That was Kevin Spacey’s line at the end of The Usual Suspects.

Yesterday’s vote in the Victoria State Parliament just eliminated the whole argument for a housing shortage. And so to paraphrase Mr. Spacey, “And like that… it’s gone.”

Not that there ever was a housing shortage. But thanks to the new law, the land area of metropolitan Melbourne will increase by 5%.

Doesn’t sound much does it?

Only it is. It’s a lot. And over half of the area will be available for new housing. It’s an extra 24,500 hectares which The Age compares to four times the size of Phillip Island.

Or to put it another way, it’s 30 times the size of the Melbourne suburb of Brighton.

But even more importantly, according to The Age, “The expansion is to accommodate an additional 134,000 homes for Melbourne and provide 20 years of land supply for new housing.”

Well that should do it then.

According to our pals at the National Housing Supply Council, Victoria has an underlying demand of 52,300 homes.

This morning the property spruikers won’t know whether to laugh or cry. We’ll suspect they’ll be crying. Seeing as there isn’t a housing shortage they’ll now have an extra 134,000 house and land packages to flog.

That’s on top of the nearly 40% of homes that go unsold at auctions in Melbourne each weekend.

So thanks to the Victorian government, the non-existent chronic housing shortage has just become even more non-existent, if that’s possible. And if it was alive then it’s just been dealt a death blow.

More than double – and nearly triple – the number of homes that are supposedly in demand in Victoria.

Even better than that, the 134,000 homes helps meet the so-called underlying demand from other cities too. For instance, according to the National Housing Supply Council, New South Wales has an underlying demand of 54,200 homes, and Western Australia – we’re told – has a demand for 30,100 new homes.

And it can only be a matter of time before the pasture land in Melbourne’s south east is swallowed up by housing estates:

As the map above from The Age shows, there’s a massive wedge of land east of the southern bayside suburbs that’s ripe for development. We’ve circled the area on the map.

We drive along the Frankston freeway every day. On one side there’s housing estates, on the other there’s green fields… not for long is our guess. Take a trip on Eastlink and you’ll see even more green fields, all the way from Frankston to Dandenong.

That’s thousands more homes ripe for the building.

And all within a commutable distance of the Melbourne CBD and areas to the east and south.

But oh dear, what’s this: “End of the boom? Housing industry showing sign of nerves“.

According to another article in The Age:

“THE era of surging growth in house prices appears to be over with expectations flattening and builders warning of a hiring freeze amid slowing development activity.”

You can see why the Victorian government’s move is perfect timing. Right at the top of the market it’s making available 134,000 blocks of land for house building.

At least the builders will be glad of the extra work. Even though they’ll have to cut their margins to the bone in order to be competitive.

But it’s not just the spruikers who’ll be happy, the banks will be too. ANZ Bank must be cock-a-hoop this morning that their campaign for an increase in housing supply has paid off.

In a June publication for its Economics & Markets Research report the ANZ states:

“Top-down analysis reveals the Victorian housing market is fundamentally under-supplied by around 47,000 dwellings.”

Not anymore! But it goes on. Clearly frustrated:

“Nothing in the foreseeable future is likely to shift this pent-up demand substantially. Even a solid recovery in completions in the years ahead will only chip away at the shortage.”

Cheer up guys, haven’t you seen the good news – 134,000 homes.

Forget about chipping away at the shortage, this has strapped a tonne of Semtex to it and blown the shortage to smitherines.

In one swoop the housing shortage for three states has been wiped out by Victoria.

What does the inscription on the Statue of Liberty say? That’s right:

“Give me your tired, your poor,
Your huddled masses yearning to breathe free,
The wretched refuse of your teeming shore,
Send these, the homeless, tempest-tossed to me.
I lift my lamp beside the golden door.”

OK, we don’t have a lamp, or a golden door, but I’m sure we could leave the porch light on to help guide the way.

Huddled masses, to Victoria ye shall come.

Can’t afford a home in Sydney or Perth? Then to the Melbourne suburbs with you. To Sunbury, to Melton, to Cranbourne and Pakenham.

“Oh, no-one will want to live there”, shriek the toffs of South Yarra, Richmond and Middle Park. Oh yeah? Check out the maps, people already do. And funnily enough about 95% of the Melbourne population lives outside the inner city.

We can’t wait to tell the spruikers the good news. One thing’s for certain, they’ll be speechless. Delighted that their long campaign has finally come to pass.

Similarly the National Housing Supply Council will be doing cartwheels too. We haven’t given much airtime to their second report released a couple of months back.

In the first report, which you’ll recall we ridiculed for blaming the housing shortage on the homeless and caravan dwellers, they put the shortage at 85,000 homes. Well, now it’s increased to over 200,000 homes.

But we’ll give them some credit for taking on board our criticisms. We’ll have to assume it’s our criticisms they’ve listened to because no-one in the mainstream press has dared say anything to argue against the housing shortage nonsense.

The second report from the National Housing Supply Council states:

“Members of the Council and some stakeholders were uncomfortable with the composite proxy measure of current undersupply used in the 2008 report. The measure used in the 2008 report has a number of drawbacks, including:

We’re particularly pleased by dot point three which addresses our claim about homelessness being an insulting way to measure a non-existent housing shortage, and the bizarre claim that a lower rental vacancy rate indicates a housing shortage.

We countered that argument by simply pointing out a comparison. If a supermarket normally has 20 cartons of milk left over at the end of the day, but today they only have 15 cartons left over, no-one in their right mind would claim there is a shortage of milk.

But that’s one of the methods the spruikers use to claim there’s a rental shortage. They claim that because the rental vacancy rate is at say 2.5% rather than 3% then there is a shortage of houses by the amount needed to take the rate back up to 3%.

Rubbish.

And we’re also pleased by dot point four which at least admits homelessness is not caused by the price of a four bedroom home in Caulfield being too expensive.

Homelessness is usually caused by the issues they list above. Any psychologist or social worker will tell you that.

But look, let’s be serious, the decision to allocate all this extra land to housing is just another example of government’s believing their own spin. Believing in their own ability to manipulate markets for their own benefit.

The Victorian government has bought into the idea of a housing shortage. Sorry, a chronic housing shortage.

And for what seems like years the property spruikers have been calling for the government to make more land available. Not because they really believed there was a shortage but because it fits in nicely with their reason for Australia not having a housing bubble.

Well, now they’ve got what they asked for. And not surprisingly, the silence is, well, very quiet. So far we haven’t heard a peep from them.

Doubtless an emergency meeting of Spruikers Anonymous has been called and the next excuse will be put through its paces.

But with auction clearance rates slipping, house prices plateeeeeeeaaaau-ing, and a huge swathe of new land just waiting for the builders to move in, that good old housing bubble is now looking more unstable than it’s ever looked before.

Oh, and by the way, according to the ABC, “Australian house prices have fallen for the first time in 17 months, as rising interest rates, and the end of government stimulus payments crimp demand.”

You’ll be able to check out the full details from RPData when the press release is posted on its website.

What’s that noise? We can hear the sound of something deflating. I wonder what it is…

Cheers.
Kris Sayce
For Money Morning Australia

James Bullard, the president of the Federal Reserve Bank of St Louis has suggested that the Fed resume purchasing Treasury securities if the economy slows. This is interesting timing, as the US will release its GDP numbers Saturday morning our time, and many economists are expecting the number to be quite low.

And a low GDP number is one way of saying the economy is slowing down.

Basically Bullard is terrified of Japanese style deflation. Japan which has basically seen its economy contract rather than expand over the past twenty years has quickly become a ‘how not to’ guide to running – or ruining – an economy.

So in order to avoid what happened to Japan, he’d like the Fed to flood the financial system with more money. Yeah, that should fix the problems.

‘A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.’ Said Mr Bullard.

One of the main reasons he’s worried about deflation is falling house prices. He’s said previously that declining home values ‘undermine financial contracts’, like your mortgage.

It’s interesting that he believes further stimulus will help deflation. Just over a month ago, he visited Japan and had commented on how central banking officials had been unsuccessful with ‘aggressive fiscal expansion’.

And, this news is likely to add to Bullard’s troubles. Economists that have spent more than a decade studying the Japanese economy and they’ve been forced to admit something: They actually don’t understand how deflation works!

Rather than Japan suffering a traditional, depression like period of deflation, the country’s experience has been completely different in this case.

Consumer prices in Japan have slowly fallen about 2% each year for the past fifteen years. Prices haven’t fallen in the drastic way that economists predicted, or the way prices fall during a depression.

What this could mean to the US is rather than being hit with rapid deflation, the US economy may just end up stuck in a deflationary cycle much like Japan.

Now that’s something to look forward to!

Now let’s have a look what happened on the market’s yesterday…

The S&P/ASX 200 closed lower by 5 points, to 4,524.10.

The Dow Jones Industrial Average had a volatile trading sessions today. The Dow still ended the day in the red, down by 30 points to close at 10,467.16.

Coming out tonight our time will be a second quarter report of gross domestic product (GDP). It’s widely tipped that the report will show economic growth was slower in the second quarter. The US has had several weak economic reports in recent weeks, and lower GDP numbers may bring back talk of a double dip recession.

The FTSE dropped 5 points to end at 5,313.95.

The Footsie had a relatively flat day of trading, despite companies like Reed Elsevier [LON: REL] and AstraZenca [LON: AZN] with better than expected earnings, the market was still subdued ahead of the GDP numbers coming from the States.

The Nikkei closed at 9,696.02, lower by 57 points.

The price of spot gold in Australian dollars is trading at $1,294.74 while in US Dollars it is trading 1,166.96. The price of silver in Aussie dollars is $19.44 and in US Dollars it is $17.52.

The Aussie dollar versus the US dollar was USD$0.9014, and gained against the Japanese Yen JPY78.13

Crude Oil closed at USD$78.30.

For the biggest movers on the market yesterday click here…

That’s all I have you this Friday, have a great weekend.

Shae.

What’s that you say? Commodities have already made a comeback. They did seven years ago when the China boom started.

Yes, I know that, but it’s not the commodities like iron ore, copper, oil or natural gas that I’m referring to.

Instead I’m referring to what they call soft commodities.

In a nutshell, pretty much any commodity that is used in the production of food can be considered a soft commodity – cocoa and sugar are obvious examples.

Despite that, few people or mainstream investors have any interest in something as dull sounding as soft commodities.

The only thing most people would know about them is from watching movies like Trading Places where Eddie Murphy and Dan Ackroyd make a killing from trading frozen concentrated orange juice (FCOJ) futures.

But our trip to the UK a few weeks ago highlighted exactly why there isn’t much interest in this sector of the market. And in my view, it’s a big mistake…

The Sayce family was winding down our UK tour with a three-day stay in London at the Euston Hilton – by the way, the emphasis should be more on the Euston part of the name rather than the Hilton part. But what do you expect for GBP129 per night!

Being back in London there was little need to keep the hire car, so after angrily negotiating the traffic of central London and finding the hotel without the help of a satellite navigation system, it was your editor’s job to make the lone journey from Euston to London City Airport to return the hire car – while the rest of the Sayce clan enjoyed an in-room movie and room service.

So, we less angrily drove around the northern fringes of the City of London and through our old stomping ground of Whitechapel, taking in the sites, and erm, smells of Commercial Road as we headed ever deeper into London’s East End.

We noticed on the way how little things had changed since the last time we were there in 1996.

We’d heard a lot in recent years about how London had been swamped by Polish plumbers and labourers. We’d been warned that good old London town wasn’t the same anymore.

To us, it was exactly the same. We’d always considered London to be a hodge-podge of funny looking people – we were one of them back then, and we were one of them now.

Most were probably locals, while others were recent arrivals. There were white people, black people, and Asian people.

But when we were driving to take the car back we couldn’t get a full picture of our surroundings. Only glimpses.

Sure we could see close up the dirty old Victorian buildings. And between the breaks in buildings we could every now and again catch glimpses of the fancy buildings at Canary Wharf.

But we were so intent on not going the wrong way that we didn’t take it all in.

Which is a shame because we went the wrong way. We missed our turn and drove half way to Dagenham before realising our mistake.

And so, it was only as we took the Docklands Light Rail (DLR) train back into central London that we really started to notice things.

You tend to notice things more when you’re in a train elevated forty-odd feet or more above ground level.

It was about 6.30pm on a Friday evening, and the first thing we noticed was the lack of suits. We saw plenty of suits milling around in the airport, one guy sounded like he was Swiss. Zengler we think his name was. That’s how it sounded anyway. A banker, we thought.

But there weren’t many suits – or Swiss – on the train. But that’s OK, they’re probably catching one of the 400 black cabs that are lined up, or hiring a car or they’ve got a chauffeur service.

No such luxuries for the three large African women we sat next to, or the girl from London sat across from us who was chatting to her recently arrived Irish friend.

And anyway, we were still a few stops from the gleaming towers of Canary Wharf. The pinstriped pinheads will doubtless swarm onto the train there. They didn’t.

But before that, we looked out the window at the view. We saw a few nice looking apartment buildings. And some nice looking cars… BMWs, Fords, a Mercedes (just a small one), and a whole bunch of small but expensive looking other European cars.

Then we came to an area known as Silvertown. It’s not far from the Thames flood barrier.

There’s not much to say about Silvertown. Apart from its habit of getting blown up. As it did due to a TNT explosion in 1917 and during the Blitz in 1940.

Aside from that no-one seems to care too much about the place.

But as the train moved slowly through the Silvertown area you couldn’t help but notice the Tate & Lyle factories. It was a few weeks ago now, but we recall seeing two of them, perhaps there was another. We forget now.

We do remember seeing a large tin of Golden Syrup. It must have been 10 stories high. Maybe more, it’s hard to judge. It was big anyway. We’ll guess it was an empty tin.

As far as we can guess, no-one much cares for the sugar and syrup factories there. They probably care about it just as much as they care about Silvertown. Aside from the 550 people who work there of course.

London has much more important things to do than worry about a sugar factory. Things such as what they do at the big shiny buildings just down the road at Canary Wharf. That’s where the traders buy and sell things written on bits of paper.

Or where they buy and sell things on one of the six LCD screens they look at for eight hours per day.

We’ll even take a guess that some of the things they buy and sell include sugar futures as well.

We wonder if they’ve ever been to the Tate & Lyle factory. Actually, we wonder if they’ve ever noticed it. Probably not. We suspect they arrive at Canary Wharf from the other direction.

As it happens, just a week before, Tate & Lyle had decided to sell its sugar and syrup business to the Americans for GBP211 million. American Sugar Refining Company (ASR) will be the proud owner of the factory built more than 130 years ago.

And according to Andrew Hill in the Financial Times this is “British industry’s gain.”

Really? That doesn’t seem likely. Let’s hear Hill’s argument…

Hill says that Tate & Lyle wasn’t all that much interested in the low margin sugar business anyway. That it’ll be much better for a company such as ASR to buy it. A company that does have an interest in the sugar business and will continue to invest in it.

Hmm. Not convinced.

But look don’t worry, we’re not having a crack at foreigners for having the cheek to take over domestic businesses. We say good luck to the Americans in Silvertown. And we say good luck to American, Japanese or Chinese businesses that choose to buy Australian businesses.

The point we’ll make isn’t unique to the UK.

It’s the idea that an economy can survive and flourish purely on a services based industry. That it can survive on services while at the same time allowing a manufacturing base to be destroyed. You only have to look at the wasteland around Silvertown to see that.

And even worse, that it can survive based on making money from the financial services industry.

When we arrived in the UK we thought the brainiacs may have learned their lesson from the economic meltdown. That inventing financial products from thin air and then selling them to each other isn’t sustainable.

Buying and selling the Sugar No. 11 futures contract on the Intercontinental Exchange may be exciting and it may – or may not – make the trader a lot of money. But what does it actually do for the economy?

And if the trader is a speculator then they surely provide a benefit to the market by increasing the liquidity and therefore helping with what the boffins call price discovery.

But it seems odd that an economy would be so keen to encourage and grow the business of trading the price of things like sugar and cocoa and anything else you can think of, yet aside from the jingoistic cries about an old English firm being sold to the Americans there’s little interest in growing a business that actually allows the traders at Canary Wharf to make their bets.

What impact will that attitude have on the UK economy in the long run? We considered that as we moved further along the train line. We went through some of the poorer suburbs. The kind of suburbs where the washing is hung from apartment windows and balconies.

Young Bengali kids were kicking a football around, and a Bengali mother was pushing a pushchair along the footpath. There weren’t any BMWs or other expensive cars, just cheaper cars that were trying to look expensive – a stripe along the side, or an oversized exhaust pipe should do the trick.

We’re not sure what line of work these kids will get into when they grow up. It probably won’t be at the Tate & Lyle sugar factory anyway. If they’re lucky they’ll end up living in one of the fancy estates nearer Docklands and working in the shiny offices of Canary Wharf.

But the greater likelihood is they’ll end up working in the services industry. Selling mobile phones, working in a department store or maybe, just maybe writing financial newsletters!

We’re not saying that the service industry is bad and the manufacturing industry is good. But what we are saying is that a lopsided economy that is so heavily dependent on men and women in tall buildings pressing buttons to buy and sell something that doesn’t exist doesn’t make for a healthy economy.

Australia is different (you never thought we’d say that did you?) for now. For now we can at least rest on the knowledge that China is supporting the economy by buying up all its resources.

But what happens if Dr. Joseph Stiglitz in today’s Australian Financial Review is wrong, and China’s urbanisation doesn’t drive demand for hard commodities such as iron ore, copper and oil for many years?

What happens then?

We don’t know, but we’ll have more to say on soft commodities in coming weeks.

Cheers.
Kris Sayce
For Money Morning Australia

The CPI figures came out yesterday, which showed inflation increased 0.6% for the June quarter, and 3.1% since June 2009. However, it’s now ‘predicted’ that the RBA will keep rates on hold when they meet Tuesday next week.

The Dow Jones Industrial Average closed at 10,497.88, lower by 39 points. The Dow slumped on the Fed’s economic outlook as the Federal Reserve’s Beige Book reported a slowdown of growth in four of the twelve regional districts. Adding to the disappointment, were the lackluster durable goods figures, which dropped 1%.

The FTSE was 45 points lower ending the session at 5,319.68. The banking sector dragged the index down as many investors took profits from yesterday’s gains.

The market also reacted badly to comments from Mervyn King, Governor of the Bank of England (BoE). King warned that a sustained recovery for the UK was uncertain, even though there had been a recent increase in output.

‘The wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the UK will be sustainable.’ He said.

The Nikkei jumped 256 points higher to end the session at 9,753.27.

The price of spot gold in Australian dollars is $1,302.93, while in US dollars it’s $1,164.58. The price of silver in Australian dollars is $19.59 and in US dollars it’s $17.51.

The Aussie dollar lost nearly USD 0.75 cents after the CPI figures were released.

The Aussie dollar versus US dollar is AUDUSD 0.8926 and against the Japanese Yen it’s AUDJPY 78.06.

Crude Oil closed at USD$76.85.

For the biggest movers on the market yesterday click here…

That’s all I have for you this morning, see you tomorrow.

Shae.

“[C]ut carbon dioxide emissions by 1 million tonnes and save $344 million in fuel costs in the next 10 years”.

We then wrote, “But when you compare it to Australia’s total CO2 emissions as of 2007 of 374 million tonnes, the amount saved isn’t even a drop in the ocean. In fact it’s a paltry one quarter of one per cent.”

Of course our error was that we didn’t divide the supposed CO2 savings over the ten year period. So as a proportion of Australia’s total annual CO2 emissions, the dopey cash for clunkers scheme will actually reduce CO2 by even less than we claimed.

It will be a miniscule one-tenth of one quarter of one percent each year. Or to put it another way, 0.025%.

Not only that, but according to Michael Green at The Age:

“EcoBoost-Hybrid – wow! That sounds green, right? But it neglected to mention those other – ahem – icons of fuel efficiency, the Toyota Prado 4WD, or the Hilux 4X4 ute, which are also eligible. In fact, more than half of the 1800 new models sold in this country will qualify. Far from being an ambitious target, a greenhouse rating of six equates to the average performance of the entire Australian fleet, as it stands.”

We can imagine it now, “Save the planet, buy a 4-wheel drive truck!”

Furthermore, Green confirms our thoughts that buyers of new cars tend to drive their cars more, hence cancelling out supposed ‘green savings’:

“There’s some research to suggest that scrappage schemes increase greenhouse gas emissions overall. A Dutch study, published in the journal Transportation Research in 2000, concluded that “reducing the age of the current car fleet may result in an increase of life-cycle carbon dioxide emissions”.

As your editor mentioned yesterday, from personal experience we increased our driving distance nearly ten-fold once we replaced our clunker with a shiny new car.

But anyway, onto today…

The mainstream financial journos and economists have gone jargon crazy over the past week.

All in anticipation of the latest consumer price index (CPI) number.

But they aren’t content with just saying what they think the CPI number will be. They have to tell you what it will “print”.

We have to say that it’s an even more annoying bit of jargon than the urge for financial commentators to insist on rate “hikes” rather than rate increases.

To be honest, we’ve got no idea what “print” means or where it comes from in relation to the CPI. But they’re all at it. They’re printing faster than a central bank can print money…

“There would prima facie be some downside risk to our forecast for headline CPI to print at +1.1 per cent [for the June quarter],” – Michael Turner, RBC Capital Markets

“The highlight of the week will no doubt be the eagerly awaited CPI print on Wednesday… the CPI print would be key in determining whether they looked to raise rates by 25 basis points in August.” – Ben Potter, IG Markets

“I think that offers a pretext to duck an unusually high inflation print next week” – Ray Attrill, 4Cast Capital Markets

“It maybe will take three CPI prints to get there, though.” – Stephen Roberts, Nomura Australia

“We believe an elevated print on the upcoming second quarter CPI on both the headline and core measures will be enough to trigger another rate move” – Helen Kevans, JPMorgan

In the same article, David de Garis from National Australia Bank was guilty of cliché abuse when he spoke of a “rate hike”. But back to the prints…

“That’s because Stevens has signalled he will be unflinching in jacking up rates again if underlying inflation comes in at above 3 per cent in next week’s CPI print.” – Rob Burgess, Business Spectator

But Bill Evans at Westpac wins the gold medal for Financial Clichés by using “print” seven times in one article for Business Spectator:

“It now appears likely that a 0.7 per cent quarterly print for core inflation would see policy unchanged at the August meeting… we think that a print of 0.8 per cent quarterly on underlying inflation…”

Including three times in one sentence: “If this forecast prints on the day then the annual increase in the trimmed mean will print 3 per cent – the same print as the annual rate to the March quarter.”

He rounds off with, “Despite 10 of the last 12 prints of the trimmed mean being 0.8 per cent for the quarter or higher… the possibility that the trimmed mean could print ‘only’ 0.8 per cent quarterly”

Lovely.

In case you’ve missed it, the Australian Bureau of Statistics (ABS) will announce (print) the latest quarterly CPI number (print) at 11.30am today – about the same time you receive (print) this letter.

What will the CPI number be? We’ve got no idea.

The so-called experts however, have busied themselves by not just predicting the CPI but they’ve decided to put their money on a Double by predicting what the Reserve Bank of Australia will do with interest rates next week.

But whatever the number is, the universal message from the mainstream commentators is that they’re happy with price inflation running at around the 3% level.

Remember, in Mainstreamland, rising prices good, falling prices bad. Only in the world of mainstream economists and mainstream financial commentators is it a good thing to pay higher prices for goods.

But more to the point, what we’d like to know is what are these pointy-headed economists going to do about it?

Don’t forget that the rise in prices is a direct result of the monetary inflation wrought by governments and central banks over the last eighteen months.

You’ll recall that at the time when financial markets and economies were crumbling, the universal phrase was that you shouldn’t worry about inflation. It was more important that the economy was saved – by any means necessary.

There were those that claimed inflation was dead. Some – as we recall – seemed to think it was dead forever, never to return.

Others said that inflation wasn’t a problem because there was an Output Gap. If you’re not sure what that is, it’s a completely discredited economic theory that claims inflation isn’t possible as long as actual GDP is below potential GDP.

Oh yeah, then why is inflation currently running at 3%?

We won’t go into the full details here, but you can read our debunking of the hare-brained theory here and here.

So, they thought, because there was an Output Gap, inflation wasn’t something to be concerned about.

Finally there was the argument that, well yes inflation could be a problem, but that’s something for the future. Worry about it then…

We don’t want to sound too melodramatic, but the future is here. Now it’s time for the smart guys to put their anti-inflationary plan into action. So far we’re completely underwhelmed by their response.

It seems they’ve decided that interest rates are the way to go. Well really, how ingenious. We never would have suspected.

Of course it might have been nice if they’d mentioned that a bit more while they were telling everyone to spend every dollar they owned.

What about other plans? It seems their other hope is that the unemployment rate doesn’t fall any further! That’s a bizarre one.

We’ve seen and heard several references to how the Australian unemployment rate is so low it’s creating inflationary pressures. That any unemployment rate below 5% is considered to be full employment and therefore inflationary.

I don’t know about you, but surely full employment is where everyone who wants to work can work. Surely full employment is something to strive for, not to fear. Anyway, full employment most certainly isn’t the situation now.

Just ask the 341,602 Australians that are receiving the Newstart allowance as reported by Ben Schneiders in The Age at the weekend. Although a word of warning, keep the sound down on your computer because a video of Michael Pascoe babbling on automatically starts when you load up the page.

According to the article, the number of people claiming the Newstart allowance of up to $462.80 per fortnight for a single person, has increased by 36% since November 2008.

Yet according to the financial boffins, these 341,602 people are already employed… theoretically anyway, because we are at full employment. Apparently the Treasury considers it a “long standing practice” to effectively count these people as employed when they’re not.

That’s nice of them.

So because the Australian economy is hitting on a couple of theoretical numbers – CPI at 3% and unemployment near 5% – the financial manipulators are ready to meddle again, banking on the RBA increasing interest rates.

An increase that will obviously lead to higher costs to businesses and individuals and potentially lead to higher unemployment, or greater financial hardship.

Yes, that’s right, here’s the financial consequences of the borrow-and-spend it mania. Supposedly smart men and women armed with crazy economic theories such as the Output Gap, encouraging financial novices to spend and borrow like crazy and not to worry about the consequences.

Now the same pointy-headed economists see fit to apply more of their theories, only this time they’re spreading bad news. All that money you borrowed from the bank and then spent? Well, it’s got to be repaid, and if you can’t afford to repay it they’re going to need to charge you more.

Look, as we’ve pointed out before, interest rates were manipulated to artificially low levels. Levels which they never should have gone.

All the while the central bankers and their buddies at the banks spun the line that it was crucial to save the economy. Now the central banks and their banker pals are manipulating the interest rates higher.

Not because they necessarily want to, but because they have to. They have to because higher interest rates are a direct consequence of their previous low interest rate policies.

Not that they’ll admit that. You’ll just hear the rubbish about interest rates returning to “normal” levels.

Free market economists and thinkers get plenty of flak from the mainstream for being heartless and not thinking about others. As is usually the case, the opposite is true.

Supporters of free markets oppose government intervention and central bank manipulation because we know exactly what the consequences of those actions are.

One of those consequences are 341,602 unemployed who the Keynesian economists ignore because statistically there is full employment.

And soon enough, the ranks are likely to swell as their economic plans “work” causing even higher interest rates, higher inflation, and higher unemployment.

Cheers.
Kris Sayce
For Money Morning Australia

Coming out today is the consumer price index (CPI) data for June. Economists are expecting figures to increase 1% for the quarter, which would mean annual increases have risen 3.4% for the year.

The Dow Jones Industrial Average gained 12 points last night to close at 10,537.69. The consumer confidence gauge dropped almost four points to 50.4, its lowest reading since February this year. Consumers are still concerned about the job market in the US.

The FTSE closed at 5,365.67, up by 14 points. The Footsie finished higher thanks to the banking sector. Banks were boosted by news that the Basel Committee’s regulatory reforms would be watered down.

The Nikkei finished at 9,496.85, down by 6 points.

Gold dropped to a three month low overnight. The equities markets have stabilised which has slowed down ‘the-run-for-cover’ attitude that was pushing gold higher back in May and June.

The price of spot gold in Australian dollars is $1,287.64, while in US dollars it’s $1,160.45. The price of silver in Australian dollars is $19.56 and in US dollars it’s $17.62.

The Aussie dollar versus US dollar is AUDUSD 0.9013 and against the Japanese Yen it’s AUDJPY 79.14.

Crude Oil closed at USD$77.09.

For the biggest movers on the market yesterday click here…

That’s all I have for you this morning, see you tomorrow.

Shae.

WHATEVER FORCE you spy behind this week’s swoon in gold prices to $1160 per ounce and lower, ’tis but a scratch – a flesh wound – so far.

“I’ve had worse!” as Monty Python’s Black Knight says.

First, the current options contract on gold futures expired Wednesday, guaranteeing volatility. Because as bullish speculators moved to close and rollover their position in the derivatives market, those banks taking the other side of the trade were only too happy to oblige.

Call that manipulation if you must (double-check your facts first), but more broadly, long-time investors and traders would always expect to see a seasonal lull – if not drop – in gold prices between July and Sept. India’s gold-hungry millions don’t buy over the summer, waiting instead until autumn’s post-harvest Diwali festival. And after the huge gains spurred by the Greek crisis of April and May, a pullback in gold investment pressure looked due.

Of course, that’s not to say the gold bull-market starting a decade ago hasn’t just met its end. Some in the finance media would like to believe it’s over (even if, like this article at the Sydney Morning Herald, they seem more driven by resentment than analysis). But for now, recent history says the bull market in gold is a long way from losing both arms and legs just yet…

Dropping a little over 9% from last month’s top to date, the gold price in Dollars would have to reach $1073 an ounce before matching the 15% drops of Dec ‘09-Jan ‘10 and Feb-Apr ‘09.

Gold would need to hit $948 an ounce before matching the 25% drop of May-Jun ‘06. And it would have to reach $834 before matching the 33% Mar-Sept. loss of 2008.

This current swoon is also a good way from setting new records for pace, too. Top to bottom, it’s nothing – so far – next to the 16% week-on-week drops of June 2006 and Sept. 2008.

Western government deficits are set to keep rising, meantime, while real interest rates remain below zero everywhere, slowly destroying the value of cash. Gold, in contrast, continues to find favor with central-bank reserve managers, and private Chinese gold demand is undimmed.

Indeed, “with all the deregulation we’ve seen in China and the Chinese gold market being so alive, it may just turn out to become a bit of a casino atmosphere over there,” says gold-mining magnate Pierre Lassonde, speaking to MineWeb – “a gambling atmosphere [that] could very well push the gold price beyond anything that we believe is reasonable.”

Small comfort to investors or traders picking early July’s dip as a bargain, perhaps. But so far, it’s only a scratch. And whatever nemesis gold has stumbled across in July, it’s certainly got nothing to do with the long-term drivers of its four-fold gains to date.

Adrian Ash
for Money Morning Australia

Adrian Ash is head of research at www.BullionVault.com

But anyway, today we’re referring to something sent in by a reader.

Money Morning reader Paul sent us an email on Saturday saying, “Here we go again…” followed by a link to a Sydney Morning Herald article titled “GM to pay $A3.9b for auto financier”.

We share Paul’s thoughts, here we go again…

Or kind of. Except we’ll make the point that what Paul refers to never really stopped. By that I mean excessive leveraging. As we’ve written many times before, the so-called deleveraging in financial markets and household balance sheets has been a massive lie put about by those who want the borrowing gravy train to continue.

A cursory look at the statistics will show you that even where there has been a small decline in borrowing in one sector it has been more than made up for by borrowing in another.

But I encourage you to read the article for yourself. To be fair to the SMH, the paper has just syndicated an article written by the Associated Press, so we can’t really blame them for the journalistic, er, quality of the article.

But we can blame them for running such tosh.

I mean, take the opening paragraph:

“General Motors Co. will buy AmeriCredit Corp. for $US3.5 billion ($A3.93 billion), a deal that allows the automaker to expand loans to customers with poor credit and offer more leases, key areas where GM must grow to accelerate its car sales.”

When we read that your editor’s head literally slumped into our open hands. Expanding loans to customers with poor credit is a “key area” for GM? Oh Lordy! But it gets better, or is it worse? Anyway, read this:

“Only 4 percent of GM’s sales come from subprime buyers, which the company hopes to expand with its AmeriCredit acquisition. ‘If you just had a modest increase from 4 to 5 per cent, that’s a significant number it its own right,’ Liddell [GM's chief financial officer] told reporters.”

Because of course GM would stop when it gets to 5 per cent. That’s right, there wouldn’t be a temptation to increase it to 6, 7 or 10 per cent would there? No, of course not.

If you recall, General Motors had to be bailed out by the US government to the tune of nearly USD$60 billion less than two years ago.

Why did it need the bailout money in the first place? For many reasons. But chief among them were company killing retirement and redundancy funds.

On top of that it was building crappy cars which it then had to bribe customers to buy using the incentive of zero percent finance.

But even that wasn’t generating enough cash to keep the company solvent. Even that incentive couldn’t encourage enough chumps to stump up the cash for its crappy cars. So it had to provide incentives to those with low credit scores too.

How could that possibly fail? As we’re told repeatedly by the mainstream press, interest rates are never going up again so the increase in household debt won’t be a problem. Similarly, with a zero percent interest rate for the life of a car loan, it must be impossible for anyone to default because there is no interest rate risk for the borrower.

It didn’t happen like that though did it. Hence the USD$60 billion bailout.

But as I’ve mentioned above, the fact that GM is hoping to increase its exposure to subprime borrowers isn’t new, it’s just ramping things up a little further.

It goes to show you that despite the massive bailout, and despite the ‘cash for clunkers’ programme, the auto industry is a terrible business to invest in.

It shows you that without massive intervention by governments and without taking on company-busting risks, car companies live on wafer thin margins.

Even the Ford Motor Company [NYSE: F], which didn’t receive direct government handouts – but which did benefit indirectly thanks to the Obama ‘cash for clunkers’ programme – could only manage a USD$2.7 billion profit for the last financial year on the back of a massive USD$116 billion of sales.

Yet despite that it’s been enough to see the Ford share price more than double this year! We’d go as far to say that it’s become one of the darlings of the American stock market.

And now it seems the Australian auto industry is on the verge of getting yet more handouts.

Has Australia ever subsidised an industry more than it has the likes of Toyota, Ford, General Motors and Mitsubishi?

The latest ruse offered by Australia’s first unelected female prime minister is for a $2,000 taxpayer funded rebate for anyone who trades in a pre-1995 car in order to buy a fancy environmentally friendly car.

No prizes for guessing what’s going to happen to the price of used cars over the next couple of years.

Of course there are plenty of conditions attached to the handout. Such as you need to have been the owner of the traded in car for at least two years, and the car you buy has to meet a minimum ‘green’ standard.

There could be a nice little earner here for scrap yards to offer a warehousing service. Pay them a fee and they’ll store a crappy car for you, registered in your name for two years. Then when you ‘trade it in’ for a new car you’ll get the rebate.

But anyway, we’re sure the handout will be fully maxed out before long, with $2,000 of your tax dollars going straight from your wallet into the hands of your friendly neighbourhood car dealer.

However, it’s all for a good cause because apparently, according to the Australian Financial Review it’s going to “cut carbon dioxide emissions by 1 million tonnes and save $344 million in fuel costs in the next 10 years”.

Naturally that sounds like a lot. 1 million tonnes less of a gas which is unproven to be environmentally unfriendly, and $344 million in fuel savings.

But when you compare it to Australia’s total CO2 emissions as of 2007 of 374 million tonnes, the amount saved isn’t even a drop in the ocean. In fact it’s a paltry one quarter of one per cent.

And as for the $344 million in fuel savings. Savings for whom? According to the AFR the so-called Cleaner Car Rebate scheme will cost taxpayers $394 million.

So the fuel “savings” will actually be an additional cost to the tax payer of about $50 million.

It’s the old robbing Peter to pay Paul story that’s so typical of government interference.

Besides, who says the scheme will cut any emissions at all?

We’d like to know how the 1 million tonnes in CO2 savings has been calculated. Has it been calculated on a like for like replacement? In other words, based on the assumption that the owner of the spanking new Toyota Camry hybrid will drive the car exactly the same way as the crappy pre-1995 bomb.

From personal experience we’ll say that’s unlikely.

Prior to trading in our 1996 Hyundai Lantra Sportswagon (and very sporty it was too!), we would only drive the thing to work in Fitzroy from home in Frankston two or three times per week.

And each time we made the 40km journey in each direction, we did so in the knowledge that we were never sure we’d make it home without the help of the RACV. Every day was an adventure… hill starts especially!

But after we traded the bomb in for a spanking new hip-hop red (that’s the manufacturer’s description, not your editor’s) Hyundai Getz, guess what that’s done to our driving patterns?

Yep, you’ve guessed it, we now drive to work every day, and have only used public transport less than a handful of times since then.

And based on the so-called CO2 savings you’ll get from buying an eligible car such as the Toyota Camry hybrid, it won’t take that much of an increase in driving patterns to wipe out the CO2 savings.

Because according to the Toyota website:

“Hybrid Camry’s 2.4 litre engine produces 142 grams per kilometre of carbon dioxide. This is equivalent to a small car with a 1.3L engine. Compare this to petrol-engine cars in its class which produce up to 60% more CO2 per kilometre.”

So to put it simply, it’d only take a 60% increase in vehicle usage to completely offset any of the supposed gains. If your editor’s new car experience is anything to go by, the actual carbon dioxide savings are likely to be negligible.

Look, let’s admit it, we are in the middle of an election campaign. The whole point it seems of election campaigns is to outspend your opponent.

But hats off to the PM for coming up with a policy that combines savings, increased government expenditure, and a green policy all in one.

It’s the Holy Trinity of election policies. Forgive us if we don’t yell Hallelujah!

Cheers.
Kris Sayce
For Money Morning Australia

Monday’s producer price index (PPI) figures have come in at slightly lower than economists expected. The PPI figure for the June quarter rose by 0.3% as economists were expecting an increase of 0.3%. The PPI has risen 1% since June 2009.

Overnight, the Dow Jones Industrial Average ended the day higher by 100 points to 10,525.43. The Dow jumped on the back of surprising new home sales data in the US. Sales for June were 23.6% higher than May.

However, Joel Naroff, president of Naroff Economic Advisors warned, ‘Builders sold almost no new homes in May, so the sharp rise in June shouldn’t be taken as a sign the housing market is suddenly on fire.’

The FTSE closed at 5,351.12, up by 38 points. Banking stocks clawed back Friday’s losses after the stress test showed there were no nasty surprises.

BP [LON: BP] shares gained 5% after CEO Tony Hayward stepped down, and then confirmed he was being shipped off to a joint venture in Russia.

The Nikkei added 72 points, closing at 9,503.66.

The price of spot gold in Australian dollars is $1,314.26, while in US dollars it’s $1,184.23. The price of silver in Australian dollars is $20.12 and in US dollars it’s $18.13.

The Aussie dollar is higher this morning thanks to the American new home sales data which saw our commodity-driven currency push past the 90 cent mark. The Aussie dollar has gained over 7% since the start of July.

Kathy Lien, Director of Currency Research at GFT, believes there is a chance that the Aussie dollar will reach 92 cents if the Reserve Bank raises interest rates next week.

The Aussie dollar versus US dollar is AUDUSD 0.9014 and against the Japanese Yen it’s AUDJPY 78.40.

Crude Oil closed at USD$78.95.

For the biggest movers on the market yesterday click here…

That’s all I have for you this morning, see you tomorrow.

Shae.

According to CEBS, the banks are only mildly tense, rather than stressed.

You’ve probably read, or at least skimmed over the details of the results already.

The upshot is that as today’s Australian Financial Review reports, “Just seven relatively minor unlisted banks of the 91 subjected to stress tests failed to pass.”

It also reports that, “regulators decided the banks needed to raise an additional €3.5 billion of capital.”

Phew! Everything must be fine then.

That’s a piddly amount. Especially so when you consider these so-called strong European banks have already raised €220 billion over the last 18 months.

As the AFR points out, “much of it from governments.”

Of course what the AFR really means is, “much of it from taxpayers.”

You can view the summary of each banks’ results under what CEBS calls the benchmark and adverse testing scenarios by clicking here.

And just in case you’re wondering what those scenarios are, here’s a link to the document that spells it out. Skip to page 3 if you’re just interested in knowing what the scenarios were. If not, enjoy the full 55 pages.

In a nutshell, the benchmark scenario is based on there being a mild economic recovery, whereas the adverse scenario is based on the much-feared double-dip recession.

But, the most interesting part of the report was perhaps footnote 19 on page 47:

“Since no sovereign defaults are considered in the exercise, there is no impact on holdings of sovereign bonds which are held to maturity in the banking book.”

Considering how close Greece came to defaulting, you’d have to be pretty confident that a sovereign default in the European Union isn’t going to happen.

And they’re probably right. As we pointed out on Friday, it’s much more likely that the Europeans will continue to take the cowards’ way out by bailing out economies and inflating their way out of one problem and into another.

Not only that, but under the adverse scenario Greek debt would receive a “haircut” of 42.2%, and Portugal 26.6%. In other words, the value of those country’s bonds would be revalued significantly less should the adverse scenario play out.

The full list is on page 52 of the link I’ve provided above.

But yet again the stress test doesn’t stress because the report notes, “these haircuts were not used in the stress test exercise and are presented only for the sake of comparison.”

Which has the effect of making the stress tests pointless.

Furthermore, we have to wonder what’s the point of testing the banks against an adverse scenario if everyone knows the European Central Bank (ECB) and European governments will just bail the banks out anyway?

And what’s the point of a stress test if you’re not going to stress it out?

You see, it just goes to show you how worthless money is, which I’ll come to in a moment.

But just one more quick note. Money Morning reader Jack has brought our attention to some interesting details of who’s holding US treasuries.

According to the latest report from the US Treasury, holders in the UK increased their holdings of US treasuries from just USD$90.8 billion in June 2009 to USD$350 billion as of May 2010.

That’s the single largest increase by holders in any particular country.

Out of interest, Australians sensibly only hold USD$14.1 billion worth.

Over the same time as the UK has more than tripled its holdings, the Chinese – who are still the biggest holders – have gradually reduced their exposure.

In other words, the Chinese are selling and the Brits are buying.

What could it all mean? We’re not sure. There are claims by one blogger that it’s simply the US government monetising its debt through offshore holdings.

Could that be right? We don’t know.

Or, could it have anything to do with the European banking stress tests? It’s possible we suppose. In anticipation of the stress testing have Europe’s banks dumped their dodgier sovereign debt holdings onto the central banks and then used the bailout money to invest in what’s deemed to be a safer asset – US treasuries.

That would make sense if it’s the case. And it could explain the massive increase over the past few months. We’ll see when the next quarterly report is released in August whether UK holdings of US treasuries have increased further.

But bringing the subject back to the points we raised last Thursday and Friday, it’s clear that the ECB will just print as much money as it needs to get the European banking system out of a hole.

After all, what’s another 3.5 billion compared to the 220 billion they’ve already put their taxpayers on the hook for?

It’s what makes the following two news stories that caught our eye over the weekend even more interesting. The best way to summarise them is that one article is about a store of value, while the other is about a store of rubbish…

A few months ago a treasure hunter in the UK county of Somerset unearthed 52,500 Roman coins. According to the report from the BBC, most of them are “made from debased silver or bronze.”

He found them on a farmer’s land while waving his metal detector around. We’re sure one or two locals have laughed at the man over the years as he’s unearthed treasures such as old bicycle frames and thirty year old empty baked bean cans.

But now he could be about to receive up to GBP1 million for the loot.

That’s not bad for 52,500 coins that are reckoned to be around 1,700 years old! That would give each coin a value of around GBP19 each.

Now take a look at this second report that we came across over the weekend. Here’s the headline as reported by News Ltd: “Old Romanian banknotes turned into bins.”

The report states, “The [Romanian] Central Bank processes roughly 4.5 million banknotes daily, of which 1.2 per cent are deteriorated and must be withdrawn from circulation.”

Ah, the coincidences. Roman versus Romanian. 52,500 coins, versus 1.2% of 4.5 million – which coincidentally is 54,000 bank notes.

If there was ever an illustration to show how valuable a hard and sound money system is compared to the worthlessness of a paper-based fiat currency system then this is it.

I mean, look at the comparison. 52,500 coins that are 1,700 years old are more valuable then paper bank notes that were probably produced no more than ten years ago.

You see, here’s the difference. The Roman coins are valuable in two ways. First of all there’s the intrinsic value. By that I mean, the actual value of the metal that the coins are made from.

And secondly there is the numismatic value, ie. The value that a collector places on the coins over the intrinsic value. Depending on how valuable these coins may be to a collector or a museum will obviously have an impact on the price.

The point is, after 1,700 years the collection of Roman coins still has real value.

Whereas the collection of paper Romanian bank notes are worthless. They contain nothing of any value. Not even as a collectable. The only worthwhile use for these notes is apparently to recycle them into things like rubbish bins!

Look, obviously if these coins were gold coins they would be even more valuable.

Although as we understand it, by the time of the fourth century the Romans were already well down the path of monetary inflation. Gradually reducing the precious metal content of coins and making them smaller while trying to retain the same face value.

Which is no different to how the modern money system works.

Except rather than changing the content of the paper notes, all the central bank has to do is just print more of them. The effect is the same, a devalued currency.

That’s why we’re in favour of a genuine money system that’s backed by gold or other precious metals. After 1,700 years, even the debased coins are still around and still have value, whereas in 1,700 years not a single paper note from today will be in existence.

The Europeans have supposedly put their banks through a rigorous test to assess their ability to withstand another financial shock.

The reality is that they’ve done no such thing. All they’ve done is provide concrete evidence of how they will save the bacon of them and their banking pals while simultaneously using the evils of inflation to destroy the wealth of its citizens.

Despite the high price it’s still clear that buying gold should be the top of everyone’s ‘To-Do’ list.

Cheers.
Kris Sayce
For Money Morning Australia