2009, oil, gold and the all important land
Mon, 22 Nov 2004

plenty plenty plenty to talk about

Unbelievably, George is making a comeback - henry that is. Seems he gets a mention on all sorts of interesting market sites these days.


You know, Americans can seem pretty dumb at times, (like the leaders they choose) but for all that, some incredible research comes out of the place. The pro's understand where the cycle comes from you can be sure of it, though nobody ever says much. For us though, and timing it all, Gann is the key. Oil attachment shows you one reason why.

[Attachments not available with this site update, subscriber only material, refer to commodities section of the site, ed, 2006.]

Suggest you read things in this order; the bit on oil (this is incomplete unfortunately - I have been unable to scan in the bits of Yergin's book as yet that I wanted, his stories and description of the speculation that went on in these years are hilarious, however I want to now get this email out. When completed, I will fwd it on.)

the re-written 1929 real estate cycle research. Again this is incomplete, but readable enough for the moment. (I just love Proudhon's quote. Note the possible 90 years terrorist repeat history leading into war.)

the 1929 addendum (to show you that the 1930's depression had nothing to do with the 1929 stock market crash but was instead real estate induced. I am not forecasting another depression for after 2009, but 1929 plus 82 years is 2011 which is highly likely to be a low point. 1929 plus 90 is 2019 for a high, but this is not tradable info so ignore it.)

comments welcome

then visit www.financialsense.com/editorials/petrov/2004/0902.html

And make an effort to read Homer Hoyt's 100 years of land values in Chicago. Hoyt pointed out that every Chicago real estate cycle was marked by extra government infrastructure development in the last half of the cycle. So note;
For China, Beijing olympics 2008, they will be doing absolutely everything possible to showcase the country in this year Good timing. China now produces 30% of the world's TV's, 21% of the world's pc's, and 50% of the world's cameras, and is in the midst of a very large land boom. Scary isn't it. Land booms ALWAYS bust. At the end of October China announced an increase in interest rates for the first time in nine years, you may have noticed. But read the fine print. The decision to raise rates was done in conjunction with deregulating them at the same time. In the past, the govt tightly limited the maximum rate of interest any bank could charge its customer. This limited the lending to bigger firms, rather than those that might have been a bigger credit risk and therefore would have required an increased interest charge for the higher risk to the bank. Now, the banking area deregulation of China approaches something much more western free market based. This smells to me of a possible expansion in the supply of credit, albeit at higher rates. But as long as the returns to the borrowers of the money are covered by higher returns in what they are investing in, ie land, the higher rates become irrelevant. Bit like the late 1980's scenario of Australia. Time will tell but i think you will find credit expand for the moment in China. Significantly, if reports in US papers are correct, China bank stock shares rose on the news. That tells me the market thinks the decision will fatten china bank profits does it not ? Banks fatten profits by expanding their credit base. The news in our market areas related to China brought a confirmed high, but so far a correction to a higher low.

Australia, infrastructure spending:
road toll construction for Victoria out in the south east of Melb (ie land value up) - Australia's biggest single road project. You should have learnt by now to view it in the following way:
Total value of the road at present is forecast at $2.5 billion. $1.1 billion will be requested from investors via an IPO. $290 million from the organizers Theiss, John Holland and Macquarie (see how they are using other people's money to run with) and $2.1 billion in bank loans. Now there is the interesting part. $2.1 billion in credit creation, coming into the community as a debt (If you have done my cycles class, remember the example I give about the building of a bridge across the river ?, remember too what Abe Lincoln had to say about money from banks introduced as a debt ?) which feeds into the price of government granted licenses, in this case land value.

There will be huge investor focus in property along the road - if it hasn't begun already (the government telegraphs this to investors in advance thru its planning agency, see Melbourne 2030 for example, otherwise known as the speculators handbook) and land price will rise, if not double in some parts.

Importantly for our purposes, the real estate cycle simply cannot turn down whilst this credit creation process goes on. Still to come in Australia, Sydney's Westlink M7, Sydney's M4 east, and Brisbane's Billion dollar Gateway bridge duplication just for starters. Watch for these things to peak and at what time.

Politicians remain as honest as ever of course - Bracks in 2002; no tolls; no ifs, no buts - they always say what you least need to hear.

The IPO price should go as follows: price will move up as construction continues, whilst the organizers issue bullish announcements about targets and numbers. Upon opening of the road, price will retrace by half as early user numbers will be lower than optimistic forecasts released in the building phase and as disgruntled potential users vent their anger in a boycott, but price will then run a repeat range up as car owners see the advantages and usage goes up.

Anyway, leaving aside environmental questions and the issue of car use and urban sprawl, the road building is an example of the productive use of the credit creation process, used to fund an asset that the community gets, but it falls down in the sense that the price of government granted licenses take all the gain, most of which is land value, creating the real estate cycle. It is all happening in front of you.

[May I point out, the road could have been funded without the credit creation and without the debt, simply by taking the increase in the value of the adjoining land, but such discussions are too difficult for Joe and Jane average, nor is it desired by banks and vested property interests. Canberra was financed solely in this exact way, as demanded by the designer Walter Burley Griffin, so too the Sydney Harbor Bridge, so too Melbourne's underground rail loop, to mention just three - no debt and no taxes were then payable by the community which ended up with great assets largely for free, but that's another story. Also shows you the absolute ignorance of politicians who continually complain that their governments never have enough money to do things the community wants. It is just utter crap. The wealth is stored in those government granted licenses, and is always collected by someone.]

We might note also;
the scheduled completion of rebuilding the twin towers site in New York is presently for 2009. Tallest buildings in the world have a consistent habit of opening as the real estate cycle turns nastily downward. See Hoyt as to why this is so. Australia this time perhaps is not getting the world's tallest, but we are getting Australia's longest toll road construction, if you see what I mean... though the Eureka tower is coming along I understand.

The boom continues, rising interest rates will, later this decade, turn the yield curve negative and voila, a downturn. A set up is coming. I just hope it isn't too obvious.

To other things, a few things noticed:
US third largest bank, Bank of America profits rose 29% last quarter on increased lending and higher fee income from consumer banking. You know what that means, credit creation going on in earnest.

The IMF Global Financial Stability report said "the system looks resilient" Well they said that about Asia in 1997 too. It goes on: "Short of a major and devastating geopolitical incident or terrorist attack undermining, in a significant and lasting way, consumer confidence, and hence financial asset valuations, it is hard to see where systemic threats could come from in the short term." Oh deary me. So let me tell them, via you; watch the creation of money, and land price. The IMF watches neither very well. At the peak of every real estate cycle, the thing that pushes the cycle over the top and into the down turn has to be credit or banking related. Terrorists attacks will have nothing to do with it. It will come internally from within some country's banking system, but only when land price has been driven to unsustainable levels. And we ain't there yet.

Ansell reported steady demand in its consumer (condom) division to underpin growing earnings for next year. The've called the three year strategic program to grow earnings 'operation full potential' That's nice isn't it

As quoted by The Bulletin Oct 19 issue, "Liberal Party research and endless anecdotal evidence showed that memories were still keenly attuned to Paul Keating's recession and the massive interest rates that followed." Yep, it takes time for memories to wind down after big bubbles like that one, but by 2009, no one anywhere in the world under 40 (except in parts of Asia) will have any direct experience of a real estate decline. Only then can it happen. And rarely before.

An Asic officer file note of Dec 3 2001;
"in summary, go for Rich, Keeling and Greaves - strategically and legally not go for Packer, Murdoch and Adler" (AFR 15th October) And profoundly misled they were too...

We live in a funny world.
The UK can find untold billions to create, borrow and invest in military ventures around the world, but can't stop 200 thousand elderly who died prematurely last decade in houses they could not afford to heat.

Muammar Gadafy, during talks in Libya with the German Chancellor to hand over the $35 million as a part payback to those from the 1986 West Berlin disco bombing, so that the country can be welcomed back into the non pariah states; but interesting rascal that he is goes on to suggest Germany might reimburse Tripoli for the 18 million anti-tank mines still in the neighbourhood desert put there by Field Marshal Erwin Rommel's retreating army and stomped on every day by careless nomads wandering in and out. Said Gerhard, "Well, I think we should move on from the past..." The mines were also laid by Britain and Italy, particularly in and around the town of El Alemain.

Said President Bush to Iraqi Americans on the campaign trail in St Louis, year 2000: Arab Americans are racially profiled on what's called secret evidence. People are stopped. And we've got to do something about that. It's not the American way." (Guardian Weekly, Oct 22.)

Big court case got underway here in Paris this month. 12 former govt officials and senior police officers (one now the current head of Renault) are on trial for running an illegal phone tapping operation used by the then President, Mitterand (now deceased) to keep tabs on, and dig for dirt on potential political enemies and thus ensure his own potential scandals could be 'neutralized'. The operation was originally set up as an anti-terrorist operation but, as the defense intend to argue, was 'diverted' at the instructions of the President to assist his political campaigning. Quite successful it was too - especially in diverting further digging by french journalists into the sinking of the Rainbow Warrior in New Zealand in 1985.

Proudhon would be proud.

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