Final message from Berlin

  • New target in war on cash
  • Seen it before
  • A property megatrend in the making

Your editor is on limited duty today. We have a few meetings to finish here in Berlin, then getting some early shut-eye, before beginning the long journey back to Melbourne.

So today, our old buddy, Callum Newman, has volunteered to step into the breach. You’ll find Callum’s contribution shortly.

But before we get to that, we can’t help but pass comment on one or two issues to have caught our eye. First…

Markets

Overnight, the Dow Jones Industrial Average closed up 59.7 points, or 0.3%.

The S&P 500 gained 8.75 points, or 0.39%.

In Europe, the Euro Stoxx 50 index added 39.03 points, or 1.18%. Meanwhile, the FTSE 100 was up 0.72%, and Germany’s DAX index closed up 1.08%.

In Asian markets, Japan’s Nikkei 225 index is up 87.22 points, or 0.46%. China’s CSI 300 is down 0.06%.

In Australia, the S&P/ASX 200 index is down 3.2 points, or 0.06%.

On the commodities markets, West Texas Intermediate crude oil is US$51.12 per barrel. Brent crude is US$54.02 per barrel.

Gold is trading for US$1131.30 (AU$1538.41) per troy ounce. Silver is US$17.09 (AU$23.24) per troy ounce.

The Aussie dollar is worth 74 US cents.

New target in war on cash

It was appropriate that we should meet with Jim Rickards this week in Berlin.

For one, Jim filled us in on a key event in macroeconomics and geopolitics that had its genesis at the G20 meeting in Brisbane in 2014.

It was a development that Jim has labelled, the ‘Brisbane Rules’. We’ll have more to say about that in the weeks ahead.

But one of the other subjects on Jim’s lips, is the idea of the abolition of cash — the ‘War on Cash’. It attracted much discussion among the folks gathered here.

We’re all of the same or similar view: that governments and central banks worldwide, are in the process of demonising cash, in order to achieve their outcome of abolishing it.

Why do they want to do that? Simple: control. If cash is electronic, it’s easier for governments and central banks to control it. They can control who gets it, who saves or spends it, and how much is saved or spent.

The abolition of cash won’t happen overnight. It will take several years. Nonetheless, the propaganda campaign to demonise it is well underway.

Evidence of that is in a story in yesterday’s Sydney Morning Herald:

Getting rid of $100 notes may be ineffective in disrupting crime, because $50 notes are more commonly used in illegal cash transactions, the Reserve Bank says in a paper.

After an inquiry this week kicked off into the cash economy, including the future of the $100 note, RBA researchers on Thursday said there could be legitimate reasons for the strong lift in demand for cash in recent years.

Some countries overseas, most recently India, are phasing out high-denomination bank notes as part of a crackdown on tax evasion, leading to speculation Australia might do the same, as consumers here embrace digital payments.

Against this backdrop, an article in the RBA’s December-quarter Bulletin acknowledged that one potential source of demand for cash was illegal activity, and the desire to hide income from the tax man.

It was impossible to say with any precision how much cash was being used in the underground economy, the paper said. However, key crime and money laundering agencies had told the RBA $50 bills were generally the note of choice for criminals.

“Liaison with AUSTRAC (Australian Transaction Reports and Analysis Centre) and the Australian Crime Commission suggests that it is the $50 denomination – rather than the $100 – that tends to be preferred by criminal elements because of its ubiquitous use in legitimate transactions,” the paper said.

First they attacked the $100 note. Now the $50 note is being drawn into the game.

Soon, law enforcement agencies, the government, and central banks will claim that all cash transactions are suspect, and therefore a complete ban on physical cash is necessary.

This is precisely why we urge Australians to hold as much of their wealth outside of the ‘system’ as possible. That means holding and investing in gold and silver.

Granted, gold and silver aren’t 100% safe. The currently dormant Part IV of the 1959 Banking Act has the provision for the Reserve Bank of Australia to confiscate private gold holdings under the instruction of the Governor General.

However, considering that so few Aussies actually hold gold compared to physical cash, our bet is that finding a way to get rid of all cash is a higher priority for the local and global elites.

Be warned, it’s a genuine threat. And the elites won’t be satisfied until they’ve achieved their goal.

Seen it before

Finally, before we hand over to Callum Newman, we spotted an interesting chart from Bloomberg, which goes some way to confirming our doubt about the market’s positive view of rising interest rates.

Check this out:



chart image

Source: Bloomberg
Click to enlarge


By 2027, US debt payments will reach 2.6% of GDP, a level last seen in the late 1990s. By 2026, it will reach 5.9% of GDP.

US public debt now stands above US$19 trillion. President-elect Donald Trump has vowed to cut tax rates and increase debt. We’ve seen this before.

We’ve seen the result of this before, too.

It won’t take until 2056 for the problems to emerge in the system. Jim Rickards believes the next major economic crash could happen in 2018.

We believe he’s right.

Cheers,
Kris

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A Property Megatrend in the Making

By Callum Newman

I’m a bit of news junkie. I love reading the Australian Financial Review every day and picking out the small titbits that give me useful information for my investing.

I’m not talking about the headline stuff the mainstream media focuses on. Usually the useful bits are lost in the middle of the paper somewhere, and you only notice them if you know what you’re looking for.

But there’s something I want to highlight for you, because I know there’s a lot of sceptics out there when Phil Anderson and I say property can go higher in Australia.

I understand that, but urge everyone to consider the following.

If you’re reading this, I’m sure you’ve heard about how the big banks are tightening up their loans to property investors. For example, this Friday Commonwealth Bank will hike the interest rate on interest only property loans. The other major banks are making similar moves.

Here’s why I bring it up. A major trend I’m seeing develop is the market creating platforms for ‘small’ investors to pool their savings and invest in the real estate market.

This is a trend that bypasses the restrictions being placed on the banks.

For example, we’ve had DomaCom [ASX: DCL] list on the stock market this year. This company allows investors to take part ownership of a property. The investor chooses the project. The company pools other investor’s money, and then invests.

Rents and capital gains are distributed according to the level of ownership. So if you own 5% of the property, you get 5% of the rent, and of any capital gain.

One key difference is, as an investor, you can on sell your units to somebody else to get your money out. It’s more ‘liquid’ than normal property investing. That’s a good thing.

The stock itself has taken a bit of a pounding since listing, so don’t take this as any sort of recommendation. It’s the trend underneath I’m highlighting. In this space, there’s also BrickX, which does a similar thing. Just this week it was reported BrickX has just acquired its seventh property. It’s now looking at the commercial sector.

Here’s what I saw this week, which I want to bring to your attention. A real estate financier has invested in a startup company that allows small investors in Australia to lend money to Asian buyers. 

These are the overseas investors that are struggling to get loans off the big banks now. You might have read in the press the worry this is causing apartment developers.

But see how the market finds a way around government regulations and restrictions? But also, even more money is funnelled into property.

The startup says investing in this debt is appealing to people with self-managed super funds looking for more yield than they can get from their regular term deposits. Low interest rates are luring investors up the risk profile.

Now, this is one small startup. It won’t replace the enormous loan books of the banks overnight. But never before in Australian history has it been easier for anyone to put money into real estate, because the minimal amounts have become so low. This ‘fractional’ ownership is a mega-trend in the making.

And let’s not forget the psychology of the crowd here. There was a farmer in Wyndham Vale (the very west of Melbourne) that recently sold their land for almost $100 million to developers. This is to accommodate Melbourne’s sprawl. High inner city prices are pushing families further and further out.

As more people see windfall gains like this happening in real estate, the bigger the urge will be to get in on the action. If they can’t afford a large mortgage for their own property, they’re going to turn to fractional ownership options. This causes the property cycle to keep on building.

This psychology and behaviour is nothing new. A man called Homer Hoyt wrote a book about real estate booms and busts and noted this about the working class in 19th century Chicago…

Early in 1889 thousands of laborers and clerks pooled their savings and formed syndicates to purchase suburban acre tracts. “Even serving girls, seamstresses and woman clerks have caught the fever, put their saving into a lump and become joint owners of suburban property. Kindled by stories of large profits, they believe it is impossible to pay too much.’

The motivation is the same now as it was then: chasing property capital gains. If you don’t understand how this process drives the economy and asset markets, you are at a substantial investment disadvantage. Get up to speed here.

Regards,
Callum Newman