Financial Extremists

Financialization has led to a world of useless analysts and "extremist" naysayers...

OH WOULD the International Monetary Fund please shut up and leave Australia alone? asks Dan Denning in his Daily Reckoning Australia.

According to a report in The Age, the IMF is about to release a report in which it reveals that Australian house prices are "moderately" overvalued by 15%. This is not nearly extreme enough, in our view...which makes us an "extremist" to use the words of our friend Rory Robertson, with whom we debated about house prices a few months ago.

Rory used the word like it was a bad thing, which, we suppose, it IS, when you're using about people who blow things up for religious reasons (probably the image/impression he wanted to conjure). But we'll let you in on a little secret...

When asset prices become unhinged from values – as they do in a worldwide credit boom – the world has become an extreme place. Extreme asset values are the rule and not the exception during a credit boom.

We are all extremists now, Rory. Because the Fed has forced us to be.

Incidentally, this is why returns on most asset classes are so tightly correlated during a crack up boom. There's no point in differentiating between what's cheap and what's dear when everything goes up. Thus, bad credit (or too much credit) clouds good judgment.

To follow up on this thought, this explains how too much credit perverted Wall Street. Yes, the money was easy which probably lowered the threshold for committing fraud on a mass scale (subprime mortgage lending and securitisation). But if credit elevates asset values, then there is no need to an analyst anymore. You can't distinguish yourself by virtue of the quality of your work. In fact, the quality of your work has less and less influence over the result, which is foreordained because of the flow of money into markets. This is why Wall Street (and America, and a lot of the Western world) have moved from a culture of merit-based achievement to a culture of "who can legally loot the most money."

This gradual corruption of the value of honest work and honest money is the result of the financialization of our economies. We'd argue that it all stems from the corruption of our money (fiat money). When the basic unit of value and of conducting transactions for goods and services becomes unreliable, unstable, and is designed to erode over time, is it any surprise that other values erode too?

Gold, which as a noble metal does not rust (or erode), is currently trading at US$1341. Everyone is wondering what the Fed will say next week. Everyone is expecting "the big one". But as our colleague Murray Dawes notes, the Fed is probably going to drip-feed support markets (through large-scale asset purchases) on an as-needed basis. This month could be a big fat nothing-burger if you're expecting...a big fat policy announcement.

Or, in narcotic terms, the markets are looking for their next big hit. They are already nervous that if the Fed doesn't bring more liquidity (smack) the big indexes will correct (come down) to reflect how they have mis-priced the Fed's actual efforts. The Fed has left everyone guessing, but generally buying, which is probably what it wanted.

For our money, and probably because we just wrapped the October issue of Australian Wealth Gameplan (AWG) in which we wrote about the matter extensively, the real game changer in the world currency scene will come from the slowly but inexorably imploding US mortgage market. The recapitalization of US banks and improving their earnings is the real target of the Fed's Dollar devaluation policy – which makes perfect sense when you recall that the Fed is a cartel of those very same banks. Of course it would act to save its member banks, even if it cost US taxpayers hundreds of billions and a real loss in American standards of living as a result of the end of the Dollar standard and lower US purchasing power.

Australia seems to be perfectly positioned for Dollar devaluation to the extent that it's a commodity producer (commodities are priced in Dollars and thus growing in value as the supply of Dollars increases). It doesn't hurt that Australia – like Singapore and Malaysia – is also a kind of China-proxy.

That is, those currently exiting the Dollar may be looking for a currency with a chance of growing in purchasing power. That would be China's currency – if and when it ever lets that happen. This is also an issue we covered in the AWG report. But if you can't buy Chinese assets or own Chinese currency directly because of capital controls, you have to do the next best thing.

Get the safest Gold Bullion at the lowest prices using BullionVault...