Back on the housing crash wagon

  • Mystery gold stock picker
  • Bullish or bearish for gold
  • The Great Aussie housing cartel

After taking a beating for a week, gold has rebounded this morning — if only slightly.

You know the reason for the gold price fall. Investors think the US Federal Reserve will raise interest rates in December.

That may happen. Or it may not. Your editor is sceptical about the chance of any Fed rate increase.

We continue to see the flaw in the market’s view. The market is trying to predict a future event based on market opinions from two, three or four months ago.

In Port Phillip Insider last week, we pointed out that economic data was stronger for part of August and September. But that may only be because in July, there were very low expectations of an interest rate rise this year.

Today, the market has factored in a 64.3% chance of a Fed rate rise in December.

But check out the table below. This is a snapshot of the market’s position on interest rates three months ago:

chart image

Source: Bloomberg
Click to enlarge

In July, the market had the probability of a rate increase at just 11.8%. You can see where I’ve circled the number. Not only that, but more interestingly, even as far forward as September 2017, the market had only priced in a 29.9% chance of a rate rise.

Now, we’re not suggesting that every individual and business makes all their decisions based on the Fed.

However, it would be naïve to think that an increase in probability from 11.8% to 64.3% won’t have at least some impact on business decisions.

This is why we have a problem with the current stream of data. Traders are taking a position today on where the market will be in two months, based on how individuals and businesses foresaw the economy two or three months ago.

It’s hard to imagine that’s something any investor can rely on.

Put it this way. Can you imagine how hard it would be for a technical analyst to provide you with an accurate view of where the market is today, if their charts didn’t include the last two months’ of price action?

So as we say, we’re sceptical about the odds of a rate rise. And significantly, Friday’s US jobs data could be the first hint that the US economy isn’t as strong as some think.

Economists had expected US employment to increase by 172,000. The actual number only came in at 156,000. These numbers can be choppy. So it may be too soon to draw any conclusions.

But we’ll stick to our guns on this one. We don’t see a rate rise coming. And perhaps gold’s small rebound this morning may be another clue that the market is sceptical too…


Over the weekend, the Dow Jones Industrial Average fell 28.01 points, or 0.15%.

The S&P 500 index fell 7.03 points, or 0.33%.

In Europe the Euro Stoxx 50 index fell 21.01 points, or 0.7%. Meanwhile, the FTSE 100 added 0.63%, and Germany’s DAX index fell 0.74%.

In Asia, Japan’s markets are closed in observance of Health-Sports Day. China’s CSI 300 index is up 0.76%.

In Australia, the S&P/ASX 200 index is up 16.81 points, or 0.31%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$49.23 per barrel. Brent crude is US$51.36 per barrel.

Gold is US$1,259.76 (AU$1,658.17) per troy ounce. Silver is US$17.65 (AU$23.23) per troy ounce.

The Aussie dollar is worth 75.94 US cents.

Mystery gold stock picker

Speaking of gold, our resources expert, Jason Stevenson, is at the Precious Metals Symposium in Sydney today and tomorrow.

Based on the short dispatch he sent through this morning, it seems as though he’s having a whale of a time up there.

He tells me there’s a mix of macro and fundamental presentations on gold bullion, not to mention a raft of representatives from gold mining companies flashing their wares.

The latter may be of keen interest to our ‘mystery gold stock picker’, in terms of uncovering some of the tiniest and most speculative of the Aussie market’s gold stocks.

Bullish or bearish for gold

However, don’t for a moment think that everyone shares your editor’s view on gold.

Just as we’re convinced the gold price can only go one way over the long term (hint: it’s higher), there are others who will look for any reason to take gold down a peg or two.

Bloomberg reports:

The Federal Reserve has spooked investors out of gold.

Prices posted their biggest weekly slump in three years after hawkish comments from multiple Fed officials ignited concern that the central bank will soon raise U.S. interest rates. Investors are bracing for more declines, cutting their bets on a bullion rally by the most since late May.

The report relies on the difference between bullish bets and bearish bets on the gold price. To do so, it looks at the number of investors with long positions in gold (bullish) against those with short positions in gold (bearish).

The outcome? The number of bullish bets is down 22%, while the number of bearish bets is up 59%.

A warning sign? It could be. But naturally, we’ll find something to play down the risk. We’ll admit to having no objectivity when it comes to gold. We’re always bullish on it, and we’re unapologetic about that fact.

That said, it’s worth checking out the following chart. The white line effectively shows you how bullish or bearish investors are on the gold price. The higher the number, the more bullish. The lower the number the more bearish (or arguably, the less bullish).

As a point of interest, we’ve overlaid the gold price (yellow line) so you can see how the bullish/bearish bets relate to a change in the gold price:

chart image

Source: Bloomberg
Click to enlarge

It’s clear that a correlation exists. But it’s also fair to say that the volatility of the net long/short positions far exceeds the gold price volatility.

But more than that, we could also reasonably argue that it makes sense for traders to wind back bullish bets, considering the strong gold price this year.

Even after the recent fall, it’s still up 19%.

This could be an interesting correlation to watch. Our initial feeling after seeing this chart is that the gold price could fall a touch further, especially if traders place fewer bullish bets.

But that’s for traders and short term investors to worry about. For long term investors, and those who believe gold is the one and only true money, we’ll just keep buying whatever the price does in the short term.

The Great Aussie housing cartel

Subscriber, Grant, sends us a copy of the front page of Singapore’s Straits Times:

chart image

Perhaps Grant feels our pain when it comes to trying to predict an Australian property crash. We’ve done it, made a fool of ourselves, and so vowed not to touch the subject again.

But we admit, it’s hard to stay on the wagon. For two reasons. First, this story in today’s Sydney Morning Herald:

Treasurer Scott Morrison said debate on Australia’s housing market is prone to exaggeration — even as Sydney property prices rise anew — and indicated he doesn’t see much appetite at the central bank for further cuts in the nation’s already record–low interest rates.

There was “no evidence” the property market was overvalued outside “arguably some pockets if x and y and z happened, and x and y and z as yet has not happened,” he said in an interview at the International Monetary Fund’s headquarters in Washington.


We enjoy that argument. In effect it’s saying that property prices aren’t overvalued because they haven’t crashed.

[Silence, again]

Or to draw an analogy, it would be like your editor arguing that I am immortal, with my proof being that I haven’t died yet.

Call us an old stick-in-the-mud if you will, but we find it hard to accept that argument.

There are other reasons to believe house prices are way overvalued (aside from what we can see with our own two eyes in our own neighbourhood). An example comes from Bloomberg:

Beset by lending curbs and bubble-esque prices, first-time home buyers in Australia are turning to a rapidly growing source of finance: The Bank of Mom and Dad.

Now, if the story ended there we would be inclined to say, good. The more people can rely on family support rather than government and bank support, the better — in our humble view.

We may even guess that decades ago, families did help in one way or another with the buying of a house. It may not have been to hand over cash for a deposit, but there was certainly indirect help. Usually in the form of young married couples living with parents in the family home until they could afford their own place.

But the story doesn’t end there. As Bloomberg continues:

More parents are taking advantage of record-low interest rates to refinance their properties and help their grown-up kids onto the housing ladder amid sky-rocketing house values. Digital Finance Analytics estimates the number of Aussies getting help from their parents has soared to more than half of first-home buyers from just 3 percent six years ago.

Even so, that’s still not half the story. The following chart should provide you with the biggest cause for concern:

chart image

Source: Bloomberg
Click to enlarge

Refinancings are on the up. The Bloomberg article refers to homes becoming ‘cash dispensers’. The phrase sent a shudder down your editor’s spine.

Why? Because we recall back in 2003, when working for a Melbourne-based stockbroking firm, the in-house analyst explained the virtue of rising US house prices.

He explained how Americans were buying houses, waiting for the price to rise, refinancing, taking out the ‘equity’, and then using the money to buy cars, boats, and holidays.

The ‘good’ news was that this could carry on, because house prices always went up.

Sound familiar?

And that’s not all. As part of your editor’s preparation for the upcoming Great Repression investment conference in Port Douglas, we’re poring over all the books written by our guest speakers.

At the moment, we’re reading Jim Rogers’ Investment Biker. In the book, Mr Rogers makes several references to asset price bubbles. He says the bubble always ends.

But there was something else that struck your editor about one particular passage in the book. It’s this:

The economic history of the world is full of cartels that attempted to support a price and failed.

Anyone who buys mammoth amounts of a product with the idea that they can keep up the price is doomed to fail. It’s one of the oldest and soundest rules in economics: You can control the price, you can control the supply, but you can never control both for long.

That’s it. A point we’ve previously overlooked. This isn’t just about high prices, this is about the government, central bank, and retail banks being deeply involved in a house price cartel.

They are all working in tandem to try to control the price and supply of housing.

We’ll give them credit. It has worked for more than two decades.

Perhaps it can last another two decades. We’ll see. But we don’t like its chances.

Ah, the Aussie housing bubble. We’ve missed banging on about it. We may just have to dust off those old house price bubble theories and give them another airing.

Why not? It is spring, after all.