crisis=opportunity

[chilliaa]

some data:
View attachment 4462
View attachment 4463
I don't see much value in the S&P in US.
But of course Australia is different....

Thanks for the charts boz,
one of the headaches is getting a feel for the true underlying earnings. There are two issues that potentially distort underlying earnings:
1)4qtr results included a number of restructuring charges that occur when a company downsizes.
2) the current crazy accounting rules that stipulate mark to market of ALL securities regardless if they are being held to maturity. This rule is absolutely nuts.

To give you an illustration of point two, imagine if a company enters into long term SWAPS to hedge its interest rate expense. This makes financial sense because the company wants certainty over its interest expense up to maturity, its not means of speculation but a prudent cash flow management technique. Now with interest rates droping around the world, companies are being forced to book massive losses on the SWAPS even though they have NO IMPACT on the cash operations of the business nor, over the course of maturity, on the P&L.

In simple terms imagine i took out a loan due in 5years with interest expense being the RBA interest rate. Lets say 5%. Now to be prudent i enter into a 5yr SWAP to hedge my position at 5%. Thus i pay a fee and i know for the next 5 years my rate is fixed at 5%.

Now lets say interest rates drop to 2% a year later. I would have to pay the current 2%RBA rate but because of the swap i would also pay an insurance rate of 3% (to equal the agreed SWAP rate of 5%). This is all good because i chose to fix the rate at 5%.

But under current accounting regulations i have to book a loss equal to the value of the swap insurance rate of 3% multiplied to the end of the hedge position (4years). This would all apear as a loss in the current years P&L statement.

The accounting bodies are looking into this this month and hopefully we will get a more sensible outcome in the next couple of months.

 

[nonrecourse]

Here is an interesting link that you should look at by a fellow who does not dismiss the possibility of a total melt down. He discusses ways to analyse what is best for you. The link I have given you is the last of a series of talks about the changes we face in the next 20 years.


http://www.chrismartenson.com/crashcourse/chapter-20-what-should-i-do

 

[kum yin lau]

Hi NR, many thanks for the link. Fantastic reading. Will buy the book if I see it.

He does say though [I'll read the hard copy more carefully] that it is a continuum and he doesn't know which point the world will be at.

So it's still left to the individual to assume responsibility for their own belief and take action accordingly.

Thanks again,

KY

 

[kum yin lau]

Hi again, have read Chris Martenson's Chap 20, downloaded the assessment and am slightly disappointed.

It's very slightly different from any other FP book I've read. And I read all that I could lay my hands on when I started the serious accumulation that will lead to self funded retirement.

However, I'll recommend that anyone who's still accumulating or just starting go through the assessment.

A bit like going back to uni.

Thanks again,
KY

 

[keithj]

What is best for you

Here is an interesting link that you should look at by a fellow who does not dismiss the possibility of a total melt down.

There's always a possibility of a total meltdown, in the same way that previously unknown 50m asteroid was v. close to hitting earth last week.

He discusses ways to analyse what is best for you.

I think that's the point NR.

Analysing what's best for you is obviously an individual thing. Both from an asset mix POV & a risk level POV.

For someone who is overweight commercial property a high LVR is likely to be suicide. All those multi $B LPTs with conservative LVRs of <40% have been marked down by between 70% and 100%. The ones that have survived so far will have to roll their loans over within the next couple of years when their review comes up - their bankers will not be cooperative.

Of course, for those with non-recourse loans (like all us res IP investors ) an 80% LVR is significantly less of a problem.

And for someone who is close to retirement, low risk & low debt will be a higher priority. For the younger among us, high debt & higher risk doesn't matter nearly as much - if in the unlikely (though not entirely dismissed) event of a total wipe out there's plenty of time to start again.


One of the problems with the rise of internet is that any whacko can make their extreme views available to the world for free. 20 years ago this was impossible. So it's easy for example for someone to present a v. strong (& v. one sided) case that all banks are insolvent and we're all doomed unless we revert to the gold standard..... until you try to find the other side of the coin & discover that that's been the case for a long time & banks aren't designed to be solvent in all circumstances.

I'd suggest trying to falsify any whacko idea that anyone stumbles across on the net before putting on their chicken likken hat and telling us that we're all doomed (except for themselves).


Dunno if your link covers these points - I looked at it a few months ago & it wasn't especially memorable (except the bit that says send us money ).

 

[kum yin lau]

Good on ya, Keithj. Anyone who reads the link please pick out "I don't know where" and "cannot entirely rule out any particular outcome"

The same as saying "your guess is as good as mine"

The point is at least he acknowledges that. NR, maybe you should too.

KY

 

[chilliaa]

The problem is that the proprietors of subscription based newsletters get paid according to how many subscribers they have.

Some rely on their historical investment performance (mainly the equity based newsletters).

Others make money through suggesting a 'plan' in the event of some destabilising factor. The problem with these type of newsletters is that nobody is going to pay money unless they are 'shocked' into it. Hence the aggressive nature of their 'free' articles.

 

[chilliaa]

I have been doing much reflection on the GFC, obviously im just like the rest of you, just a retail investor, so i recognise my own limitations.

Any way here are my current thoughts:
There are two major problems:
1) build up in global prices of residential property prices leading to residential property as a means of speculation and as a consumer ATM machine.
2) the shadow banking system.

The first problem is being worked through, its major source is the US. I have attached several case shiller graphs of US housing prices. We can see from the graphs that not every US city went bananas with housing price explosion, but those that went up the fastest are also now leading the correction down.
Property prices should continue to fall given the historical YOY rate of decline (which only looks to be forming some form of bottom in the rate of decline, not a movement towards zero).

Ok so near term US property to continue to fall, but when can we hope for a turn around.

The key to this IMO is to look at housing supply. I dont have these figures on hand, but its currently huge, something like a multi decade high of around 14months. This supply is being impacted by two factors: new building supply and bank mortgagee sales. Its only since around Dec 2008 that new housing supply effectively went towards zero (prior to this it was adding to supply). By the way you cant look at raw data new housing units to analyse this because of the way the data is compiled but when you hear D&G articles about new housing contruction dropped x% you should be cheering this, its good not bad.

So that leaves us with mortgagee sales, and this is where Obama's plan is not as bad as some people make out (unfortunately it also seems to have been recently diluted in order to get it passed through govt legislation, this is bad). The reason why we can't do a scheme similar to solving the problem with LTCM is that the debt no longer lies with the financial institutions who created the debt, its now dispersed into numerous other financial entities accross the globe (securitisation of debt products). Under contract law we would have to get consent from all these different parties which is practically impossible. The managers of the securitised products dont have the legal right to change the contract terms. Hence Obama's plan to allow judges to re-write the contract terms based on equity law or fairness.

If the US can decrease the rate of mortgagee sales, then surplus stock of housing (currently at 14months odd) will rapidly shrink due to no new building supply.

Thus one of the major signs i am looking for of a potential turnaround is the supply of housing, keep a very close watch on this figure. Reduce the supply and housing prices will stabalise. Housing prices stabilise and debt markets will stabalise.

Ok now on to the shadow banking system.
This is the other major cause of the global financial crisis. Its here one day and effectively gone the next. Let me highlight this with a very simplistic example:
Lets say the traditional banking system has $50 dollars
So everyone goes around borrowing and lending that $50 in their economic system.
Now the shadow banking system is created which creates another $50 dollars.
The money supply is increased to $100 dollars and everyone continues in their merry ways based on $100 of circulated dollars being lent and borrowed.

Now suddenly nobody has confidence in the shadow banking system anymore, it wasnt properly regulated, so nobody can be sure that if they have lent one dollar of shadow banking money, thats its actually there, if there is any security there, if the counter party can actually give them their one dollar back.

So that $50 is effectively withdrawn from the system and hey presto we have one hell of a credit crisis. Where the system was used to $100 of circulation we now only have $50.

This is the primary reason why you see articles about 'banks' not lending. They cant $50's has dropped out of the system.
Does that make every borrower who borrwed part of that $50 irresponsible: NO. But what does a borrower who borrowed part of that $50 do when it comes time to refinance, the borrower wants his money back and there is no more $50 in circulation to get that money refinanced through another borrower.

THAT IS WHY central banks around the world are massively expanding their own balance sheets. The central banks have no choice, they have to plug this fallout in the shadow banking system, otherwise the global financial system will implode.

So essentially the central banks are saying to the lending institutions give me your $1 of shadow money as security and i will issue you with $1 of traditional money backed by the central bank.

In normal economic times this could be massively inflationary because of the huge increase in money supply, but its not happening at the moment because the central banks are merely swapping shadow bank money for traditional money.

However this ratio is not one to one, the shadow banking system had grown so large that the central banks are playing a game of cat and mouse. They are trying to restore confidence to the system so that the shadow banking system doesnt fall 100%.

So when you read that central banks are trying to encourage lending to businesses and consumers, they are not just trying to get consumers and businesses to go on a debt spending spree like some people suggest. There is just not enough traditional money to lend to even responsible borrowers. At the moment they are just trying to get that $50 of shadow banking money back into the system.

 

[chilliaa]

the graphs i forgot to attach.

 

[nonrecourse]

I think that's the point NR.


Of course, for those with non-recourse loans (like all us res IP investors ) an 80% LVR is significantly less of a problem.

[/I] ).

Are you serious Keith A limited recourse also incorrectly termed a nonrecourse loan means that if your investment fails the bank only takes the property. I would respectfully suggest that as a resi investor the bank well and truely has you by the short and curlies. When you sign on the dotted line for a resi mortgage at 80% LVR you agree to an all monies clause and you give a personal guarantee.

As for less problems with resi properties I beg to differ. If you have a couple of shoe boxes in the sky ok, your liabilities are diddly squat. But as soon as you get up to 5 or 6 freehold residential properties you have the state bandits shaking you down each year for land tax and tenants who think you are there to fund their lifestyle. I know as I have been there done that and moved up the property food chain.

As Dazz has said before resi property = lots of headaches for a relatively small return. You pay most of the outgoings such as rates, Land taxes, building repairs and anything the tenant squeeze out of you.

With a commercial lease with a public company you only pay that portion of the land tax above the single unit holding. The tenant pays everything else.
Yes you do have to have deeper pockets with commercial but higher returns compensate you for that over time provided you are not geared to the back teeth.

If there is a financial melt down and hundreds of thousands lose their jobs like the great depression, you know what will happen keith? My wife's grandfather had a string of resi properties in Brighton during the great depression. He had to sell them because the government put in rent controls that froze his rents for over a decade. He had tenants who were subletting rooms and collecting more rent for a few rooms than he was getting for the entire property.

When talking about property on a property investment site I assume that I am speaking from the point of view that even if you don't have a huge property portfolio yet that is where your headed. My prudent advice over the last 18 months to limit your gearing assumes that even if you only have 3 or four freehold properties we are headed into a period of deleveraging and you need to protect your seed capital.

One of the most basic oversights that I hear on this site is oh its ok I'm young enough to start again. That attitude ignores the principle of compounding. When you lose your seed capital you wipe out all of your compounding and you start from zero. By reducing your gearing you do slow down your growth but it still grows. When you are wipped out you then have to make up all that you have lost plus the lower growth at the 30% gearing level.

Albert Einstein called compounding the eigth wonder of the world. Warren Buffet has two rules in investing. Rule one states preserve your seed capital. Rule number two states refer to rule number one.

 

[nonrecourse]

Good on ya, Keithj. Anyone who reads the link please pick out "I don't know where" and "cannot entirely rule out any particular outcome"

The same as saying "your guess is as good as mine"

The point is at least he acknowledges that. NR, maybe you should too.

KY

Hello KY. Maybe you should examine the other side of the ledger rather than just accepting the prevailing view point. The reason the world is in trouble is because people don't allow for black swan events like the one we are now facing.

Here is a very good article on the coming devaluation that I am acused of scar mongering on;

http://www.dailyreckoning.com.au/how-to-prepare-for-the-coming-devaluation/2009/02/03/

 

[chilliaa]

Hello KY. Maybe you should examine the other side of the ledger rather than just accepting the prevailing view point. The reason the world is in trouble is because people don't allow for black swan events like the one we are now facing.

Here is a very good article on the coming devaluation that I am acused of scar mongering on;

http://www.dailyreckoning.com.au/how-to-prepare-for-the-coming-devaluation/2009/02/03/

Non-Recourse i have extrated the major point from that article:
"These lower (interest rates) rates, and not just in Australia mind you, represent the coming devaluation of paper money against real goods"

The phrase "crack-up boom" first appears, as far as we can tell, on page 427 of Human Action, by the great Austrian economist Ludwig von Mises. Mises was writing about how changing expectations for purchasing power eventually affect people's real-world economic decisions. Once people see trillions in new money coming down the pipeline, they flee for higher, firmer ground.

"Once public opinion is convinced that the increase in the quantity of money will continue and never come to an end," he writes, "and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size."

"For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantage of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse)."

Now i dont listen to daily reckoning much, as i said they are pushing their own agenda: to get you to subscribe to their paid for services.

However this article highlights the point that holding cash has the risk of being depreciated against 'real assets'.

So this is actually going against your theory of creating a property portfolio with only 30% LRV. Instead you should be protecting your property portfolio by ensuring it is cash flow positive and then entering a long term FIXED loan to protect yourself against potential future interest rate rises in the event of future inflation.

In regards to the first part of the article about the decrease in export trade in asia and its relationship to the drop in consumer purchases in the west, i have already discused this at

http://www.somersoft.com/forums/showthread.php?t=49975

and how you can avoid being in the storm of the crisis.

I also identified the problems with Asia back in January at this post:

http://www.somersoft.com/forums/showpost.php?p=502966&postcount=31

As i have been saying all along, we have to take the GFC as a given, its here so just deal with it. Increase your risk and insurance strategies, but use these turbulent times to your advantage instead of just hiding under the bed covers.

 

[keithj]

Are you serious Keith A limited recourse also incorrectly termed a nonrecourse loan means that if your investment fails the bank only takes the property. I would respectfully suggest that as a resi investor the bank well and truely has you by the short and curlies. When you sign on the dotted line for a resi mortgage at 80% LVR you agree to an all monies clause and you give a personal guarantee.

You misunderstand NR. A resi loan term is for 25 yrs, no annual review, no 'margin call' - it's written in the contract. Now, those commercial loans, aren't like that - they get reviewed periodically - and if the banks decides that you're not a good risk, or your property isn't worth quite what you paid for it in 2004, then they'll demand their pound of flesh - it's written in the contract. Provided that a resi investor keeps paying the interest (which is a done deal in these low interest times) it's extremely unlikely that the bank will be able to show cause to call in the loan. OTOH, if your bankers just had a row with his wife & is in a bad mood, then he is within his rights to call it in immediately. Your 30% LVR is looking a lot shakier than 99% of the resi investors here.

As for less problems with resi properties I beg to differ.

....snip usual drivel

seed capital. Rule number two states refer to rule number one.

Have you tried falsifying any of your hypotheses yet NR ? Can you tell us a few scenarios where we're not all stuffed ? I'll start you off - that asteroid last week missed us by about 50,000km - phew lucky I didn't sell everything.

 

[nonrecourse]

Just to get a clear picture of where your coming from Keith. Is your residential holdings freehold real estate or is it in Stata Title or Stratum?

The vast majority of property investors only hold one or two properties. Once you get up to six and more your looking at a fraction of a percentage of the population. Where are you with regards to numbers and what percentage are you geared at ?

In your numbers don't count your PPOR I will assume that like 70% of people you will be paying it off or own it outright. If you rent correct me on this please.

 

[BoatBoy]

Here is a very good article on the coming devaluation that I am acused of scar mongering on;

http://www.dailyreckoning.com.au/how-to-prepare-for-the-coming-devaluation/2009/02/03/

Story loses a bit of cred with me when they use Google earth images of Singapore ships waiting to be offloaded for his scaremongering.

Does he really think these pics are live?
They are probably from 2005

Dave

 

[keithj]

The vast majority of property investors only hold one or two properties. Once you get up to six and more your looking at a fraction of a percentage of the population. Where are you with regards to numbers and what percentage are you geared at ?

Now we're getting somewhere NR......

I'll paint you a picture of 2 imaginary investors, and maybe you could tell us the risks & probabilities of those risks occurring -

Firstly, Sheila has 2 freehold IPs, 80% LVR, 4% yield, secure job.

And Bruce has 8 IPs, 85% LVR, 5% yield, secure job. He a bit gung-ho, however, he's done a little to mitigate risk - he's spread his loans around a few banks so < $1M exposure to any one. He's fixed his rates at 6.5% for 5 yrs, his tenants are all reasonable payers, he's got a 3 month cash buffer in case of unusually high vacancy.


I think these 2 investors would cover the vast majority of the SS population. What risks do you perceive these 2 investors are likely to face in the next 2 years ?

 

[want2bewealthy]

I personally entered the game almost 2 years ago and I started with nothing, like most so I'm 'equal' with the general working population at that point swapping time for money and never getting ahead, not particularly wondering why Im not doing any better financially because everyone else is doing it, its just what you do.

I now control a few properties and owe the bank some money, I've done really well so far and don't see 'luck' to be any part of my success to date.

I'm much better off than I was 2 years ago when I had my 40k in the bank and if things go pear shaped for a while what have I lost? nothing, and I'm sure I'll be well off into the future as my mindset wont allow for anything else now, I'll always be wealthy.

Even if I 'gave up' and sold everything to re-enter my life as an employee for the rest of my life then I would have lost nothing but thats the stupidest thing I could do and that certainly will never happen as I buy and never sell.

As a matter of fact, I could now take a few years off to do whatever I want and thats only 2 years worth of investing, imagine what things will be like in 10 years.
Its so tempting to take off and chase the sun but for now I'm focussing on investing for the future so I never have to worry about going back to work, I can just stay wherever I want without ever running out of money, in fact, I'll be creating more wealth than I can spend in an ever increasing pool of assets that see compounding growth over the long term.

Theres my 2 cents.

 

[kum yin lau]

Hi, wasn't going to post [it's like a dog chasing its own tail] but will finish off this one.

NR, we thank you for sounding the alarm & have taken note of it. We've also taken note that your position is very extreme.

Do you KNOW for a certainty that I have not examined the other side of the ledger? Or that people have not prepared themselves for 'black swan' events?

Or that Eternit has not considered what he needs to do to ensure he gets on OK?

Until your opinion of financial armageddon is true, it remains just that - a hypothesis, not fact.

There is merit in living today for today, not for fear that tomorrow the world will explode or implode. Today, my tenants pay $285 p.w. and I pay the bank $260, I fix the loan for as long as I need to ensure stability. That's the Aussie investments.

Chilliaa, thanks for the analysis and the answer. Interestingly, I did in Dec what you bolded in that answer. I fixed the NZ loans. Even though I knew the rate would come down [should have waited 2 months cos they came down massively], I was happy to fix. Simple reason : I get a 2% + arbitrage on those investments. Bought @9.25% yield, fixed @ 6.69%

Today, if I see a spread of 3%, I will still buy.

KY

 

[Bill.L]

Hi all,

nonrecourse, I am going to give you a little hint here, in regard to Keith.....

Once you get up to six and more your looking at a fraction of a percentage of the population. Where are you with regards to numbers and what percentage are you geared at ?

..... I suggest you read some earlier posts of Keiths going back a couple of years. He is not your average IP investor.

Sorry Keith to spoil your party.

nonrecourse, if the full financial armageddon were to happen, then we are all probably buggered anyway. Realistically we should be only planning on a positive future.

bye

 

[handyandy]

With a commercial lease with a public company you only pay that portion of the land tax above the single unit holding. The tenant pays everything else.

Hi NR

I always understood 'pay land tax on single unit holding' to mean that the tenant would pay the land tax owing on the portion of the value above the threshold.

I came to this conclusion because on a single holding the owner would get the threshold. Have I misunderstood this concept?

Cheers