How do you keep a bubble from popping?

Tuesday, 3 July 2018
Melbourne, Australia
By Bernd Struben

  • 22 years in the making…
  • Project Prophecy

Over the weekend I visited my local Bayside library.

They’d put on a children’s event earlier in the day to encourage literacy.

The kids were gone by the time I got there. But a proliferation of colourful balloons remained.

One of the librarians was busy gathering them behind her desk for disposal. She must have been tempted to send them off with a mighty pop! Admittedly, I secretly hoped she would.

Instead she carefully inserted scissors at their base, and slowly deflated each one. This way no one was disturbed. No one who wasn’t watching closely even knew the balloons were in trouble at all.

Which, dear reader, brings us to the Australian housing market.

Below you can see the latest house price dates from CoreLogic.



chart image

Source: CoreLogic
Click to enlarge


While regional prices rose 2.2% over the past year, that wasn’t enough to offset the 1.6% average loss among the capital cities. This left national dwelling values down 0.8% for the year.

Sydney, the city that fuelled the FOMO (fear of missing out) mania and drove record property gains, saw prices fall 4.5% in the last 12 months. And that downtrend looks set to continue.

From The Australian Financial Review (AFR):

Top economists are turning more bearish on the housing market at the same time as fund managers fear house price declines could trigger a “nasty cycle” in the economy and more downside for the Australian dollar…

“We have got more bearish on house prices over the past three months,” ANZ’s David Plank said.

ANZ is now expecting house prices to fall 4 per cent in calendar 2018 and another 2 per cent in calendar 2019, with larger declines expected for the Sydney and Melbourne markets. In March, ANZ had forecast that house prices would grow by just under 2 per cent through 2018.’

From a growth forecast of almost 2% for 2018 to one that predicts housing prices to fall by 4%. That’s a remarkably bearish turnaround in only three months.

And ANZ isn’t alone. NAB’s analysts are also a lot less optimistic than they were earlier this year. As the AFR notes:

“The short answer is yes,” National Australia Bank’s Alan Oster said when asked whether he had a more pessimistic view on the housing market since The Australian Financial Review‘s last quarterly economist survey was released at the end of March.’

At the moment their predictions are gloomy…but not necessarily alarming.

Aussie house prices, after all, are among the most expensive in the world.

Driven by years of cheap debt, and FOMO, prices in Sydney rocketed 16% in the 2017 financial year. At that rate prices would have doubled every 4.5 years. That’s clearly shooting into bubble territory.

So a decline in prices was in order. Like the librarian carefully putting a pinhole in the balloons, prices could gradually fall by another 5–6% without a mighty pop!

Except that’s not how people generally operate.

Just like FOMO saw investors stampede to get onto the rising property ladder, the herd may begin edging towards the exits once they collectively notice the hiss of the property bubble’s slow deflation.

And as with any deflationary scenario, if you expect the price of a house is going to be 5% less next year, you’re far more likely to hold off taking out that big mortgage today.

This could see a scenario where sellers outnumber buyers. And you don’t need to be an economist to predict what impact that will have on prices.

Although that hasn’t stopped controversial economist Harry Dent. Harry is more widely known for his forecasts on US markets. But over the past year he’s turned his attention Down Under. And what he sees scares him.

As he says,

The folly of central bank policies are about to become painfully clear. And the greatest bubble in modern history is about to finally burst — between now and late 2022.’

Harry doesn’t expect Australian home prices to fall by 5% or even 10%. He’s forecasting a gut wrenching 50% fall, very possibly inside the next year.

He explains exactly why in his new book Zero Hour. And he provides a crucial timeline of events to watch out for, so you can prepare your investment portfolio accordingly.

You can find out how to get your digital copy of Zero Hour here.

Now to the markets.

Markets

Overnight the Dow Jones Industrial Average closed up 35.77 points, or 0.15%.

The S&P 500 gained 8.34 points, or 0.31%.

In Europe the Euro Stoxx 50 index finished down 23.39 points, or 0.69%. Meanwhile, the FTSE 100 fell 1.17%, and Germany’s DAX lost 67.83 points, or 0.55%.

In Asian markets, Japan’s Nikkei 225 is down 216.33 points, or 0.99%. China’s CSI 300 is down 1.49%.

In Australia, the S&P/ASX 200 is up 34.71 points, or 0.56%.

On the commodities markets, West Texas Intermediate crude oil is US$74.15 per barrel. Brent crude is US$77.60 per barrel.

Those prices, now at three years highs, are 15–20% above where I expect we’ll see them by the end of Northern summer. And they come despite the Saudis upping production.

From the AFR:

Saudi Arabia’s biggest oil-production surge in five years was only enough to keep OPEC’s output steady last month, as losses elsewhere in the group piled up.

The kingdom is delivering on its promise to try and tame crude prices, boosting output by 330,000 barrels a day in June to 10.3 million a day, according to a Bloomberg News survey of analysts, oil companies and ship-tracking data.’

Donald Trump, as you likely know, is pushing to bring the cost of energy down. With US mid-term elections looming in November, he’s ramping up pressure on the Saudis to do more:



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Source: Twitter
Click to enlarge


Ignoring Trump’s poor spelling, I’d expect to see more oil coming from Saudi Arabia. Let’s not forget that the Iranian regime and the Saudis are mortal enemies. Meaning King Salman is not going to want to disappoint his good mate Trump.

And when Trump meets with Putin next month, I imagine Russia’s capacity to deliver more oil will make the agenda…while Crimea will not.

Add to that America’s own untapped (though logjammed) capacity and the fact Canada’s Suncor Energy Inc.’s syncrude facility should be back in action next month — adding 350,000 barrels to the market — and oil’s midterm outlook remains down.

Turning to gold, the yellow metal is trading for US$1,240.88 (AU$1,691.03) per troy ounce. Silver is US$15.84 (AU$21.59) per troy ounce.

One bitcoin is worth US$6,611.92.

The Aussie dollar is worth 73.38 US cents.

22 years in the making…

Turning from a possible housing meltdown to more signs of a pot stock melt-up, here’s this, from Bloomberg:

GW Pharmaceuticals Plc grows about 20 tons of cannabis annually at greenhouses the size of football fields in an undisclosed corner of the English countryside… The plants, genetically modified to remove the psychoactive properties, are used to produce Epidiolex, a prescription drug for children with severe epilepsy. The U.S. Food and Drug Administration approved the treatment on June 25, making it the first prescription medicine derived from cannabis permitted to be sold in the U.S…

“It’s a watershed event to get FDA approval,” says Sasha Kaplun, vice president for corporate development at Auxly Cannabis Group Inc., an investment partnership in Toronto. Approval should help alleviate skepticism among some physicians about the plant’s medical uses, Kaplun says.

Epidiolex sales could reach $1.3 billion by 2022, say analysts at Cowen & Co., dwarfing GW’s revenue of $17 million last year. In anticipation of approval, investors sent the company’s market value soaring to more than $4 billion, making it one of the world’s most valuable publicly traded weed farmers…’

There are a few things worth noting here.

First, it’s been 22 years since California legalised the medicinal use of marijuana. It was the first state to do so.

Yet cannabis remains illegal under federal law. While a number of states have allowed doctors to prescribe marijuana for pain treatment, this is the very first time the Food and Drug Administration — a federal agency — has approved any kind of marijuana-based prescription drug.

Second, according to the analysts at Cowen & Co, GW Pharmaceuticals could see annual revenue rocket from $17 million to $1.3 billion in only four years. That’s a 7,547% increase based on sales of Epidiolex alone.

Third, any improved treatment for children with severe epilepsy, or any disease, should be celebrated in its own right.

Over at Australian Small-Cap Investigator, Sam Volkering has long kept a close eye on the marijuana revolution.

Sam believes the market for legalised recreational use — such as the sweeping reforms just passed in Canada — will see select pot stocks soar in value. However, it’s the medicinal cannabis market where he sees some of the best potential stock gains ahead.

That’s why Sam refers to marijuana not as a drug to get intoxicated, but as the next penicillin. A drug that has the potential to save and improve patients’ lives in ways we’re only now beginning to appreciate.

If GW Pharmaceuticals’ Epidiolex is any indicator, the door to innovative new treatments is wide open. And the companies that deliver those treatments could join GW among the world’s most valuable publicly traded pot stocks.

If you haven’t already, you can get all the details on Sam Volkering’s top four pot stock plays here.

Project Prophecy

The names Jim Rickards and Shae Russell will certainly ring a bell for long time readers.

They both wrote for Port Phillip Publishing’s free e-letters as well as several paid advisory services for a number of years.

They’ve since moved over to our friends at Agora Financial Australia. It was an amicable move. And we continue to follow the work they do with interest.

With that in mind, I want to draw your attention to a four-part investment series Jim and Shae are putting together for their readers. It’s called ‘Project Prophecy’. It involves exploiting a very rare, and historically very lucrative, gold window. And they’ll show you just how to do it.

The investment series kicks off this Sunday, 8 July on a restricted VIP website.

But Agora Financial Australia has agreed to allow our paying readers access — for free — to this exclusive event.

You can get all the details, and register your interest to secure your spot, right here.

Questions or comments? Send them to letters@portphillipinsider.com.au. If we publish your letter we’ll only use your first name.

Finally, here’s the latest on US-North Korean negotiations, from The Australian Tribune:

‘North Korea’s Weapons Could be “Dismantled Within a Year”’

If you follow the North Korean story in the mainstream news, you’d be forgiven for thinking the Singapore summit deal is unravelling.

You’ll read that President Donald Trump conceded too much and got nothing in return. And that North Korean leader Kim Jong-un is even now moving to shore up his nuclear weapons programs.

We’re supposed to be dismayed that the nuclear and missile systems didn’t disappear overnight. And that delicate negotiations remain. Yet the truth is…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another, then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd