There is not a much of a lead to follow after Friday’s slightly downbeat day in New York trading. We’ll just have to make our own way then, won’t we?
Here’s something to think about: farm land. Granted, it has not exactly been a great year for managed investment schemes in the agricultural sector. But it’s not because the underlying assets-food, livestock, forests, fruit-are less valuable than expected. It’s because the structure of the schemes themselves was flawed.
There are two things to like about the idea of investing in farmland right now. First, with Timbercorp and Great Southern both going into administration, this is a hated asset class. You might be able to find some bargains (if you can find a business that makes both sense and money). The second reason is that Jim Rogers and George Soros are talking up farmland too.
The world’s population is expected to go from six billion to nine billion in the next forty years. Frankly, that sounds like way too many new mouths to feed. Arable land isn’t something you can buy down at the corner shops. But it is a fruitful world. And there is much multiplying.
So what’s the investment angle? “Land is scarce and will become scarcer as the world has to double food output to satisfy increased demand by 2050,” says Joachim von Braun in Fortune. He’s the director general at the International Food Policy Research Institute. “With limited land and water resources, this will automatically lead to increased valuations of productive land. And it goes hand in hand with water. Water scarcity will probably increase even more than land.”
Hmm. Well this could be a problem in Australia (the water). And of course, there is always the possibility that there is no way on God’s green earth the world can feed, clothe, fuel, and plasma-TV another three billion people. But it looks like we’re going to try!
By the way, we haven’t paid much attention to “Ute gate.” It looks like it’s just politicians doing what they always do: lying, cheating, and stealing when they think no one’s looking. Business as usual, isn’t it? But indirectly, you can notch another casualty up from the credit crisis.
That’s right. The whole thing started with car dealers struggling to find finance during the credit crunch. The government-in its infinite wisdom and generosity-set up a facility to match dealers with creditors. Strictly a middleman role, of course.
But had it not been for the credit crisis and the difficulty auto dealers are having buying cars on credit to stock the lots, we probably wouldn’t be looking at the possibility of resignations in Parliament today. But the more resignations the better, we say!
Meanwhile, in the housing market, the government is seeking new ways to keep the bubble from deflating. “Stamp duty on housing loans is set to be abolished after the Henry tax review, which is likely to recommend states be given a share of income tax to make up the difference,” reports today’s Australian.
Stamp duty is a cash cow for the States. And boy do they need the cash. The trouble-as they seem to be grokking now-is that if the housing market stops booming, a vital source of State revenue disappears just when the States are facing increasing liabilities AND borrowing costs. According to the Australian, “One of the world’s leading experts on federal taxes, Canada’s Richard Bird, said the states were heading for a financial crisis because they did not have a sufficient tax base to support their burgeoning health and education costs, which were all rising much faster than the consumer price index.”
This is the nexus of the demographic and credit crises. As populations age and get larger, the cost of generously promised government benefits goes up. If the government cuts one tax you can be sure it’s going to raise another. But you wonder if it’s ever occurred to anyone that it’s not a question of getting the right mix of taxes and excise, it’s a question of reducing unrealistic promises the government can’t keep without going deeply into debt or crushing economic growth with higher taxes.
Finally, a third party weighs in on Australia’s banking sector. Dow Jones newswires reported last week that, “Veteran banking analyst Brian Johnson has warned of more bloodletting in Australia’s banking sector. He recommends investors go underweight in banking stocks as loan defaults begin to climb.”
“Mr. Johnson, an analyst at CLSA, says that for the first time in 17 years, Australia is facing a loan loss cycle, where growth in bad debts outpaces growth in lending. In a markedly bearish 200-page report, Mr. Johnson has slapped price targets on the four major banks that are dramatically lower than their current trading levels. ‘Having largely avoided the pitfalls associated with securitization assets that have plagued global institutions, Australian banks are now facing their first loan-loss cycle since 1992,’ said Mr. Johnson.”
There’s nothing new in the analysis. There are still heaps of bad loans in commercial and residential real estate around the globe. Those loans don’t improve if people feel more confident about them. It’s an asset value problem. And it’s a debt problem. The debt households and businesses used to build up their assets now has to be wound down.
So let’s see…it’s still a balance sheet recession…politicians are still liars…you still can’t get something for nothing…and investors looking for bargains now should look at hated assets that are on the right side of long-term trends. Until tomorrow…
for The Daily Reckoning Australia