At Last! Back to Abnormal

Contrarians relax! Things have got abnormal again at last...

 

The FACT THAT that Australia's S&P ASX/200 is still down 20% from its 2007 high should not get in the way of a good story, writes Dan Denning in his Daily Reckoning Australia.

 

And the good story shaping up for 2014 is that everything is back to normal. The crisis is over.

 

You can come out of your bomb shelter. Happy days are here again.

 

Growth is the new debt, as far as buzzwords go. The International Monetary Fund reports that the world's economy will grow by around 4%. Europe and the United States are on the mend. And China will chip in with its regular annual growth rate somewhere between 7.2% and 7.8%.

 

And with growth will come sales and profits. And let's not forget new shares, either.

 

Australia had the fourth-largest initial public offering (IPO) market in the world last year. $6.4 billion worth of new shares floated in 2013, and nearly 70% of that total came from companies that went public in the fourth quarter. Nothing says 'animal spirits' like a new rush of equities for the public to buy.

 

Shares are so popular now that we wonder if this will this be the year that Aussies focus on shares instead of property. Property had a great year last year, at least in the capital cities. After a 15.2% rise in 2013, the median house price in Sydney is now $775,000. Melbourne prices rose by 8.5% for a median price of $625,000. In fact, prices were up in all eight cities for an average gain of 9.9%. Another couple of years like that and the median Sydney house price will be a million Dollars.

 

Until then, why not combine both passions? There were two property related floats in the fourth quarter. GDI Property Group Ltd (ASX:GDI) went public at 88 cents a share in late December. Industria REIT (ASX:IDR) went public a few weeks later. Between the two, they raised almost $750 million in new capital.

 

Here's the thing, though. Every normal narrative needs at least a semblance of sensibility to it. In the tech boom, it was the promise of revolutionary profits. Back in the 1960s and 1970s, you had the 'Nifty 50' stocks. Those were stocks you couldn't go wrong with because the world was growing and big corporate blue chips were bound to profit from it.

 

What is today's narrative? That the way to profit from a property boom is to buy property shares? Or is it something simpler? If it's just that stocks should go up as long as central banks keep interest rates low, that's not a very convincing story.

 

To be fair, it worked a treat last year. But it's not really investing if you're just following the Federal Reserve. Last week we called it cooperating with an occupying power, like Quislings.

 

Perhaps this was too harsh. But frankly we welcome the return to normal. It means our mailbox is now full of invective from readers telling us how wrong we are about everything. We even get the occasional 'Yankee go home' email, always a sign of confidence in the normal.

 

Yes, judging by the tenor of the mailbox, normal is back. Today feels much more like 2007-when all the theories about sound money and deficits and gold were the province of cranks, wingnuts, and wackos. Back then, it was only circus-freaks and fringe dwellers that were willing to suggest that something was deeply flawed in the world's financial system.

 

Something unusual happened over the next few years. Mainstream economists and pundits realized they had no idea what was really going on in the financial world. All of their academic theories and textbook arguments collapsed more swiftly than a sub-prime lender. As a publisher of contrarian ideas, we found it harder than ever to be contrarian. Suddenly everyone was a doom and gloomer.

 

Enter Ben Bernanke's Fed. In fact, enter a whole cavalcade of central bankers and economists. They came armed with digital printing presses. And they've been so prolific in pumping up stock prices since 2009 that all the doubts about debt vanished under a sea of green numbers. Bernanke is now so secure in his opinion of himself that he spent a good part of his farewell address lecturing emerging markets on the structural reforms they need to make.

 

Seldom have so few who know so little about money deceived so many and done so much damage. When you look around at the world created by the Fed, don't ever forget it's been created by people who know nothing about operating a business in the real world. The entire financial system – indeed the entire global economy – is now in the grip of an experiment by academic bankers.

 

If you think that's progress, or that's normal, or that's safe, you need to quit drinking the Kool-Aid. No one knows exactly how this experiment in managing an economy with asset purchases will blow up. But that it will, well, there can hardly be any doubt about that.

 

The good news is that financial markets are finally interesting again. The re-emergence of the normal position (that everything is okay) allows us to re-assume the mantle of abnormality.