RBA to cut rates by 100bp in December

[Francesco]

This is hilarious.

OK, if all these problems were all so obvious, what did you do about it then?

From memory, I think you have a reasonably high LVR ratio. If you knew about all this, did you try to reduce it? Plenty of bargains coming up? It would be good to be cashed up?

This whole debarcle only happened because hardly anyone saw it coming, otherwise it wouldn't have happened.

You should have started a post about these problems, like nonrecourse did, so we all could have averted this disaster.

See ya's.

What's obvious to some laymen LL is that the IP increases (after the fact) were feeding CPI. LL raised rent urgently (it's that or risk loan repayment arrears and mortgagee foreclosure). LL risked tenant churn by lifting rent increase as soon as possible (75% in my IP portfolio). Oil was also fueling CPI big time. The RBA (and many others) took an almost naive and ineffectual approach to fighting CPI. Nobel laurete Stiglitz, Turnbull, some academics and consultants warn against sticking inflexibly to CPI band targeting.

Why was RBA bias towards increasing IR against the perceived threat of CPI when CPI largely did not originate domestically, except the financial services sector which was fueled by the IR increases of RBA? Initially, there may be natural expediency to support the political masters' electoral spiel of inheriting an inflationary economy.

What did we do to warn others? Discussions in SS include the thread I started in early June 2008 forecasting IR has to drop when many others (incl forumites and economists) were more convinced that going forward the immediate priorities should be inflation and IR increases:

http://www.somersoft.com/forums/showthread.php?t=42870&highlight=trifecta

What else could we do beside trying to survive the tsunami of about 1.5% IR (incl independent lender increase) increases within 12 months on our IP portfolio and existing rental leases have yet to expire to allow higher rent?

Many people, including M Turnbull and John Hewson criticised the inflexible band targeting (a newspaper applied pressure with a headline 'is this the most useless man in Australia?' ) and the RBA did moderate their monetary management.

What we do have now is a more proactive RBA prepared to undo the damage and lost opportunities in 07-08 with 2% IR drops in 3 months. This is still net benefit to PIs of about 0.5% (= 2% -1.5%). It wouldn't surprise me to have another 1.5% IR drop at least to get out of this downturn period.

IMHO

 

[landlubber]

This is hilarious..

Yes, thank goodness it's only money.

OK, if all these problems were all so obvious, what did you do about it then?

Personally? Back in Nov 07 we saw what was happening to house vals in US and had the whole IP flock re-valued and re-freshed all our LOCs. We're in good shape.

You should have started a thread about these problems, like nonrecourse did, so we all could have averted this disaster.

With full respects to both the forum and nonrecourse, I doubt that threads on SS , regardless of who started them will ever "avert disaster". But if you read my posts I have been questioning the logic of RBA IR/inflation decisions "forever" .... cause they just didn't make sense.
LL

 

[topcropper]

What did we do to warn others? Discussions in SS include the thread I started in early June 2008 forecasting IR has to drop when many others (incl forumites and economists) were more convinced that going forward the immediate priorities should be inflation and IR increases:

IMHO

Sounds like you forecast commodities tanking in advance. Our economy was still very strong in June 2008. The RBA acted after it was obvious how serious the problems were going to be. If you saw that in advance, then well done. I need to borrow your crystal ball.

See ya's.

 

[topcropper]

What we do have now is a more proactive RBA prepared to undo the damage and lost opportunities in 07-08 with 2% IR drops in 3 months. This is still net benefit to PIs of about 0.5% (= 2% -1.5%). It wouldn't surprise me to have another 1.5% IR drop at least to get out of this downturn period.

IMHO

Does anyone seriously think the RBA caused all this simply by raising interest rates a bit too far?

This whole mess was caused by too much debt and leverage throughout the entire world. Consumers could stand no more and they have shut up shop. First the US, and then the rest of the world baring Australia, and then when commodities crashed, we did too.



The whole world is going into recession. Does anyone seriously think Australia alone would have avoided recession simply by the RBA not raising interest rates by as much as they did? The rest of the world in recession, and Australia still cruising along?

Who the flip would have we sold all our commodities to? Martians? While the commodities boom continued, Australia had a chance of missing the crisis. Once commodities crashed, it was game over, and in fact we are now a bigger risk than others.

See ya's.

 

[quoll]

YoYo

Anyone else with me?

I think I might put my hand in the air, it's looking crappy out there, maybe 125 is a possibility no I thnk more like a good chance.

 

[MichaelW]

While the commodities boom continued, Australia had a chance of missing the crisis. Once commodities crashed, it was game over, and in fact we are now a bigger risk than others.

See ya's.

TC,

Do you seriously think our entire economy is driven by commodity exports? That's showing your personal rural farming bias I think...

We're a bit like the US in that domestic consumption is also a large part of our economy as is real estate construction and infrastructure and other elements. Have a look at the attached table which is just one professional bodies forward projections for GDP. In 2009 exports and domestic consumption together contribue 1.4 points each to GDP. Neither will run to zero. Public consumption and investment adds another 0.9. The government is going to pull forward infrastructure build to prop the economy up whilst exports and domestic consumption stall. It is NOT the end of the world.

The attached table projects 2009 GDP to be 2.2%. i.e. Not a recession. I know the IMF now has it at 1.8% and our treasury just revised it to 2.0%. But noone at present is projecting even a recession. If we do go there then it will be mild. I personally think we'll skirt it. As an aside, do you like what this report is projecting for the percentage change YoY for dwelling investment in 2011/12/13? I do...

The media is painting this as the end of the world, but you watch how quickly sentiment turns positive again once it becomes clear we're not headed for a deep or prolonged recession. There's a reason the banks haven't eased their long term fixed interest rates. Inflation will come back in a hurry once the current crunch evaporates. I'd love to lock at 6% or lower but think the banks will only ease their variables to track the RBA settings. Fixed will hold as they know what the long term rate setting outlook looks like.

I may not be the "archetypal" consumer, but I certainly haven't shut up shop and haven't gone all negative at the moment. In fact, Kay and I were talking last night about buying a new $20K car, and we just spent $5K on a cruising holiday next year. I'm going to enjoy Christmas and can't wait to go to the banks for $1.2M to build Mona Vale in 2009. Already got pre-approval and they're eager to lend me the money. Northern Beaches property is up 9% in the last 12 months which hugely inflates my projected gross realisation. My cash flow on costs is still around 6.8% yield with rents still improving daily and vacancy rates set to get much worse.

The world is NOT going to hell in a handbasket. This is a temporary credit crunch and will be resolved. 2010 is looking like the beginning of the next bull run with a short term slow down in 2009 with the potential that Australia "might" join the US and EU in a recession. If we do it will be mild, and not long-lasting.

I'm getting sick of all this presumptuous end of the world stuff. I advise to all those getting caught up in all the media negativity at present, stick to the facts and let the deluded media run their scare campaigns.

Cheers,
Michael

 

[Aaron Sice]

the RBA got it wrong with extended rate rises. pure and simple. no scheming, no underlying motives - they just got it wrong in trying to control both imported inflation AND the still-at-the-time rising personal debt levels.

it's not 747s fault, it's not the media's fault - the blame rest solely on the shoulders of the RBA and their narrow minded policies.

that said - i'm with shadow - D&G is just plain dperessing and i woudl rather focus on on the opportunities presenting themselves rather that how to deleverage and squirrel away my cash.

 

[Ajax]

the RBA got it wrong with extended rate rises. pure and simple. no scheming, no underlying motives - they just got it wrong in trying to control both imported inflation AND the still-at-the-time rising personal debt levels.

it's not 747s fault, it's not the media's fault - the blame rest solely on the shoulders of the RBA and their narrow minded policies.

that said - i'm with shadow - D&G is just plain dperessing and i woudl rather focus on on the opportunities presenting themselves rather that how to deleverage and squirrel away my cash.

Agree with this. At least Australian reserve bank has lots of points interest rate available to cut to stimulate the economy (unlike US at 0.5% I think and UK which Fin Review today says may cut to as low as 0.5% sometime next year, or Japan at 0.3%).

There has to be huge opportunites around atm.

I suspect that's what Steve McKnight is pushing in his seminars at the moment-buying cheap high yielding properties at variable interest rates now (8%+ yield in the hope of cash-flow positive next year then locking in interest rates around 4.5%-5% middle of next year).

There are also tantalising high returns on writing share options at the moment (either puts or calls) due to the huge share-price volatilty.

 

[topcropper]

TC,

Do you seriously think our entire economy is driven by commodity exports? That's showing your personal rural farming bias I think...

We're a bit like the US in that domestic consumption is also a large part of our economy as is real estate construction and infrastructure and other elements. Have a look at the attached table which is just one professional bodies forward projections for GDP. In 2009 exports and domestic consumption together contribue 1.4 points each to GDP. Neither will run to zero. Public consumption and investment adds another 0.9. The government is going to pull forward infrastructure build to prop the economy up whilst exports and domestic consumption stall. It is NOT the end of the world.

I look at export earnings as like household income.

Housing construction, domestic consumption, infrastructure, is all what the income is spent on.

You can't spend more than you earn, or else nasty things may happen.



Simplistic? Very, but I'm a simple person. I don't really see what GDP has got anything to do with. GDP is a measure of goods and services. Australia's economy is 75% services. Nothing wrong with that. I don't want to see less nurses or teachers or any other service industry, but we still have to earn an income from exports to pay for it all. I also think most people have no idea how much income the government gets from mining royalties. A lot of that will dry up.



OK, our entire economy is not driven by commodity exports, but where did I say it was. I think Australia's economy has out performed during the commodity boom, and so now we are going to underperform for a while. Simple as that.

See ya's.

 

[landlubber]

Sounds like you forecast commodities tanking in advance.

I don't think it's up to forum members to forecast anything, least of all commodities prices. We're hardly the ones with 200 economists "on tap" monitoring the financial world. But I do expect the bleeding RBA who hold us all "by the proverbials" to be able to see more than one metre ahead....and they've proven time and time again that they can't. By end of 2007 the extent of the sub-prime was evident. Then the derivatives mess became more apparent. If you get right down to it, all the IR rises in 2008 were totally un-forgiveable mistakes. Certainly by Mar 08 we had banks actually 'crashing' in the US for goodness sake. ( and I refer to Bear Stearnes & then Lehmans.)
FURTHER, even now as "crap" descends in truck loads the RBA technically STILL HAS IT'S FOOT ON THE BRAKES... in as much as the target cash rate is 5.25% but the market conomists now tell us we need (like) 3.5 - 3.75% to even start to turn this baby around. Why not act now ????? What "sign" are we waiting for ?
Which leads me to my final point, made in posts to other threads, the bleeding RBA has no "feed-back loop". i.e. IT DOESN'T LEARN . It's done exactly the same this time as it's done previously !! Stick it's head up it's rear-end, not follow the real world, and hence raise rates too far. Look up the graph of the cash rate. It's made up of HUGE rises and then HUGE falls. Is this really the best the RBA can do. If it is, it's pretty pathetic.
LL

 

[boz]

TC,

Do you seriously think our entire economy is driven by commodity exports? That's showing your personal rural farming bias I think...

We're a bit like the US in that domestic consumption is also a large part of our economy as is real estate construction and infrastructure and other elements. Have a look at the attached table which is just one professional bodies forward projections for GDP. In 2009 exports and domestic consumption together contribue 1.4 points each to GDP. Neither will run to zero. Public consumption and investment adds another 0.9. The government is going to pull forward infrastructure build to prop the economy up whilst exports and domestic consumption stall. It is NOT the end of the world.

The attached table projects 2009 GDP to be 2.2%. i.e. Not a recession. I know the IMF now has it at 1.8% and our treasury just revised it to 2.0%. But noone at present is projecting even a recession. If we do go there then it will be mild. I personally think we'll skirt it. As an aside, do you like what this report is projecting for the percentage change YoY for dwelling investment in 2011/12/13? I do...

The media is painting this as the end of the world, but you watch how quickly sentiment turns positive again once it becomes clear we're not headed for a deep or prolonged recession. There's a reason the banks haven't eased their long term fixed interest rates. Inflation will come back in a hurry once the current crunch evaporates. I'd love to lock at 6% or lower but think the banks will only ease their variables to track the RBA settings. Fixed will hold as they know what the long term rate setting outlook looks like.

I may not be the "archetypal" consumer, but I certainly haven't shut up shop and haven't gone all negative at the moment. In fact, Kay and I were talking last night about buying a new $20K car, and we just spent $5K on a cruising holiday next year. I'm going to enjoy Christmas and can't wait to go to the banks for $1.2M to build Mona Vale in 2009. Already got pre-approval and they're eager to lend me the money. Northern Beaches property is up 9% in the last 12 months which hugely inflates my projected gross realisation. My cash flow on costs is still around 6.8% yield with rents still improving daily and vacancy rates set to get much worse.

The world is NOT going to hell in a handbasket. This is a temporary credit crunch and will be resolved. 2010 is looking like the beginning of the next bull run with a short term slow down in 2009 with the potential that Australia "might" join the US and EU in a recession. If we do it will be mild, and not long-lasting.

I'm getting sick of all this presumptuous end of the world stuff. I advise to all those getting caught up in all the media negativity at present, stick to the facts and let the deluded media run their scare campaigns.

Cheers,
Michael

Interesting read Michael,
I was feeling a bit like you a year ago when all media, investor and consumer where playing down what was happening and what was going to happen and thinking things will be business as usual and stilll risking a lot of money to fuel speculations. Here we are, 1 year after and the media still mixed with report that advise to hang on in the share holding because you'll miss out and government saying fundamental are sound, giving money to property owner to buy homes and stating property prices are not going to go down much, of course then you have the GDP forecast that put it at over 2%. But like you say there is also media that play the doom and gloom scenario. I guess it is part of democracy and I kind of got use to crappy information you get most times, I'll end up to read the raw data, and reliable sources and report that give importance to data and not to opinion.
I think your positive view of the Future is possible, I am still a bit more pessimistic.
I just ask you what data or news or information is going to change your view of the future or the nextt couple of years?
Is like the AU$ at 40 cent? or inflation at 8% or gold at 5000$ or next gdp review in a couple of month of recession or unemployment reading very high in the next future or ASX at 2000 or what?
I think you've got to be ready to review your forecast to be ahead of markets, that is very important in moment like in the one we are now.

 

[Aaron Sice]

landlubber - their policies only allow them to see one metre ahead.

we need a change in how the RBA view the world and Australian GDP, GNP and inflation.

 

[boz]

I don't think it's up to forum members to forecast anything, least of all commodities prices. We're hardly the ones with 200 economists "on tap" monitoring the financial world. But I do expect the bleeding RBA who hold us all "by the proverbials" to be able to see more than one metre ahead....and they've proven time and time again that they can't. By end of 2007 the extent of the sub-prime was evident. Then the derivatives mess became more apparent. If you get right down to it, all the IR rises in 2008 were totally un-forgiveable mistakes. Certainly by Mar 08 we had banks actually 'crashing' in the US for goodness sake. ( and I refer to Bear Stearnes & then Lehmans.)
FURTHER, even now as "crap" descends in truck loads the RBA technically STILL HAS IT'S FOOT ON THE BRAKES... in as much as the target cash rate is 5.25% but the market conomists now tell us we need (like) 3.5 - 3.75% to even start to turn this baby around. Why not act now ????? What "sign" are we waiting for ?
Which leads me to my final point, made in posts to other threads, the bleeding RBA has no "feed-back loop". i.e. IT DOESN'T LEARN . It's done exactly the same this time as it's done previously !! Stick it's head up it's rear-end, not follow the real world, and hence raise rates too far. Look up the graph of the cash rate. It's made up of HUGE rises and then HUGE falls. Is this really the best the RBA can do. If it is, it's pretty pathetic.
LL

you've got to know that playing with the rates is like playing with fire, you have to be very very very very carefull. Just look at UK in the last week:
EU drop the rates by 0.5% and UK by 1.5%, this week and specially last 2 days UK experienced the biggest fall in the exchange rate against the Euro ever (to 0.86, and before this week the exchange rate was stable for the last 6 months between 0.77 and 0.82), put in Australia term it would be like queensland currency will slump to the rest of Australia, how good would that be? how good would be for australia to have the AU$ at 0.20 US$ or 0.15 euro? I also point out that if we would have mortgage rate at 10% 5 years ago and not last year we wouldn't be worried about home prices falling in Australia, that was the mistake of the RBA they pull rate up way too late.

 

[sash]

You missed the pluses:

1. More money flowing into OZ as our assets look cheap...particularly housing

2. More export growth...thus more employment.

Also can't see the dollar fall past 55 cents as we have typically been 3-4% higher in terms of interest rate compared to other countries. Once we hit sub 6%...my feeling is that the economy should start coming out of its slumber.

you've got to know that playing with the rates is like playing with fire, you have to be very very very very carefull. Just look at UK in the last week:
EU drop the rates by 0.5% and UK by 1.5%, this week and specially last 2 days UK experienced the biggest fall in the exchange rate against the Euro ever (to 0.86, and before this week the exchange rate was stable for the last 6 months between 0.77 and 0.82), put in Australia term it would be like queensland currency will slump to the rest of Australia, how good would that be? how good would be for australia to have the AU$ at 0.20 US$ or 0.15 euro? I also point out that if we would have mortgage rate at 10% 5 years ago and not last year we wouldn't be worried about home prices falling in Australia, that was the mistake of the RBA they pull rate up way too late.

 

[landlubber]

On the subject of exchange rates ...

I can't see why a weak AUD is not really great for Australia. For a start our exports get cheaper ( more jobs), our resources income goes up bigtime as it's all sold in USD. We become cheaper for tourists to visit. So overseas travel is more expensive....tough mate. Imports ( BMWs and plasma screens ) are more expensive ...so ? None of them are, shall we say essential to life on the planet.

A cheap Yuan seems to work for China. Don't know why we wouldn't want the AUD just as cheap as we could get it.
LL

 

[quoll]

Inflation will come back in a hurry once the current crunch evaporates.

Yep I reckon we are in for some high inflation in the near future. It will erode the debt and savings of many australian families and business.

 

[MichaelW]

I just ask you what data or news or information is going to change your view of the future or the nextt couple of years?
Is like the AU$ at 40 cent? or inflation at 8% or gold at 5000$ or next gdp review in a couple of month of recession or unemployment reading very high in the next future or ASX at 2000 or what?
I think you've got to be ready to review your forecast to be ahead of markets, that is very important in moment like in the one we are now.

Boz,

All of the above would be good indicators that its worse than I'm projecting, but none of them would change my strategy. If you haven't sold your IPs now and are still holding this as an option then you're too late. The only game left is hold on and ride the downturn. Eventually it will turn positive again, the only question is how long. I'm still projecting this to be 2010/11.

Make your salaried income as secure as possible. Keep rents as high as possible. Keep all your mortgages 100% variable IO. And wait. Pay down some debt if you've got some spare cash flow.

I'll improve my cashflow some time soon by taking on some more debt. Funny how that works, but development can do that. If the economy all turns pear shaped then at least I can flog my hard bullion AU and reduce my debt big time. It was bought as a hedge after all If gold gets to US$5000/oz then that's AU$7300/Oz or AU$240,000/Kg. Now, THAT would be some serious debt reduction for me.

Cheers,
Michael

 

[boz]

Boz,

All of the above would be good indicators that its worse than I'm projecting, but none of them would change my strategy. If you haven't sold your IPs now and are still holding this as an option then you're too late. The only game left is hold on and ride the downturn. Eventually it will turn positive again, the only question is how long. I'm still projecting this to be 2010/11.

Make your salaried income as secure as possible. Keep rents as high as possible. Keep all your mortgages 100% variable IO. And wait. Pay down some debt if you've got some spare cash flow.

I'll improve my cashflow some time soon by taking on some more debt. Funny how that works, but development can do that. If the economy all turns pear shaped then at least I can flog my hard bullion AU and reduce my debt big time. It was bought as a hedge after all If gold gets to US$5000/oz then that's AU$7300/Oz or AU$240,000/Kg. Now, THAT would be some serious debt reduction for me.

Cheers,
Michael

Good point,
I also think the cash flow is the key point, if it is positive just wait and will get better and better (like WW said) and also the market will turn around.
The risk is that a society that taking more debt improve the cash flow is going to implode and as soon as more people realise the way to do it the amount of money around will be out of control and in need to be limited with interest rates, this is important because it will happen even if economy is severly in recession.
In my opinion this will happpen when interest rate to serve the debt (after tax rebate and fees) is below the rate of inflation for an extended time.

 

[Francesco]

Sounds like you forecast commodities tanking in advance. Our economy was still very strong in June 2008. The RBA acted after it was obvious how serious the problems were going to be. If you saw that in advance, then well done. I need to borrow your crystal ball.

See ya's.

Not me, I do not forecast with any statistics, sorry no crystal ball as such to lend. I observed and interpreted what was happening and discussed.

Attached is one article in March 2008 reporting the big drop in consumer sentiment (business sentiments index was making multi year low also), implication to unemployment and potential interest drop. However, at the time the monetary management was still biased toward containing higher inflation, hence months yet before RBA found courage including re-examining its assumptions (eg IR rise contribution to CPI) to reverse course and provide IR drop in September.

http://news.sbs.com.au/worldnewsaustralia/consumer_confidence_hits_record_low_542623

As to commodity drop, it was going to drop, question then was how much after urgency for infrastructure was lessened post Beijing Olympics in combination with China's loss of exports to US courtesy of sub prime mess.

Cheers

 

[landlubber]

Yep I reckon we are in for some high inflation in the near future. It will erode the debt and savings of many australian families and business.

Well I've got no savings but plenty of debt to quite happily erode so ...bring it on !!
LL