The Australian central bank is getting ahead of the curve. Australia became the first of the world's largest 20 countries to raise interest rates since the financial crisis began last year. The Reserve Bank of Australia raised its primary interest rate from 3% to 3.25%. Glenn Stevens, a Reserve Bank governor, said the move might be the first in a series of increases.
What may have been a good idea at a lower interest rate becomes unworkable at a higher one, so higher interest rates often mean muted economic activity. That's why none of the big central banks wanted to raise interest rates.
Australia has managed to avoid the deep contraction that has hurt most global economies. Now, it wants to avoid inflation caused by monetary stimulus.
The market responded by pushing the Aussie dollar higher. The Aussie is 25% higher so far this year, relative to the U.S. dollar.
Everywhere you look, there's another reason to expect interest rates to go higher. Friend/author/investor Vitaliy Katsenelson says Japan could cause interest rates to rise.
Japan's debt-to-GDP ratio, at about 180%, is second only to Zimbabwe. In the past, over 90% of Japanese debt has been consumed internally, i.e., as a means of saving money. Today, Japan has the oldest population in the developed world. As the population continues to age and the savings rate continues to decline, there'll be less demand for Japanese debt. As the Japanese raise rates to attract new investment for its debt, other developed economies – like the U.S. – will have to raise rates to compete.
Japan's savings rate has been low and falling for almost 20 years, so who knows when this could happen. But that doesn't matter. Commodities like gold and oil saw 20 years of declines before they started to turn up again. The property & casualty insurance industry barely made money selling insurance for 20 years but made up for it on the investment side.
Things like this can go on for a long time, causing investors to fall into complacency. Then, one day, everything changes...
So maybe the Australian central bank started something bigger than it intended. Maybe its decision to raise interest rates today was the "shot heard 'round the world," and you and I will be looking at double-digit Treasury rates sooner than we think.
U.S. apartment vacancies rose to 7.8% in the third quarter, the highest since 1986, as rising unemployment hampered demand. And rents paid by tenants, known as effective rents, fell 2.7% from a year earlier.
This weakened demand came at what is a traditionally strong leasing period for apartments, bringing Victor Calanog, director of research at real estate investment firm Reis, to conclude fourth-quarter figures will be even worse. Calanog expects 2009 to be "the worst year in rent drops on record."
Two years ago, everyone was borrowing to beat the band, so they could all own homes. Now, many of those same people can't even afford an apartment.
I bet vacancy rates in Las Vegas are running at higher than the average, too. That's what the latest in the MGM Mirage City Center debacle seems to suggest... The $8.5 billion Las Vegas development slashed prices on its condos by 30% to encourage those who already signed contracts to close on their units.
If MGM could have sold the 2,420 units at City Center at the top of the market, it would have grossed $2.4 billion. Instead, it only got deposits on a portion of the units. If all of them close, MGM will gross $1.6 billion.
So MGM prices are down 30%-33% from the peak... Considering real estate prices in Las Vegas are down closer to 40%, I wouldn't be surprised if City Center owners demanded an even bigger discount to stay put.
On the bright side, Vegas real estate will likely have a long time to stabilize. According to a recent Wall Street Journal article, "Many casino executives don't expect to break ground on another major building project in Las Vegas for at least 10 years."
Vegas has no choice but to halt its debt-fueled expansion. Neither the credit nor the demand is available right now. Instead, the major casino companies will start focusing on expanding margins through cost cutting and better management. One of these days, a casino stock and/or debt instrument is going to wind up in the pages of Extreme Value.
Gold rose to a record $1,042.80 this morning – besting the previous record of $1,033.90 in March 2008. Investors are betting on inflation. Whether you believe in gold as an inflation hedge or not, the simple fact remains, gold is money. And given the U.S. government's predilection for printing money, it's obvious the dollar is toast at some point along the way.
I realize since the crisis began last year, tens of trillions of dollars have been destroyed. And I realize bank collateral values are still falling, so banks' lending capability is still being impaired. Without lending, the money supply doesn't grow.
But don't forget. At the peak of the bubble, stocks and real estate were flying at all-time record highs. If we get even part of the way back to where we were in the fall of 2007... well... gold could be $1,500 or $2,000 by then. Or maybe it'll just be $1,100. I have no idea. But I do know there's zero political incentive to do anything but inflate, inflate, inflate...
The Daily Crux published an absurd graphic showing the relative amount of the government's latest bailout efforts versus other, huge numbers... It's a must see.
New highs: Morgan Stanley Emerging Markets (EDD), Managers Fremont Bond Fund (MBDFX), Philip Morris (PM), European Goldfields (EGFDF.PK).
In the mailbag... What happens when the world gets wise to the dollar. How are you preparing? Let us know here: feedback@stansberryresearch.com.
"If the world stops using the USD as the reserve currency and there is a significant decrease in the value of the dollar – what are the primary ramifications? I assume that imports would become very expensive, but would the domestically produced goods be affected? (I guess to the extent they use imported raw materials). What would be the effect on US real estate prices? Would there necessarily be inflation of all goods here or are some sectors likely to be hit worse than others? Other than parking your money or investments in another currency or country – what type of US investments might thrive under such a scenario? Any other advice for preparing for this scenario?" – Paid-up subscriber Mike K.
Ferris comment: I'm no economist, nor could I begin to predict the myriad consequences of such a world-changing event. What I worry about for myself and my family is purchasing power. I would want to preserve my purchasing power by owning gold. Anything priced in U.S. dollars would be more expensive. The supply of dollars relative to the demand would be enormous. The Fed would have to raise interest rates to get the world interested in owning dollars again.
It would be much better to own anything priced in dollars than dollars themselves. Real estate and other hard assets would become much more important to own, and dollar-denominated financial assets (especially bonds, money markets, CDs) would likely suffer a painful decline in value as China, Japan, and other nations that have recently built U.S. dollar reserves to record highs all try to get out of the dollar.
Regards,
Dan Ferris and Sean Goldsmith
Medford, Oregon and Baltimore, Maryland
October 6, 2009