Hey, I know you think I'm nuts for making such an outlandish statement. After all, if you don't know who Ben Bernanke is, he's the man behind the world's largest money-printing press and he's cranking it up like crazy!
It's an out-there statement for sure… and you're unlikely to read anything like this in the mainstream media. But there is nothing mainstream about me or the money that I make as an investor.
So here me out, let's roll…
Central Banks the world over are being forced into the uncharted territory of money printing (Quantitative Easing.) Thankfully, we're a still a long way from that, but you could be sure that Glenn Stevens has got a nervous eye on how much ammo he's got left. If we did end up forced down America's money printing road, what would it mean for property? I'd argue it's win-win either way.
Like those odds?
Glenn “Let the Good Times Roll” Stevens over at the RBA let the party continue last week, leaving official rates at record lows. But is anyone else detecting a bit of a nervous twitch beneath that poker-face exterior of his?
Glenn knows he's slowly being backed into a corner. And there isn't much he can do about it.
The RBA's quarterly Statement on Monetary Policy, released towards the end of last week is an uninspiring read. Essentially, the economy is on track, with modest growth this year and the economy starting to hit its strides again sometime in 2014.
But, of course, they have to say that, don't they? If the economy wasn't on track, then that would be an admission that they've got the current interest rate settings wrong. And they're not going to do that now are they?
Personally I don't know why we pay much attention to the RBA's forecasts. Everything's always “returning to trend”. The only guide it gives you is what their thinking about interest rates is.
And in that sense, the thing that really jumps out at you is just how many uncertainties there are in the outlook – or more specifically, the lengths the RBA went to point them out.
Here is my reading between the lines…
They're giving themselves plenty of room to cut rates further if they want to. I'd say they'd be expecting their hand will be forced at least once or twice more this year (in the best case scenario!!)
Interestingly though, housing gets a big wrap this year. Quote:
“Improving conditions in the housing market are expected to continue to provide support to dwelling investment.”
I wonder on that basis if Glen will rush out and buy an investment property. Or would that be insider-trading?
Have you ever thought this… “Hey MR Economist what are you investing in right now?” just after they give you their pearls of wisdom.
I digress… Where was I? Oh yes…
So say Glenn pulls the trigger twice more this year, that would take official cash rates to 2.5 percent. Glenn would have a very nervous eye on his ammo clip. He's starting to run out of ammo.
Central Banks can't cut interest rates down past zero. Negative interest rates don't make sense (effectively paying people to borrow from you.)
But this is exactly where the US is at right now. The Fed cut rates aggressively, but didn't get the bounce in activity it needed. Interest rates fell to zero, and the Fed, under Ben Bernanke, had to get creative.
Enter stage left: The Money Printing Press… Quantitative Easing
Quantitative Easing refers to a range of creative policies that have one aim: pumping as much cash as possible into the system.
As it works right now, The Fed creates money ex nihilo (the term you want to use when you want to say “out of nothing” and still sound like you know what you're doing) and then stuffs that into the financial sector by purchasing treasury bonds and mortgage backed securities off the banks.
Once they do this, the only direction for asset values to go is up… that's what there stock market and the real estate market did… You don't have spend 4 years at uni and get an economic degree to figure this out.
So Glenn will be watching the US experiment carefully and trying to learn what he can. A few little hic-cups on the global stage, and we could end up in exactly the same boat.
I'm still taking a bullish view on the economy over the medium term. There's evidence that the wall of money is sparking things in the housing sector, which will give consumers more confidence. And government budgets here are paragon of fiscal prudence compared to the US.
But just for the fun of it, let's imagine ourselves in the worst case scenario. What does it mean for the property sector?
Interestingly, it's a win-win scenario for property.
And this is because central banks have a fixation with property. They know just how important it is to the economy. It is central to household wealth, and therefore central to consumer spending.
And so we saw with QEIII, the Fed announced that on top of Treasury Bills, it was going to pump money into Mortgage Backed Securities. This was a direct attack on the housing market. According to Big Ben Bernanke:
“Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.”
So then, there's two possible outcomes. Either QE works.
Or it doesn't.
If it works, mortgage interest rates are driven as low as they can go, and banks encouraged by the booming markets, become eager lenders. This will feed directly into property sales and prices.
Of course a cooling economy will be having a cooling effect on the market as well. But where else are you going to put your money? The government won't be directly intervening in the stock market to puff up shares…
But in this scenario, QE works, and the property market leads the economy to recovery.
In the alternative scenario, QE does what's it's doing now in the US – not much. The economy keeps dragging along the ground, and ultimately, all this money printing translates into inflation. Investors start rushing towards assets that are “real” and give them some way to preserve purchasing power.
Even in the short term, property becomes a hedge against inflation.
But in either case, those of us who have a stake in property before the economy topples into a liquidity trap, get a good shot in the arm.
One other thing that I want to add is this: All the money-printing is sure to keep the America dollar weak and the Aussie dollar strong… So the “home run” play is this… Invest in USA real estate assets today.
Firstly, by doing this you get an amazing currency advantage right now as well as the opportunity to get a the double whammy of profits as growth slowly picks up over there.
Effectively, if you buy today and the Aussie dollar returns to 85c you would have made a 20% capital gain, even if the property has not moved a cent over there.
Add to that a 10-20% capital growth of the real estate, then the compound effect of all this can return a 50% gain overall… All this could happen in the next 12-24 months.
But wait, there's more… You get great holding cashflow of any where between 10 to 15%… How good is that?
Do you now see why I made the crazy statement, “Bernanke backs Aussie real estate investors…”
Not so crazy now, is it?
Look I'm no fool, granted, these are uncertain economic times, but even amidst changing economic paradigms, property is as safe a bet as it's always been right now.
Stay invested and start adding to your real estate portfolio… Today.