Alarmist? Maybe. But when the stakes are this high, even a “maybe” warrants genuine concern.

Of course, this bubble started with China’s mother of all stimulus plans in 2008/2009. Gordon Chang, an international lawyer and China analyst, has spent much of the past 30 years living and working in China. He puts it this way: by 2009 the Politburo had dumped about $1.1 trillion into a then $4.3 trillion economy. (He’s referring to an easing of lending, in addition to direct stimulus.)

These mind bogglingly huge inputs created growth, but also created a stock market bubble, a property bubble and inflation. And the faster something goes up, the faster it comes down.

How fast? Inflation, at a modest 1.5% in January 2010, rose to 6.5% by July 2011. But that’s just for starters.

The property agent, Homelink, reports that new home prices in Beijing dropped by 35% in November. You heard that right, folks. More than a third in a month. Another property agency, Centaline, estimates developers have 21 months of unsold inventory in Shanghai and 22 months in Beijing.

According to Gordon Chang, in mid-2010, the state electricity grid in China reported that 64.5 million apartments showed no electricity usage for more than six consecutive months. That’s enough housing for 200 million people. Most of it empty.

If these astronomical numbers don’t convince you, consider the surveys that show the rich and super rich in China are, in growing numbers, thinking of leaving the country. That means getting passports and ensconcing their families in comfortable Western cities. That’s what Gordon Chang calls a leading indicator.

If things are going pear shaped fast, what does it mean for us Aussies? To paraphrase and twist the old sin city adage, what happens in China doesn’t stay in China. The real estate collapse is already nailing the construction industry. Since mid-year, steel production in China is down about 15%. And where do we sell most of our iron ore? I don’t need to answer that, do I?

The big question is whether the Politburo can engineer a soft landing. But imminent political change in China isn’t helping. At the end of 2012, the Communist Party will start changing the members of the Politburo Standing Committee. Those guys are the top of the pops. And change means uncertainty, which means weakness, which means power struggles and so on.

So if we don’t get a soft landing and the real estate crisis spreads through the Chinese economy, contagion style, then it’ll be more than steel that tanks. Demand for commodities – our economic specialty – will go off a cliff, taking a chunk of our prosperity with it. Alarmist? I certainly hope so.

Andrew Pegler – 13 January 2012

Cars cost a motza. Food isn’t cheap. And real estate prices just plain hurt. It’s enough to strain our cherished notions of the lucky country.

The Centre for Independent Studies (CIS) has recently taken up the cause with a report on why many of our prices are too high, why the government is to blame, and what the government should do about it.

First the caveat: the CIS is a pro-business organisation. Like many of its ilk, the CIS is quick to blame the government for our woes, but not so eager to praise it when things go well.

With that in mind, let’s proceed. The CIS finds that Sydney is the sixth most expensive city in the world – more expensive than New York, Rome or London. Further, Australian house prices have climbed from three times the median household income in the 1980s to nine times the household income in Sydney.

But we all know Sydney is expensive. What about the rest of the country?

The CIS takes aim at bananas, of which imports are banned for quarantine reasons. It says the ban contributes to the $13.98/kg price as of April, 2011. Whoa there! Cyclone Yasi had a bit to do with that. As an aside, the report mentions that bananas were $2.30/kg before the cyclone, only marginally more than America’s $2.16/kg.

Books and cars are also in the firing line. The report says the Copyright Act 1969 results in books that cost two to three times the price of overseas equivalents, while failing to drive sales to Australian authors. No disagreement from me: cheap books means more readers, and last time I put a coin in the Common Sense Machine, it said the more literate a population the better.

Similarly, the CIS suggests scrapping the remaining import duties on cars, abolishing the luxury car tax and allowing the private importation of certain used vehicles.

All in all, some good suggestions. Most of us, after all, find it hard to make ends meet.

But if we’re trying to gauge whether Australians really have it worse, we need to consider the other side of the ledger. Comparing median household income is a good place to start. In 2007, the Aussie median was AUD$66,820. Two years later, in 2009, America’s median was a much lower AUD$49,777.

Low-cost public health is another factor. We only spend 8.7% of GDP on healthcare. That compares to 9.8% in the UK, 11.4% in Canada and a whopping 17.4% in America.

I could go on (higher minimum wages, family tax benefits, the ability to study at university without paying upfront fees, etc.).

So are we really worse off than so many other countries? It’s a big and complicated question. For what it’s worth, here’s my gut feeling: sure, we should make some tough decisions in pursuit of lower prices, but it’ll take more than a survey or three to disavow me of the notion that we’re the lucky country.

Andrew Pegler – 6 January 2012

Short answer: it involves central banks and the never ending geopolitical quest for world dominance. Now for the long answer…

Through much of 2011 gold was on a tear, even pushing through USD 1,900 an ounce, capping off a decade-long bull run. By September, the price was crashing, into the mid-$1,500s (it’s since recovered some).

All this price movement has taken some of the gloss off gold, has gold watchers confused and even has some of them questioning gold’s traditional role as a safe haven.

But underneath the short-term price fluctuations a few powerful players are engaging in some serious brinkmanship. How powerful are these players? Well, Putin, Chavez and Chinese Politburo powerful.

These chaps are buying up gold, and lots of it. Central banks around the world, led by the Chinese and Russians, are expanding their reserves for the first time in a generation. The World Gold Council reports that these and other government institutions may have purchased 450 tonnes of gold in 2011, compared to only 142 tonnes in 2010.

Sometimes they buy publicly: Putin has been photographed manfully fondling ingots. Chavez sent shockwaves through gold markets in August when he pulled Venezuela’s 99 tonnes of gold from the Bank of England’s vaults and flew it back to Caracas.

Sometimes they buy under the radar: China’s admission that it has increased its gold reserves by 450 tonnes in the past five years is notable for what it omits. If they declare 450 tonnes, how much have they really purchased?

If we try and read these gold-plated tea leaves, what patterns do we find swirling at the bottom of the cup? One thing is clear: Putin, Chavez and China all have something in common – they’re not big fans of the US.

Putin has described America as living beyond its means, like “a parasite” on the global economy. China often scolds America’s indebtedness and let’s not even start on Chavez’s feelings about the U.S.

They all agree that American dollar dominance – built as it is on huge debt – is bad for the global financial system. And buying gold is their way of doing something about it. The more they hold in gold, the more they diversify their massive portfolios. Which means they can hold less Greenbacks, and be less exposed to, and dependent on, America.

So it’s a power play, folks. Global domination ‘n all that. The game that never ends. It’s far from being the only factor affecting the price of gold but it is worth keeping a lazy eye on as the ancient story of the yellow metal continues to unfold in 2012.

Andrew Pegler – 23 December 2011

The European Union emerged in the early 1990s as a French-German idea to bind the region after the unexpected collapse of the USSR. 20th century Europe had twice torn itself to shreds and a union seemed like a great way to bury the well-used hatchets. But the great coming together hasn’t worked as planned: Greek spreads now mean more to us than tzatziki.

Germany, disillusioned by its debt-happy neighbours, is no longer reserved about wielding its economic and political clout. Its hard line against the credit binge of the Club Med nations has won out and it is now reshaping the union.

European leaders (sans the Brits) have agreed on a new fiscal pact calling for tighter regional oversight of government spending. This is a good move; the euro crisis didn’t need more can kicking down Stimulus Road. It needed a long-term overhaul of membership rules.

These new structures will force errant borrowers to mend their ways. Then, with the EU’s fiscal future more certain, it’s hoped the European Central Bank will take a kinder view of the basket case countries, and start buying up their bonds. This should force down their yields and reduce the chances of a European implosion.

But we are not out of the woods yet. Expect the cold winds of a recessed Europe to buffet the global economy for another year or two. Down Under, this will translate into investment tentativeness, moths in consumer wallets and another nail in the coffin of Aussie manufacturing.

And how will this affect interest rates? Let me preface my thoughts by quoting John Kenneth Galbraith: “The purpose of economic forecasting is to make astrology look respectable”.

With that in mind, let’s have a crack: I reckon the RBA will move rates down until the middle of next year, settling around 1% less than current levels. The Bank will sit tight for a bit and then slowly nudge rates upward for the rest of the year. So put a lobster on the nose of a .25% rise on Melbourne Cup day 2012. But don’t hold me to it, I’m an Aquarian after all.

Andrew Pegler

Right now the news out of Europe is bleak. The occasional static about rescue packages and glimmers of hope are ephemeral. But wait, there’s more! Just as it seems like it couldn’t get worse, S&P puts 15 European nations on credit watch! (Yes, that S&P, the company that rated the subprime mortgages AAA+ and we all know how that turned out…)

As outlined in last week’s missive, the problem is that Ireland, Greece, Spain, Portugal and Italy – and probably a few others yet to be revealed – have borrowed too much. If, for example, Greece were to default, the fear would be contagion, domino effect, tumbling house of cards, etc.

Italy is the current poster child of woe. It is $AUD 2.5 trillion in the hole with an $AUD 540 billion payment looming next year. The chances of it meeting that under current market conditions are, well … your guess is as good as mine.

Right now we face two possible outcomes. The first has the fairy tale ending. The European Central Bank (ECB) takes bold action to reduce borrowing costs for Italy, Spain and other heavily indebted countries. We avoid kicking the can down the road again, and, after a year or two, things settle and the EU moves forward, albeit with some tighter regulations.

The second option has more of a Brothers Grimm feel. The liquidity crisis turns into a solvency crisis and then into a meltdown followed by a European depression. The “Club Med” nations, amongst others, get their marching orders and another union, centred around Germany and France, pops up with centralized budget oversight and tight legal constraints on how much debt national parliaments can issue.

If we go down that yellow brick road, may I suggest dumping the name “euro”? That brand is somewhat tarnished. I’m thinking the Frerman?

The countries not invited to the party will either group together to form a sub-union of also-rans, or just go back to using their old currencies.

Meanwhile we’ll continue tankering out our backyard to satisfy the countless Asian nation building projects set to shape the 21st century. We really are the lucky country eh?

Posted by Andrew Pegler

What does it means to hear the market is “deserting” or “attacking” a particular European country?

In other words how and why is the market giving countries like Greece and Italy – and increasingly France – such a hard time? Well just like the GFC before it, Europe’s woes all come down to debt, except this time it’s public sector or government debt. Most of these problem countries (you can add Spain and Portugal to the above list) are running deficits, which are financed by borrowing, largely from the private sector.

This financing works as follows: banks and other private sector players, known collectively as the dreaded “market”, buy government bonds that pay a prescribed interest rate, known as a yield, for a fixed period of time, known as the term. At the end of the term, known as maturity, the government returns the money to the bond buyer, i.e. it repays its debt.

Under normal circumstances this works just dandy. When a government needs money it issues bonds. The market knows the yield in advance (the profit) and knows it can’t lose on the investment (because governments pay their debts, right?).

But now the market is becoming increasingly panicked/terrified/spooked (choose your dramatic descriptor) at the possibility that some of these countries won’t repay their bonds. All of a sudden those guaranteed investments are becoming high risk. And as the investment truism goes: the higher the risk, the higher the return. In return for taking on increasingly risky government bonds, the market is demanding higher yields as compensation.

For example, the recent Italian attempt to raise funds in a bond auction went so badly that their five-year yield rose to 7.8%. That means the Italian government is borrowing at 7.8%. Six months ago the yield was 3.5%. This is big cheese. An upward tick of 1% in bond yields can cost a government billions in extra interest payments.

But it goes much further than a bigger interest bill. European economies are stagnant. Unemployment and welfare costs are up. Taxes are down. Savage cuts aimed at reigning in deficits just exacerbate the problem by further depressing the economy and further shaking market confidence, which drives up bond yields even higher.

It’s a vicious cycle that now has Greece’s one-year bond trading at yields of over 300%. And the fear of contagion – one country’s collapse leading to another – is even making it hard for the poster child of prudence, Germany, to raise money.

That’s what happens when the market “deserts” or “attacks” a country – or countries. It gets ugly, fast. And in the case of Europe, pretty soon, something’s gotta give.

This week, an assortment!

Bit 1: Writing in Business Spectator, Gills says significant new technology promises to bring solar much closer to the cost of coal than anyone would have expected even just a few years ago. Some of these efficiency improvements are occurring right here in Oz, involving tiny nano-particles (50 fit on the end of a human hair) and a technology called plasmonics. As I pointed out a couple of weeks ago, this is the sort of stuff we need to secure a viable manufacturing future.

Bit 2: Further to the closing thoughts in last week’s blog, legendary Australian fund manager John Sevior has come out loudly and proudly to back the new “two-strikes” rule that gives shareholders decisive power to curb executive pay. If at least 25% of votes cast at two consecutive AGMs oppose a bonus package, the board (but not the managing director) must stand for re-election within 90 days. Google “GUD Holdings two strikes” to learn how this recently worked in practice.

Bit 3: I had a thought bubble – has anyone else noticed that the financial crises in Europe and the U.S. are problems borne of their respective cultures? In Europe, socialist ideas of bigger government and unsustainable welfare states have seen massive stimulus packages rolled out and, particularly in Greece, too many people working for the government. Meanwhile, the U.S. problem stems from its individualism ethos, where everyone has to look after themselves. This free market philosophy failed to properly regulate the banking sector, triggering the GFC house of cards.

Bit 4: The growing shift to online retail is presenting Harvey Norman and Westfield with a wicked challenge. According to the latest research from Quantium Online, the value of Australian online purchases is rising 26% a year and the number of online shoppers by 20% a year. This leaves both companies with little choice but to follow the very same trend that is undermining their once-vaunted property values. Harvey Norman, which operates a franchise model, owns most of its buildings, as does Westfield. The further they push online the less valuable their portfolios of bricks and mortar. Good luck turning that problem into an opportunity.

The Occupy movement has travelled well since kicking off, or should I say sitting down, in Manhattan a few months ago.

Perhaps it’s a zeitgeist thing, the time is nigh and all that. A lot of angry people reckon “the system” has let them down. On that I offer no opinion; every argument has two sides. But today let’s explore what’s bugging Occupy.

Right now a generation of young people in the U.S. and Europe are staring down the barrel of 40 per cent unemployment, and years of social upheaval and economic austerity. Even here in the luckiest of lucky countries, there’s anger. One Occupy Sydney protestor literally got her teeth stuck into it, biting an arresting officer, while the Melbourne chapter were turfed out of the CBD in a bloody conflict with mounted policemen.

The demands of the loose global coalition that is Occupy are varied but their aspirations are ambitious, including the decorporatisation of politics, more equal distribution of income, bank reform and a review of executive pay. (In the case of Occupy Melbourne, now permanently camped in a city park, may I also suggest 144 rolls of Kleenex 2 ply and 20 cans of Glen 20 air freshener?)

One of the many catalysts of Occupy can be traced to a Vanity Fair article penned earlier this year by Nobel Prize winning economist Joseph Steiglitz

Smokin’ Joe deftly tears strips off modern capitalism, blaming it for everything from social dislocation to sovereign debt dramas. Steiglitz, not a guy who does facts lightly, calculates that the wealthiest 1 per cent of Americans earn about 25 per cent of that nation’s income. And they control 40 per cent of the country’s wealth. In the mid 1980s, the figures were 12 per cent and 33 per cent respectively.

And while the top 1 per cent have seen their incomes rise 18 per cent over the past decade, US middle class incomes have fallen. That’s essentially what’s occupying the busy heads of those occupying.

I’ll leave you with Steiglitz’s closing remarks: “… there is one thing that money doesn’t seem to have bought [the top 1 per cent]: an understanding that their fate is bound up with how the other 99 per cent live. Throughout history, this is something that the top 1 per cent eventually do learn. Too late.”

According to the Australian Payments Clearing Association, Australians have turned from cash in droves in the last few years. Thousands of ATMs have closed and similar numbers of Eftpos machines have been installed.

As I’ve written before, the decline of cash is a global trend from Nigeria to Nicaragua, from Wopping to Washington. For a visionary like Steve Jobs, this presented Apple with a business opportunity and the chance for another paradigm shift. It would work thusly: Apple’s 190 million customers (all who have credit cards on file) would buy stuff, online and off, by simply entering their Apple iTunes username and password.

But it’s not all Apple. A couple of weeks ago, U.S. Google Wallet users with a Samsung Galaxy S2 handset began buying stuff at shops set up for the task. Shoppers simply bump their phones on a machine and money goes from their account into the vendor’s. But that’s relatively small beer. Once the Apple behemoth marshals its faithful for the cashless life, things will change forever.

On a technical note, the next generation of smart phones will allow you to transfer money by either bumping your smart phone against another or by sending an SMS. Ironically, the just-released iPhone 4S is not equipped with what’s called “contactless payments technology”. The best guess is iPhone 5.

All this poses the question: will the cashless future end up being Steve Jobs’s most enduring legacy?

In other news… from the “how computers are taking over our jobs” file, an IBM super computer called Blue Gene can now simulate about 5% of the human brain. The plan is to sort the rest within ten years or so. The implications for the jobs market are stunning for everything from voice recognition (fare thee well call centres) to self-repairing machines (goodbye computer repair shops).

While the world must envy our natural resources, they’d have to be shaking their heads at how we’re squandering it. Norway, with less than 5 million people, has saved around $500 billion from its North Sea oil windfall. And they put it in a fund to underwrite their long-term prosperity. In comparison, we haven’t really saved anything.

Folks, the day will come when this historic mining boom — $182 billion last year alone — runs out of steam. When that happens, we need a Plan B, and Plan B will require a pool of money, i.e. a sovereign wealth fund. Shaving a bit off the tanker loads of money our great miners are making will help stabilise the economy, provide more certainty for future generations and be a buffer in times of emergency or natural disaster.

Like the Norwegians, other countries with once-in-a-generation opportunities are way ahead of us. Think oil-rich Kuwait, United Arab Emirates and Bahrain, and copper-rich Chile. Even the Israelis are viewing their recent major offshore gas finds as an opportunity to build a future fund. Sure, they have certain “issues” that threaten their existence, but the basic logic still applies.

In the midst of huge commodity booms these countries are preparing for the challenges of tomorrow, using the good times to cushion the inevitable bad ones.

But how about the future fund you might ask? Ain’t that going to serve us well? Yes but that money pool (now $75 billion) is earmarked for public sector pensions. It will, however, free up tax revenues for other post commodity boom programs.

Finally, here’s an apt thought from Henry Lawson, who, quoting an American in a story set in the late 1800s, wrote “you’ve got the makings of a glorious nation over here, but you don’t get up early enough!”