You and your houses
The bore-athon that is the discussion about house prices continues unabated in the Australian press and at BBQs across the country. Everyone with a house expressing their smug surprise, everyone without their utter despondency.
It would be fair to say prices have done well in the last five years, particularly recently. The chart shows the average price index for all cities in the country. Overall, close to a 30% rise in the last five years which is very solid indeed.
The index is less compelling when repriced however. Instead of valuing the index in Australian Dollars (because what isn’t going up in AUD terms?). Have a look at these.
Rebased versus the NASDAQ Aussie house prices are down 50%. That might be unfair because the stock market has gone crazy but so have house prices, apparently. I’d say the comparison is absolutely fair.
Against something that’s had a less fun time, gold. Prices are still down 5%. Sydney, Melbourne and the Gold Coast have probably got their noses in front of gold but it’s a close-run thing even there.
Finally compared to bitcoin, house prices have lost 95% + of their value in the last five years. You say, “that’s clearly nonsense”, except that no, it isn’t.
It’s a merry-go-round. Real Estate agents, banks and newspapers all of whom advertise with each other and work together keep the show on the road. Politicians are in on it too, of course, because stamp duty is a huge part of state revenues and Federal politicians don’t generally win on the back of falling house prices. Incentives matter and the incentive is to keep nominal house prices going up, and they will.
The measurement basis is entirely wrong though. Pick whatever asset you think is valuable long term, go to the Australian Bureau of Statistics, download the house price index and rebase it. Prove it to yourself.
If you print a load of money and throw it across the country, prices rise – that’s just what happens. If you are totally obsessed with your house price rising, consider that its percentage increase is probably much less than you have incurred on a piece of steak.
The whole thing is just a story and most people believe it.
The cupboard is bare
Believe it or not the United States Government has a bank account at the Federal Reserve known as the General Account. As you can see, it’s running low thanks to the delays in agreeing a debt ceiling rise. That discussion is now deferred until December but inevitably a compromise will be reached.
Once we get through that, debt issuance can recommence in earnest. The target level for the General Account is now $750 billion, that sounds a lot but it’s less than three months cash on hand. To get back there, the US will need to issue that $750 billion in debt along with accommodating the Biden spending plans (the ‘no cost’ plans). All told then, $3 – $4 trillion in net new debt issuance over the next 18 months, depending on how the economy goes.
That is not unprecedented, a similar thing happened in the first half of 2020. The difference this time is that the Federal Reserve is supposed to be tapering its QE at the same time the government is issuing lots of new debt. That might be fine provided the private sector is willing to lend at 1% and less.
The signs from the private sector here in Australia are they aren’t that willing, interest rates on mortgages 2 years and longer are rising, even though the Reserve Bank has said no interest rate rises until 2024.
The Fin Review highlighted this week that the Australian bond market is on track for its worst year since 1994. Looking at that chart I think I spot a trend too. The appetite for more and more and more of them must surely be dimming.
It seems a 7.5% annual return is deemed reasonable, at least according to the Wall Street Journal, who provided this chart. Getting it though is far more difficult than it once was.
The chart extends only to 2015, I have no idea what it looks like now but I guess it’s even trickier to achieve. 7.5% seems low though. In the current environment you would be going backwards even at that rate and it’s quite the portfolio to have to manage. With a standard deviation three times what it used to be, it’s a far more stressful portfolio than the 1995 version.
Perhaps the chart really depicts the destruction of fiat currency. You can basically invest in anything that is not cash or is in some way preserved if the amount of cash sloshing around increases sharply, as it has. Looking at the 2015 iteration it provides a certain amount of protection from inflation, as businesses can increase prices and landlords can increase rent. Bonds, unless they are index linked, not so much. Even if they are index-linked, does anyone still believe the CPI?
Despite those meagre returns, the global bond market still dwarfs every other, save for real estate.
Interesting too that the art market has now reached $17 trillion. It makes sense, art is probably quite a low-risk investment in a very risky world. It’s an asset class that has no management team on the inside enriching itself at your expense, no CEO spending company money on their own ego and has very much stood the test of time.
Pick the part of the chart you think will grow the most in the next 10 years.
A crazy person
Buckminster Fuller was an American inventor and general crazy person. In his time, his ideas were considered wild and unworkable. He created something known as the Geodesic Dome which, once everyone had finished mocking him, turned out to be a very accurate representation of some carbon isotopes. They were then named after him.
He prophesied (in this video) that in the century we now live in energy would be money. He was right. There is only one money in the universe, and it is energy, whatever is the closest proxy to that will likely prevail as the unit of account.
Bitcoin has effectively set out to do this. Of all digital assets, it is the only one claiming to do one thing alone and that is to be money. It does that through a costly production process that requires (and represents) energy.
Those rejecting bitcoin because of its energy consumption are missing the point entirely, that is at the core of the value proposition. Some people, like Mr Fuller appreciated that long before bitcoin was invented. Others are only just coming to the same realisation now.The majority still think he is crazy.
“nous avons déjà capturé le Portugal, l’Italie, l’Allemagne et l’Espagne dans notre Euro Goulag. Qui sera le prochain?”
In other words, we aren’t here as central bankers to reflate the economy with printed money. It is outside our mandate.
Lagarde could barely conceal her delight tweeting some nonsense about her “good friend Jens”.
Europe (and Germany) have lost two giants in quick succession, first Angela Merkel and now Jens Weidmann. I can’t think of any others.
With them gone, the most powerful person in Europe now is probably Christine Lagarde.