Rogue economist Phil Anderson has gone on the record to say America’s heading into a property boom and might take Australia with it. Phil’s theory is based around an 18 year real estate cycle and the key variable of land values. He says it can lead you to much better investment decisions. That’s worth a look in anyone’s book.
Phil says the signal that confirms we’re into a new beginning of the cycle is US stocks hitting a record high. That’s what he predicted would occur.
Both the Dow Jones and S&P500 indexes hit record highs this week. Will Phil’s other predictions also be right?
We don’t know. What IS intriguing is Phil wrote an article in 2008 with this headline: ‘Property Will Fall Until at Least 2011, Then US Stocks Will Lead the Way’. So far that forecast is on track.
That’s more than you can say for the Chairman of the US Fed, Ben Bernanke. He spoke this week, with moves in the market mostly attributed to him. The hapless Bearded One has consistently overestimated the growth of the US economy, despite having an army of economists behind him.
Perhaps it’s inevitable for an organisation drenched in conventional thinking. That’s not something you could ever accuse Phil Anderson of. You could argue a part of Phil’s previous forecasting success — being all in cash in 2007–8 springs to mind — is due to the fact that he did not train as an economist in university.
We were curious enough to go back and check out again what he told Dan Denning in a Port Phillip Publishing Strategy Session back in March. If you need a refresher, he was speaking at time when the Dow Jones had closed higher for nine days in a row, the longest winning streak for the Dow since 1996. The DJI was 14,455 at the time.
This is how Phil explained the behaviour of US stocks:
‘The stock market starts making higher bottoms, which we got right through 2010 and 2011, but those higher bottoms happen on actually worse economic news. And that’s what fools everybody…the higher bottoms, even though they’re on worse economic news, are actually telling you that the market thinks things are improving. I’ve noticed over the years, except at the extreme highs, the stock market never gets that wrong.
‘So once those higher bottoms were occurring it was fairly clear to me that despite the economic news getting worse, and despite in the US property news getting a little bit worse, company earnings were improving, and therefore when company earnings improve the prices of stocks simply have to go up. And that’s what’s been happening over the last couple of years. That process has happened every single time, in exactly the same way, since 1800 in the US.’
The Dow Jones is now over 15,500. Hmm. The question, of course, is this: is the recovery in America thanks to Ben Bernanke’s trillion dollar money printing, or a genuine rebirth as Phil claims?
Well, that depends on how you see the commodity markets.
The second major pillar of Phil’s argument is for the worldwide commodity boom since 2000 to not only continue, but to go even higher. Compared to the mainstream view right now, he looks even more crazy. Infamous US short seller Jim Chanos would certainly say so.
He spoke this week at the CNBC/Institutional Investor Delivering Alpha conference on Wednesday to say he was shorting (betting the price will go down) US blue chip stock Caterpillar.
Caterpillar is a world leader when it comes to construction and mining equipment. You can view it as a kind of proxy for those industries. But Chanos views it as a proxy for the end of the so-called commodity ‘super cycle’ and the end of the road for China’s credit-led infrastructure boom.
This brings us to the familiar spectre of China’s ghost cities and alleged mountain of what Austrian economists call ‘malinvestment’. That is to say, government boondoggles that have no business being where they are or doing what that do because they don’t make any economic sense.
The world has spent a long time waiting to see something crack in China. Will 2013 be the year? We don’t know. We do know our colleague Greg Canavan says yes. He’s expecting a panic.
It seems like for Australia it always comes back to China. Phil Anderson says the Middle Kingdom is the one variable he can’t quantify into his (admittedly unscientific) model. He still remains bullish on Aussie real estate because, he says, land values will capture the wealth from strong commodity prices. That’s the link between his two forecasts.
But that leaves us with Greg and Phil completely at odds with each other. The bull and the bear. How will it play out? Who will be right? Stay tuned.
Callum Newman+
Editor, Money Weekend
From the Port Phillip Publishing Library
Special Report: The Sixth Revolution
Daily Reckoning: The End of The Economy Deformed by Easy Money
Money Morning: Why Invest ‘Hard’ When You Can Invest ‘Easy’?
Pursuit of Happiness: Getting Serious About Freedom at FreedomFest