AUD 0.38 A question for NR

[plusnq]

Hi NR

Continuing on from our discussion earlier about your "soft depression" thesis, I am interested in what you feel the economic conditions might be if you are right and the AUD goes to 0.38. What do you think will happen to

1.GDP?
2. Interest rates initially and later
3. Inflation
4. Unemployment
5. Property prices

Look forward to further discussion.

Cheers

Shane

 

[silversands]

Hey Shane,

Bump!

Care to invite Gross Real to the discussion? I think he mentioned a similar exchange rate in a previous thread. We may as well pick his brains as well.
I have been wondering about this scenario also.

 

[plusnq]

Hi SS

I'd be intersted in GR's take too!

Still hoping NR will reply.

Cheers

Shane

 

[keithj]

Still hoping NR will reply.

So am I.

Back here I asked him -

You've given us a fair bit of D&G opinion with an end result (of 2% IRs & a 38c A$) - can you back it up with the path we'll take to get there with some causes & effects - maybe tell us about wages, inflation, GDP, exports, IRs, liquidity, lending criteria tightening, renters reactions to 2% IRs, house prices, movement of the Aussie $, and anything else you think might be relevant....for Oz, China & the rest of the world. And also the likely hood of each of these events occurring.....

I don't cloud my thought processes with the minutiae of detail your looking at.

You may eventually be right NR. But right now, you'll telling us the End is Nigh simply because there are some guys on the other side of town saying it. We'd be interested to know why you think the End is Nigh .

 

[plusnq]

Hi Keith,

Bump!!

Maybe NR is away?

Cheers

Shane

 

[boomtown]

A bump for the drop bear.

 

[keithj]

Hi Keith,

Bump!!

Maybe NR is away?

Cheers

Shane

He'll be back.... last I heard he was busy rewriting his placard... The End Is Even Nigher

 

[nonrecourse]

Sorry like most of you I have to limit my time on line or my wife would divorce me. Will get back to this today. I had hoped that the share market would have settled until Feb but it seems things just continue to spiral down with no let up.

Regards

 

[nonrecourse]

Ok phew what a week life is very full.

GDP is going nowhere in the next ten years but our pollies will play with the numbers just like they do with the cost of living figures and any other meaningful statistic.

Interest rates will continue to go down because consumer sentiment is such that like the 1990's in Japan will collapse. My call is the reserve will have interest rates at 2% and your mortgage rates will be around 4%. I note forcasters are now talking of the reserve rate sliding to 3.65%. I think 2%, I dont't think it will drop to 0% like the U.S. or Europe will.

Why 2% because any lower and our 38 cent dollar will be a banana republic funny money. The world is awash with fiat currencies and at some stage much to the chagrin of reserve banks (Governments can't play as many games with their currency on a gold standard) we will have some form of a gold banking again for currencies. That has always been the case throughout time.

Inflation In most of the world there will be deflation its already happening in parts of the UK. But Australia won't suffer as badly as Europe or the America's but will not fare as well as some of our new Asian masters because they will hold the whip hand with commodities. Our white devil prime minister has some serious sucking up to do.

Unemployment will hover around 5-6%. In the real world 5% unemployment is effectively full employment because the bottom 5% are unemployable. When I came to oz in the early 70's they had less than 2% unemployed and that was because society was willing to pay for lift attendants and a mirade of other menial tasks. But that was before the social engineers came along and got rid of those jobs and gave them the right to sit at home sucking on tinnies

Property prices Best case scenario a 40-50% drop, worse case scenario 70% but unlikely, as unlike the great depression our pollies will not be sitting on their hands. This time it is the old money that has taken a king hit in the America's and Europe.

The other difference is with the liquidity crisis our housing is going to experience increased demand not less so rents will continue to slowly increase. That combined with lowering intrest rates you would think would be good news for property investors. It is provided you don't need to sell or roll over your loans into new loans because that will be the sticking point.

There is going to be a severe restriction on access to those funds. Crditors will be merciless. If your borrowings are low or nil it will be a firesale if you can internally generate the cash for further purchases but it will all be cash flow positive. Negative gearing for the next 25 years will be the exception rather than the rule

 

[25North]

25North

Ahhh interesting times afoot.
Lucky to be an expat I enjoy talk of falling OZ dollar and interest rates, 30% payrise over the last 6 months. Doesn't quite make up for the past few years but welcome.
At present we are battening down the hatches, creating good buffers for possible difficult times. A year or two should provide clarity and a brief slow down in our growth is good insurance against possible dire times ahead.
( The world is still reluctant to mention credit card debt, yet to come. )
Not too fussed with drop in prices as we have 80% commercial but tenants are our number one concern and a weak economy will test our skills.
Good news - this is likely to be the worst financial crisis we shall see in our lifetimes and should we ride out the storm, we will emerge with greater knowledge and confidence for the future.

 

[nonrecourse]

Ahhh interesting times afoot.
Lucky to be an expat I enjoy talk of falling OZ dollar and interest rates, 30% payrise over the last 6 months. Doesn't quite make up for the past few years but welcome.
At present we are battening down the hatches, creating good buffers for possible difficult times. A year or two should provide clarity and a brief slow down in our growth is good insurance against possible dire times ahead.
( The world is still reluctant to mention credit card debt, yet to come. )
Not too fussed with drop in prices as we have 80% commercial but tenants are our number one concern and a weak economy will test our skills.
Good news - this is likely to be the worst financial crisis we shall see in our lifetimes and should we ride out the storm, we will emerge with greater knowledge and confidence for the future.

Like you North we are mostly into commercial property. We managed to sell some of the non core stuff and cleared the decks. The wife complains that I know every cent she spends before she even leaves the supermarket. That's the beauty of having all your credit cards personal and business online.

 

[boz]

Ok phew what a week life is very full.

GDP is going nowhere in the next ten years but our pollies will play with the numbers just like they do with the cost of living figures and any other meaningful statistic.

Interest rates will continue to go down because consumer sentiment is such that like the 1990's in Japan will collapse. My call is the reserve will have interest rates at 2% and your mortgage rates will be around 4%. I note forcasters are now talking of the reserve rate sliding to 3.65%. I think 2%, I dont't think it will drop to 0% like the U.S. or Europe will.

Why 2% because any lower and our 38 cent dollar will be a banana republic funny money. The world is awash with fiat currencies and at some stage much to the chagrin of reserve banks (Governments can't play as many games with their currency on a gold standard) we will have some form of a gold banking again for currencies. That has always been the case throughout time.

Unemployment will hover around 5-6%. In the real world 5% unemployment is effectively full employment because the bottom 5% are unemployable. When I came to oz in the early 70's they had less than 2% unemployed and that was because society was willing to pay for lift attendants and a mirade of other menial tasks. But that was before the social engineers came along and got rid of those jobs and gave them the right to sit at home sucking on tinnies

Property prices Best case scenario a 40-50% drop, worse case scenario 70% but unlikely, as unlike the great depression our pollies will not be sitting on their hands. This time it is the old money that has taken a king hit in the America's and Europe.

The other difference is with the liquidity crisis our housing is going to experience increased demand not less so rents will continue to slowly increase. That combined with lowering intrest rates you would think would be good news for property investors. It is provided you don't need to sell or roll over your loans into new loans because that will be the sticking point.

There is going to be a severe restriction on access to those funds. Crditors will be merciless. If your borrowings are low or nil it will be a firesale if you can internally generate the cash for further purchases but it will all be cash flow positive. Negative gearing for the next 25 years will be the exception rather than the rule

Interesting view.
I agree with most you wrote but I think that unemployment at 5-6% doesn't make sense with the Gdp growth going nowhere for 10 years, that would mean zero increase in productivity and zero increase in population (gdp increase also with population numbers going up). Unemployment must go up to have no growth on gdp on the long term.
Also with full employment and interst rates at all time low why people will sell homes to drag down prices?, specially considering cash flow will turn positive and NG will be a big factor in full employment.

 

[evand]

Great post NR....sounds like financial Armageddon. Over what time frame do you see the (best case ) 40%-50% decrease in property prices?

Ok phew what a week life is very full.

 

[topcropper]

Great post NR....sounds like financial Armageddon. ?

Gee's, I dunno.

4% interest rates? Sounds good.

5 to 6% unemployment. Crikey, that would be a great outcome, but I think we are heading higher than that. Plus, a lot of early retired people living on share dividends are going to have to go back to work. I know a few like that already.

38c $A. Obviously, commodities would be regarded as almost worthless if our currency got to that level. But in that situation, imports would be very expensive, and mining and agriculture should still do OK, and that's about all we export now anyway. Our economy should be OK. Mining and agriculture in Australia are the lowest cost and most efficient in the world. Prices should flatten out at levels where it's still profitable for Aussie producers, because otherwise no one else will be able to produce commodities either.

I just can't see property prices dropping 40%, let alone 70%. Although top end and coastal houses could see 40% drops and may have seen that already. I see more like what happened in the early 90's. A long period of flatness, meaning real losses compared to inflation.

Rents? I think rents are slowing now and may even drop. Some people are going to have to move to the bush where there is no shortage of property.

No idea, just pure speculation like anyone else.

See ya's.

 

[Shadow]

My call is the reserve will have interest rates at 2% and your mortgage rates will be around 4%.

Unemployment will hover around 5-6%.

our housing is going to experience increased demand not less so rents will continue to slowly increase

Property prices Best case scenario a 40-50% drop, worse case scenario 70%

Hi NR, sorry but you are not making any sense! You say we will have low unemployment, low interest rates, high demand for property, higher rents, yet prices will fall at least 40%-70%... why? What will force so many people to sell that it causes a 40% dive.

There is no logic there. Why would anybody sell for a 40% loss if they are fully employed and paying low interest rates (cashflow positive for investors!)

There is going to be a severe restriction on access to those funds. Creditors will be merciless.

When will this start happening? Banks are bending over backwards to lend!

Cheers,

Shadow.

 

[evand]

Imagine what state the economy would be in to handle a 2% cash rate? Not to mention 40% - 70% drop in property prices.

I think unemployment would be higher tho, possibly high single figures.

Gee's, I dunno.

4% interest rates? Sounds good.

 

[keithj]

Ok phew what a week life is very full.

Thanks for the response NR.... a bit better than fairy tales .

GDP is going nowhere in the next ten years but our pollies will play with the numbers just like they do with the cost of living figures and any other meaningful statistic.

Anyone forecasting 10 yrs out is making a v. big call. We're living in unusually uncertain times. What probability do you place on your forecasts being right ? Is it all 100% guaranteed or is it a remote possibility espoused by some Utube whacko ?

And can you think of any policies from govts or any left-field event that will make everyones forecasts useless ?

 

[boz]

Hi NR, sorry but you are not making any sense! You say we will have low unemployment, low interest rates, high demand for property, higher rents, yet prices will fall at least 40%-70%... why? What will force so many people to sell that it causes a 40% dive.

There is no logic there. Why would anybody sell for a 40% loss if they are fully employed and paying low interest rates (cashflow positive for investors!)


Shadow.

Hey Shadow! I did point that out first in my reply! Good to see you agree with my views

When will this start happening? Banks are bending over backwards to lend!

Cheers,

It could happen, if banks at the moment are bending backwords to lend money is because they get the short term funding from the RBA and eventually some longer term funding from the Government funding guarantee. This can change if home prices drop because tha banks mortgages backed securities will be worth less and RBA will give banks less money in exchange for their MBS, also RBA will be in trouble with losses from the dodgy securities banks have flogged to RBA. Also inflation could become out of control from all this give away money from RBA and force the RBA to stop lending money for a cheap rate and banks will have to stop to give away cheap mortgages. This scenario is also likely at the point that more debt you take and more cash flow positive you become (like also Michaelwhite point out for his case). What do you think will happen once a lot of australian will get smart and do get too much debt to get cash flow positive? what is too much money is going to do? The RBA has to be very carefull to manage the monetary policy and not just look at the economic growth.
I also want to point out that the AU$ exchange rate is very much effected by the Gold price: you can't have a high gold prices without effecting upwards the AU$ exchange rate.

 

[Kenster]

Interest rates will continue to go down because consumer sentiment is such that like the 1990's in Japan will collapse. My call is the reserve will have interest rates at 2% and your mortgage rates will be around 4%. I note forcasters are now talking of the reserve rate sliding to 3.65%. I think 2%, I dont't think it will drop to 0% like the U.S. or Europe will.

Hi NR,

The lower IR combined with increased money supply can counter the effect of deflation in short term, but can lead to hyper-inflation in medium term (and subsequent return to gold standard and/or global currency).

What do you think?

Thanks.

 

[nonrecourse]

Thanks for the response NR.... a bit better than fairy tales .

Anyone forecasting 10 yrs out is making a v. big call. We're living in unusually uncertain times. What probability do you place on your forecasts being right ? Is it all 100% guaranteed or is it a remote possibility espoused by some Utube whacko ?

And can you think of any policies from govts or any left-field event that will make everyones forecasts useless ?

Hi Keith; A lot of SS posters believe in fairy tales that was my point As for guarantee's there are only two I know of namely death and taxes. I believe in economic cycles that are much longer than what most look at. Hence the disbelief of most on this site with regards to a soft depression.

As a society we have forgotten history and are doomed to repeat it. Many years ago the AFR reporter Trevor Sykes wrote a brilliant book on corporate failures from the first fleet to just before Alan Bond.Every 10-20 years the corporate regulators have to come in and shuffle the chairs on the titanic


The only left field event that would put paid to forecasting is a world war