Are you missing the point that if other world economies are in recession they will buy much less of the things that drive the Aussie economy. Which will lead us into recession. We are not an isolated economy. In fact we probably depend more on a healthy world economy than a lot of other exporting countries.
Recession/Interest rates. This is going to end badly!
- Thread starter topcropper
- Start date
Too right. It's just that it's harder to state the bearish view here than the bullish. That's why I respect the bearish views on somersoft. This is such a forum full of eternal optomists, that the bearish view is valuable. The real eternal bears are elsewhere, where they are surounded by bears.
I value the fact that I can change my views. if you go back over my posts from 18 months ago, I was a bull. I was calling the resource boom to last another decade, I was calling Australia to be running massive current account surpluses, I was calling the food crisis to mean my farm was going to double in value.
Optomistic people generally do better in life than pesimistic people. But the ones who do best of all are those who can see the reality of the situation and change their views. Eternal bulls eventually lose in the long run.
See ya's.
So if you dunno then it could be as early as 6 months from now ? If the commodities market recover as fast as they deteriorated then it is a real possibility, right ?
What are you saying, has all these happened in the last half of 2008 ?
Nope. The bull goes up the stairs. The bear jumps out the window. It will be a while away.
See ya's.
Nope. manufacturing has declined over the last half century, and especially in the last decade with globalisation. Globalisation is where countries specialise in what they are good at. Australia is good at digging stuff out of the ground.
See ya's.
Then what has that to do with the last commodities boom or the recent (possible) recession ?
Is that "Nope" because you wish it so or do you know something we don't? Using your logic if the bears jump out the windows then they obviously reach the bottom a lot faster then it takes the bull to go to the top by stairs. Its now been 6 months since the bears took the dive so they must be on the ground by now which would make this the bottom. Are we there yet ?topcropper said:
Are we there yet ?
Not by a long shot. Late in, late out.
We are in for a rough ride for sure.
I am hearing that a lot of the mining related commodities will have their contract prices negotiated in April/May. My belief is that WA will get hit the hardest...due to their exposure there followed by Qld.
My feeling is that we will crawl out of this mess in late 2010 -2011....Sue's advice is very sound. You needs to have cash or casflow!
Forget commericial property...it has some ways to fall!
I am hearing that a lot of the mining related commodities will have their contract prices negotiated in April/May. My belief is that WA will get hit the hardest...due to their exposure there followed by Qld.
My feeling is that we will crawl out of this mess in late 2010 -2011....Sue's advice is very sound. You needs to have cash or casflow!
Forget commericial property...it has some ways to fall!
Minsky is by far the best on this.
If you read Minsky (as in Minsky moments), there are 2 types of debt crissis, in what he describes as unstable situations. The first, which we had in the late 80's, when the prevailing inflation rate is high, you get through by inflating away the debt and high interest rates. The result is suboptimal growth for a number of years thereafter but is relatively painless to borrowers who can cope with the rates for a short period. Keating did the right thing and the only thing he could.
The second type, when the prevailing inflation rate is low, and debt has ballooned, results in deflation and the government responds by lowering rates to zero. This too is the right thing to do. Rudd and everyone else is doing the right thing. The Minsky moments are interesting. I doubt that government can actually do much to help. Minsky's and other post keynesians idea that the money supply is actually determined by the credit markets makes a lot of sense (which is why money supply targets earlier never worked). The banks are hoarding money and not lending because there is less demand for lending. This happens in debt deflation. The banks too are doing the right and only thing they can. That is why trying to inflate the money supply by central bank action will not work either : monetry supply targeting never worked, and again it will not work here. They can move around the money base but the end demand for debt is market determined.
Unfortunately the second type of debt problem (debt deflationary scenario) is often not so kind to owners of assets. It may however set us up for a future era of very sensible lending and business.
I think it is good to be a player in the game but also able to take a step back and curiously wonder what maybe coming next.
If you read Minsky (as in Minsky moments), there are 2 types of debt crissis, in what he describes as unstable situations. The first, which we had in the late 80's, when the prevailing inflation rate is high, you get through by inflating away the debt and high interest rates. The result is suboptimal growth for a number of years thereafter but is relatively painless to borrowers who can cope with the rates for a short period. Keating did the right thing and the only thing he could.
The second type, when the prevailing inflation rate is low, and debt has ballooned, results in deflation and the government responds by lowering rates to zero. This too is the right thing to do. Rudd and everyone else is doing the right thing. The Minsky moments are interesting. I doubt that government can actually do much to help. Minsky's and other post keynesians idea that the money supply is actually determined by the credit markets makes a lot of sense (which is why money supply targets earlier never worked). The banks are hoarding money and not lending because there is less demand for lending. This happens in debt deflation. The banks too are doing the right and only thing they can. That is why trying to inflate the money supply by central bank action will not work either : monetry supply targeting never worked, and again it will not work here. They can move around the money base but the end demand for debt is market determined.
Unfortunately the second type of debt problem (debt deflationary scenario) is often not so kind to owners of assets. It may however set us up for a future era of very sensible lending and business.
I think it is good to be a player in the game but also able to take a step back and curiously wonder what maybe coming next.
very true and we shouldn't forget that what could be coming next
would either be good, or bad or even more of the same
Its good to be prepared but we should not be overtaken by fear because the fact is that we don't know what's going to come next
I guess at the end of the day it depends on your view of risk versus return. Sure i see risk, but i see that risk being compensated for by very attractive returns (in this case industrial and big 4 australian banking shares shares, but not property except for some listed ARIETS).
Too many investors wait until the stars are aligned before they invest, the problem then is that the underlying asset classes will be priced accordingly. In the short term price stability of the asset will probably be high, but over longer periods 5yrs there is a high risk of the asset class being repriced to reflect more uncertain conditions.
When we are in uncertain conditions its very important to mentally prepare yourself for it. There is a reason for basic investment themes like the investment clock and the buyers emotional investment wave
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Hi all,
Buy in gloom and sell in boom, is a popular market saying that appears to be losing its popularity amongst many here.
My opinion has been buy when things start going up in price, and cut your losses quickly. Now is no different. This is for stocks and commodities.
Property is a different type of market (res). We have had gloomy news about property for over a year now, yet it has not cracked (like the US or UK). I'm a firm believer that if bad news does not move a market one way, then more bad news will have a similar effect and watch out for the movement the other way.
History tells us that when Governments put on the brakes at the beginning of a recession they can turn it into a depression. Hence governments around the world are reflating madly to stop the recession from being too deep.
The cost is inflation eventually, but they are not worried about that now.
Here is a bit of really out of the square thinking of mine.
Because money is really just a concept or idea, and is created out of thin air, then government deficits mean nothing as they can print as much as they like (they only really have to borrow it when the economy is at full capacity). Some go to absurd levels (Zimbabwe), yet others US? have not gone as far as they can.
On the politics side of things, I think the same type of spending would be happening no matter who was in power.
bye
Buy in gloom and sell in boom, is a popular market saying that appears to be losing its popularity amongst many here.
My opinion has been buy when things start going up in price, and cut your losses quickly. Now is no different. This is for stocks and commodities.
Property is a different type of market (res). We have had gloomy news about property for over a year now, yet it has not cracked (like the US or UK). I'm a firm believer that if bad news does not move a market one way, then more bad news will have a similar effect and watch out for the movement the other way.
History tells us that when Governments put on the brakes at the beginning of a recession they can turn it into a depression. Hence governments around the world are reflating madly to stop the recession from being too deep.
The cost is inflation eventually, but they are not worried about that now.
Here is a bit of really out of the square thinking of mine.
Because money is really just a concept or idea, and is created out of thin air, then government deficits mean nothing as they can print as much as they like (they only really have to borrow it when the economy is at full capacity). Some go to absurd levels (Zimbabwe), yet others US? have not gone as far as they can.
On the politics side of things, I think the same type of spending would be happening no matter who was in power.
bye
The major reasons why i dont see Australia having the same degree of economic pain as the US and UK (and i emphasise same degree) are:
1) This is a financial crisis caused essentially by lending to people who couldnt afford the asset and had the legal right to hand back the asset and underlying debt.
2) Our financial institutions have minimal involvement in the debt securities issued on the basis of point 1. We are more than 18 months into the credit crisis yet our banks are still generating profit, compare this to Iceland, UK and US where their financial institutions are haemoraging losses.
3) Australian lending rates where much higher going into this global recession. Hence Australian borrowers have a much higher buffer as interest rates come down. (In the last 6 months compare the huge differential interest cost savings of Australian borrowers compared to their US counterparts). This factor to me is one of the key supports of the Australian economy. We all complained in prior years when our lending rates were much higher than other countries, but at least now those higher interest rates will insulate the pain as interest rates fall, and again i emphasise here the rate of differential fall in the Australian borrowers lending rate compared to their US counterparts. Sure some Australians will loose their jobs and hence find themselves in financial difficulty in repaying the loans. But compare the increase in unemployment rates to reduction in interest rates and the stimulatory effect of the the reduction in interest rates will still be greater than the loss from an increase in unemployment. In simplistic terms what was the residential lending rate in early 2008 about 9%. If we see RBA target rates of 3% this should translate into residential lending rates of 5.5%. On an average loan of say $300,000 this translates into cost savings of $10,500 a year. This is a huge 'tax cut'. Sure there will be some recently unemployed for whom this may just act as an insulator before the inevitable, but for those still employed its an extra $200 a week in their pocket.
3) The benefit of the commodity boom was only indirect for most of the australian population (through the wealth effect from speculation in resource shares, through increased government tax receipts that were then partially redistributed to recipients not benefiting directly from the commodity boom etc). Hence its loss will also only be indirect. For those that were direct beneficiaries it will seem like the world has come to an end for the rest of us that never had a direct involvement the effect will be indirect and more muted (mostly in the form of loss of government revenue).
4) Australia's 'smallness' for want of a better word. Unfortunately the US is regarded as the global lender of last resort, essentially the world central bank (im not stating the correctness or otherwise of this, just that this is still the current underlying opinion of the world). Hence even though it is the catalyst of the global financial crisis, it is still regarded as being a global safehaven for cash. The problem here though is its impact on exchange rates. Basic economics suggests that the US currency should be depreciating, unfortunately with demand for its 'safe' currency the opposite is happening (and in my opinion this will lead to an extention in depressed global conditions than would otherwise be the case). Australia doesnt have this, hence the depreciation of its currency. Essentially this is good for australia as it will improve the future trade situation (through an increase in exports and increased competitiveness of import replacement industries (however for import replacement industries there is a significant time lag as it takes time for capital to be allocated to it, essentially what Paul Keating referred to as the J-curve effect).
5) Our proximity to Asia. Although Asia will incur a down turn because of its export dependency model to the west, Australia provides many key resources that will still be in demand (resources, foodstuffs, education, immigration), with the AU$ depreciating our industries become more competitive. Sure recources will not be as attractively priced, but they will be insulated by the falling AU$ (from memory we still managed to surivive prior to the resource boom starting 2002 odd
)Again i stress i dont think everything is going to be hunkey dorey in 6 months time i just dont see Australia being effected to the same degree, and hence i am investing accordingly.
I think the Australian residential property market was the first to have a euphoric peak (in 2003 from memory). Hence enough time has passed to enable people to have build additional equity buffers in their loans. Also the the fact that australia had much higher interest rates will prove a very big buffer as interest rates decline.
However having said this, even if we get through this relatively unscathed that does not mean that residential property will be an asset class that really out performs over the next 10yrs. If our property market does not plummet, the there is also not the chance of future excess returns. Asset classes always gravitate around a long term mean. In the short term they can move above and below the mean, but over the long term it will always move withing the mean. Residential property significantly underperformed in the early 90's and this set the stage for the gains that we have seen over the last 10-15yrs. What ever you do dont build the last 15yrs of gains into your forecasting model when extrapolating for the next 10yrs.
If there's anything we should take from the past it's that property holds it owns even during recessions AND massive interest rates. Luckily, monetary policy has had a little better foresight since then... is it perfect? no? But the fed & government has made it clear which direction they want to head in. Property as an assett will hold up.. Why?
Because the majority of property owners are owner occupiers, alot with little or no liabilities on their property as well as a fair chunk of investors who may be in the same position or who hold secure jobs. Sure a percentage of owners & investors who may have to sell due to loosing their jobs may cause a market fall in real terms, or even slightly in nominal terms but at the end of the day the majority of the market won't sell during a recession, and the majority of properly won't realise the same loss that a small percentage will suffer.
OF course there are some that will go down, and some that just manage to stay afloat but the only real losers here are the people that are forced to sell in the absolute worst time and this is the risk that we as investors talk of but never appreciate.
If your looking to jump ship, unless you have been investing for a decade it may be pointless. Besides, the risk of long term inflation is alot higher than any short term (<5yrs) risk we are facing today and I know which assett I would rather be holding when those days come around.
TO summarise, if your at the end of your investing years and you don't have another 5-10 years to see through some boring years for property, then perhaps you MAY consider selling. But also consider the fact that you probably have a very good LVR, and a great rental income - which, if not by now, will be throwing positive geared cash your way (if this long term recession comes to fruition rates are going to stay rock bottom)
Otherwise if your still relatively young, then don't act rash and carry out what you were determined to be when you bought the property - an investor. Long term, secure, passive growth - and enjoy the rebalancing of your portfolio and maybe picking up a few bargains in short term.
P.s this is personal opinion and does not take into consideration individual circumstances -
Because the majority of property owners are owner occupiers, alot with little or no liabilities on their property as well as a fair chunk of investors who may be in the same position or who hold secure jobs. Sure a percentage of owners & investors who may have to sell due to loosing their jobs may cause a market fall in real terms, or even slightly in nominal terms but at the end of the day the majority of the market won't sell during a recession, and the majority of properly won't realise the same loss that a small percentage will suffer.
OF course there are some that will go down, and some that just manage to stay afloat but the only real losers here are the people that are forced to sell in the absolute worst time and this is the risk that we as investors talk of but never appreciate.
If your looking to jump ship, unless you have been investing for a decade it may be pointless. Besides, the risk of long term inflation is alot higher than any short term (<5yrs) risk we are facing today and I know which assett I would rather be holding when those days come around.
TO summarise, if your at the end of your investing years and you don't have another 5-10 years to see through some boring years for property, then perhaps you MAY consider selling. But also consider the fact that you probably have a very good LVR, and a great rental income - which, if not by now, will be throwing positive geared cash your way (if this long term recession comes to fruition rates are going to stay rock bottom)
Otherwise if your still relatively young, then don't act rash and carry out what you were determined to be when you bought the property - an investor. Long term, secure, passive growth - and enjoy the rebalancing of your portfolio and maybe picking up a few bargains in short term.
P.s this is personal opinion and does not take into consideration individual circumstances -
The major reasons why i dont see Australia having the same degree of economic pain as the US and UK (and i emphasise same degree) are:
1) This is a financial crisis caused essentially by lending to people who couldnt afford the asset and had the legal right to hand back the asset and underlying debt.
2) Our financial institutions have minimal involvement in the debt securities issued on the basis of point 1. We are more than 18 months into the credit crisis yet our banks are still generating profit, compare this to Iceland, UK and US where their financial institutions are haemoraging losses.
3) Australian lending rates where much higher going into this global recession. Hence Australian borrowers have a much higher buffer as interest rates come down. (In the last 6 months compare the huge differential interest cost savings of Australian borrowers compared to their US counterparts). This factor to me is one of the key supports of the Australian economy. We all complained in prior years when our lending rates were much higher than other countries, but at least now those higher interest rates will insulate the pain as interest rates fall, and again i emphasise here the rate of differential fall in the Australian borrowers lending rate compared to their US counterparts. Sure some Australians will loose their jobs and hence find themselves in financial difficulty in repaying the loans. But compare the increase in unemployment rates to reduction in interest rates and the stimulatory effect of the the reduction in interest rates will still be greater than the loss from an increase in unemployment. In simplistic terms what was the residential lending rate in early 2008 about 9%. If we see RBA target rates of 3% this should translate into residential lending rates of 5.5%. On an average loan of say $300,000 this translates into cost savings of $10,500 a year. This is a huge 'tax cut'. Sure there will be some recently unemployed for whom this may just act as an insulator before the inevitable, but for those still employed its an extra $200 a week in their pocket.
3) The benefit of the commodity boom was only indirect for most of the australian population (through the wealth effect from speculation in resource shares, through increased government tax receipts that were then partially redistributed to recipients not benefiting directly from the commodity boom etc). Hence its loss will also only be indirect. For those that were direct beneficiaries it will seem like the world has come to an end for the rest of us that never had a direct involvement the effect will be indirect and more muted (mostly in the form of loss of government revenue).
4) Australia's 'smallness' for want of a better word. Unfortunately the US is regarded as the global lender of last resort, essentially the world central bank (im not stating the correctness or otherwise of this, just that this is still the current underlying opinion of the world). Hence even though it is the catalyst of the global financial crisis, it is still regarded as being a global safehaven for cash. The problem here though is its impact on exchange rates. Basic economics suggests that the US currency should be depreciating, unfortunately with demand for its 'safe' currency the opposite is happening (and in my opinion this will lead to an extention in depressed global conditions than would otherwise be the case). Australia doesnt have this, hence the depreciation of its currency. Essentially this is good for australia as it will improve the future trade situation (through an increase in exports and increased competitiveness of import replacement industries (however for import replacement industries there is a significant time lag as it takes time for capital to be allocated to it, essentially what Paul Keating referred to as the J-curve effect).
5) Our proximity to Asia. Although Asia will incur a down turn because of its export dependency model to the west, Australia provides many key resources that will still be in demand (resources, foodstuffs, education, immigration), with the AU$ depreciating our industries become more competitive. Sure recources will not be as attractively priced, but they will be insulated by the falling AU$ (from memory we still managed to surivive prior to the resource boom starting 2002 odd
Again i stress i dont think everything is going to be hunkey dorey in 6 months time i just dont see Australia being effected to the same degree, and hence i am investing accordingly.
Sorry Chilliaa,
I warn the readers to get different opinion as your views are very missleading.
I'll reply only to point 3 about the more buffer australia has with rates, this is a very tricky point, as I said several times Australia is part of the globabilsed world and if the system was stable with australia's interest 2-3% higher then the rest of the oecd now with the differential shrinking to new daily lows the system is at very big risk of destabilising with risk of capital fleeing australia big time (and NZ and UK as well). I also remind that rates don't create new wealth but just shifting it around, Australia as a whole is not going to be richer with lower rates, this is a very important point to understand.
I also give a brief comment on point 4 as the low AU$ is not going to improve the trade balance. If you have a mild recession in australia consumer spending will not drop significantly and because prices of consumer goods are gone up over 30% (at importin level) for the devaluation of the AU$ to get an improve in trade balance you have to get 30% increase in our resource export. That is far away from happening even ith prices of resuorces in US$. The trade position will improve in australia only with a recession and deeper it is and better the trade position will be.
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But interest rates do have a huge stimulatory effect on the economy, if as you suggest it doesnt then monetary policy would never be used as an economic tool. Its just that because of the credit crisis, monetary policy is not as effective as in normal economic conditions, hence the ability to make larger decreases than would otherwise be the case.
i will not stand by and watch all these Keating-huggers openly and freely declare their love for the worst PM Australia has seen. his strategy was to raise interest rates to pull australia out of the recession by making ANYONE who owed ANYTHING pay through the nose - so if you weren't a dole bludger on rent assistance close topublic transport, you got slammed. got to love em, huh? socialists to the core.
the current crop of thinking is to not try and create breadlines around the block, in full knowledge that people ARE up to their eyeballs in debt - so lower interest rates to minimise the impact of said debt, meanwhile try to keep the economy up by inciting voluntary spending. at the end of the day - people are going to use the extra money to pay down that debt rather than buy a new telly (unlike that homeswest home around the corner from me, where 5 days after the handout they got some big 20in bling wheels for their EL falcon....), but the result is the same.
if IRs get to 22%, retailers AND the general public suffer. with IRs at 2%, only the retailers suffer as everyone pumps their extra cash to pay off CCs, GE finance contracts etc.
i deal with the masses everyday, and investors. there is large sentiment out there, for anyone with half a brain and not a product of the iGen, that things will get worse, so get rid of all debt - even try to scrub the mortgage down.
Keating was as blind as Swann. Anyone who can ponce back into parliament house after announcing they ****ed $20bil against the wall, and now our "only" option is deficit, is a fkn moron who has no credibility as any kind of monetary figure-head of Australian economics.
down with labour. boooooo...
the current crop of thinking is to not try and create breadlines around the block, in full knowledge that people ARE up to their eyeballs in debt - so lower interest rates to minimise the impact of said debt, meanwhile try to keep the economy up by inciting voluntary spending. at the end of the day - people are going to use the extra money to pay down that debt rather than buy a new telly (unlike that homeswest home around the corner from me, where 5 days after the handout they got some big 20in bling wheels for their EL falcon....), but the result is the same.
if IRs get to 22%, retailers AND the general public suffer. with IRs at 2%, only the retailers suffer as everyone pumps their extra cash to pay off CCs, GE finance contracts etc.
i deal with the masses everyday, and investors. there is large sentiment out there, for anyone with half a brain and not a product of the iGen, that things will get worse, so get rid of all debt - even try to scrub the mortgage down.
Keating was as blind as Swann. Anyone who can ponce back into parliament house after announcing they ****ed $20bil against the wall, and now our "only" option is deficit, is a fkn moron who has no credibility as any kind of monetary figure-head of Australian economics.
down with labour. boooooo...
Spot on this is the point im trying to emphasise, even if consumers use additional savings to repair their balance sheets, it still puts them in a better future position and hence their internal confidence will build.
Some consumers will use the reduced interest rate costs to save (restore their financial position), others will spend it, otheres will do a combination of the two. In all cases it leads to a better outcome for Australia.
chilliaa - be aware about the buffer thing. Money is honestly easy come and easy go. It's just as easy to for properties to rise as it is to fall to a point where you are negative equity. Don't forget that people were buying even at the peak of the boom.
Equity is determined by how much the bank values it, how much someone is prepared to pay for your property etc Many sellers are still in denial hence their properties have been in the market for mths and can't sell. What if you can't see your porerty and you can't refinance? just because you have $150k equity in your property, doesn't menayou can re-finance if you can't service the loan. If at any time you lose your job or somehting else and you get stuck in a catch 22 position then that's it. Desperation sets in and this is what we will be seeing a lot of soon.
They key is don't be too greedy.
Equity is determined by how much the bank values it, how much someone is prepared to pay for your property etc Many sellers are still in denial hence their properties have been in the market for mths and can't sell. What if you can't see your porerty and you can't refinance? just because you have $150k equity in your property, doesn't menayou can re-finance if you can't service the loan. If at any time you lose your job or somehting else and you get stuck in a catch 22 position then that's it. Desperation sets in and this is what we will be seeing a lot of soon.
They key is don't be too greedy.
