This one really could go either way.

The other day, I laid out two big themes that are going to define 2022. Now let me give you a third.

3. China

What happens in China has a big impact on Australia, but really, the whole world is watching what’s happening over there right now.

And the news has been pretty quiet on it really.

China is in a fascinating space right now. They’re in the middle of trying to reshape their entire economy. I’m not overhyping that. They are.

Basically, the government thinks that some sectors are getting too big.

So we saw a crack down on the tech sector in the middle of the year, and then a crack down on the big property developers a few months after that.

This is still playing out, and it’s pretty massive. The government introduced a ‘Three Red Lines’ policy, which basically put limits on how much leverage the big developers could have.

And as it stands, two-thirds of China’s big developers are on the wrong side of those lines.

This is forcing the developers to deleverage, but it’s not going smoothly. Evergrande – the biggest developer in China – is already in default, along with 9 other major players.

We’re all hoping it unwinds smoothly, but you never know. Evergrande has over $300 billion (yes, billion) in debts, that it’s probably not going to make good on.

That could create a whole bunch of problems for the Chinese financial sector. And if the financial sector topples, you get some massive problems.

And that’s a big story for us, because China is still our biggest trading partner. And the Chinese construction industry is a big buyer of Aussie iron ore.

So much so, that the Aussie dollar tends to ebb and flow with the Chinese manufacturing sector. Check out the chart:

So a serious shake-out in China could have big implications for the Aussie economy.

And that’s happening at the same time as China and Australia are in the middle of a messy break up.

China has defriended Australia on Facebook. Australia is drunk-texting China in the middle of the night.

Basically Australia got caught up in a realignment of the geo-political poles of power.

For a long while, China and the US were best buddies. Or were pretending they were.

But those days are over, and the US now recognises China as a strategic rival.

That meant that Australia had to choose sides, and Australia picked America, (and we’ll have a side of nuclear submarines thanks.)

China wasn’t happy about that, and decided to retaliate by blocking certain Aussie imports.

Like wine. Aussie wine exports to China have taken a serious hit.

However, so far, this hasn’t hurt our commodity exports.

And basically that’s because commodities are fungible – one container load of iron ore is much like another, whether it comes from Australia or Brazil.

And so commodity exports are still booming, and Australia’s trade balance is still through the roof.

But this is a trend to watch.

The worst case scenario is that China’s development sector goes belly up, and China goes super hard on blocking Aussie imports.

That would hurt.

However, while it’s possible, it wouldn’t be my central scenario. It’d be much more likely that China muddles through the developer shake-out, with a range of stimulus measures to ease the pain, and we get more diplomatic grumbles out of China without any real policy action.

But it’s an open question. It really could go either way.

Big trends, big times

So these are the three big trends I’m watching right now, and I think every serious investor should have an eye on.

Ultimately, I think the outlook for Australia is very bullish.

But there’s never a dull moment in economics.

Anyway, that’s me for the year. Thanks for tuning in. I hope I’ve been able to make some sense of this crazy-arse year. It’s been a doozy.

I really hope you have a rejuvenating break, and I look forward to getting back in the saddle with you early in the new year.

Have a great holiday everyone!

JG.

There’s three stories that defined 2021 and will shape 2022.

So, as 2021 comes to a close, it’s worth remember what a bat-crap crazy year it was, economically speaking.

Never in the history of humanity has such a strange collection of forces confluenced together.

(Actually, maybe I shouldn’t say that. I slept through history class, so I don’t know for sure.)

But not since the Bronze Age has such a strange confluence of factors come together – a confluence that drove property prices to soar 22% year on year, and rising. 

So as we bring things to a close, let me lay out my pick for the themes that defined 2021, and will be the key themes to shape the first part of 2022.

1. Money Printing

So we are still, right now, in the middle of one of the strangest economic experiments in history.

And that experiment is to just print heaps of cash and see what happens.

It isn’t entirely new. It was America’s response to the Global Financial Crisis. But Aussie money printing only started with Covid in 2020.

But 18 months on, it’s still going. At a pace of $4bn a week!

It’s been a phenomenal expansion of the money supply. It’s hard to even put it in context. But take a look at the RBA’s chart of their balance sheet. (This more or less lines up with money printing. The RBA prints money and gives it to itself, and then buys assets from the financial sector to inject that money into the financial system.)

Anyway, it looks like this:

Yep. You’re reading that right. The RBA’s balance sheet was less than $200bn before Covid. By the end of 2021, it had grown to about $600bn.

That’s an expansion of $400bn.

$400 billion fresh new money sloshing around the financial system.

Where does all that money go?

Well, the American experience suggests that it ends up in asset prices. And that’d be my bet.

That money is still heading through the system, and will probably wind up in asset prices, and land prices in particular, sooner or later.

But the experiment is still live. The RBA is still printing.

And every Central Bank is doing it. Every Central Bank in the developed world has gone on a printing spree.

As I said, this is radical. Not since the dinosaurs were running the central banks in the Mesolithic Period have we seen anything like it.

Wild.

2. Inflation.

The second big trend to define 2021 and that will define the first half of 2022 is inflation.

Conventional economic theory used to say that money printing creates inflation.

However, that’s sort of gone out the window. We had almost a decade of money printing in America following the GFC, and inflation consistently undershot the Fed’s target.

So it’s not as simple as that.

But it’s still an open question. We don’t know for sure what all this money printing is going to do. (My bet is that we end up with asset-price inflation rather than consumer-price inflation, but it’s an open question.)

And we are seeing inflation lift in some places. However, for now, that seems mostly connected to supply-chain disruptions coming out of Covid, rather than excess money driven demand shocks.

So the question is, in the lingo, will inflation be transitory or more permanent?

It’s still an open question, and if it is more permanent, then central banks will raise rates and turn off the printing presses.

However, most central bankers, and most fund-managers (see chart), seem to think that it’s transitory, and inflation will disappear in the middle of next year.

But, we’ll see.

And the third big trend?

Well, you’ll have to tune in tomorrow…

JG.

Crypto is disrupting everything. Property is next.

Just when you think you have a handle on crypto and what it means, something else comes along and blows your mind… again.

Over the past 18 months Crypto has really embedded itself in the mainstream.

And we went from coins to NFTs (non fungible tokens) – authentic signatures of digital art (if your definition of art includes cat memes).

Now with Facebook rebranding to “Meta” we are starting to see the birth of “metaverses” – virtual worlds where people can interact…and stay with me… buy and sell virtual plots of land to build and sell virtual houses.

Yep, people are buying and selling real estate that’s not actually “real”.

We have well and truly jumped the shark when someone’s paying $4.3 million for a plot of land in cyberspace:

The idea of spending millions on non-existent land may sound ludicrous – but feverish predictions of a virtual reality future are pushing investors to bet big on digital real estate.

This week, New York-based company Republic Realm announced it had spent a record-breaking $4.3 million on digital land through The Sandbox, one of several “virtual world” websites where people can socialise, play games and even attend concerts.

That came hot on the heels of a $2.4-million land purchase in late November on a rival platform, Decentraland, by Canadian crypto company Tokens.com. And days before that, Barbados announced plans to open a “metaverse embassy” in Decentraland.

Such websites bill themselves as a prototype of the metaverse, a future internet where online experiences like chatting to a friend would eventually feel face-to-face thanks to virtual reality (VR) headsets.

“Metaverse” has been a Silicon Valley buzzword for months, but interest soared in October after Facebook’s parent company renamed itself “Meta” as it shifts its focus towards VR.

Virtual reality has been around for a long time but it’s only now starting to become realistic enough to use and affordable enough to scale.

But why should we care? Well I care because any disruption generally leads to potential money making opportunities…

And when you hear virtual land being sold in the millions, do we really care that the concept is weird… There's money to be made here people!

But think about it: The pandemic is now stretching into its third year. It has already forced us into the virtual world – we do virtual meetings, virtual seminars and virtual drinks…  There’s virtual tours of homes and virtual auctions.

If virtual reality technology is here now… let alone where it will it be in 5 years… or even 12 months!

If it’s here now, it's inevitable that it will become further entrenched in our lives.

And it's not really a stretch to see that people who grow up with this technology would also want to own assets in these worlds – assets published to the blockchain, non-fungible and paid for with crypto.

The metaverse is new, there virtual assets to be bought… it's effectively the digital frontier and people smart enough to get in now may well be the oil barons of the metaverse.

Now I’m not liquidating my real-world portfolio to push into digital real estate – I just don’t know the space well enough yet.

But the point is, the blockchain is disruptive tech, and it’s disrupting everything.

And where there’s disruption, there’s money to be made.

JG.

I’m betting on more government cash for the property market in a few months.

One of the things that every Federal election has given us in recent times is some sort of cash-splash for property.

The tone and timbre has changed a bit. It started at as raw grants for first home buyers. By the last election it had morphed into a first home buyer deposit scheme.

Some single mothers were able to access properties with a 2% deposit, thanks to government help (which I think is fantastic policy by the way. Nothing sets you up for life like housing security.)

So now we’re looking down the road, a little way into 2022, and we can see there’s another election coming.

Are we likely to see more cash for property?

You betcha!

I actually expect it to be big.

This is driven by two things. First, it’s driven by a government on the ropes that is likely to throw money at any popular cause they can find.

And nothings been a consistent vote winner like property.

Secondly, affordability is becoming a hot-button topic again.

The RBA was covering it in detail the other day. They note that with rising prices, the house price to income ratio has taken a stiff leg up.

Mortgage serviceability hasn’t changed all that much, thanks to falling interest rates. In fact, serviceability expenses remain well down on where they were in the 2000s.

And housing loan repayments as a percent of disposable income, have remained largely unchanged for a decade (except when disposable income tanked when Covid first hit).

So the interest expense isn’t the problem.

Where first home buyers are struggling is with the deposit. Average deposit sizes have spiked significantly.

And with that, the average time to save a deposit has blown out as well.

So that’s where first home buyer pain is – with the deposit.

And that’s a pain that gets spread around, since first home buyers often end up hitting up their parents for help with the deposit.

So this seems like a likely target for government spending – more measures that help with the deposit side of things.

One of the things I would note though is why this is all true of the market over all, when you break it down into detached housing and units, a bit of a different story emerges.

And that is that affordability has significantly worsened for detached houses, but for units?

Not so much.

Look at the price to income ratio:

Or years to save a deposit:

This makes me wonder if we might see some measures to encourage young buyers out of the suburbs into the unit markets, since this is where you could actually shift the needle on home ownership.

Maybe we might see more concessions on stamp duties for off-the-plan apartments or something like that.

We’ll have to see.

But however it plays out, I expect to see more money gushing property’s way.

As if there weren’t enough drivers lining up behind property in 2022.

JG.

There’s more sellers in the market… but a lot more buyers.

One of the interesting things about the epic boom in prices we’ve seen through 2021 is that partly it’s been driven by a lack of stock on the market.

There was a seller’s strike. People weren’t putting their places up for sale. Maybe it was because of the confusion around Covid. Maybe they were just waiting for higher prices.

But whatever the case, a shortage of properties on the market helped fuel the epic boom that we’ve seen.

That dynamic maybe starting to shift though. In recent months we’ve seen new listings pick up somewhat, to be back in line with normal averages.

That’s happening in both our capital city and our regional markets, though more so in the capitals.

So that might go some way to taking some of the heat out of the market. That said, total listings remains well below normal averages.

And that’s because we are just selling properties so quickly. Anything that comes on the market is snapped up, keeping the total available pool low and thin.

You can see it in the sales data, which is well above 5 year averages.

And the time on market data too. The number of days a listings spends on realestate.com.au is about half of what it normally is.

So the story here is that while supply might be opening up a little, demand remains massive, and will continue to drive the story.

You can see it in the average number of views listings on realestate.com.au get. Again, it’s about twice as much as normal.

So while supply might be relaxing a little, it is relaxing into a market where demand is still massive.

And that means that the market will remain in shortage (with total listings well below normal levels) well into 2022, even in the best case scenario.

And for as long as the market remains in shortage, prices will keep going up.

If Aussie property prices are going to put a brake on any time soon, it’s not going to be during 2022.

JG.

Crypto is creating financial freedom.

It’s almost cliché now: make millions on crypto, quit work and buy a Lamborghini.

But how common is it?

Actually, it’s quite common. I was shocked. A recent poll found that 4% of Americans have quit work thanks to the financial freedom they’ve won through crypto investing.

That’s massive. For an asset class that young, it’s an incredible result. It’s proof that crypto is creating millionaires all over the place.

Well, not exactly. When you break it down, you can see that most of the people who have quit were quitting jobs that were fairly low-paying.

The majority are earning less than $50,000 a year, so in that sense, the hurdle isn’t al that high.

That said, 8% were quitting jobs paying more than $150,000, so it does have the ability to create serious income.

And it also makes sense that if the labour market isn’t offering you much of a wage, you have much more incentive to get into crypto investing, where there’s just so much more upside.

Another interesting stat in the survey was the result that while most people were investing for capital gain, 16% were buying crypto to use in transactions.

That’s a pretty big number, and suggests that adoption is coming quicker than most people think.

And when you break that one down by age, young people are much more likely to use it for transactions than older people. The money of the future.

But for all the wealth-creation potential of crypto – and it is massive – this survey still comes with a word of warning.

Of those who are active crypto investors, 16% are less wealthy now than when they started.

And that’s despite an epic bull-run in recent years.

It just goes to show, you still have to know what you’re doing. Education as always is the key ingredient in success.

But at any rate, crypto has already set 4% of Americans up for life.

What can it do for you?

JG.