Robin Griffiths: Gold Will Become The Greatest Bubble

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Let's check in on British gold bull Robin Griffiths.

Griffiths tells King World News the recent dip is a correction he would buy. A huge gold bubble driven by money printing and emerging market demand hasn't even started yet:

"When gold was over $1,900 it was too high, too soon.  The deviation above what I would call a sustainable moving averages was too high.  If there is a setback I would see that as another buying opportunity.  I believe gold will become a bubble, possibly the greatest bubble I am going to live through, but it isn’t a bubble yet."

The Cazenove Capital strategist says stocks could head much lower this fall:

“Until we get clarity on the Greek issue, equity markets will continue in their bear phase.  Between now and late October they will be lower again, with a similar fall to the August low.  It will be very scary, it might even be described as a crash.”

Read more at KWN >

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This Is What A Bubble Looks Like

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Email Zip This Is What A Bubble Looks Like Patrick Chovanec, An American Perspective From China | Sep. 10, 2011, 6:28 PM | 3,936 | 9 A A A   x Email Article From To Email Sent! You have successfully emailed the post. Patrick Chovanec URL Patrick Chovanec s a professor at Tsinghua University's School of Economics and Management in Beijing, China

Recent PostsThis is What a Bubble Looks LikeAprès Nous, Le DélugeActually Chinese Inflation Hasn't Slowed And It's About To Get Worse This is What a Bubble Looks Like Après Nous, Le Déluge Signs of Continuing China Inflation See Also: Chinese Central Bank Chief Speaks On Yuan Convertability In LondonCheck Out Pictures Of The Unauthorized Angry Birds Theme Park That Just Opened In China A Map Of The Biggest Global Risks From The Past Two Weeks

Two years ago, I appeared in a TV report by Al Jazeera’s China correspondent Melissa Chan about the “ghost city” of Ordos, Inner Mongolia, which illustrated — in extreme form — my somewhat eccentric hypothesisthat the Chinese real estate market was being driven by the willingness of investors to buy and hold emptyvillas and condos indefinitely as a “store of value,” like gold, an unproductive but supposedly safe place to stash their cash.  Her report inspired a steady stream of journalists to make the pilgrimage out to Ordos, and helped turn my ”store of value” explanation into a stock part of the discussion about China’s ongoing real estate boom.

Last week Melissa returned to Ordos to see what, if anything, had changed, and asked me to comment and help make sense of what she had seen.  You canwatch the segment by clicking here.  Suffice it to say, Ordos remains largely empty, and construction continues — although there’s a growing nervousness about how long it can last.  As I’ve frequently said, demand in China for real estate as an unproductive “store of value” may be extremely persistent, but that doesn’t mean it’ssustainable.  And the longer it persists, the more worrisome the overhang becomes.

After you’re done with that, check out this recent TV report by Steve Engle at Bloomberg, about the debt-funded building binge that’s taken place in just one relatively obscure city in Hunan.  Note the guy being interviewed about halfway through who talks about all the high-rise condos that have been built and what the occupancy rates are.  Steve’s segment is actually a companion to a Bloomberg investigative piece about local government debt that I’ve mentioned before as a must-read.

Then take a look at this Bloomberg segment, from earlier this year (January 2011), about China’s largest mall, which is standing almost entirely empty.  You may find it interesting to compare it with this Bloomberg article, about the very same property, written in April 2007 — empty then, still empty now.  As the later report states, the original developer went bust and then Peking University bought it, and now doesn’t know what to do with it.  The real gem comes at the very end:

Reporter:  Despite obvious problems, the malls owners plan to expand.

Mall Manager:  We’ve been trying hard to make money, and we’re actually heading towards that direction.  We still have some 200,000 square meters soon to be developed.  I think we’ll balance out as soon as those 200,000 square meters are open.

Ah yes, we’re losing money on each unit we sell – but we’ll make it up on volume!  The solution, as always, is to keep building.

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Receive email updates on new comments!cvszEmail9 Comments 10 3 Flag as Offensive Gary Anderson (URL) on Sep 10, 6:44 PM said: It is stupid to jack up the price of commodities in order to build empty houses. It is the height of folly. It is---Las Vegas!

The problem is that these properties deteriorate as they remain vacant. If they didn't deteriorate it would make sense to build for a rainy day, but it doesn't work that way. Reply 5 0 Flag as Offensive Me on Sep 10, 7:51 PM said: @Gary Anderson: You right to mention that properties deteriorate. And they will deteriorate pretty fast as China use lousy construction. If people haven't moved by now it is more than likely they will not move soon unless the prices come down by a large percentage. Reply 6 1 Flag as Offensive Brewskie on Sep 10, 8:17 PM said: @Gary Anderson: Deteriorate if unoccupied? Sir, they deteriorate regardless - often within several, or a few years! So do roads, bridges, dams, power pole lines, etc. Even homes worth $1 million USD don't match the standards of the West. The Bird Nest: how man times has it been used since the Olympics? ONCE. Showin' rust, poorly built, bad welds: a true testament of Chinese construction. Reply 1 1 Flag as Offensive slainson (URL) on Sep 10, 7:02 PM said: There are enough other projects that need to be done in China that it seems silly to build houses and malls that no one needs. How about converting the entire country to renewable energy as soon as possible? That involves construction, too, and also is an investment in the country's future. Reply 6 1 Flag as Offensive Geology Joe on Sep 10, 8:01 PM said: @slainson: Green energy reminds me of an experience I had once when I sat down at the blackjack table in Bally's in Vegas many years ago. Another player sat in and asked about the odds. The concrete hair-do'd gum smackin' gal dealin' the cards didn't even look up at him and said "Hun... I don't know the odds, but I can guarantee ya that if ya stay here long enough I'll take away everything you own."

Now that's Obama's definition of a Green Job. Reply 2 0 Flag as Offensive Brewskie on Sep 10, 8:20 PM said: How bout this for a side-effect of a bubble? Pork prices up 60% this year!

An old Chinese saying goes, “The world will be in peace as long as there are grains and pork.” Reply 0 2 Flag as Offensive facebook What are these? Strikes! Earn three of them in a month, and you'll be sent to the Penalty Box for 24 hours. How do you earn strikes? Write comments that our editors kick to the Bleachers. Want to get rid of the strikes and start fresh? Write excellent comments that our editors promote to the Board Room. on Sep 10, 9:18 PM said: to the gloomers everything is a buble
http://seekingalpha.com/user/926530/instablog/full_index Reply 2 0 Flag as Offensive gmj on Sep 10, 10:10 PM said: @facebook: Everything IS a bubble.
Roman empire: bubble.
Feudal system in Europe: bubble.
French monarchy: bubble.
Economy of Soviet Union: bubble.
US post WWII economic growth: bubble.
Oil-based world economy: bubble.
Global population explosion: bubble.
Energy output of Sun: bubble.
Expanding universe: bubble. Reply 0 0 Flag as Offensive jack sprrow on Sep 11, 12:10 AM said: Maybe the put their money to buying empty houses rather than buying $USD. Maybe the house is worth more in 10 years than $USD. Im trying to rationally think why they would buy vacant housing. Maybe why every asset class is rising besides the $USD. could be the reason they are stock piling commodities. Buying foreign mining companies. Securing their future. When the housing goes pop in china, they will need a heap of YUAN to recapitalise their banks and then when all the money flows back into china, it may mean a sell off of US treasuries. Would it be conceiveable that the chinese would dump all US bonds and push yeilds upwards.. The US would see that as an act of war and then attack china, like they did to IRAQ. Reply Join the discussion with Business Insider
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The Collapse Of The Commodities Bubble

Stoneleigh: Our most consistent theme here at The Automatic Earth has been the developing deflationary environment and the knock-on effects that will follow as a result. Now that the rally from March 2009 appears to be well and truly over, it is time to revisit aspects of the bigger picture, in order for people to prepare for a full-blown liquidity crunch. October 2007-March 2009 was merely a taster.

As we have explained before, inflation and deflation are monetary phenomena - respectively an increase and decrease in the supply of money plus credit relative to available goods and services - and are major drivers of price movements. They are not the only price drivers, to be sure, but they are usually the most significant. People generally focus on nominal prices, when understanding price drivers is far more important. A focus merely on nominal price also obscures what is happening to affordability - the comparison between price and purchasing power.

We have lived through some 30 years of inflationary times, since the financial liberalization of the early 1980s under Reagan and Thatcher initiated the era of globalization. Money freed from capital controls was free to look for opportunities worldwide, and the resulting global economic boom greatly increased trade, resource consumption, financial interconnectedness and the multiplier effect for monetary expansion. 

The increased purchasing power that resulted, largely for the better off, found its way into asset markets around the world, allowing people to bid up prices. This created a psychological 'wealth effect', which spawned an orgy of consumption through borrowing against rising nominal assets values. This in turn led to greater monetary expansion, since money is lent into existence. Fractional reserve banking, securitization, the enormous expansion of the shadow banking system and many other factors acted as engines of monetary expansion.

This spiral of positive feedback started slowly, but gradually morphed into a global mania of epic proportions. Caution was thrown to the wind, debt expanded exponentially, risk multiplied, wealth concentration increased with higher returns to capital and consumption became almost frenetic where increasing purchasing power supported it. At the same time, rising consumer prices put increasing pressure on the less privileged, who were forced to compete for basic necessities becoming ever more expensive. As we have seen in a number of places, this has been a major ingredient in the development of social unrest. High prices, and fear of both higher prices and actual shortages, can be socially explosive.

Rising prices are not themselves inflation, as we have repeatedly explained, but are the result of it. Credit expansions create excess claims to underlying real wealth through the creation of artificial, or virtual, value. They also bring demand forward, increasing pressure on resources for the duration of the expansion period. Extrapolating consumption trends forwards linearly leads to fear of shortages, which encourages market participants to bid up prices speculatively.

However, being based on Ponzi dynamics, credit expansions and speculative manias are naturally self-limiting. Credit expansions proceed until the debt they generate can no longer be serviced, and there are no more willing borrowers and lenders to continue lending money into existence. Speculative manias continue until the greatest fool has committed himself to the exhausted trend, and no one remains to push prices up further.

As an expansion develops, one can generally expect increasing upward pressure on commodity prices, thanks to both demand stimulation and latterly the perception that prices can only continue to increase. The resulting crescendo of fear - of impending shortages -  is accompanied by the parabolic price rise typical of speculative bubbles, as momentum chasing creates a self-fulfilling prophecy. At the point where almost everyone with the capacity to do so has jumped on the bandwagon, and all agree that the upward trend is set in stone, a trend change is typically imminent.

We find ourselves still near the peak of the largest credit bubble in history. As faith in many of the more spurious 'asset' classes devised by 'financial innovation' has been shaken, faith in the ever increasing value of commodities has strengthened. However, commodities are not immune to the effects of a shift from credit expansion to credit contraction, despite justifications for endless price rises, such as apparently bottomless demand from China and the other BRIC countries. 

Every bubble is accompanied by the story that it is different this time, that this time prices are justified by fundamentals which can only propel prices ever upwards. It is never different this time, no matter what rationalizations exist for speculative fervour. BRIC demand only appears to be insatiable if we make our predictions solely by extrapolating past trends, but that approach leaves us blind to trend changes and therefore vulnerable to running off a cliff. Insatiable demand results from seemingly endless cheap credit, given that demand is not what one wants, but what one can pay for. When credit collapses, so will demand, and with it the justification for higher prices.

While credit expansion (inflation) is a powerful driver of increasing prices, credit contraction (deflation) is a far more powerful driver of decreasing prices. Credit, having no substance, is subject to abrupt fear-driven disappearance. Confidence and liquidity are synonymous, and confidence is once again evaporating quickly, as it did in phase one of the credit crunch (October 2007-March 2009). As contraction picks up momentum, the loss of credit will rapidly lead to liquidity crunch, drastically undermining price support for almost everything. With purchasing power in sharp retreat, however, lower prices will not lead to greater affordability. Purchasing power typically falls faster than price under such circumstances, so that almost everything becomes less affordable even as prices fall.

Credit expansion reversed in 2008, and this is deflation by definition. Despite the talked-up attempts to monetize debt through quantitative easing - a deliberate attempt to stoke inflation fears in order to counteract the psychology of deflation - money plus credit has been in net contraction. Talk of monetary growth based on only the money fraction misses the elephant in the room, since the vast majority of the effective money supply is credit, and the tightening of credit is by far the dominant factor. 

As one can see from the graph, credit reversal had not occurred for decades until 2008. Now that it has done so, we can expect significant consequences to follow. There is a constellation of trends that had been correlated with the ebb and flow of liquidity, for instance increasing equities and commodities and a falling dollar. The end of the recent large counter-trend rally has already seen equities and commodities begin to fall, and a reversal in the fortunes of the dollar is very likely in the not too distant future. A look at long term charts of the various different commodities demonstrate both the parabolic run up in prices since 2009, and the beginnings of price retreat. This is likely to be a top that lasts for quite some time in a persistent deflationary environment, at least for the less essential factors.

Food and energy price falls come as a surprise to many, given that both are necessities in a very heavily populated world. Energy is the master resource, and net energy analysis demonstrates that supply can no longer increase meaningfully, hence the commonly held opinion that prices can only move in one direction. However, that opinion also held sway in 2008 during a previous speculative episode, and a closer look at oil prices reveals that that period ended in typical bubble fashion, with a sharp fall following the parabolic rise.

At the time, we were warning that exactly this scenario would unfold, which was an unpopular opinion. The secondary bubble formed in the price run up from 2009 is destined to end the same way, with a fall to a lower level than the 2009 bottom. Supply problems further down the line will ensure that the bottom is strictly temporary, and that future price spikes are in the cards, but that is tomorrow's issue rather than today's.

Of all the commodity bubbles, it is the end of the explosive rise in gold that is set to surprise the largest number of people. Very few expect it to follow silver's lead, but that is exactly what we are suggesting.

Gold has been increasingly considered to be the ultimate safe haven. The certainty has been so great that prices rose by hundreds of dollars an ounce in a blow-off top over a mere two months. The speculative reversal currently underway should be rapid and devastating for the True Believers in gold's ability to defy gravity eternally. Expect to hear all about the enormous Ponzi scheme in paper gold, and a lot more about plated tungsten masquerading as gold. It doesn't even matter whether or not that rumour is true. What matters is whether or not people believe it, and how it could feed into a spiral of fear as prices fall.

Central banks are buying gold, which some consider to be a major vote of confidence, and therefore bullish for gold prices. However, it is instructive to look at the previous behaviour of central banks in relation to gold prices. When gold hit its low point eleven years ago, after a long and drawn out decline, central bankers were selling, in an atmosphere where gold was dismissed as a mere industrial metal of little interest, or even as a 'barbarous relic'.

Selling by central banks, which are always one of the last parties to act on developing received wisdom, was actually a very strong contrarian signal that gold was bottoming.  They would not have been selling if they had anticipated a major price run up, but central banks are reactive rather than proactive, and often suffer from considerable inertia. As a result they tend to be overtaken by events. Regarding them as omnipotent directors and acting accordingly is therefore very dangerous.

Now we are seeing the opposite scenario. After eleven years of increasingly sharp rise, central banks are finally buying, and they are doing so at a time when the received wisdom is that gold will continue to reach for the sky. Once again, central banks are issuing a strong contrarian signal, this time in the opposite direction. While commentators opine that central banks will hold their gold even if they develop an urgent need for cash, this is highly unlikely. In a deflationary environment, it is cash that is scarce, and cash that everyone, including central bankers, will be chasing. Selling gold to raise cash may well not be a matter of choice.

Typically a speculative bubble is followed by the reversal of speculation causing prices to fall, and then by falling demand, which undermines prices further. As the bubble unwinds, people begin to jump on a new bandwagon in the opposite direction, chasing momentum as always. The need to access cash by selling whatever can be sold (rather than what one might like to sell), and the on-going collapse of the effective money supply as credit tightens mercilessly, will also factor into the developing vicious circle. 

Gold has been considered money for thousands of years, and will hold its value over the long term. However, this does not preclude a huge downward move in the shorter term, and for those forced to sell early, there is no longer term perspective. Spot prices will fall, but those with no bargaining power will get much less than the spot price if they are forced to sell into what is likely to be the ultimate buyers market during the next few years. They will never be able to buy back into the market, and would generally have been better off holding the cash that will appreciate in value for the few years of the credit collapse. Only those who can genuinely hold gold for the duration of the deleveraging, without having to rely on the value it represents in the meantime, will really be able to use it as a store of value.

We stand on the verge of a precipice. The effects of the first real liquidity crunch for decades will be profound. We are going to see prices fall across the board, but far fewer will be able to afford goods or assets at those lower prices than can currently afford them at today's lofty levels. The social effects of this will be enormous, and will spread to many more countries. The collapse of our credit pyramid will be the driving factor and it will sweep all before it like a hurricane for at least the next several years. Beware.

This post was published at The Automatic Earth.

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Another Sign That The Huge Aussie Housing Bubble Is Popping

Reality came to Reality TV in Australia last week, when 3 of the 4 properties in the much-hyped “Flip that House” program The Block failed to sell at their nationally televised auction. A 400 person live audience, watched by over 3 million TV viewers, couldn’t entice more than one person to part with money rather than eyeballs. As the SMH observed:

Whatever the lure of a celebrity house, the would-be buyers in Fitzroy Town Hall were just as jittery as the would-be buyers at any other auction in recent weeks. (“Auction failure shocks The Block“, SMH August 22)

The remaining three properties sold in the week after the sale, but at a substantial loss compared to the initial purchase prices plus the sums expended on them by the 4 couples in their 2 months of televised renovations (and let’s not mention the advertising budget).

So is the chopping of The Block a sign that the days of ever-rising house prices are over? Not if you listen to Chris Joye (“Property’s fine forecast“, Business Spectator 25th August 2011). The median forecast of the “21 leading market economists” he polled was for 5% growth in nominal house prices per annum for the next ten years, which Chris notes would suggest “that they will likely be 55 per cent higher in 10 years’ time”.

Good luck with that. As Chris notes, my forecast wasn’t included, but it should be no surprise that I expect a fall in house prices of about 40% over the same time period.

I differ with the 20 who predicted positive price growth for one simple reason: I focus on the role of debt in driving house prices. Having argued that debt drove prices up over the last 15 years, I now expect debt to drive them down again.

The mechanism is simple—but it’s not part of conventional “Neoclassical” economics, which is why Chris and his surveyed market economists don’t consider it. Aggregate demand is the sum of income plus the change in debt, and this is spent on both goods and services and assets. There is thus a link between the change in debt and the level of asset prices (and the fraction sold, and the quantity produced, but I’ll focus just on just house prices for now).

Going one step further, the change in aggregate demand is the change in income plus the acceleration of debt. There is thus a link between the acceleration of debt and the rate of change of house prices. If this relationship is strong, then rising house prices require that the rate of growth of debt rises over time.

So just how strong is the relationship? Using the RBA’s data on mortgage debt from 1992 till now (there was a break in the series in 1991) and the ABS House Price Index, the correlation between accelerating mortgage debt and the change in real house prices is 0.42 and highly significant—see Figure 1.

Figure 1: The Mortgage Debt Accelerator and change in real house prices

The acceleration in mortgage debt has been volatile, but on average positive. For two decades, mortgage debt has accelerated at 0.5% of GDP per annum. Can that continue for the next ten years?

No way. That sustained acceleration of debt has caused mortgage debt to rising dramatically, from less than 30% of household disposable income in 1991, to a peak of 135% of disposable income early in 2011 (see Figure 2).

Figure 2: A 4.5 times increase in mortgage debt compared to disposable income over 2 decades

That’s a 4.5-fold increase over 20 years, compared to the 50% fall in mortgage rates across the same period.
Simply paying the interest on outstanding mortgage debt now consumes over 8% of household disposable income, versus 4% back in 1991—and less than 2% in the 1970s.

Figure 3: A fourfold increase in mortgage servicing vosts since 1980

 The situation is worse when debt repayment is taken into account. The cost of paying a 25 year variable rate mortgage on the average First Home Loan has risen from 45% of Average Weekly Earnings (AWE) in 1991 to 63% now—and it peaked at 74% of AWE before the “unexpected” Global Financial Crisis forced the RBA to drastically cut rates in 2008. Figure 4: It now takes 2/3rds of the average wage to become a First Home Buyer

Chris realistically observes that household leverage can’t rise any further, but implies that this is neutral for house prices. But stabilising debt is not neutral for house prices: since debt levels have risen till now, a stable debt level in the future means decelerating debt and falling house prices. Figure 5 shows that the deceleration (on an annual basis) began in October 2010, and it has gathered pace since.

Figure 5: Mortgage debt decelerating

f rather than stabilising debt, Australian households start to reduce their debt as US households have done (see Figure 6), then house prices would need to defy the gravity of decelerating debt to keep rising at the 5% nominal rate (roughly a 2% real rate) that Chris Joye predicts for the next decade. Figure 6: Mortgage debt in the USA is now falling

Of course, this is Australia, where the world is upside down: maybe “this place is different”?

It will need to be, if the US post-Bubble experience is anything to go by. The relationship between mortgage debt acceleration and change in house prices has held up through the ups and the downs of the US market since 1986 (with a correlation of 0.78)—see Figure 7. The US experience since 2006 shows what is likely to happen here as the debt bubble that fed the housing bubble finally comes to an end.

Figure 7: Debt acceleration determines change in US house prices

The final retort to the argument that house prices will crash here as they have elsewhere is that there hasn’t been a bubble here, so a crash can’t happen. Chris acknowledges that house prices have risen faster than disposable income per household in Australia, but attributes that to rational rather than bubble factors:

By way of historical context, disposable income on a per household basis has averaged a healthy 5.8 per cent per annum over the last 10 years, and 4.9 per cent per annum over the past 18 years.

Yet for a range of reasons that I have explained many times before – including the once-off, 40 per cent plus reduction in nominal interest rates over the 1980 to 2011 period – historical house price appreciation has consistently outperformed disposable income growth.

For example, we estimate that between 1982 and 2011 median Australian house prices rose at a 7.7 per cent compound annual growth rate. (“Property’s fine forecast“, Business Spectator 25th August 2011)

Firstly, as noted earlier, a 40% fall in interest rates can’t explain the 4.5-fold increase in the household debt to income ratio. Secondly, the argument that debt levels have risen because interest rates have fallen can’t explain why debt levels were much lower in the 1960s when interest rates were also lower than today. If households responded rationally to the fall in rates by increasing debt levels in the 1990s, why didn’t they respond rationally to the increase in rates during the 70s by reducing debt levels?

Mortgage debt almost doubled as a percentage of household disposable income from the mid-1970s till the early 1990s, even though interest rates (adjusted for inflation) increased from minus 4% to over 10% across that period. The debt ratio also increased from 75% to over 120% between 2001 and 2008, when real mortgage rates rose from 0.5% to 6.4% (see Figure 8).

Figure 8: Mortgage debt rose before real interest rates fell

Rather than changes in debt levels reflecting rational, equilibrium responses to changes in interest rates, the growth in mortgage debt was the fuel for a Ponzi Scheme that has propelled house prices far faster than incomes have risen.

There have been 3 big bubbles in Australian housing in the last 50 years, all driven by accelerating levels of private debt: the late-60s to early 70s bubble focused on Sydney; the 1988 bubble when the 2nd incarnation of the First Home Vendors Scheme transferred speculation from the busted stock market into housing; and our current one since 1997, which has been driven by accelerating mortgage debt and government policy—by both Liberal and Labor—with the First Home Vendors Scheme being used to give the economy a sharp stimulus to avoid recession.

Figure 9: Bubbles upon bubbles in Australian housing

These bubbles have been built on each other only because the debt has continued to accelerate. But now that Australia has reached a mortgage debt to GDP ratio that exceeds the worst ever experienced in the USA (see Figure 10), the days of accelerating mortgage debt are over—and so are the days of prices rising faster than incomes.

Figure 10: Mortgage debt grew faster in Australia than in the USA

Even to simply eliminate the impact of the last bubble that began in 1997, prices would need to fall 40 percent (compared to incomes) from their current levels. Australia is now starting to experience the same process of debt deleveraging and falling house prices that America has been mired in for the last five years. The one saving grace we have is China—so long as China continues to grow and drive demand and prices for our raw materials. But as recent economic data has indicated, even China may not be enough to stop unemployment rising in Australia, now that Australia’s debt driven love affair with house prices is on The Chopping Block.

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