $12.75 billion. The average property punter in Australia claimed losses of $10,640 last tax year. Six out of ten investment properties lose money every year.The growth in losses over the past decade has been staggering. In 2001, there was only 650,000 property investors claiming $2.5 billion in losses. By 2006 it was $5 billion and in 2008, $12.75 billion.In the mugs game of property investment in Australia, investors didn’t care about investment yields. As long as they were reaping huge speculative capital gains, the good times rolled on. Tax deductible losses could be sustained on the expectation of prices rising in the future. But now the tide has turned.With prices dormant or falling in many states, it makes no sense to hold a loss making investment property where the “investor” has to fork out money for the privilege of subsiding your tenants living expenses. It would appear smarter investors have finally come to there senses & are heading for the exits

    ….. Anyone interested in the Facts about China & their property boom should follow the links at the end or GOOGLE ” CHINA EMPTY CITIES ” Everything is built on the premise that people are leaving the farms to work in the city & that this will cause a huge demand for property in the major cities. However 99% of these workers cannot afford the houses or Apts being built but more importantly they all live in Factory supplied accommodation or Lodgings when the work in the city. {Fed Clothed Housed they consume nothing} These workers are all sending every spare dollar back to their families on the farm to support parents still on the farm. Every family in these villages then want to make money so pool their money to buy a apt in the city because the prices keep going up because 100 million other families & villages are all doing the same …. O*N*E __ G*I*A*N*T ___ P*O*N*Z*I ___ S*C*H*E*M*E that will come down like a house of cards … Just think Australian Property market on Viagra …. http://www.buyric.com/news/china/china-massive-government-stimulus-equals-empty-cities-027/ ____ http://www.youtube.com/watch?v=0h7V3Twb-Qk

    ….. With a Million Dollars in 1980 a investor could buy 25 houses at the 1980 Median price of $40K & rent them out @ $100pw or $130K PA giving you a yield of 13% less 1980 interest rates of 10% & you had a investment that paid for itself to hold plus a investor could sit back & enjoy the capital gains… Fast Fwd to 2010 $1 Million will buy you 2 houses at todays Median of $500K & rented @ $500 pw you would take in $52K pa or a yield of just 5.2% not enough to cover the interest let alone other holding costs. Of course the investor in 1980 now has a $12.5 million asset in 2010 but to achieve the same outcome as a 1980 investor, todays $500K house would need to go to $6.25 milion by 2040 Now if wages also follow the last 30 years history, wages will only get to $325K PA and with the banks only lending @ 5 times income this will constrain a 2010 propertys worth to only $1.65 Mil in 2040 a capital growth of only 3% PA making property investment in the future unattractive. Once upon a time property was a sound investment, at todays prices property is grossly OVERVALUED. Until property returns to sound fundamentals like any other investment stay away from it!!!

    Not Fooled By Property Spruikers Hype
    December 16, 2010
    Reply
  18. @Not Fooled By property Spruikers Hype: “clearly the intent is to offend?” – And with “Ned, you are a piece of work” the intent ISN’T to offend??? Ha ha!

    Would love to stay and chat (not!) … But your repeated comments are presumably just going to be cut and paste repetition from what others say. So no point even reading them now that I’ve been told that’s your game.

    And I’m heading off to pick up some building materials for my Dad anyway – At 78 he’s still doing ‘unproductive’ things pertaining to housing construction. Gee, if only he’d learned some TRULY useful skills over his life, he could sit on his bottom all day and do TRULY productive things like trade stocks and spam sites too – Ha ha ha ha ha!!!

    Reply
  19. “@ Admin … you are right Ned & Biker spoil this site with irrelevant chatted & frankly do you want to encourage this type of tone?”

    I am the admin btw. I was just rev’ing up Pete and Ned for giving be a bit of stick last week. Even guys? (Oh, and no, I’m not the admin HERE specifically :) )

    But you mate, after reading your posts on perthnow sound heretical. I agree with about half of what you say, but you miss the mark on the bigger issues relating to home ownership:

    – Dramatically higher leverage.
    – Inexperienced home owners coming in at 90 to 100% LVR in the past decade.
    – Decoupling of wages and Cap gains has in the past 10 years led people to think of houses as an ‘investment’ when it generates losses. The tax office allowing losses to be written off against income is the sole reason. They attack other fake businesses doing this (Look up hobby farms and the ATO) but let this one through, which distorts the market pricing.
    – Pete and many Somersofties are correct when they model a business based on profit inflows. Flipping houses is the cause of the problem, not merely owning investment properties.
    – In another thread I went in to a bit more detail on the risks I see in this bubble. They range from weak hands (yuppie investments) through to Chinese demand being unsustainable, and the resultant backlash.
    – I also believe that leveraged investors face a new risk today never seen before. In the event of a financial meltdown, which each day seems more inevitable I really wonder about how title\deed will work with insolvent lenders if a country goes bankrupt(once it bails out all debt from insolvent banks).

    You see, your tone, heretical ranting and overuse of caps just hurts our eyes and closes out minds. Your conversation has no flow and information has no structure.

    Besides, as a ZeroHedge doomer I would be remiss to not suggest that in a financial meltdown, which looks like it’s setting up for 3-5 years away, your non physical wealth will be zero. So, if you want people to get out of RE, I would suggest pushing Physical PM’s as a better alternative.

    Reply
  20. Oh, for the record, I having nothing to do with any posts that are missing.

    BTW, If you want to be the admin, just change your name in the comment. I’m happy to share the title ;) LOL…

    Reply
  21. Chris: “I am the admin btw. I was just rev’ing up Pete and Ned for giving be a bit of stick last week. Even guys?” – Sweet by me! :D – Though I don’t actually recall giving you any stick??? Anyway, a sense of humour is a handy thing to have to have regardless!

    Geez, we had some ugly rain on the north side of Brissy when I was picking up those building materials. No hail where I was but I sure reckon someone has copped some. A great excuse for Suncorp to increase insurance premiums on everything again I guess.

    Reply
  22. You are probably right… I only recalled Pete. I didn’t even bother to check it. All in good jest though. Though, a few months ago I really do recall seeing only three names on the sidebar on the front page, you two, and shoes…

    We just got a a whopper too. Look here:
    http://www.bom.gov.au/products/IDR713.loop.shtml#skip

    For a good read on gold market manipulation here:

    http://www.usagold.com/goldtrail/archives/another1.html

    It also touches on the beginning of the Chinese buying era mention in the article.

    Reply
  23. Chris: “if you want people to get out of RE, I would suggest pushing Physical PM’s as a better alternative” – That’s a pretty important point.

    While I’m not at all keen on acquiring more Oz housing at current prices, I’ve also got cash. With my existing housing simply being my “hard asset” investment in lieu of any particular and special amount of faith in PMs as a “hard asset” investment class over housing at current prices on both.

    Reply
  24. Houses as hard assets to me are ‘ok’. People can understand them, and you can almost always rent it out, which is pretty important once you reach retirement. It’s is a depreciating asset however that need a constant income stream to remain viable. For me, the reason I don’t see it as attractive is that the quanta starts around 2-300k. That’s a petty steep buy in if you are against long term leverage (I’m happy to use 20:1 in spot fx for a few minutes at a time, or for a few days if I see a good arb to play (This is my main area btw!)).

    For me, PM’s are not special except in a few cases:
    1) The ‘price’ for PM’s is reversed to what people think. A rising price actually relates to a sinking value of the dollar. It’s a barometer of inflation abuse.
    2) US and BIS downward manipulation of price to raise confidence in fiat gives a great buying opportunity right now. If you track the $\oz price over time in terms of volume of dollars existing gold alone is priced in the tens of thousands under the current dollar scheme.
    3) ag\au are still here after thousands of years! I can easily give it to my kids

    Houses are cool IMHO, providing you stay away from leverage, as once you go down track, you have to ensure the economy can always afford to pay you more than the lender charges you, else you margin call yourself!

    As you mentioned elsewhere (I think), if you own the houses, like Physical PM’s you could give a rats as to current unrealised sale price. A bullion bar, like a house ‘just sits there’.

    One other difference. You -own- the gold. You can take it to a new country if needed. As a home owner, you only own a promise that the government will honour your claim on that rectangle. So in a way, your land is a lease than can be called in if needed, like if they need to build a freeway or if in a brave new world decide that laws will change and all land is leased (as it is in the US, via land taxes).

    Reply
  25. Unless one really figures they’ve spotted some especially great investment (in any asset class), leverage/debt sounds to me like a damn good thing to be avoiding right now. Though if one had a REAL secure job and was very much convinced by the high inflation arguments, they might still see it differently. But as I don’t have a job at all, that’s not a consideration for me.

    As to the high inflation arguments, I lean that way personally – Though without the knowledge or understanding to make a strong case either way myself. Stevens of the RBA is on record very recently as commenting on the “moral hazard” that policy makers have introduced into financial systems over the last couple of years through their extraordinary actions. Which kind of indicates to me that he doesn’t have a fixed opinion on what the future will bring. So I’m pretty reluctant to place a huge amount of faith in any potentially transient opinion I might have! :)

    Reply
  26. Riding north all day. Some interesing posts. Don’t recall giving you any real shtick last week, Chris in IT. Are you, as rick e suggested, Charles Nenner? I thought it unlikely after following up that suggestion.

    What’s in a name? I listed a _dozen_ used by Not Fool, the other night.
    He needs that kind of support, as sometimes he’ll post six long comments to no response whatsoever. My post listing these pseudonyms was quickly deleted along with at least another dozen comments. As a RTW Biker, I’ve used RTW Traveller, Traveller and Travs on PerthNow; and Biker Pete, Biker and Pete here. These changes were always advised online. You’ve used at least two tags yourself. I think you’ll find few here use their own names.

    As you’ve observed, God’s Gift to Cut’n’Paste has some interesting data to support his single goal. I recall Dr Brett, Dr Steve, Karan and others have put up even more impressive arguments over the years. Didn’t buy it then, don’t buy it now. Did buy Bonner’s warning on the impending stock market crash and $cored twice as a result.

    Never once claimed to be rich, as N Fool claims. We’re comfortable and free. Our key financial activities are property, Super and cash.
    We treat tenants fairly and, as a result, enjoy long tenancies.
    The desperation with which N Fool saturates the medium suggests
    his own financial activities haven’t _always_ been divinely-inspired. ;)

    Reply
  27. Comment by Ned S on 16 December 2010:

    As to the high inflation arguments, I lean that way personally – Though without the knowledge or understanding to make a strong case either way myself.

    We all have the same data available to us Ned and we still have different views on what is in store for us… Inflation or deflation or hyperinflastion or all 3 at different times and different orders..

    I think we are/or very well near tipping point one way or the other.. I still expect inflation to be the former, the volume of money being printed in China/USA/Europe sways my thinking to inflation. Will we get a last mega hoorah into hyperinflation before it all blows up.. Gut feelong says no.. Inflationary signals are strong though so I am sticking with my inflation first deflation second… The USofA may experience Hyperinflation at some point in the not too distant future (2 to 5 years or not at all)

    Stillgotshoeson
    December 17, 2010
    Reply
  28. “as rick e suggested, Charles Nenner?”

    No. I’ve actually been here since about 2005’ish, but didn’t post until early this year. I exited the ASX forever whilst reading DR in 2007. Been reading LATOC since 2005 as well. Right now I’m reading up on the history of monetary theory and solutions to practical banking over in the FOFOA archives.

    Yes, I really am ‘Chris’ and really am in IT. I really am over on the Permiculture forums, and really do believe we’re heading in to a system reset, which will probably affect us heavily in AU. For me, this is an opportunity. I don’t much like the world as it is, despite the fact that I’ve worked in the IT side of the finance sector since the early 90’s and benefited from it greatly.

    In terms of AU’s future, I’m still calculating. High level is that I suspect that being a net exporter to a fragile world will not rock ours. I think the massively overleveraged property market will implode, knock out our banks, force nationalisation and probably tank the government, hence we get a system reset here too. I don’t know how it will play out. I think title ownership on property will be interesting. Will property debt be forgiven, or converted to a special land tax in a reset. I give all of this a LOT of thought and research, and to that end, I’m out(as much as I can be) and staying out.

    During the reset I expect hunger, unemployment, riots (see hunger) and eventually a complete repricing of hard assets away from current norms. I see large oil price increases as the flow is constrained 4% each year. This will probably change the property market long term (thinking 20-30 years out) to one that more favours rail based transit, narrower streets (carless) and much higher density. (Think European walking cities).

    Right now though, the only thing for me to front run is the reset. Everything else is BAU :) If you gave me a million I wouldn’t drop it on property!

    Reply
  29. Oh, and I’m in the hyper camp. I however suspect that this is not Weimar but rather a digital hyperinflation we’ll see. Once inflation gets too high there won’t be enough circulating currency to even buy things… tha’ts when we get a reset as people barter and stop using the currency.

    A reset stat I read about on ZH was that the derivatives market is now valued at over a quadrillion dollars. Quadrillion is a word I’ve never written before! So that’s a thousand Trillion. That could probably buy every physical object on the planet a hundred times over.

    I think we’ll just get a digital crack up boom and us down here in OZ will be on the sidelines standing around open mouthed. One day… we’ll just not turn up for work… After that, what hapens next is best explained by history.

    Reply
  30. Interesting perceptions, Chris. If you’re right, those of us who can generate everything we ‘need’ are already ‘reset’. That’s always been an integral goal for us… .

    The events you predict are fairly dire. Thinking over that full ‘scarenario’ (forgive me, I suspect you’re actually genuine!) it eclipses anything we’ve seen so far. Possibly comparable to WW2 or total nuclear war, in fact.

    My optimism is of a quite negative kind. I suspect governments will interfere to the nth degree to prevent the very (unpreventable?) scenario you envisage, in which _only_ gold (and productive property) is actually worth anything. It’s likely that over 95% of Australians would be ruined mid-way through the two-decade (?) calamity you’ve outlined.

    Certainly the events you describe are larger than those which took our families’ farms (later retaken by force) in the early-to-mid 30s. Will we see a greater meltdown in my time? I very much doubt it, but I’ll work just a little harder on our main property’s projects, occasionally looking over my shoulder, with your scenario in mind… . :D

    Reply
  31. I’m glad your eyes are open. I’m not terribly concerned about a financial collapse, to me, it’s easy to plan for. You know what really worries me?

    Go and have a look at LATOC (Offline right now, so here is the google cache:

    http://webcache.googleusercontent.com/search?q=cache:4C5i9lCKGvAJ:www.lifeaftertheoilcrash.net/+life+after+the+oil+crash&cd=1&hl=en&ct=clnk&gl=au

    I’ve been tracking this problem for 6 years now. In the past few years the problem as really started picking up steam. The US Army openly says they are preparing for it. The DOE still has its head in the sand. It’s being discussed in UK parliament. OPEC, after denying it for the last decade, last month announced that we really did hit the peak in 2006 AND that -the world can not rely on Saudi increases to cover the growing world production drops-.

    Reply
  32. Interesting link, Chris. I’ve given it to my son who is moving from cold Quebec to almost Mediterranean western Canada in February. He is looking at small holdings in the Okanagan.

    In many respects we’re on the same page. You arrived well after my discussions on the Tesla.

    So far I’ve bought forty solar panels. Sixteen more on order.
    We’ve influenced the sale of well over a hundred more.
    Grain of sand in the global perspective.

    Biking further north, I’m seeing fuel prices approaching their past high levels. Much more of that to come.

    “In the US, the average piece of food is transported almost 1,500 miles before it gets to your plate.” Much of ours moves 2m – 500m. I suspect your situation may be the same. :D

    Reply
  33. I fully support the Tesla and Solar panels, and as a techie and lover of ‘New Scientist’, slashdot and long term believer in science, so good work. I’m saddened to discover that the problem cannot be solved by technical advancements (Barring a Dues Ex Machina in the historical sense, like cold fusion, etc.)

    Of course, that doesn’t stop the early adopters picking up the good stuff whilst it’s available, but there is simply not enough rare earth elements to go around to service all current PV technologies.

    The absolute best reference I ever found on the problem is here:
    http://www.feasta.org/documents/risk_resilience/Tipping_Point.pdf

    It’s a very nicely packaged view of the energy problem. The two concepts that struck me (and boxed me in!) were:
    -The worlds interconnectedness and high efficiency are now it’s downfall as there is no resilience to change.
    -The EROI model shows how unsuitable other energy sources are.

    Yes, I know… Doom, Doom, Doom… for those that are wired in to the current system so tightly they have no capacity to adapt. For those expecting change, BAU will merely be a new normal… net energy decent, which will not be smooth until we adapt. By ‘we’ I expect my kids will do the adapting better than me :).

    “I suspect your situation may be the same.”

    You are living my dream! I’m still 3km from the Sydney CBD. That said I work my little plot fairly hard. I don’t do it for fresh food right now, but sort of as a personal test. How many kg of potatoes can you grow per sqm kind of tests. Potatoes have the highest caloric density per sqm of any low GI plant(Sugar beet is higher). Roma’s from Eden Seeds are very prolific right now. a few months back we were inundated with turnips. What do you DO with 80 turnips! LOL… we ate them, but it took imagination!

    “Okanagan”

    That looks cool! I was looking at RE in Prince Edward Island a few nights back(Yes, after Anne of Green Gables was on). Just make sure there is firewood on the holding. He would need a minimum of 400 trees IMHO of a good burning variety. I would feel better with ~2000 or so. For cooking and heating you want a fair margin of error, if ‘heating oil’ was expensive or not available. Apart from that good water is a priority, though I guess that’s not a problem in a snowy locale!

    Reply
  34. Crumbs Chris that IS very gloomy stuff. But thanks for the post which may help us all out.

    Reply
  35. I love all you guys and gals

    Reply
  36. What about all the natural gas we’re ruining wheat fields and other farm land for? There’s oodles of that stuff. Probably why everyones in such a hurry to dig it up. Meanwhile, deliberately wreck the world economy to curtail oil consumption. Phew, glad I worked all that out….guess i’ll take off my tin foil hat and come out of my bunker now.

    Reply
  37. Hey Everybody (Ned, Biker Pete, Pete, Lachlan, Stillgotshoeson et al)

    If anybody has a mailing list of people where they send interesting articles to, I’d love to be on it. Or if you have a blog or something I can read, let me know – I’m just trying to get off the training wheels. I read ZH but don’t understand some of the financial jargon there not having had a background in financial literacy. (Getting sick of reading Mainstream Media.)

    Email is undergraduate@gmail.com

    Reply
  38. Comment by “First Home Buyer” on 18 December 2010:

    You are about to log in to the site “gmail.com” with the user name “undergraduate”, but the website does not require authentication.
    This may be an attempt to trick you…

    Stillgotshoeson
    December 18, 2010
    Reply
  39. G’day FHB – I read Nadeem Walayat on Market Oracle regularly. Definitely not mainstream. Neither bull nor bear as such. He’s a Brit so handy for that perspective and the European one as well as the US. (You’ll find all sorts on Market Oracle. With some of it is just being too extreme for me.)

    For the US perspective, you could do worse than balancing out the thoughts of Bill Fleckenstein and Jim Jubak on US MSN IMO. (Jubak is mainstream; Fleck is not. But both certainly seem knowledgeable.)

    Greg Atkinson on Shareswatch is also a good read on Oz with some first hand insights from Asia.

    As a general overview of the important things that are happening in the world daily, you could do way worse than read Nadler’s daily writeup on Kitco. while Nadler is personally conservative, there doesn’t seem to be too much of significance that escapes his attention.

    Satyajit Das is also an extremely good read. He doesn’t publish much. But is well worth keeping an eye out for because what little he does write IS good.

    Reply
  40. How is the housing oversupply going over there in Perth Biker?

    Reply
  41. Merry Xmas to you and yours if we don’t happen to chat beforehand Steve!

    Ned

    Reply
  42. Thats very kind of u Ned

    Reply
  43. Steve: “How is the housing oversupply going over there in Perth Biker?”

    Same as Sydney, Steven. Houses and units are all down 40%, just as Keen predicted, son. You can make a killing, now interest rates are at zero… and with employment at over ten percent. Your time has finally come.

    Guess you must be spoiled for choice with all that oversupplied prime realty being given away? Buy _two_ for the price of one… .

    Reply
  44. Why, Steven, you’ve given me the Big Minus One! I’m surprised and shocked.
    I gave you five gold stars, because your question was genuine and well-meant.
    ;)

    Reply
  45. “What about all the natural gas we’re ruining wheat fields and other farm land for? There’s oodles of that stuff.”

    Based on EROI, gas is a poor substitute for oil. Low energy density, high cost technical processes to extract, transport and utilise (car conversion, gas station upgrades), etc. Oh, yes, WE have lots of it, which is why we export it. The US is running really low on usable gas as well. Make no mistake, if the price triple, aussies won’t be getting it at the same price.

    Right now gas is a touch cheaper than petrol to fuel vehicles. Also since it has less power, you need larger engine capacities to get the same power. Notice how the cabbies switch back to petrol on the motorways?

    Check the article listed above(page 14). EROI is half of that of oil. Coal has a decent EROI, but poor utility for transport.

    The tin foil hat comments are welcome, except you’ll notice I’m not running around screaming about how the sky is falling. I came to find my peace the the following comment a few months ago:

    “In a finite world, infinite expansion is not possible.” You know in your heart that we cannot expand forever. So, logically, the question becomes, at which point does the human race find balance in energy consumption with what the Sun is providing. (Fossil fuels are clearly an interim step, a temporary boost.). Given that, I make plans, and restructured my life so that if we DO have an energy shock I can sit back and watch it play out. That’s why it doesn’t bother me. See? No tin foil hat needed by me, nothing to protect myself from.

    Ned, Pete, check out this guy. Seems to have his head screwed on:

    newworldeconomics.com

    Good analysis, and at least someone else providing workable solutions. As always, we won’t follow them! :) We, the human race, will do what we currently do, until circumstance forces us to do otherwise. LOL … at THAT point there will be PLENTY of people calling for the end of the world. Hopefully I’ll be eating Apricots! ;)

    Reply
  46. Good posts Chris. My tin foil hat and bunkers ref was just me having fun at my own expense however rather than yours.
    For some time I’ve been of the opinion that the US will blow up their dollar and hyperinflate. The alternatives would be (a)they print money, recapitalise and create a new system. God knows how that would be possible. (b) for the existing heirarchy to give up the reins and for the corporate/banker government to collapse leaving a gov spending dependent economy in smoking ruins and people generally fending for themselves…..
    Of course nobody wants to hear that so I just happily wear the crank label and buy gold.
    As for Aus well I’m trying very hard to see to see things in the best case scenario however I think with the globalisation of finance it is inevitable that inflation will be experienced widely. Still, in everyday life one has to aim for something “best case” I think while just trying to blend your “end of life as we know it” plans in with it…to some degree. Not easy. In respect to your own plans, congratulations. I like what your doing and I’ve been headed that way myself for some time.

    I like silver too and holding nice gains in that dept. Giving some coins out for Chrissy presents this year.

    Re: peak oil. I clock up a lot of km’s for work and love the freedom my car gives me getting around the place. I’m driving a diesel ute but often wonder how that may change in the near future. I have not studied the subject very much in contrast to your situation.

    Reply
  47. “diesel”

    Perhaps of interest. I read an post somewhere that cracked crude releases larger quantities of diesel over normal petroleum. IN the US this is a problem as they use something called ‘Heating Oil’ which is just government subsidised diesel. They use a lot during winter. Here in OZ, we have a greater supply, so apart from the new demand coming from Euro imports we may have better stock of diesel than petroleum.

    Of course, if you just make sure you end up near a train line you’ll be in better shape ;).

    “for the existing heirarchy to give up the reins and for the corporate/banker government to collapse leaving a gov spending dependent economy in smoking ruins and people generally fending for themselves”

    Bingo. Think : ‘Somebody should Do something!’. There will be no blame, no direction. Peak Oil’ers have been cranks since Hubbard first made the proposal.

    Reply
  48. Are we being prepared? From Cancun……

    “In one paper Professor Kevin Anderson, Director of the Tyndall Centre for Climate Change Research, said the only way to reduce global emissions enough, while allowing the poor nations to continue to grow, is to halt economic growth in the rich world over the next twenty years.

    Prof Anderson admitted it “would not be easy” to persuade people to reduce their consumption of goods

    He said politicians should consider a rationing system similar to the one introduced during the last “time of crisis” in the 1930s and 40s.

    This could mean a limit on electricity so people are forced to turn the heating down, turn off the lights and replace old electrical goods like huge fridges with more efficient models. Food that has travelled from abroad may be limited and goods that require a lot of energy to manufacture.

    “The Second World War and the concept of rationing is something we need to seriously consider if we are to address the scale of the problem we face,” he said.”

    Then theres this……

    http://blogs.news.com.au/heraldsun/andrewbolt/index.php/heraldsun/comments/column_why_you_may_soon_need_a_warmists_permission_to_eat/

    I know from the CRU emails that the oil co’s are behind the false warming theory/carbon scheme. Does this all tie together somehow with peak oil?

    We are having a one in fifty year rainfall event here at present (QLD). And Rudd/Wong promised us droughts n dustbowls.

    Reply
  49. Steve Keen’s latest blog post makes for interesting reading. At least he has admitted that he got things wrong – to a point :)

    Reply
  50. Perhaps Dr Brett Edgerton may be next… ? One of the factors both ignored was the immense difference between the number of building starts in the US as opposed to Australia. Even as the US property market was sinking, they were building up to _eight times_ as many homes per head of population.
    The machine couldn’t, or wouldn’t, stop cranking out (unsaleable) houses!

    Current monthly decline in Australian home construction spells future shortage in those cities with high(er) employment and perceived better lifestyle.

    Reply
  51. From SK’s Debtwatch blog

    Can we keep on borrowing our way to prosperity? Here’s where I turn cynic once more: we could, if we didn’t already have an unprecedented level of private debt, with both households and businesses carrying more debt than they’ve ever sustainably carried in the past.

    So I expect Australia to resume deleveraging during 2011, leading to recession-like conditions in sectors that are not major beneficiaries of the China Boom. We are already seeing the first casualty – retailers are discounting well before Christmas, rather than after it, and the “unexpected” drop in retail sales last month is something I expected to see when the First Home Vendors Boost wore off. Retailers’ pain will only increase through 2011.

    Here he is very much right and we will see continued deleveraging next year and an increase in unemployment.
    The recession we were to have a couple of years ago we are now going to have. The band aid on an arterial bleed did not work..
    Sure the government can issue more bandaids, but that did not help the US and Europe so how will it help us…

    Stillgotshoeson
    December 20, 2010
    Reply
  52. Nah, not cynical, hopeful… . ;)

    Reply
  53. I share his worries for the amount of debt we have but I have more respect for any person who specialises in a field to come out and say they were mistaken. Some experts are like the Fonz from Happy Days, cant even say the phrase – “I was wrong.” I remember watching a speech by James Randi who postulated that one of the side effects of getting a PhD is that the person in question loses the ability to say two things: “I was wrong” and “I don’t know.” :)

    Reply
  54. You chastise DRA and their followers as prophets of doom, talk the economy down, trying to insert fear and doom into the masses to cause a crash in the economy so they can profit.. Yet you yourself confess that the DRA saved you not once but twice from losses in your share portfolio, yet the mention of similiar dangers to your and others property portfolios is dismissed as fear mongering, yet for you and others as to the share market collapse it was fair warning that you were able to take advantage of.. how does the fair warning on overpriced property and the effects it may suffer differ to the warning you received on your share portfolio

    Stillgotshoeson
    December 20, 2010
    Reply
  55. “I remember watching a speech by James Randi who postulated that one of the side effects of getting a PhD is that the person in question loses the ability to say two things: “I was wrong” and “I don’t know.” ”

    Reminds me of computer geeks who when asked how to do something, reply “You can not do that” – Translation: Said geek does not know how to do it! :D

    Reply
  56. “how does the fair warning on overpriced property and the effects it may suffer differ to the warning you received on your share portfolio” – Just my thought: The “fair warning” has been going on so long that if one had followed it they’d be significantly out of pocket?

    It’s certainly looking like it could be one of those situations of saying “Damn, I was so early, that even if I’m right now, I was still effectively wrong!”

    Reply
  57. PS: Even on stocks, DRA totally missed the market bottom – They were in the camp calling for significant further declines when the bottom came in. And they didn’t want to know about it when it did. Suspect they still don’t really? Though their stance on gold has been good to date – Very good for those who got in early enough in fact!

    Reply
  58. “…you yourself confess that the DRA saved you not once but twice from losses in your share portfolio…”

    Misread my post, Shoes. I had no ‘share portfolio’ as such. My Super allows me to shift assets on an hourly basis. I can move them from cash to LPTs to ASX, etc, online, at will. Yes, DRA’s warnings, in harmony with other trends I saw, alerted me to move to cash… and then later back to ASX…then back to cash. Saved from a loss, but the second windfall was really my timing alone (and I got it half right!~ ;) )

    And I’ve happily given DRA credit for that first ‘save’, not once, but _several_ times.

    Perhaps doctors Edgerton and Keen should initiate a special Sorry Day(!) to apologise to the hundreds, perhaps thousands, of families who sold their homes after these gurus / martyrs advised them to sell their houses… and now cannot get back into homes which have risen so much in the passing years that they’re locked out. Some, no doubt, lodged these funds in shares and are still as much as 30% down there, as well as the other 20% the property market has since risen in two major capitals. Ouch!

    As for following DRA’s advice on property, we’ve consolidated and reduced debt. As yet we’ve seen nothing at all to convince us that property will suffer anything other than the cyclical corrections we’ve experienced for decades. DRA has been calling a crash on an almost weekly basis, since it first went online. Years have passed with the totally opposite result, in fact. Bill Bonner recently summed us this irony with a comment that his own employee had seen her Melbourne property _double_ in four years.

    Just as Bill is honest enough to summarise that Australian ‘difference’ accurately, I’m ethical enough to credit DRA with saving us close to 50% of our Super. I simply give credit where it’s due. :D

    Reply

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