crisis=opportunity

[handyandy]

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.

The main reason that it less inflationary than it should be is because the retail bank then buys government securities with those real dollars. The retail bank in this way has moved the bad loans from a potential loss situation to a government security asset but no money has entered the system. This is also why lending has not massively expanded - because the banks don't actually have the money they have securities.

Further I suspect that there is a background agreement in place which dictates that these retail banks can not cash in the government securities without redeming their flawed loans. (the last part is my speculation)

Cheers

 

[nonrecourse]

Hi all,

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



..... 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

Hello Bill and I'll include Kum yin lau as well. There is a problem with what you think is ocurring and reality. You talk about if a financial armageddon were to happen and I know if you read the local press they still argue if we are in a recession ?

The reality is an enormous portion of the upper middle class and the wealthy individuals and companies world wide have lost numbers that include more zero's than I or you would wish to count.

Back in July 2007 when I first started reading about the financial tragedy your current view was justifiable. Early in the GFC I wrote on this site how finance was going to contract and it would become very difficult to borrow. If you saw the front page of the age today you may have noticed that the desalination plant in Victoria looks like not going ahead because of inability to secure finance. If you actually read the entire article you would realise how this "recession" in Australia is going to affect all of us for decades.

For the past year I have just been struck by the absolute drivel and lies that have been trotted out by our political spin merchants and bankers about how this financial crisis will miss us. Remember how our trade with China was going to save us? To talk about the problem being over at the end of 2009 or early 2010 beggars belief.

I realise that most people including many on this site operate in their micro world about what happens to them. In the macro world the reality is "most of the developed world, namely the US, UK and Europe are in a full blown financial depression and virtually all their banks are insolvent".

My extreme view was extreme 18 months ago when I initially started to extrapolate out what could occur. Today I think it is time that those who operate in their mico world stepped into the macro world and appreciate what is really happening.

Our children yours and mine will some day tell their grandchildren about the depression that they lived through. Some will talk about it lasting ten years but the consequences of what is occurring will take 30 years. It will take anywhere from 50 to 60 years after that for people to yet again forget the lessons that we are all about to re learn in the next couple of years. Reduce your debt, don't spend or borrow more than you can afford to repay realistically and always look out for that black Swan event that everyone tells you cannot happen.

When the Soviet Union imploded in the late 1980's American, UK and European capitalism ruled supreme. Yet in under two decades the sheer arrogance and greed has turned the horn of plenty into a basket case.

My view is is no longer an issue, events have overtaken our arguing. I see the reality in my business clients every day particularly in the 40 plus age group who now realise their secure retirement plans are in tatters. In the last great depression it took WWII and not until 1952 for the Dow to recover.

Your view that my call on residential property of a fall of 40-50% is silly, is in fact just another Black Swan waiting to happen. Why anyone would argue in these times that reducing your gearing to 30% bemuses me.

I realise what I am conveying is really upsetting but rather than shooting the messanger explain to me how you cannot see what is unfolding.

 

[kum yin lau]

NR, what you've last posted is more worthy of debate mainly by its tone.

I have no problem accepting that your extreme view may eventuate.

I do have major problems with your 'answer' to the problem.

Action must be consistent with belief.

So, banks will be insolvent & govts corrupt or inept to do anything.
Stock mkts have halved and most likely go down some more. [Note I have no problem accepting this. It's almost a given]
Following on its heels, property will fall 40-50% [possible too]

What to do then?
30% LVR is NOT A GOOD ENOUGH action if one took that extreme position.
To be consistent, one must LIQUIDATE.

Now you see my problem with your point of view? I will be left with stacks of the despicable 'fiat currency' that the insolvent banks led by foolish govts churn out.

You suggest that I examine the other side of the ledger. Do you?

I do agree with you that high LVRs is something to address. The 20 something or 30 something or even 50 + buying a FH on the grant is merely doing something that needs to be done. Providing shelter.

That shelter comes at a price determined by the real providers - the concreters, the brickies etc.

The buyer pays for it with some pain - give up cigarettes, holidays, big ticket items etc

I also look beyond the FHBs. I see their attachments - the children, the 15 yo and 17 yo who in 5 years will be looking for homes to buy.

I can go on and on but I'll be covering old ground.

KY

 

[Bill.L]

Hi all,

NR,

"most of the developed world, namely the US, UK and Europe are in a full blown financial depression and virtually all their banks are insolvent"

One of those insolvent banks just announced a good result for the first 2 months of 2009.

That is right, we can't trust them.....

the absolute drivel and lies that have been trotted out by our political spin merchants and bankers

NR, Do you know what money, credit and debt are?? They are UNLIMITED constructs of man. They are only constrained by 'rules'. Governments and central banks can change the rules. That is the macro picture.

If 'authorities' create too much money relative to others via 'quantative easing' then hyperinflation and rapid currency depreciation often occur.
But what if everyone does it together?? Then if the relativities stay the same, no hyperinflation, no massive currency depreciation, yet debt problems can be solved with the stroke of a pen.

bye

 

[nonrecourse]

Hi all,

NR,



One of those insolvent banks just announced a good result for the first 2 months of 2009.

That is right, we can't trust them.....



NR, Do you know what money, credit and debt are?? They are UNLIMITED constructs of man. They are only constrained by 'rules'. Governments and central banks can change the rules. That is the macro picture.

If 'authorities' create too much money relative to others via 'quantative easing' then hyperinflation and rapid currency depreciation often occur.
But what if everyone does it together?? Then if the relativities stay the same, no hyperinflation, no massive currency depreciation, yet debt problems can be solved with the stroke of a pen.

bye

Hi Bill I had a bit of a chuckle about your observation on unlimited constructs of man. Seems the other day the ex finance Minister of Zimbabwe congradulated the EU, UK and the US for following Robert Mugabe's lead in quantitative easing that he instructed the Zimbabwe reserve bank to follow so he could pay his cronies

 

[nonrecourse]

NR, what you've last posted is more worthy of debate mainly by its tone.

I have no problem accepting that your extreme view may eventuate.

I do have major problems with your 'answer' to the problem.

Action must be consistent with belief.

So, banks will be insolvent & govts corrupt or inept to do anything.
Stock mkts have halved and most likely go down some more. [Note I have no problem accepting this. It's almost a given]
Following on its heels, property will fall 40-50% [possible too]

What to do then?
30% LVR is NOT A GOOD ENOUGH action if one took that extreme position.
To be consistent, one must LIQUIDATE.

Now you see my problem with your point of view? I will be left with stacks of the despicable 'fiat currency' that the insolvent banks led by foolish govts churn out.

You suggest that I examine the other side of the ledger. Do you?

I do agree with you that high LVRs is something to address. The 20 something or 30 something or even 50 + buying a FH on the grant is merely doing something that needs to be done. Providing shelter.

That shelter comes at a price determined by the real providers - the concreters, the brickies etc.

The buyer pays for it with some pain - give up cigarettes, holidays, big ticket items etc

I also look beyond the FHBs. I see their attachments - the children, the 15 yo and 17 yo who in 5 years will be looking for homes to buy.

I can go on and on but I'll be covering old ground.

KY

Hello KYL;
If you think my tone has been strident on this board you should talk to my wife and kids for the last 18 months they have been to hell and back with me over what has evolved. My accountant and solicitor both though my business must be going under because of my sudden interest in insolvency, accounting and our trust structures starting 18 months ago. The solicitor has a two page synopsis on what was going to occur on his desk that I wrote to him in September 2007 that he shows to clients who say who would have guessed it.

My business partner of just over 16 months is a University mate who is in the same line of work. When I described what I though would happen he sold half of his property holdings (like us he and his family rents) and moved his business in with me. He walks around with a permenant grin on his face and is a delight to have as a partner because he owned his own business for 15 years and isn't afraid to put his shoulder to the wheel when requirred.

The upside is that my sons now realise that money really dosen't grow on trees and my wife has forgiven me for selling our family home 5 years ago and refusing to purchase another. We have seen most of our friends and customers lose a significant portion of their net worth. To the detriment of my business for a while I was Mr doom and gloom for most of our customers early on because I didn't want to see them hurt by what was coming.

As a young man in the early 70's I spent 5 years back packing around the world. I had the opportunity to see a number of third world countries in melt down with severe deflation, devaluation of the currency and awful poverty.

Those people in the country who had land were at least able to survive at a subsistence level and feed their children. Those unlucky ones who required medical treatment simply died as the child mortality rate particularly in Bolivia was horrendous.

You say that liquidating in my worst scenario is the only option. Have you considered that perhaps the paper money that you recieve in that scenario quickly becomes worthless? I really believe that land is more valuable than gold in a deflationary enviroment because as you pointed out people need somewhere to live and in our case somewhere to operate a business.

Even in the great depression the majority still had jobs. My father when he was alive was forever saying that the businesses that thrived in the depression were those who had little or no debt and they only spent what their business could internally generate and only if that spending created more income above the initial outlay. Pretty simple isn't it?

Live within your means, look after your family, staff and customers and they will stick with you.

 

[kum yin lau]

Fair enough. I know people who sold their homes and waited to buy again.

I was making the same point. That real estate has the intrinsic value that paper money may not. That I prefer to hold my wealth in realestate than cash.

The spectre of deflation is something that we do not want to face. We will deal with it if it comes.

A high horse is a mighty lonely place to be sitting.

KY

 

[HiEquity]

When I described what I though would happen he sold half of his property holdings (like us he and his family rents) and moved his business in with me.

.....

and my wife has forgiven me for selling our family home 5 years ago and refusing to purchase another.

.....

I really believe that land is more valuable than gold in a deflationary enviroment because as you pointed out people need somewhere to live and in our case somewhere to operate a business.

.....

Pretty simple isn't it?

Hi NR

Yes of course you were right but I still can't work out whether you are advocating buying or selling property?

If property is an excellent store of value and fiat money becomes worthless then we should all be buying as much property as possible using money that will otherwise soon be worth very little...

If we are in the grip of lengthy deflation then we should all be selling our properties, regardless of their LVR as the cash we get for them will be increasing in value and the properties will continue to go down in relative value...

So which is it?

 

[Bill.L]

Hi NR,

Keep chuckling.

melt down with severe deflation, devaluation of the currency

Do you know the difference between inflation and deflation???

bye

 

[nonrecourse]

Hi NR

Yes of course you were right but I still can't work out whether you are advocating buying or selling property?

If property is an excellent store of value and fiat money becomes worthless then we should all be buying as much property as possible using money that will otherwise soon be worth very little...

If we are in the grip of lengthy deflation then we should all be selling our properties, regardless of their LVR as the cash we get for them will be increasing in value and the properties will continue to go down in relative value...

So which is it?

Hi HiE; You won't like my answer. I think we are going to see deflation first because world trade has already fallen off a cliff. People are gradually pulling back their expenditures. I then think you are going to see property values tank as I've said before. That is going to destabilise our four pillars (Banks) My bet is we will end up with 2 pillars, CBA and Westpac.

I also think we are going to see most developed countries currencies devalued because there is going to be a wave of bank failures accross the western world that is going to destabilize the entire financial system. The end result will be a new finacial system that pegs the old currencies value of say 10 to the new currencies of a value of 1 and that will in some form be linked to gold as it is the only thing that people trust in a panic scenario.

So by all means my take is hang onto as much property as you can just be prepared to initially see its value drop like a stone and that is why I keep carring on about 30%. Some on this site argue that the banks won't call in residential loans that have an LVR at 80% provided you continue to meet your obligations.

I think that that is a very brave call. The banks are currently doing some pretty stupid things with commercial property loan covanants even though there is no issue with the REIT's servicing the loans because the buildings have long leases and are fully occuppied.

I had this conversation almost two years ago with my banker and he laughed in my face. Eight months ago we had the same conversation and it took him most of a week to get an answer from Head office. I have posted this before. He assurred me that the bank wouldn't want to step in and start repossessing provided I met my repayment obligations. I'm not so sure we have some pretty juicy properties with very good yields.

What makes me very suspicious is all our commercial properties have residential loans on them thanks to a little Indian banker who no longer works at the nab because he fell foul of the immigration department when he found another juicy loop hole for his Indian clients.

My current nab bankers are really keen for me to change those loans over to commercial loans. Quite a few contracts are fixed at 6.69% until 2011 and then just roll over into the variable home rates. That was back in the heady times of 2005 just before rates really started to climb when the banks were doing everything to keep me away from Aussie and the brokers.

We live in very interesting times. My take may not be yours but what is important is that you think and grow rich slowly so you manage to hang onto some of it

 

[nonrecourse]

Hi NR,

Keep chuckling.



Do you know the difference between inflation and deflation???

bye

See above bill

 

[HiEquity]

Hi HiE; You won't like my answer.

I don't mind the answer at all - you seem to be saying wait until property drops 40% and then buy like crazy before hyperinflation sets in and money becomes next to worthless.

Given that the effect of medium to long term hyperinflation is so much greater than short term deflation then I am happy to dollar cost average the property deflation just in case the turnaround into high inflation comes quicker than we think.

Totally agree about having a plan to be able to hold onto your properties in the worst case scenario as well. I just won't be hanging around until the drop happens to start buying - if what you predict comes to pass then the window to buy property at those prices prior to the onset of inflation will be very small!

The likelihood of future high inflation as a result of this mess is one of the main reasons I am still buying ATM. I reckon it will happen sooner rather than later too...

 

[nonrecourse]

Have you thought about setting up an SMSF and a bare trust so that you can purchase one or more properties in super as it gives you some protection long term against your creditors and the banks once you have it paid off?

Regards NR

 

[Big Rog]

Have you thought about setting up an SMSF and a bare trust so that you can purchase one or more properties in super as it gives you some protection long term against your creditors and the banks once you have it paid off?

Regards NR

NR,
Your many and varied posts make for interesting reading. I'm not too sure however about your assertion of 40+% drop in values; if you take a look at residential property values over time they rarely drop much more than 5% at the low part of the property cycle, if that. Mostly the prices go flat for a while (maybe 2 or 3 years), or drop a little and then go on charging ever upwards - particularly so in the below $500K property range where most retail property investors dwell.

Of course I can see why high priced properties fall a lot because of the reasons that highly charged yuppies try to outdo each other and bet everything on the swish house and then come unstuck when they lose their high paying job, etc ,etc. However these high priced properties are so few and far between and not really an investment class anyway.

Your D&G rhetoric whilst entertaining (hmm, reminds me of Steve Keen) to me doesn't particularly lead anywhere. Most retail investors on this forum are enthusiastic and highly intelligent who long ago looked at the stark investment choices facing them; these being cash, equities, or residential property. Cash as we know is next to useless in an investment sense as it is a poor earner (no doubt great in a business sense for cash flow purposes, or to keep as a stash under the bed for a while until it becomes devalued), equities - well you only have to look at the shambolic share market to realise even the experts can't handle it with Buffet himself experiencing something in the vicinity of 40 to 50% drop in value of his equities this past year. Do you know that unless a person sits on 5 to 10 of the top 20 stocks for a hell of a long time, they will invariably lose money trying to mix it with a small and highly charged pool of relentless sharks. This then leaves you with good old residential property - boring as it is and favoured over commercial property by the vast majority of Property investors. Here are some good reasons to be a property investor in Australia as we speak:

1. Migrants are flooding in each year to Australia (something like 350,000 odd) ie; in Melbourne that translates to approx 1,000 - 1,400 people PER WEEK requiring housing
2. In Maslow's hierarchy of needs, shelter is one of the basic human needs, therefore real estate is always high on the agenda
3. Rental vacancy rates are at an all time low
4. Occupany rates are ever dropping - it seems like people need to see each other less and less and need their personal space a lot more further creating demand
5. Supply of properties is woefully underdone with property planning approval processes still stuck in some long ago century, and a startling lack of qualified tradies, thereby creating huge demand for remaining properties
6. Interest rates are currently so low that if a person feels a bit queezy then just go and fix the rates for 5+ years (a real "set and forget" strategy)
7. Even the gov't knows what to do and is throwing FHOG's all over the place thereby stirring demand - the gov't makes a lot of its money in rates, land taxes and the flow on affect of people whipping down to "Hardly Normal" (Harvey Norman) and buying up piles of furniture and furnishings

NR, enough I say of this D&G and negativity; no good ever came of it. My conclusion is to therefore not lose your day job, gear yourself to the back teeth, whack $30,000 in cash somewhere, keep on singing and thinking wondrous thoughts.

Big Rog

 

[ffc1883_1996]

...my wife has forgiven me for selling our family home 5 years ago and refusing to purchase another. ...

Oh man, nonrecourse. You really are committed to your position – big time!

You convinced your missus to sell the castle just a couple of years before the “Inner Melbourne Mini Boom” of 06/07 and every day since then you’ve had to look her in the eyes and say “don’t worry – the crash is coming – trust me”.

You often talk about prudent risk management but it looks like you’ve gone out on a limb BIG TIME. I mean, how may “I told you so points” you’ve lost so far? How many to you stand to loose in future. That’s a high stakes game to play.

 

[nonrecourse]

NR,
Your many and varied posts make for interesting reading. I'm not too sure however about your assertion of 40+% drop in values; if you take a look at residential property values over time they rarely drop much more than 5% at the low part of the property cycle, if that. Mostly the prices go flat for a while (maybe 2 or 3 years), or drop a little and then go on charging ever upwards - particularly so in the below $500K property range where most retail property investors dwell.

Of course I can see why high priced properties fall a lot because of the reasons that highly charged yuppies try to outdo each other and bet everything on the swish house and then come unstuck when they lose their high paying job, etc ,etc. However these high priced properties are so few and far between and not really an investment class anyway.

Your D&G rhetoric whilst entertaining (hmm, reminds me of Steve Keen) to me doesn't particularly lead anywhere. Most retail investors on this forum are enthusiastic and highly intelligent who long ago looked at the stark investment choices facing them; these being cash, equities, or residential property. Cash as we know is next to useless in an investment sense as it is a poor earner (no doubt great in a business sense for cash flow purposes, or to keep as a stash under the bed for a while until it becomes devalued), equities - well you only have to look at the shambolic share market to realise even the experts can't handle it with Buffet himself experiencing something in the vicinity of 40 to 50% drop in value of his equities this past year. Do you know that unless a person sits on 5 to 10 of the top 20 stocks for a hell of a long time, they will invariably lose money trying to mix it with a small and highly charged pool of relentless sharks. This then leaves you with good old residential property - boring as it is and favoured over commercial property by the vast majority of Property investors. Here are some good reasons to be a property investor in Australia as we speak:

1. Migrants are flooding in each year to Australia (something like 350,000 odd) ie; in Melbourne that translates to approx 1,000 - 1,400 people PER WEEK requiring housing
2. In Maslow's hierarchy of needs, shelter is one of the basic human needs, therefore real estate is always high on the agenda
3. Rental vacancy rates are at an all time low
4. Occupany rates are ever dropping - it seems like people need to see each other less and less and need their personal space a lot more further creating demand
5. Supply of properties is woefully underdone with property planning approval processes still stuck in some long ago century, and a startling lack of qualified tradies, thereby creating huge demand for remaining properties
6. Interest rates are currently so low that if a person feels a bit queezy then just go and fix the rates for 5+ years (a real "set and forget" strategy)
7. Even the gov't knows what to do and is throwing FHOG's all over the place thereby stirring demand - the gov't makes a lot of its money in rates, land taxes and the flow on affect of people whipping down to "Hardly Normal" (Harvey Norman) and buying up piles of furniture and furnishings

NR, enough I say of this D&G and negativity; no good ever came of it. My conclusion is to therefore not lose your day job, gear yourself to the back teeth, whack $30,000 in cash somewhere, keep on singing and thinking wondrous thoughts.

Big Rog

Hi BR Each to their own I guess. If your serious about long term wealth you don't go far if your wiped out and have to start from zero. I haven't advocated you get out of the market entirely just that you protect yourself by getting your gearing down to thirty percent (That concept seems to really upset a portion of individuals on this site as I have coped a fair amount of venom over that and the 40-50% property drop) Building sustained wealth is a slow process and you only make it more difficult if you lose your seed capital. You can build wealth slow and steady without riding a roller coaster.

Don't know if this link will show as it is from my paid subscription of the Eureka Report

http://www.eurekareport.com.au/iis/iis.nsf/pages/215E185FBE7B138BCA25757600133FC1?OpenDocument

 

[kum yin lau]

ffc, don't pick on him. He has the guts to act on his convictions.

NR, you make your stand much clearer but the part about continue to buy & hold property does contradict and confuses everyone.

Commercial property has a risk different to resi & that's why banks seem to have blinkers on.

I too had a commercial loan CBA no less & I was paying 10.79%

You were very clever to get 6.69% fixed.

The point about 30% fall leading to 9-10% yields refers to commercial property not resi. I should have made that clear.

All these discussions really prove that everyone follows his own path and there's no one correct way.

There're many indications that by selling at the height, one can later pick and choose a better and more effective PPOR. The price is not one that everyone is prepared to pay.

BTW, that 10.79% commercial loan was only a temporary one for the duration of the building. It was the cost I paid for doing business.

And I did have a series of confrontations with various banks. That part is now filed 'done' and I start the next phase of 'doing'.

KY

 

[WillG]

If your serious about long term wealth you don't go far if your wiped out and have to start from zero.

I haven't advocated you get out of the market entirely just that you protect yourself by getting your gearing down to thirty percent.

I have coped a fair amount of venom over that and the 40-50% property drop.

Building sustained wealth is a slow process and you only make it more difficult if you lose your seed capital.

You can build wealth slow and steady without riding a roller coaster.

NR,

All good valid points except ...

I don't agree with statement "40-50% property drop" however ...
I have seen areas/segments that have had zero growth since 2003 - this could be counted as a drop of 30% (if you purchased in 2003). It could be seen as a 40-50% drop if you add negative gearing loss's.
If you purchased properties prior to 2003, you may have seen compounded returns > 10%.
These examples do not apply to the whole property market.

I suggest that statements such as "40-50% property drop" should be associated with market segment(location + value) and timeframe. Perhaps you are referring to high-end coastal properties that have lost 20% in the past 12 months. If you take into account negative gearing losses, inflation, opportunity cost and negative/flat growth over the past several years, they may have already lost 30%. Another 2 - 3 years of no growth or 5% drops will see them at 40 - 50% drop

 

[nonrecourse]

Oh man, nonrecourse. You really are committed to your position – big time!

You convinced your missus to sell the castle just a couple of years before the “Inner Melbourne Mini Boom” of 06/07 and every day since then you’ve had to look her in the eyes and say “don’t worry – the crash is coming – trust me”.

You often talk about prudent risk management but it looks like you’ve gone out on a limb BIG TIME. I mean, how may “I told you so points” you’ve lost so far? How many to you stand to loose in future. That’s a high stakes game to play.

Hi ffc;
When we sold in 2003 we got top dollar for the house. It was a record price per square foot in that street. We went from owning a liability into a commercial property that was putting money into our pocket. Just in cash flow alone we are miles ahead. The capital gain is a bonus and it doesn't matter when it drops by half later this year or next.

How much personal debt do you have ffc? we have none

 

[nonrecourse]

NR,

All good valid points except ...

I don't agree with statement "40-50% property drop" however ...
I have seen areas/segments that have had zero growth since 2003 - this could be counted as a drop of 30% (if you purchased in 2003). It could be seen as a 40-50% drop if you add negative gearing loss's.
If you purchased properties prior to 2003, you may have seen compounded returns > 10%.
These examples do not apply to the whole property market.

I suggest that statements such as "40-50% property drop" should be associated with market segment(location + value) and timeframe. Perhaps you are referring to high-end coastal properties that have lost 20% in the past 12 months. If you take into account negative gearing losses, inflation, opportunity cost and negative/flat growth over the past several years, they may have already lost 30%. Another 2 - 3 years of no growth or 5% drops will see them at 40 - 50% drop

Hi Will
I think that is why some are so upset with me when I talk 40-50% that does not factor in the negative gearing. In Brighton the drop so far is 21%. It tends to go first. Still expecting another 29% in the next 18 months. Would be rapt if it remains at 21% for the next 3 years.