A New Bubble

by Shae Smith (Money Morning)

Forget about the supposed gold bubble. Ignore the growing property bubble, and don’t worry yourself about the potential commodity bubble if Dr. B.S. Bernanke – yes, those are his initials – gets his way.

There’s a bigger bubble brewing. This one is in bulbs. But not light bulbs. And not tulip bulbs either…

Because this one’s not in the Netherlands, it’s in China. In fact, talk of this bubble began long ago.

"Garlic prices have increased fifteen fold in China in under a year because Chinese investors are said to be attempting to create an artificial shortage and drive up prices."

That was written over twelve months ago. But it’s truer now that it was back then.

How did the Chinese end up buying garlic as a speculative investment?

By the way, I’m serious. This isn’t some kind of elaborate analogy… China has created an asset bubble in garlic!

Well, first you have to go back a bit as the 2008 planting season was about to begin.

Farmers, sick of the increasingly low prices for garlic – about 1 Yuan (AUD$0.15) a kilo – decided to ditch the garlic crops for something that had a more attractive price, like corn or rice, which is also ‘price controlled’ by the government.

To the farmer, this made a commodity like corn, much more attractive, knowing that he would always get the same price for his crop, and not risk out on losing money on garlic plantations that attracted very little return. At one point, the price of garlic fell as low as 0.08 Yuan (AUD$0.012) per kilo.

Then along came Swine flu in 2009, and that changed everything.

You see, traditional Chinese medicine believes that garlic has medicinal use, and when Swine flu was invading our vocabulary this started to boost the demand for garlic. But because of the small crops that were planted in 2008, there wasn’t a lot of stuff to go around.

Which is partly to blame for the shortage today.

At first, officials had blamed the shortage on bad weather and farmers hoarding what little supply they had, but as the swine flu scare worsened, the price started to sky rocket.

By the end of 2009 the price for a kilo of garlic was 60% higher than the year before.

In fact, during this period, you’d find many articles like this one, stating how ‘Garlic beats gold as an investment’.

Because many food commodities are price controlled in China, garlic, which isn’t, started to attract speculators into the market.

But all this did was drive the price higher.

Right now, China is the world’s largest exporter of garlic. They export more than 1.5 million tonnes each year.

However, it greatly depends on who you listen to as to whether the price of garlic is sustainable at these new highs of about 14 Yuan (AUD$2.13) per kilo.

Firstly, you have mostly market speculators taking advantage of farmers without access to a wide range of information. Most farmers are still only receiving 1 – 1.5 Yuan per kilo for garlic, as speculators hoard the supply and release only small quantities to the market at a time, keeping the price elevated and demand high.

That being said, the farmers are still averaging three times more income from garlic this year than last year.

But the problem is, even though there’s a shortage of available garlic, many farmers are reluctant to plant bigger crops. The reason? They simply can’t afford the higher price of the seeds, and they don’t want to be left with goods they can’t sell.

Then you have Yi Xianrong, a researcher for the Chinese Academy of Social Sciences who has said that the garlic market ‘...is cyclical. Price are short term, and they will fall again before long.’ He estimates that this is just part of a three year cycle and prices will return to 1.5 – 2 Yuan per kilo soon.

However, one of the biggest problems facing the garlic market isn’t the speculators, but the Chinese government.

Many commodities, including agricultural ones are price controlled by the government.
Talk has already begun about the government stepping in and developing a ceiling limit that garlic can attract per kilo.

There’s two reasons here, being the world’s largest exporter of garlic, they don’t want the price to become too high and lose their best customers to Argentina or Spain as they also export large volumes of the stinky stuff.

But more importantly, China’s ever rising consumer price index (CPI) has caused the central bank to want to curb inflation. And any time an abnormal economic number comes out from China global markets get a bit rattled...

When the food component of China’s latest CPI was over 10% higher for the most recent quarter, you can bet that the Chinese government is going to step in and take control of the garlic market before any more of its economic numbers are skewed.

Aussie Banks "Unique System to Keep Dwelling Prices High"

by Kris Sayce (Money Morning)

Well reader, I have to say it, today your editor read the most ridiculous article we've ever read on Australia's now-popped house price bubble.And believe me, that takes some doing. There's been a heck of a lot of rubbish written over the years, but the article we read today trumps the lot.What makes it worse is that it wasn't written by some half-baked real estate agent or a rabid property spruiker. No, it was written by someone who many believe is one of the most respected financial journalists in Australia - Robert Gottliebsen.

As his biography on the Business Spectator website points out:"When it comes to Australian business media, one name is synonymous with trust, integrity and depth of knowledge that surpasses all others, that name is Robert Gottliebsen. Robert Gottliebsen is an Associate editor for Business Spectator and was the original AFR Chanticleer and founder of Business Review Weekly (BRW) Magazine."He's a commentator that many in the mainstream respect. Although based on the article he wrote yesterday, he looks to be past his sell-by date.

In his article Mr. Gottliebsen expressed sympathy for a view put forward by Bendigo and Adelaide Bank chairman Rob Johanson. Mr. Johanson was commenting on proposals by the socialist Green Party to prevent Australia's banks from raising rates any higher than rate moves by the Reserve Bank of Australia (RBA). Mr. Johanson said:"None of us... who can remember trying to buy a house in the 1970s would want to have to go through or go back to that situation for funding."With my wife I bought my first house in 1967 and I remember vividly what it was like in the 1970s. Getting a housing loan from the bank was extremely difficult and as a result house prices were very low because you had to assemble deposits many times current requirements."Mr. Gottliebsen then offers his opinion on what makes the current Australian housing market so special:"It might not be intentional, but in Australia banks have developed a unique system to keep dwelling prices high. They are liberal in granting housing loans, so there is a strong consumer demand for houses.

"We're dumbfounded, but we'll continue:"By restricting the supply and boosting the demand, banks keep dwelling prices high. If the Greens' proposal were enacted and we had further increases in the cost of funds overseas - which many are predicting - then the current high house price arrangement would be blown apart..."I am delighted that neither the government nor opposition are going down that path."

At least we should be grateful for one thing from Mr. Gottliebsen's truly mind-blowingly dumb article, and that's the admission from a mainstream insider that the current housing and banking relationship would be "blown apart" if it wasn't for house price manipulation by the banks and government.But of course, it's too late to worry about that.

As I wrote earlier this week, the house price bubble has already popped and it'll be blown apart regardless of whether the Greens' policy gets up or not.But quite frankly we find it extraordinary that not only would a banking executive claim it was terrible that people had to "assemble deposits" to buy a house, but it's equally bizarre that a so-called respected journalist would cheer the fact that Aussie banks have "a unique system to keep dwelling prices high."

Clearly they prefer how the market is rigged right now. Where those - we'll assume - such as Mr. Johanson and Mr. Gottliebson who bought their homes in the 1960s and 1970s and who have benefited from two decades of loose bank lending and cheap credit feel weak at the knees at the thought of house prices returning back to their pre-boom levels.

Much better for house prices to remain high, for banks to be "liberal in granting housing loans", and for current homebuyers to be paying 60% or 70% of their income in interest to the banks... banks such as Bendigo and Adelaide Bank.I mean think about it. Think about the difference. In the 1960s or 1970s buyers would have saved a deposit. They would have had money sitting in a bank account accumulating interest. Importantly, they would have been debt free. And, they would have had savings set aside for a rainy day or to put down as a deposit for a house.

Today, buyers are bribed and suckered in to the market by banks such as Bendigo and Adelaide Bank thanks to artificially low interest rates and taxpayer funded giveaways such as the first home buyers bribe.And rather than having a healthy bank balance of savings for a rainy day or for a deposit, well, they've already got a house so they don't need a deposit, and with 60% or 70% of their income going on mortgage repayments they don't have a bean left to put towards savings anyway.They're living the life of a pauper, but at least they're doing it in style... if that's possible!But don't worry guys, because apparently in Australia "banks have developed a unique system to keep dwelling prices high."Don't you believe it.

The market has cracked and the baby-boomers who thought they could profit at the expense of youngsters going deeply into debt will soon find the smile wiped off their faces.Perhaps Gottliebsen's name used to be synonymous with trust, integrity and depth of knowledge, but not after that article. We thinks it's time for Gottliebsen to hang his head in shame and hang up his boots to let someone with a bit of common sense take over.