Must Read: Australia will collapse when China Bubble Bursts

[londoncabby]

http://www.moneymorning.com.au/20110614/the-bill-for-your-900-tv-is-due-to-arrive-on-1-july.html

The Bill for Your $900 TV is Due to Arrive on 1 July

by Kris Sayce on 14 June 2011

The Bill for Your $900 TV is Due to Arrive on 1 July

“The ratings agencies are now playing catch-up with the market. The market is pricing in a very high probability that there will be a credit event around Greece. The agencies are just catching up to the negativity that’s already priced in by the market, not the other way around.”

That’s according to Gianluca Salford, a fixed-income strategist at JP Morgan in London.

It’s about three years since global markets collapsed.

During that time, governments and central bankers have created and spent billions of dollars trying to “fix” the markets.

Not a single dollar of it has worked.

So, what’s playing out now is exactly what we warned would happen.

The short-term stimulus of money printing and taxpayer-funded bribes to… erm… taxpayers, has worn off. But in another way, it’s still here – rising prices.

Not that everyone has lost out. There have been some winners. See if you can spot the connection…

The winners

“The Washington [D.C.] area’s home prices in May outperformed the rest of the nation by leaps and bounds – again – while other markets continue to double dip…” – The Examiner.

“Britain’s housing market softened further in April everywhere but in London…” – Financial Times.

And finally, this image:


Source: RPData

The only cities to see house price growth are the seats of thieving governments, and the centres of the finance industry.

In other words, the government and central bank bailouts were nothing more than an exercise in the redistribution of wealth… from the pocket of the taxpayer to the pocket of the banker and the politician.

But before the Washingtonians, Londoners, Sydneyites and Canberrans get too comfortable they should understand the taxpayer has taken just about all they can. They’ve been bled dry.

Prices to rise, wages to fall

Over the weekend News.com.au revealed:

“Cost of living to rise by $3000 in next year”

The article lists a bunch of items expected to see prices rises: electricity, water, gas, council rates, flood levy, interest rates, rent, petrol…

But at least meat and veg prices are going down. And train tickets. So they say. We’ll believe it when we see it.

And unluckily for you, if you earn more than $50,000 you’ll also get a pay cut thanks to the flood levy, just as these prices rises hit. Nice one!

But if nothing else, these price rises and taxes are proof that what the government gives it soon takes back. You may have gotten the Rudd bribe in 2008 and 2009, but from July 1 you’ll start paying it back with the Queensland flood levy.

The nice plasma TV you bought with the “free” Rudd bribe may look nice, but it won’t pay for your higher cost of living.

The fact is you don’t get anything for nothing when the government is involved… you only think you do.

For the past three years the masses have fallen for the spin that governments and central bankers are doing their best to fix things. You’ve been told the fixing will result in more jobs and economic growth… and that you as an individual don’t need to do anything.

But now the reality is clear.

The bailouts didn’t come for free.

They had a cost.

The cost was higher prices due to money printing – although not the hyperinflation many expected. (Why hasn’t there been hyperinflation? We’ll answer that another day).

Why inflation hurts more than it helps

And now the debts of the past have to be repaid by those who incurred them. Even the fabled saviour of inflation can’t help repay debts forever. Inflation – like bailouts – just shifts the debt to someone else.

The house price rises of the 1980s and 1990s are a perfect example of the problems facing economies today.

Inflation doesn’t lead to increased wealth and prosperity for everyone. All it does is help one bunch of people at the expense of others. Those who came to the housing party late incurred higher debts to pay for the increased prices caused by monetary inflation.

But it doesn’t increase overall wealth for the economy, or for individuals. It just appears to. One bunch of people think they’re getting rich from inflation, so others increase their debts believing they too will benefit from rising prices.

Trouble is this creates exponential growth – that’s a fancy word for a bubble. And whenever you get exponential growth, the result is an exponential crash.

Simply because the bubble needs an ever greater amount of money – in the form of credit – to keep the market inflated. A point made by Professor Keen in the “Great Property Debate”.

But even the united efforts of central bankers have been unable to keep the economic bubble growing.

That’s why you’ve seen stock markets collapse again in recent weeks. It’s why you’re now seeing headlines talking about a slowing Australian/US/Chinese economy.

It’s why, as we warned nearly three years ago, the short-term impact of the stimulus and bailouts can’t last. At some point, even with central bank money printing, a bad market can’t inflate forever.

The Chinese economy hasn’t grown because the Chinese are somehow smarter or brighter than everyone else. The Chinese economy took off because it was stimulated by credit growth in Western economies, and more recently by money printing in Western economies.

What caused the Western bubble is exactly what has caused the Chinese bubble. So get set, because the day of reckoning is soon to arrive…

And for Australia, having built the entire economy on the Chinese boom, our economy will suffer the worst when the Chinese boom busts.

Cheers.

Kris Sayce
Money Morning Australia

 

[da dick]

wrong. the whole world will risk a collapse again when china collapses. that's what you get when everyone made it the world's factory. and no one can bail them out. japan and USA too much debt already. euro also going bankrupt. india even if it survives, will never have eneough money to bail out a much bigger economy like china. the end.

 

[XiSd Tay]

The world depends on China much more than you think.

China is the place to be for now.

 

[larky28]

Eighty-Five Australian Building and Construction Firms Go Under in a Month; Crazy to Buy a House in Australia Now

The implosion in Australian housing is now in full swing as Eighty-five building and construction firms go under in a month.

The building and construction industry seems to be bearing the brunt of the brittle Australian economy, with more than 85 companies either entering administration, liquidation or being hit by a winding up notice over the past month in Victoria and New South Wales alone.

Over the past fortnight, Safi Brothers Constructions, Port Melbourne Building Supplies, Coastline Bricklaying and Blue Hills Bricklaying have entered administration. Others to have collapsed of late include plumbers, plasterers and landscape gardeners.

Registered company liquidator, Cliff Sanderson of Dissolve Pty Ltd, says while the building sector always features pretty heavily in the collapse lists, the numbers have increased over the past three to five months.

The reasons, according to Sanderson, are the relatively recent downturn and increased aggression from the Australian Taxation Office.

"An awful lot of tradies couldn't pay their bills during the GFC, and now the ATO is coming to get them," Sanderson says.

"Whereas other industries might continue to limp on, small tradies might not have the ability."

Master Builders Australia chief economist Peter Jones says uncertainty over where the economy is headed is not helping the sector, which has a higher number of SMEs than other sectors.

"Uncertainty over interest rates and lingering debt issues in the US and Europe are also playing a role," Jones says.

Uncertainty? What Uncertainty?

Peter Jones at Master Builders Australia is blaming "uncertainty". The irony is that it would make far more sense to blame "certainty".

It is quite certain that Australia's housing bubble is now in crash mode. It is equally certain there is not a darn thing the Reserve Bank of Australia or any of the home builders can do about it.

Crazy to Buy a House in Australia Now

If you live in Australia and are thinking about buying a home, here is everything you need to know in a single sentence: It's still a crazy idea to buy a house in Australia at the current prices.

By all measures of value, house prices in Australia are at or near the highest levels they have ever been.
Recent tiny house price falls are meaningless in the most overpriced housing market in the world - long term housing slumps can take years, or even decades.
Recent short term interest rate falls are also meaningless. Buying a house is for the long term, so it is the long term average real (inflation adjusted) interest rate that matters.
A typical Sydney house costs $400-500 per week to rent, or $ 1200-1500 to own. Buying at the current prices, you would have to have real capital gains of $800-1000 per week (or around 5% of the purchase price per year) just to not lose money. It may well be worth paying something for the pride of home ownership, but three times the price of renting? You can buy an awful lot of nice decorations for your rental property with a small proportion of the cost difference between renting and owning.
Think it through. Even if house prices do not fall, rents have to at least triple for renting a normal house in an Australian city to cost the same as owning one. Half of renters already pay more than a third of their income in rent. Rents tripling simply cannot happen without large increases in wages, which implies high inflation and thus high interest rates over a prolonged period of time. Without their fantasy rent rises, or their fantasy price rises, long term ongoing losses will crush real estate speculators.

There are many more excellent bullet points in the article. Those who step in here "buying the dip" will regret it.

 

[depeche]

wow, the sky is falling...take cover then!

 

[neddy]

wow, the sky is falling...take cover then!

[h=1]Europe should split the currency: McKibbin[/h]

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Australian Broadcasting Corporation
Broadcast: 08/08/2011
Reporter: Ali Moore

Professor Warwick McKibbin says a successful recovery for Europe requires serious commitment to very unpopular policies.


[h=2]Transcript[/h]ALI MOORE, PRESENTER: A short time ago I spoke to Professor Warwick McKibbin, a former member of the Reserve Bank board and now director of the ANU Research School of Economics and senior fellow of the Brookings Institution.

Warwick McKibbin, welcome to Lateline.

WARWICK MCKIBBIN, ANU COLLEGE OF BUSINESS & ECONOMICS: Evening, Ali.

ALI MOORE: It's the US markets which haven't yet had a chance to react to the debt downgrade in the US. What do you think will happen when the Dow opens shortly?

WARWICK MCKIBBIN: Well the Futures market is predicting it'll be a down day, at least start that way, and I think that is probably gonna be the outcome.

ALI MOORE: And how badly down?

WARWICK MCKIBBIN: I don't think predict these things; I just know that there are certain policies that are needed and we're not seeing them in the markets and so the market will keep falling until the policies are changed.

ALI MOORE: Well let's look at those policy requirements. I guess first of all, do you agree with the Standard & Poor's downgrade? I mean, is the US ability to repay its debt actually worsened? We have to point out of course that the price of bonds has actually gone up a little, which if Standard & Poor's is right, would seem, you know, rather perverse.

WARWICK MCKIBBIN: Well there's a number of different shocks occurring in the world simultaneously. There's the crisis in Europe and then there's the issue in the US. If you look at US debt, it's approaching 100 per cent of GDP in gross terms. Deficit's at 10 per cent of GDP. Under any plausible set of interest rates and growth rate projections, that's not sustainable, and the US has to undertake a fairly significant future fiscal consolidation for all the pieces to come together.

ALI MOORE: And Europe?

WARWICK MCKIBBIN: And Europe has that problem. It also has a problem where several countries in Europe are technically bankrupt. They need not only to have their debts written off, but they also need to have about a 30 per cent depreciation of their exchange rate.

This won't happen inside the Eurozone, so the policy approach is to deflate by 30 per cent, which I don't think is politically or economically sustainable in countries like Greece or Ireland or even Portugal. And if you bring in Italy and you bring in Spain, that is not a sustainable situation.

ALI MOORE: So, let's stay on Europe for a minute. What happens then? I mean, we've had the ECB now commit to buying the bonds of Italy, we've had all the G7 leaders say that they will do whatever it takes. Is that anywhere near enough?

WARWICK MCKIBBIN: Well, this is a form of economics that I'm becoming increasingly used to, and that is the idea that if you believe it will happen, it will happen.

Look at the facts. The facts are that the amount of debt in Italy that they need to roll over in the next 12 months is probably of the order of 350 billion euros. The European financial stability fund, which was voted on several weeks ago, is still not financed, but the governments have agreed to put it their parliaments. It's about 440 billion euros.

So Italy alone will chew up all the money that's on the table from the European governments, largely the German government. So, the numbers don't add up. What they need in Europe is a major adjustment both to their economies and to the exchange rate mechanism.

ALI MOORE: And some sort of central - pool the debt, if you like, all take responsibility for it?

WARWICK MCKIBBIN: Well that's one of the options on the table. Some would argue in Europe that the best thing is to create a euro bond where you take the poor fiscal positions of the southern countries and combine them with the good fiscal positions of the northern economies.

That brings the debt-to-GDP ratio down to about 90 per cent and the deficits down to close to balance. What that does though is it transfers an enormous amount of resources from the German and French taxpayers to the southern Europeans. I don't see that as politically viable. And all of this just to save the idea of a common currency.

The alternative I think, which is more plausible, is to split the currency into two -the Premier League and the First Division, and have France and Germany in the Premier League and let the others be in the First Division and depreciate by 30 per cent.

That way, with a depreciation of that extent, you can start to get the economies to grow again and that's what you need to have sustainability in the fiscal position.

ALI MOORE: But that's an admission of failure, isn't it, of the Eurozone?

WARWICK MCKIBBIN: Well, again, it's an admission of the failure of the common currency, but there's more to Europe than just the common currency.

We had the European community created. That was a good idea; it reduced barriers to trade between economies, it got rid of certain distortions. The gamble that was made in early '90s to create a euro by the year 2001 was the idea if you centralise the currency, all the institutions in Europe have to converge, and so the fiscal institutions have to converge, the employment labour institutions have to converge.

It was a calculated gamble which actually unfortunately hasn't paid off because the adjustments haven't occurred in these economies.

ALI MOORE: So, you paint a fairly dire picture. I mean, you started off by saying that some of these countries are technically bankrupt. Do you think that Europe will be able to fix its problems?

WARWICK MCKIBBIN: I think they can if - and I've done a report recently for the World Bank as part of an input into the G20 process where we used our global economic models.

Very, very simple tools, but looked at whether or not credible fiscal consolidation can be used as a tool of reducing uncertainty and stimulating investment in the short run, and we find for the European economies if they change their exchange rate mechanism and they undertake serious fiscal consolidation in the southern European economies, they can, after several years of weak growth, grow their way out of this situation, but it requires fairly significant commitment to very unpopular policies.

ALI MOORE: And if they don't?

WARWICK MCKIBBIN: And if they don't, my guess is that some of those countries will ultimately, through social disarray, spin out of eurozone. Once one country leaves the eurozone, most likely Greece or Ireland, then we're in very uncertain environment.

Far better for this to be an organised, co-ordinated reassessment of the situation, understanding of problem and then an understanding of the solution.

ALI MOORE: And the US? Are we staring down the barrel of another recession?

WARWICK MCKIBBIN: Potentially, because if you think again of what the shock was, going back to the 2007 - actually the period from 2001: we had a massive misallocation of capital in the US and in parts of Europe.

This needed to be resolved not through just pumping government spending into the economy, but by actually rebalancing the balance sheets of the household sector and some of the banking sector in the US. This didn't happen.

We had a transfer of wealth to - from taxpayers to the banks and the financial system. And in the end we end up with a fiscal position which is unsustainable under its current settings. We need to have a rebalancing, we need to have - it's very different to a typical business cycle.

This is very much like the Great Depression, where a rebalancing of balance sheets was required.

ALI MOORE: So where does all of this leave Australia? Of course the Treasurer has said almost like a mantra that we're in the right place at the right time, our economic fundamentals are strong, but that certainly hasn't I suppose made investors feel at ease in the last few days.

WARWICK MCKIBBIN: Well again, the shock that we face is quite different to the shock that the Americans and the Europeans are facing, as it was in 2008-'09.

We have a system in this economy where markets can adjust, the exchange rate fortunately is flexible, the central bank is independent and has a very clear policy goal. The Government fortunately had reserves that they could bring in terms of fiscal stimulus, which was partly the right decision in 2009.

In this crisis, however, a fiscal stimulus is not the right decision because the problem in the world economy is a fiscal crisis. So we have to rethink the policy response in this country, but with the flexibility of the economy and the appropriate policy settings, Australia then relies very much on what happens in China, and I'm fairly optimistic that the China story can continue for many, many decades.

ALI MOORE: Do we have the right policy settings now?

WARWICK MCKIBBIN: I think we shouldn't have had such a big budget deficit, and I said that when I testified against the scale of the stimulus package in 2009. I would've liked to have seen the second package to be half as big, which means by now we would be in a fiscal surplus position.

But, again, surpluses are not the be all and end all of policy. It's good to have in reserve resources that you can bring to the table.

What we should've done is created a sovereign wealth fund back in the early 2000s under the Howard administration and had those resources sitting offshore so we can bring them back at the time of need.

And so far we've had two of those - or one - second one possibly coming in a decade. So I think that sort of investment in the longer term risk management of the economy is something that is well overdue.

ALI MOORE: You say you're optimistic about China, so do you think Australia is in for any sort of shock?

WARWICK MCKIBBIN: Oh, definitely. We're facing a shock in the global economy depending on how the fiscal problems are resolved. The China situation in the longer term is a very, very good news story for the world. Millions - hundreds of millions of people coming out of poverty, growth, productivity, investments in new technologies in China - very, very optimistic.

However, the adjustment of China and the way it's impacting on the world is part of the adjustment problem that the Europeans and the Americans are facing. They're not handling it very well and these transitions of economic and political power globally have never been handled very well. In fact only once successfully, and that was when the US took over from the UK.

ALI MOORE: So how are Australians going to feel this?

WARWICK MCKIBBIN: I think you'll see a lot of volatility, a lot of uncertainty, and when people are uncertain, they don't spend as much and investment will be weaker than otherwise.

But having said that, a lot of the investments that are driving the Australian economy at the moment are longer-term investments in our resource sector. As long as China remains strong and as long as the policies in China are adjusted appropriately, and that includes an appreciation of the Chinese currency, then I think we'll be well-protected from the global wave which is heading towards us potentially.

ALI MOORE: Of course though, the Reserve Bank has already slashed the forecast growth for 2011 by a whole per cent. What does that do to the budget bottom line?

WARWICK MCKIBBIN: Well it reduces revenues and it potentially increases outlays and that means that the budget moves more into deficit, and I think what's important here is that we don't stick to this belief that a budget surplus by 2013 is anything other than a political promise.

The economics of that is, in this crisis, we should let the automatic stabilisers adjust. That means we should let spending go up and we should let taxes go down and we should not prevent that process because it helps to buffer against the major shock.

ALI MOORE: Well the Government's sticking to that right now. If they continue to stick to it, could it actually be damaging?

WARWICK MCKIBBIN: Well it would be - if revenue's falling and spending's rising - if spending's rising and revenue's falling and you decide you want to cut spending, that has a negative impact on the economy.

And so the credible fiscal policy is to have a very clear response to negative economic shocks. And that doesn't mean you do the opposite, that doesn't mean we have a massive big stimulus again this time, because the nature of this shock is different.

But we should be in the middle, letting it very clearly be known to the financial community that we have an automatic stabiliser fiscal stance, we have low debt, we have good, robust institutions and we have an independent central bank and we have a flexible exchange rate. And that all helps; it doesn't eliminate the shock, but it certainly takes the rough edges off.

ALI MOORE: What about the two-speed economy which we hear a lot about and we know quite a lot about? We've seen retail conditions, for example - retail confidence at decades - its lowest point for decades. How weak do you think the non-mining sectors of this economy are right now?

WARWICK MCKIBBIN: Well I think they're very weak and it's not just the multi-speed economy that's causing this. It's also a loss of confidence in conditions globally. We've seen a re-rating of the US government.

But we've also seen before that very, very unsure outcomes in the global markets. We've seen a revision of US GDP, we've seen very weak and anaemic growth, as you would expect when you have a re-leveraging going on in - or a de-leveraging going on in major economies.

That offshore negativity automatically impacts on Australian consumers. And we are - consumers are 60 per cent of the economy.

ALI MOORE: But I guess the question is: are the right policies in place to deal with that? I note that Glenn Stevens himself made the observation just a couple of weeks ago that productivity growth has been "quite poor" in this country since the mid-2000s.

Productivity was identified by the Productivity Commission in terms of labour laws as one of the big issues facing retail. Are we addressing the sorts of questions that need to be addressed to fix productivity to help those non-mining sectors?

WARWICK MCKIBBIN: There are two points here which I think are worth making. One is that we aren't addressing those issues. If you look at a graph of Australia's income per capita over the last decade, it has been rising as it has the decade before yet we've got the biggest terms of trade improvement in our history.

Why is it that Australians aren't much wealthier? And that's because our productivity has been much lower, and the two have cancelled each other out.

The second point to make is that we have put in place a fiscal framework where we've got outlays being committed very, very clearly, but the revenues are actually highly uncertain. And you see this whether it's in the carbon pricing system, whether it's in the NBN-style decisions - decisions where the outlays and the revenues are not consistently - are not aligned with each other in a world of high volatility.

And that's the risk: that we're going to have to revisit some of these issues if in fact the world economy does end up in a different place than the forecasts said it would be two years ago.

ALI MOORE: And if we don't, productivity will continue to decline?

WARWICK MCKIBBIN: Well that's a different issue. The productivity is more about reform of markets and re-regulating or de-regulating depending on the particular markets. I think the labour market reforms have been a problem for flexibility in this economy. You don't notice it until we get a turning point, and if we get a turning point then we can test the hypothesis. But ...

ALI MOORE: And we've got that now though. I mean, do you think in retail we're starting to see that in terms of loss of flexibility?

WARWICK MCKIBBIN: I think that's right; I think those parts of the economy are very weak. Having said that, the economy is still projected to grow at roughly two per cent in the next 12 months and the year after very strongly.

So, what's needed here though is an understanding that policy's not about making a prediction about the future and then setting policy, it's about understanding the uncertainty, which is enormous, and designing the policies on both - on the fiscal side so that the revenues and the expenditures can move together, rather than having one locked in with great certainty and the other one highly vulnerable to any negative shocks.

ALI MOORE: Which is, you would argue, the current situation with many government policies?

WARWICK MCKIBBIN: In a number of key ones, the very big ones. And I think the climate change is one of the key issues. We have the idea that we're going to have a revenue source, which is fairly predictable out to 2015, that's a carbon tax that Australian corporates pay.

After that, we're in a global trading system, if there is one, and the revenue then potentially could mostly go to foreign suppliers of permits, in which case the expenditures have been committed, but the revenue base has gone offshore.

ALI MOORE: You've just left the board of the Reserve Bank after 10 years. You've been the academic economist, if you like, on the panel and as such I guess you've also been a thorn in the government's side.

We've just heard some of the policy areas that you haven't been in complete agreement with the government on. Were you ever rebuked by either Ian Macfarlane or the current governor Glenn Stevens? Did the government or the treasurer ever pick up the phone and say, "Zip it"?

WARWICK MCKIBBIN: Um, I had a couple of interesting conversations with Ian, just to make it clear that I should be careful what I say because I did have a responsibility as a government - as a central bank official and it was an important set of advice.

The best advice that Glenn Stevens gave me was when I told him I was testifying to the Senate inquiry on the stimulus package. And he said, "I don't mind that you testify," which was fairly controversial of course, but he said, "Please write it down," which I did and that was very helpful

ALI MOORE: As in clarify your thoughts?

WARWICK MCKIBBIN: Write it down and speak to what you've written. Because I have a tendency to say what's on my mind rather than what should be said at the appropriate time.

ALI MOORE: How important do you think it is to speak out? Because the former head of Treasury Ken Henry of course famously urged academics to "put down their weapons", and that was a direct quote.

Recently the Government is said to have urged business to try and put aside some of their differences. Do you think that our leaders have become scared of really open policy debate?

WARWICK MCKIBBIN: Again, a very good question. I think it's dangerous for academics to keep quiet. And I think it's equally for senior bureaucrats to think that they are the founts of all wisdom. In fact they don't think that.

What they think is that there is perfection in one corner and then there's the political compromise that needs to be made to get policy to the Parliament. And my view is that we shouldn't compromise principle under any circumstances, but apparently in the space of formulating real policy with real politicians, you do have to sacrifice in many dimensions.

I think that's dangerous for society, it's dangerous for the economy and a badly-designed policy is more likely to collapse than a well-designed policy. And that's the risk you face by putting it on the table when it's half-baked.

ALI MOORE: Well now the shackles are off, Warwick McKibbin, we look forward to learning more from you, perhaps even what you haven't written down before you speak. Many thanks for joining us.

WARWICK MCKIBBIN: Thanks very much, Ali. My pleasure.

 

[scroobal]

BroI see that you are still falling for this troll. You got to be this forum's record holder. This same troll used to bait a chap called lambaste in the old forum.

 

[Aussie Prick]

We are indeed living in interesting times. We decided to book profits and hedge the rest. Looks like a very healthy 1 year return for our clients and some obscene profits may yet be realized once Ben speaks on Tues and the China numbers look good.

China is really all we have left now. There are just no other drivers to power this world economy. America is in limbo and we are actually afraid of the EU right now. Some of us think the ECB has gone insane. Trying to prevent something that has already happened is self explanatory.

But the good news is China is looking more like a soft landing not a hard one. We'll see what tomorrow's numbers bring. Australia, in our view, actually has 10 years of economic benefits coming thanks to China. (except the property market - we've once again become bearish on Aussie Props)

Of course social unrest or an unraveling of the Chinese banking loans at the government level would change this but we don't see it happening.....

But we should be getting ready for more US stimulus............

 

[Ash007]

Indeed, QE3 most likely to happen now. Australia is the best poised to handle the situation. Lets hope the pollies here don't screw it up. Property are over leveraged here. There are signs it is going to fall. Some predicted a max of 10% some 50%. Its hard to say till the times comes. Australian property prices have been resilient for a long time.

 

[Ash007]

Emphasis mine. It is time for a price correction in Aussieland.
http://www.smh.com.au/business/when-negative-gearing-backs-over-your-house-20110808-1ijad.html

When negative gearing backs over your house
August 9, 2011
<em>Illustration: Rocco Fazzari.</em>

Illustration: Rocco Fazzari.

There's a certain irony that one of the key villains in the great financial meltdown of 2008 once again is creating economic havoc.

It was Standard & Poor's, along with fellow ratings agencies Moody's Investor Services and Fitch, that in the early part of the century conspired with caffeine- and cocaine-fuelled Wall Street bankers to flood the world with trillions of dollars of worthless junk masquerading as rock solid, risk-free investments.

By dishing out thousands of AAA ratings - for a handsome fee of course - the agencies ensured that governments, banks, and financial institutions across the developed world were loaded to the gills with toxic time bombs, all loosely based on high risk loans over marginal American real estate.
Advertisement: Story continues below

Having man-handled global finance to the precipice, forcing the US government into a massive and prolonged bailout of Wall Street and the economy, S&P, in a breathtaking display of arrogance and denial, has sagely concluded that America is a credit risk.

Of course, America and Europe, along with Japan, are afflicted by a range of other quite fundamental problems.

But the disaster formerly known as the Great American Property Boom still looms large over the collective psyche of the northern hemisphere's richest nations.

Bailing out their cash-strapped banks merely transferred the problem to government finances, while the prospect of bank failures and the ensuing recession clearly scared the pants off consumers, who now universally want to save rather than spend, regardless of how much stimulus is injected.

Even before S&P downgraded the US at the weekend, the rush to cash across the globe during the past fortnight has been nothing short of astounding.

Equities are being abandoned en masse in favour of fixed interest deposits as investors seek to preserve their capital. In Europe, meanwhile, banks are depositing cash with the European Central Bank rather than risk on-lending to each other as authorities bicker and argue about how to stave off defaults by Italy and Spain.

With nowhere to hide, investors - out of desperation - have settled on US government bonds and gold, making life tougher for European banks trying to raise cash, raising the spectre of another credit squeeze.

Meanwhile, the brains trust at S&P warned that, should America and Europe implode, we in the South Pacific will also be affected. What tremendous insight!

It may not be readily obvious, but Australia has a debt problem. Our government finances are sound. It is our personal finances that require attention.

Ever since the mid-'90s, banks increasingly tapped wholesale funding markets offshore to fund the discrepancy between savings and investment.

We have more than $1 trillion borrowed from offshore. Most of that was brought in by our banks. And the bulk of that was invested into Australian real estate, fuelling a real estate boom and healthy rises in bank earnings.

It is in this environment that Bendigo Bank yesterday delivered a 41 per cent lift in earnings, only to have its stock hammered in the mass sell-off, while the Commonwealth Bank is scheduled to report a mammoth $6.9 billion bonanza tomorrow with the other three majors delivering third-quarter trading updates.

Australian banks largely avoided the American real estate meltdown. But all are hugely exposed to Australian real estate, which now is among the world's most expensive.

There are a couple of logical reasons for that.

For, unlike American real estate, our banks have full recourse loans over our houses. In the US, when the property market crashed, if you had a $500,000 mortgage on a house now worth just $250,000, you could hand the keys back and walk away and the bank would wear the loss.

Not so here. In Australia, the bank has the legal right to sue you for the shortfall and bankrupt you if you can't cough up the difference. Not surprisingly, Australians have a greater incentive to stay put and pay that mortgage. That means less supply on the market which, in turn, stops prices falling.

Given we are at close to full employment, it would take a massive global shock to push unemployment so high as to force people out of their homes and push prices sharply lower.

But the undeniable fact is that Australian real estate enjoyed a prolonged boom through the 1990s until 2008 fuelled by cheap and easy credit.

That credit boom has come to an abrupt halt. During the past 12 months, credit growth for housing has been the weakest in 40 years, ever since the Reserve Bank began compiling the data. Not surprisingly, housing prices have begun to weaken.

A market analyst, Greg Canavan, author of the Sound Money, Sound Investments newsletter, reckons the number of negatively geared investment properties purchased during the boom, many of them on 100 per cent loan-to-value ratios, will soon begin to slip into negative equity.

Negative gearing only works when capital values are rising. Right now they are not. That has the potential to produce forced sales of investment properties and a rise in bad debts among the banks. As we saw last time around, a relatively small rise in bad debts eats heavily into shareholder equity.

That's why our banks are under fire right now, why the short sellers have them by the curlies. That's why nervous investors will be hanging off every word from Cameron Clyne today and Ralph Norris tomorrow.

Read more: http://www.smh.com.au/business/when...-your-house-20110808-1ijad.html#ixzz1UURpaKb9

 

[neddy]

BroI see that you are still falling for this troll. You got to be this forum's record holder. This same troll used to bait a chap called lambaste in the old forum.

Hi Scroobal, Thanks for telling me. I do not pay attention to who the trolls are. But I generally try to cater my response to the general audience.

Professor Warwick McKibbin is one brilliant economist that every Aussie investing for their retirement should listen to. Unfortunately, with clowns like Kevin Rudd and now Julia Gillard running Australia, they have not only fail every major policy they roll out, they and ALP have politically removed one of the best person whose will bring Australia out of the monetary wilderness.

Another person I follow is http://blog.rogermontgomery.com/.

For those who want to sell Gold about 3 months ago at the last peak around AUD$1,350. Now, it is worth around AUd$1,700 Thanks to the falling AUD and to people going for Gold over Us Tresuary "wallpaper". The long queue at Perth Mint must be wondering who is that idiot buying gold.

 

[Aussie Prick]

Its shocking how much unrealized gain occurs in mere minutes. Time to pop the champagne again!!!! Especially after bourses here close, there will be smirks aplenty.

Here's to the volatility!

Trichet........dont stop the party now....we're too busy raking it all in

 

[neddy]

Indeed, QE3 most likely to happen now. Australia is the best poised to handle the situation. Lets hope the pollies here don't screw it up. Property are over leveraged here. There are signs it is going to fall. Some predicted a max of 10% some 50%. Its hard to say till the times comes. Australian property prices have been resilient for a long time.

QE3? read text taken from ...

[h=1]What's really behind the market rally?[/h]Alan Kohler
Published 7:49 AM, 10 Aug 2011 Last update 10:35 AM, 10 Aug 2011

However QE3 is not actually needed. That’s because, the US 10-year bond yield has fallen from 3.16 per cent at the end of QE2 in June to 2.23 per cent this morning.
As Fed chairman Ben Bernanke explained last year, the purpose of “quantitative easing” (a term he didn’t like or agree with) was to lower long-term bond yields and force up asset prices generally. The liquidity flood that the market focuses on was not the main goal.
No action is needed now to either lower bond yields or supply more dollars: yields are super-low and the world is awash with dollar savings and what’s more, inflation expectations are now rising so the deflation that Bernanke was worrying about last August is no longer a threat.
Moreover the futility of the Fed’s policy last year has been on display these past two weeks: as the bond yield has collapsed, so has the sharemarket. It’s clear that falling bond yields do not, on their own, result in rising asset prices, and a flatter yield curve does not lead to economic expansion. In both QE1 and QE2, the liquidity boosted market sentiment but most of the cash went straight to bank coffers


http://www.businessspectator.com.au...QE3-yie-pd20110810-KKSF3?OpenDocument&src=sph

 

[neddy]

For those who want to sell Gold about 3 months ago at the last peak around AUD$1,350. Now, it is worth around AUd$1,700 Thanks to the falling AUD and to people going for Gold over Us Tresuary "wallpaper". The long queue at Perth Mint must be wondering who is that idiot buying gold.

.errata. Another case of think faster than I type.
I am referring to the idiot who decided to buy gold 3 months ago because I thought something will happen in second half of 2011.

Timing the market is out for me. Achieving financial independence is tougher than I thought.

Robert Kiyosaki's Rich Dad Poor Dad book is now composted and will feed the plants this coming spring!

 

[Ash007]

That guy talk too much cock in his book. All his stuff are anecdotal at best.

.errata. Another case of think faster than I type.
I am referring to the idiot who decided to buy gold 3 months ago because I thought something will happen in second half of 2011.

Timing the market is out for me. Achieving financial independence is tougher than I thought.

Robert Kiyosaki's Rich Dad Poor Dad book is now composted and will feed the plants this coming spring!

 

[Aussie Prick]

warning......gold margins being raised! hearing some increased to 22%......

careful people this might spur a dip...........

 

[Aussie Prick]

Another day of pure bliss! Can things get any better We feel like were just minting money here.

 

[axe168]

Another day of pure bliss! Can things get any better We feel like were just minting money here.

Yo Bro, where's ya pessimistic views about Australia ?

Our sun is not raising and our water is not draining ?

Our world is coming to an end ?

Oh, my toilet choked ! a bad sign for Australia ?

hehehe..

 

[Aussie Prick]

Yo Bro, where's ya pessimistic views about Australia ?

..

Poor Axe 168. This past week has been the best we have ever had. T+3 settlement means the money is already in our accounts. The joy, the euphoria - its so sweet. This is it.

So just ignore all the negative news coming out of the EU, the US, and of course Australia. Recession? Nah, don't believe it.

Everything's just A-ok

At least over here it is..........

 

[Peiweh]

China economic is slowdown now so how lor?