The 300 Club

Gambling on property

The stories around barbeques and in newspaper headlines have both been full of property tales in recent months. In my opinion it's a sure sign the bubble is inflating again.

Just a few weeks ago, we heard a new record had been set for a Melbourne house purchase - $25million for a house in Hawthorn.

This week a reader brought our attention to a remarkable property at the other end of the spectrum. A

RP Data have just released data that shows Melbourne property prices have risen 15% since January, to $510,000. And nationally, house prices are up 10% for the year. But before you start to feel too relaxed, I should point out that sales have actually been falling for the last few months as first home buyers leave the market.

So, can the property market really keep going up?

Let's see...

There are a couple of

The Australian Office of Financial Management (AOFM) is keeping the property dream alive with its purchase of residential mortgage backed securities (RMBS). This puts government money into the hands of non-bank lenders to keep the merry-go-round going for a bit longer. Of course, this money is borrowed by the government in the first place, and can't be done indefinitely.

Then there's the risk of China's growth stalling. Many commentators are voicing their concerns about China being the world's biggest bubble. Jim Chanos, the billionaire hedge fund manager, believes China is heading for a crash, and is calling it "Dubai times a thousand, if not times a million".

You could argue that Chinese fixed asset investment and productive capacity is fuelled by a trade surplus and a currency policy that are on borrowed time. The argument is that a great deal of trade was purely a function of the credit cycle, which has now turned. If China pops, it would have an unpleasant impact on Australia, and of course our house prices.

In fact, there are a number of similarities between our position today and the US housing market a few years ago. Dan Denning wrote >another four habitable residences that you could classify as a dwelling.

The housing bubble has caused household debt to mushroom. Since 1990, the ratio of total household debt to household assets has increased from 9% to 19%. So households are in twice as much debt as they were at the start of the nineties.

This trend can't be sustained forever. And as with all debts, the more you carry, the more you need the good times to keep rolling in.

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Dubai was a warning

Speaking of bubbles built on debt, the Dubai sandstorm seems to have blown over pretty quickly. Richard Grace, the senior currency strategist for Commonwealth Bank of Australia, called it "a storm in a tea cup".

I think this might be selling it short though. capital to cover potential losses.

Dubai showed us the amount of global panic that can happen when $80 billion of debt looked unsteady. What could happen when $3.4 trillion starts to crumble?

Frenchman to rescue the City of London

There's been an avalanche of negative reports and forecasts on the UK's finances all year, but the latest I've just read stands out from the pack.

The US Investment bank, Morgan Stanley sent out a client note this week, written by its European investment team. There has been plenty of concern that Britain could enter a double dip recession, but this is the first time that a major global investment bank like Morgan Stanley has put it in writing.

Whilst Australia has notched up its second interest rate hike, Britain is now the only G20 country to still be in recession. Canada left the club by a whisker when it grew by 0.1% in the third quarter. Meanwhile the UK shrank again with a further fall of 0.3%.

Morgan Stanley reckons the risk is that the UK's mix of problems could come to a head next year when the government fails to restore fiscal credibility.

The pound has already fallen 30% from buying A$2.40 to A$1.80. Morgan Stanley foresees a further fall in the pound though and can see if falling a further ten per cent which would take it to around A$1.60. This would complete the steepest fall in the value of the pound since the industrial revolution!

It's hard to believe the UK still has an AAA sovereign rating, but then again it's hard to take ratings too seriously any more. These ratings would be under severe pressure and most likely some of the agencies would have to adjust it downwards.

If so, there would be a sell off of government bonds, and yields on 10-year gilts could increase by 150 basis points or more. This would push borrowing costs above 5%, making it more expensive for the UK government to borrow than it is for the Mexican government!

This would make the already Herculean task of funding Britain's budget deficit far more expensive. Next year's deficit is expected to be the worst in the OECD at more than 13% of GDP.

The government could be forced into raising interest rates to boost confidence, which would nip a recovery in the bud, and send the country right back into recession.

As if it couldn't get any worse for the Brits, now comes the news that a Frenchman, Michel Barnier, won the job of Europe's new Internal Markets Commissioner. His role is to investigate market practices and put regulations in place where needed.

And he has tough regulation in store for the City of London.

The French president, Nicolas Sarkozy, re-awoke the historic Anglo-French divide when he commented that " It is very reassuring that French ideas about regulation are winning out in Europe", and that the British were "The big Losers" of a carve-up of EU jobs.

Given the choice between the current shambles, and watching the French president gloating, I'm pretty sure most Brits would prefer the shambles!

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US mint sold more than a billion dollars in gold this year

With one of the G7-countries is falling apart in front of your eyes, it's perhaps no wonder the gold price is heading up again. The threat of a major sovereign debt crisis seems very real.

Gold continued its ascent into the stratosphere of new record highs this week. It has closed higher for the Comex session in all but 2 of the last 24 sessions.

Looking at the

The US mint announced this week they sold 1.2 million ounces of gold this year, which would be worth approximately $1.2 billion. Last year the mint sold 0.7 million ounces of gold.

This year it has sold 26 million ounces of silver coins, more than it has for 23 years. The result is the cupboards are now bare. That's the second time

Another way is to buy

I wish you all a great weekend.

Till next week,

Dr Alex Cowie.

About the author: Dr. Alex Cowie holds a Graduate Degree in Finance and Investment from the Financial Services Institute of Australia. He's the editor of the resource stock research newsletter Diggers and Drillers.