Maybe the sky IS falling

Wednesday, 20 March 2019
Adelaide, Australia
By Bernd Struben

  • Leveraged to gold
  • ‘Taiwan-US Talks to “Protect Regional Freedom”’

You’re most likely familiar with the story of Chicken Little.

Or perhaps you know it as Henny Penny.

Regardless of the title on the cover — and a few divergent endings — the premise is the same.

After an acorn falls onto his head, a paranoid Chicken Little is convinced the sky is falling. And he enlists various feathered friends on his way to warn the king.

That’s it in an, erm, nutshell.

Now the moral of the story, at least the one I walked away with as a child, is not to get carried away over small issues. One falling acorn does not a falling sky make.

Which is fortunate for Chicken Little, as LiveScience tells me the Earth’s atmosphere weighs five quadrillion tons. If it all came tumbling down that works out to 10 tons of ‘sky’ falling on every square metre of Earth.

Ouch.

Moving back into the world of finance, for years anyone daring to warn of an Australian house price crash was dismissed as a Chicken Little. That includes our own resident housing bears, Vern Gowdie and Harry S Dent. Both editors have forecast house price declines of 50%.

But the mainstream didn’t want to even ponder that scenario.

The fundamentals of the housing market were too strong, detractors were told. With low unemployment, low interest rates, and high immigration levels, a property crash was simply off the cards.

A slowdown in growth…maybe. But certainly no crash.

Even when Sydney values began to decline in the September quarter of 2017, the housing bulls were undeterred. A temporary blip. No worries…

Fast forward and the data released by the Australian Bureau of Statistics (ABS) yesterday shows that Sydney’s average dwelling prices have now declined for six consecutive quarters. Melbourne’s prices are down four quarters in a row.

All up, price falls across the whole country lopped $203.1 billion off the value of Australia’s 10.3 million residential dwellings over the second half of 2018.

Throughout 2018, home prices fell an average of 5.1% nationally. That saw the total value of Australia’s residential dwellings fall to $6.7 trillion.

Now that’s still a tremendously impressive number. And it gives you an idea of just what’s at stake if prices keep tumbling.

As recently as last year, Harry Dent’s forecast of a 50% price crash was hyperbolic compared to the cautious forecasts put forth by mainstream economists.

Today, many of these same economists have moved their own forecasts to meet him more than halfway.

From The Australian Financial Review:

In its bi-annual forecast in Sydney on Tuesday, the research group [BIS Oxford Economics] says given the negativity of the housing sector, house prices could fall between 20 to 30 per cent in nominal terms, or up to 35 per cent in real terms, especially if quarterly price falls in June and September this year remain at around 2 to 2.5 per cent or more…

AMP Capital chief economist Shane Oliver has long held that Sydney and Melbourne prices would fall another 15 per cent to bottom out at 25 per cent in nominal terms. LFE Economics says that 25 per cent could well be achieved this year alone.’

Real terms, in case you’re not familiar, takes inflation out of the picture. It’s a far more accurate measure than nominal terms, which includes inflation.

And BIS is forecasting a potential 35% drop in Sydney’s residential market in real terms.

That kind of fall will have a serious negative wealth effect, curtailing consumer spending. And as I mentioned earlier this week, consumer spending accounts for some 58% of Australia’s GDP.

Deloitte is now sounding the alarm for the retail outlook. From The Australian:

Analysts at Deloitte expect further retail pain in 2019 as household budgets remain strained due to the flailing housing market, and wage growth remains slow.

In its latest quarterly Retail Forecasts report, Deloitte said retail turnover would get worse before it gets better…

Disheartened yet?

Don’t be.

But you should stay informed. And you should consider taking steps today to shield yourself from the potential fallout of a full scale house price crash.

More than that you should take steps to target the potential opportunities presented by a falling real estate market and recession mired economy.

Over at Global Investor, international editor Selva Freigedo has put together a brand new report intended to help you do just that.

You can access that report here.

Now to the markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 26.72 points, or 0.10%.

The S&P 500 lost 0.37 points, or 0.01%.

In Europe the Euro Stoxx 50 index finished up 21.06 points, or 0.62%. Meanwhile, the FTSE 100 gained 0.34%, and Germany’s DAX closed up 131.35 points, or 1.13%.

In Asian markets, Japan’s Nikkei 225 is up 16.78 points, or 0.08%. China’s CSI 300 is down 0.51%.

In Australia, the S&P/ASX 200 is down 13.29 points, or 0.21%.

On the commodities markets, West Texas Intermediate crude oil is US$58.95 per barrel. Brent crude is US$67.61 per barrel.

Turning to gold, the yellow metal is trading for US$1,306.57 (AU$1,843.35) per troy ounce. Silver is US$15.38 (AU$21.70) per troy ounce.

One bitcoin is worth US$3,995.78.

And the Aussie dollar is worth 70.88 US cents.

Leveraged to gold

Moving away from all the gloom, let’s take a look at some opportunities.

In times of economic uncertainty — and it’s far from just Australia where warning signs are flashing red — one asset tends to stand out from the pack.

I’m talking about gold, of course.

As you can see in the six month price chart below, gold has been enjoying a fairly steady run higher:



chart image

Source: Bloomberg
Click to enlarge

After retracing from a recent high of US$1,390.94 on 19 February, gold began a new move higher on 7 March.

The yellow metal is now up 11.4% since 27 September.

Over at Gold & Commodities Stock Trader our in-house gold expert, Jason Stevenson, believes it has much further to run. He forecasts gold could reach US$1,550 per ounce by the end of June.

And Jason isn’t the only resource analyst highly bullish on gold.

From Bloomberg:

One of last year’s best-performing hedge funds says the “trade of the century” is to buy gold and sell stocks as risk assets are due for another meltdown.

It’s only a matter of time until the bearish bet pays off big, according to Crescat Capital LLC…

Among the warning signs, Crescat cites corporate insiders who are currently selling stocks hand over fist…

U.S. economic data is deteriorating and inversions remain across the Treasury yield curve, the hedge fund pointed out…

“Soon the buy-the-dip mentality and bull-market greed will turn to fear. Selling will beget more selling. That’s how bear markets work,” Crescat wrote.’

A few items to note here.

First, I started out this subsection saying we’d be moving away from the gloom.

Apologies…

Second, I’d never heard of Crescat before. But the fund manager has an impressive track record. Its Global Macro Fund returned 41% last year. And its annualised returns since inception in 2006 are close to 12%, according to the company’s website. That compares to the S&P 500’s 8% over the same time frame.

Third, increasing your allocation to gold is certainly something to consider. But if the gold price does take off over the coming months the really big gains will be made by the top gold miners and producers.

These companies are leveraged to the price of gold. Any increase from today’s prices should go straight to their bottom line.

In other words, if gold goes up $100 per ounce, a company producing 10,000 ounces of gold per month will see an extra million dollars land in their accounts without having to do any more work.

This kind of spike in a stock’s return on equity (ROE) is sure to draw investor interest. And all but certain to see the share price shoot higher.

Now investing in gold miners carries significantly more risk than investing in gold bullion. But along with that risk come potentially far higher gains. In fact, the top gold stocks could deliver gains within a matter of months that it would take bullion decades to achieve.

So by all means think about buying some gold — either physical bullion or a gold ETF.

But if you’re hunting for the kinds of gains that can turn $1,000 into $10,000…or more…before ski season kicks off, I suggest checking out Jason’s favourite gold stock recommendations.

You can find out more here.

Finally, don’t forget to check out the latest in politics from The Australian Tribune:

‘Taiwan-US Talks to “Protect Regional Freedom”’

In December 2016, seven weeks before he would be sworn into the White House, then President-elect Donald Trump made a bold phone call.

Breaking with decades of US diplomatic dithering, he called Taiwan’s recently elected president Tsai Ing-wen. The call infuriated China, which holds out the dubious claim that...’

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