Surviving the soft depression

[nonrecourse]

This thread is not about arguing the point that we are or are not in a soft depression. If you troll this thread I will request your posts be removed.

The parameters are.. The Australian dollar has collapsed to 38 cents meaning we are able to compete on the world market and we are situated in that part of the world that the next growth spurt will come from.

Unemployment is finely balanced at 5-6% partly because our manufacturing base is so small because of previous government policy of dropping tariff's.

The government under Dudd is hell bent on keeping employment in single figures and is prepared to go into deficit to achieve this.

There has been a complete financial melt down overseas with thousands of banks in the U.S. and Europe collapsing. Particularly hard hit are those banks with 4 billion or less capitalization.

Two of the four banking pillars in Austrlia have been rolled into the remaining two. In spite of the government guarantee the two pillars that collapsed had runs on them that precipitated a temporary 4 day bank holiday and a restriction on withdrawls on resumption

The share market after further government intervention has stabilized at 2200

The residential property market has collapsed 50%, Commercial and industrial property has dropped 70%. On the supply side because of the deteriorating and limited credit market, building starts have plunged to levels last seen after the second world war.

To encourage savings the government through building societies, credit unions and banks issue liqudity bonds that have a yield of 6%

Bank mortgages if you can get one after a two year savings qualification period are at 4.5%. The reserve has dropped its rate to 2%

We are in the 4th year of a ten year soft financial depression. There are moves towards restoration of a gold standard. The U.S. dollar with the backing of the Asian and Middle east oil money has declared their intention to support the dollar and currency speculation is a capital crime

solutions to the freeze on capital. Some form of rent control has been implemented so that landlord's are only able to pass on rent increases agreed to by a rent control board.

Immigration is down to 80,000 a year. Under these conditions how will you survive, retain and build your property portfolio?

 

[djsherly]

Don't suppose you can build any more assumptions into the model? I don't think you've narrowed the parameters enough.

It's a stupid hypothetical.

My answer? Wait for six years.

 

[turk]

With almost full employment what has happened to wages and inflation, These would be a crucial factors.

Peter

 

[nonrecourse]

Only if you have enough cash if that black swan appears. $hit happens to even nice people. To be forewarned is to be forearmed?

You have had 16 years where even blind freddy could make a quid. Is your answer that you will sit on your hands?

 

[boomtown]

I will have moved to Oman by that point.

 

[nonrecourse]

With almost full employment what has happened to wages and inflation, These would be a crucial factors.

Peter

Play out your assumptions both high and low. Remember we do have a federal labour government and only one state Liberal government. I said there was a rent control board, I did not say that rents would not increase. My take is they will just that speculators will be targeted.

 

[topcropper]

I will have moved to Oman by that point.

Don't you reckon Australia would be the best place to weather a crisis like the one mentioned? Although I must admit I know zip about Oman. Maybe it's a paradise?

See ya's.

 

[handyandy]

Based on my tenants able to continue renting ala near full employment and centerlink rental assistance we should be able to survive.

I have built my RE portfolio based on a +ve cash flow foundation. We have not purchased any property since 2002, with most well before that, so even a 50% drop in residential RE will still leave us with positive equity. Our LVR is less than 10% based on current values.

As long as any rent control does not become stupid and push the returns into -ve territory then we should be able to survive and also save excess funds to purchase further property.

Any funds in shares will just stay put with any dividends adding to general income.

Cheers

 

[turk]

Play out your assumptions both high and low. Remember we do have a federal labour government and only one state Liberal government. I said there was a rent control board, I did not say that rents would not increase. My take is they will just that speculators will be targeted.

NR

we are playing this game to your parameters, one being a depression with basically full employment, I don't know of any depression happening with
only 5-6% unemployment.

Perhaps you can give me example of this or is it different this time.

Very hard to playout my assumptions when I don't believe the this unemployment rate could exist during a depression.

Regards

Peter

 

[topcropper]

Under these conditions how will you survive, retain and build your property portfolio?

I could imagine a lot of people here being offended by your scenario NR, and I would have laughed 12 months ago too, but I will take your post seriously considering current conditions.



Would I be correct in saying that we would be under a 'deflation' type of economic environment?

So would that mean rents and wages have dropped?

I can't for the life of me figure out how unemployment would be so low. Has that ever happened before in a recession, let alone a depression? 10% plus I would reckon.



Hopefully, grain growing would still be profitable, I would assume so, as people will still be eating. If I can get through this disaster of a year, hopefully I would still be in business thanks to the 38c dollar and much lower input costs, despite much lower commodity prices.

As one of the few debt free farmers around, I would think I would do well. Agriculture in general would be decimated under deflation. Farmers have massive levels of debt, and that is fine while land prices continue to increase in value due to inflation.

See ya's.

 

[nonrecourse]

I could imagine a lot of people here being offended by your scenario NR, and I would have laughed 12 months ago too, but I will take your post seriously considering current conditions.



Would I be correct in saying that we would be under a 'deflation' type of economic environment?

So would that mean rents and wages have dropped?

I can't for the life of me figure out how unemployment would be so low. Has that ever happened before in a recession, let alone a depression? 10% plus I would reckon.



Hopefully, grain growing would still be profitable, I would assume so, as people will still be eating. If I can get through this disaster of a year, hopefully I would still be in business thanks to the 38c dollar and much lower input costs, despite much lower commodity prices.

As one of the few debt free farmers around, I would think I would do well. Agriculture in general would be decimated under deflation. Farmers have massive levels of debt, and that is fine while land prices continue to increase in value due to inflation.

See ya's.

My take is in the U.S. and Europe deflation is a definite. In Australia I'm not so sure. That is why I'm taking a punt on our unemployment not being what you would expect. Both the Americans and the Europeans have talked free trade while playing a cynical game of having a claytons free trade. Their farm subsidies empoverished the third world for 40 years

Unlike Australia. When I arrived here in 1974 just about everything was made local. Unemployment was under 2% and that % was unemployable

The pollies here under Whitlam pulled the rug out from under our manufacturing industry and the farmers got lectures from European and Americans about our trade barrier disease controls

The point is the pollies got it wrong giving away something for nothing but in the end may now be an advantage because there isn't much of a manufacturing industry to wipe out

We also have another advantage with regard to trade with Asia. Its location,location, location..... Not to mention a mandarin speaking snivilling pollie that can suck up to our new masters

Lots of mouths to feed in asia... We live in a good spot

 

[boomtown]

Don't you reckon Australia would be the best place to weather a crisis like the one mentioned? Although I must admit I know zip about Oman. Maybe it's a paradise?

See ya's.

Dubai is built on oil debt, Oman and Saudi are built on oil cashflow. It costs the Saudis about $2 per barrel to produce, the Omanis a little more. Both should still be fine in any serious downturn.

But the point is that if Australia got seriously seriously farked I just would leave. Assuming I lost my job, unemployment went to 30% and rents and property prices halved - I would lose my IPs. But Im sure Norway or Oman or Russia or Indonesia or somewhere would be ok. And good luck to my Australian based mortgage lenders trying to garnish my new wages in Moscow or Shanghai or the Caymans (if they can find me at all).

 

[plusnq]

Hi NR

Thanks for eventually responding to my 0.38 thread. Sadly it had degenerated before I could get involved.

Firstly I am just after some clarification. Is your proposal a longer term viewpoint or a lowest point scenario?

Can I ask how with a collapse of the AUD we would have low inflation?
If we have low inflation then we will have the low interest rates but a dollar collapse almost always results in runaway inflation, the most recent example being Iceland.

If people are wanting to buy lots of our commodities, soft and hard then they would need to buy AUD to purchase those. If there is a real supply issue due to demand destruction then only the cheapest producers can survive (the rest being unable to mine or farm for the market prices). So assuming demand stabilises then price stabilisation or rises will occur.

If people aren't buying these goods or services then we won't have the low unemployment you suggest.

I am not saying that some of the criteria you suggest will not come to pass, just that they seem to be contradictory in nature.

Perhaps you could answer the above, thanks?

Cheers

Shane

 

[james_w]

This thread is not about arguing the point that we are or are not in a soft depression. If you troll this thread I will request your posts be removed.

The parameters are.. The Australian dollar has collapsed to 38 cents meaning we are able to compete on the world market and we are situated in that part of the world that the next growth spurt will come from.

Unemployment is finely balanced at 5-6% partly because our manufacturing base is so small because of previous government policy of dropping tariff's.

The government under Dudd is hell bent on keeping employment in single figures and is prepared to go into deficit to achieve this.

There has been a complete financial melt down overseas with thousands of banks in the U.S. and Europe collapsing. Particularly hard hit are those banks with 4 billion or less capitalization.

Two of the four banking pillars in Austrlia have been rolled into the remaining two. In spite of the government guarantee the two pillars that collapsed had runs on them that precipitated a temporary 4 day bank holiday and a restriction on withdrawls on resumption

The share market after further government intervention has stabilized at 2200

The residential property market has collapsed 50%, Commercial and industrial property has dropped 70%. On the supply side because of the deteriorating and limited credit market, building starts have plunged to levels last seen after the second world war.

To encourage savings the government through building societies, credit unions and banks issue liqudity bonds that have a yield of 6%

Bank mortgages if you can get one after a two year savings qualification period are at 4.5%. The reserve has dropped its rate to 2%

We are in the 4th year of a ten year soft financial depression. There are moves towards restoration of a gold standard. The U.S. dollar with the backing of the Asian and Middle east oil money has declared their intention to support the dollar and currency speculation is a capital crime

solutions to the freeze on capital. Some form of rent control has been implemented so that landlord's are only able to pass on rent increases agreed to by a rent control board.

Immigration is down to 80,000 a year. Under these conditions how will you survive, retain and build your property portfolio?

interesteing post so if our dollar goes to .38cent's since I do most of my selling to the US then I think we will be fine plus we trade currency will keep a watch on the charts thanx for the tip

 

[Francesco]

I doubt there will be more rent control than exist.

There are already rent controls through the various State/Territory residential tenancy law. It is politically expedient for the federal govt to let the state govt face any opprobrium resulting from any misadventure in rent control. Any moves in rent control would likely be locally initiated and justified.

With rent control, supply of IP will drop and there will be lack of housing which govt will have to step in and meet demand. Govt will face backlash from tenants as well as face more deficits to fund housing.

With rent control, govt will put off LL and face backlash at election.

 

[topcropper]

Can I ask how with a collapse of the AUD we would have low inflation?

I thought the two went hand in hand? The Aussie dollar went up with the commodity boom and $100 plus barrel oil as the country was rolling in money and wealth. The Aussie dollar crashed when the commodity prices crash. No one in their right mind would want to own $A in a commodity crash, as we don't produce anything else to export.

Low commodity prices mean low inflation.



For a very short period of time, the crashing $A ment higher inflation, as it pushed up the cost of anything imported, but once things level out in the long term, it would mean low inflation.

See ya's.

 

[plusnq]

Hi TC

Assuming a Keynesian definition of inflation....

Oil has gone from $145 to $50 pb. Petrol at the pump has gone from?????

Anything denominated in currency other than AUD will be more expensive.

How will we have low inflation with higher prices of overseas goods and services?

Eventually there is a supply side response to sustained low prices then prices will stabilise as companies won't produce at below cost (as you have said in other threads regarding grain prices). This is already being expressed in miners, oilers and I am sure in farmers as well.

Your assumption is based on a long term paradigm of continuing decreased growth (not just Aus but globally). If you believe that then cash is king and one should sell all hard assets and put your money into the bank.

Personally I subscribe to a more Austrian viewpoint of economics and see inflation coming after the current deleveraging process is completed. When that will be ? Who knows. But given I am of an age where time is on my side I am positioning myself for what i see as the longer term trend rather than trading the shorter term trend. If I was closer to retirement then I would take a different viewpoint to someone younger.


Cheers

Shane

 

[topcropper]

Hi TC

Oil has gone from $145 to $50 pb. Petrol at the pump has gone from?????

How will we have low inflation with higher prices of overseas goods and services?

Shane

The crashing $A is great, but it's not crashing as much as commodity prices.

Oil has dropped by 66%, but petrol at the pump has gone from $1.70 per litre to $1.20.

Grain on CBOT has crashed by 66%, but grain prices for me have dropped by only 50%. The raw cost of food has dropped. Whether that flows through to consumers I don't know.

Steel prices are crashing.

Interest rates have dropped. That will lower inflation.



Google 'deflation'. That's whats happening just right now, I know all about it, as it has knocked me over. I don't know how long it will last. Things are happening in a lot of ways like what happened in 1929.

See ya's.

 

[plusnq]

The crashing $A is great, but it's not crashing as much as commodity prices.

Oil has dropped by 66%, but petrol at the pump has gone from $1.70 per litre to $1.20.

Grain on CBOT has crashed by 66%, but grain prices for me have dropped by only 50%. The raw cost of food has dropped. Whether that flows through to consumers I don't know.

Steel prices are crashing.

Interest rates have dropped. That will lower inflation.



Google 'deflation'. That's whats happening just right now, I know all about it, as it has knocked me over. I don't know how long it will last. Things are happening in a lot of ways like what happened in 1929.

See ya's.

Hi TC

Firstly mate I feel for anyone who has to expend a lot of cash and gamble on prices that include exchange rate fluctuations. So all the Aus farmers and miners have my sympathy atm although hopefully they salted some away over the last few years to help them through the current climate.

How do you get the lower interest rates reducing inflation? They are a CB response to economic conditions. As an example current interest rates are say 7.40% for a home loan. Inflation is 4-5% (5% at last but lets be generous). Using our current tax system we are nearly at neutral to negative interest rates. These are stimulatory as long as lending is available.

As an aside I wonder why you would hold your farming land if you believed that you could buy it a lot cheaper in a few years time due to deflation?

I trade Aus, US and UK markets and do understand the effect of declining prices and exchange rates. Even a profitable trade can become unprofitable with exchange rate risk etc.

Perhaps I might suggest that you Google deflation and Austrian economics to see if your definition is different dependent upon your philosophy.

Cheers

Shane

 

[topcropper]

I'm just throwing up some possibilities. Deflation might only last a very short period of time. I know nothing.

As an aside I wonder why you would hold your farming land if you believed that you could buy it a lot cheaper in a few years time due to deflation?

Why hold farming land? I think it will hold it's value as well as anything else. People still have to eat, but people don't need shares or need to own an 800 sqm piece of dirt worth a million dollars.

if deflation hits, you will be able to buy everything cheaper in the years ahead, so everything drops. The big losers will be those with big debt levels.

See ya's.