The Future

[Bear924]

Hi all,

Recently I have been reading a number of articles about the state of worlds economy and how there may be a major correction in the upcoming few months/ years.

Most of the articles I have read regard the US economy... however as the US and Australian economies are very closely related what happens in the US will affect Aus. for sure.

My take is as follows..... American economy is currently being driven by consumer & corportate debt. I say this because like Aus the typical American consumer and corporation is basically debted out. This debt has been used to purchase consumer products and has basically been supplied by non Americans. The American economy is currently basically running on consumer spending (fuelled by consumer debt) however if something happens to consumer confidence this could cause this economy to head into recession or possibly depression... I say depression here because it might be possible for assets (eg real estate) to decrease in value due to the flood of property onto the market. From what I have read the trigger on the inflation (goods purchased from overseas eg electronics) could be the weakening American dollar.

Could this lead to a lowering in the price of assets (deflation) and an increase in the cost of living (inflation)?? Is anyone on the forum currently following Warren Buffets investment advice, something along the lines of 'sometimes the best investment one can make is no investment at all?'

 

[see_change]

There are various similar view points I've heard asnd it is something that I keep in the back of my mind.

The biggest concern I have is of some major event which could change the market over night , however having seen how resilient the economy pick up after 9/11 I'm less concerned about that. The reason this is a worry is that it wouldn't give you time to alter arrangements to a better comfort level.

If the american and australian debt becomes an issue , I believe that it will be a gradual onset problem and this will give those who are actually watching what goes on will have plenty of time to take "advantage " of the situations that arise.

I still find it hard to believe that some people have only just woken up to the fact that the share market is going down.

If you keep your eyes open you will see what's coming , but if you think that things will always go on the same .....

Deflation in relation to property has been happening over in Japan for a while as has bad debts.

see change

 

[Bear924]

I wonder what would happen if America follows a similar path to Japan as far as deflation and economic problems.

Does anyone know how inflated the Japanese market was compared to the Australian ??? market.. eg. %average wage for building.

 

[tonyc00]

deflation, stagflation and inflation

Both myself and some of my Harvard colleagues forecast that from 2004 to 2006 the problem will be massive inflation for most Western economies.

The reason is partly that economic policy is lagged to politicians expectations. The consequences of low interest rates, increased money supply, lower direct & indirect taxes- the standard tools of fiscal and monetary deficit financing policy- will mean that the economies of US & Europe will rebound sharply from 2004 with an immediate effect on countries such as Australia & NZ.

In 2005 interest rates will rise sharply but it will take 8-10 months for that to percolate through the economy.

Take the appropriate action now. There are many reputable websites providing confirmation of this scenario eg itulip.com

regards

Tony

 

[Mr Turkey]

tonyc00 the CRB index has been going up. And shares of basic commodity producers have been withstanding the bear market best. I have bought some and they are holding. I wonder if commodities might have another down leg from here before inflationary forces win out.

The main thing I understand is that during the deflation of the 1930s the dollar was fixed to gold so responding to deflation was impossible.

 

[Bear924]

Thanks for your replies, I'm going to check out itulip after I've typed this... presuming high inflation, one should:
- Expect interest rates to increase
- Make sure Debt levels are manageable

If interest rates increase I presume there would be a large 'panic' of people trying to sell property as they can't afford to service it. Would it be correct to think that property prices will drop as the number of sellers start to outstrip the number of buyers. Or would the inflationary componet make house prices continue to grow??

Could someone also please explain what the CRB index is?

Thanks

 

[Bill.L]

The best strategy governments have used in the past to get out of harsh economic times is to cause inflation. This alternative to depression/deflation helps win more votes.

The best way to kickstart inflation is to start a war....

bye

 

[XBenX]

Re: deflation, stagflation and inflation

Originally posted by tonyc00
Both myself and some of my Harvard colleagues forecast that from 2004 to 2006 the problem will be massive inflation for most Western economies.

The reason is partly that economic policy is lagged to politicians expectations. The consequences of low interest rates, increased money supply, lower direct & indirect taxes- the standard tools of fiscal and monetary deficit financing policy- will mean that the economies of US & Europe will rebound sharply from 2004 with an immediate effect on countries such as Australia & NZ.

In 2005 interest rates will rise sharply but it will take 8-10 months for that to percolate through the economy.

Take the appropriate action now. There are many reputable websites providing confirmation of this scenario eg itulip.com

regards

Tony

bring on inflation i say, i hope your right

Im not sure of what polliticans expectations have to do with economic policy - maybe on the fiscal sides (obviously) yet this ignores monetary policy (which is operated by the RBA - which does not answer to polliticans nor are they influenced by them.)

The fundamental problem w/ linking your studies massive inflation partly to polliticans expectations is the fact that as a macro issue monetary policy is the tool to control inflation in the economy (due to the inflation/economic growth balance objectives)

Getting past that, the low interest rate ...

(has your havard study got into bond market / interest rates interactions yet ?) seehere

....does place pressures on inflation (due to the inflation/growth link) but the aussie rba has had good form recently with monetary policy (even allowing for the "lag" effect) with managing the growth/inflation trade off (and has managed to keep both within target levels) I dont understand why you are suggesting a change in this.....

did your havard colleagues reference itulip.com ? its such a great source of information ? or perhaps they used your report as a source for their article ? hrmmm and here i was thinking economics journals were a good source of info.

Nothing like a good economics debate, I love it yet



Im sure everyone else is bored

 

[Bear924]

Economic discussions and real estate investing

I would suggest that if a real estate investor is bored with economic discussions they are:
a. spending too much time discussing the economy with economists.

b. not spending enough time investigating the links between property investing and the economic cycle. I recall somebody on this forum suggesting that if interest rates rise more then 3% they will start having problems servicing their loans and then stating that real estate is a great investment so buy, buy buy. If this predicament is common on this forum perhaps it suggests the current market is overheating.

Note - I am not saying real estate is not a great investment however I believe that RE investors need to start preparing for largish interest rate increases and a decrease in the saleability of their property portfolio.

 

[XBenX]

hehe you think economists can tell you what is going to happen tomorrow ?

there is a little saying about them....

economists are the only expert that can tell you why what they predicted would happen yesterday didnt happen today

or something very similar

any investor (instead of a gambler) should have a strategy that takes interest rate risk into account

 

[Fester]

any investor (instead of a gambler) should have a strategy that takes interest rate risk into account


Er .. fixing your rate for 10 years .. would that help!!

The Fester

 

[see_change]

This is a direct link to an interesting article in itulip

http://www.cepr.net/Housing_Bubble.htm

see change

 

[AndrewG]

To bear924

>Note - I am not saying real estate is not a great investment
>however I believe that RE investors need to start preparing for
>largish interest rate increases and a decrease in the saleability
>of their property portfolio.

Two weeks ago I had an appointment with a loans guy from my local Westpac branch (a good guy who is into property investments), and he showed me there forecasted interest rates which hadn't been released to the public as yet (they probably have now tho). I was interested to see that their fixed rates from 1-5 years was VERY similar. I cannot remember the exact rates, but even the 5 year fixed was 6.29%

That to me, says that the banks aren't expecting much difference in interest rates to what they are now. In fact, it was less than their standard variable!!! (most interesting).

Naturally no-one knows what will happen, but I figure the banks ought to know more than someone like myself.

Andrew.

 

[Bear924]

Good point Andrew... that one point could shoot my argument to flames.... anyone know a good answer to this point??

 

[XBenX]

Originally posted by Fester
any investor (instead of a gambler) should have a strategy that takes interest rate risk into account


Er .. fixing your rate for 10 years .. would that help!!

The Fester

true, and just one of many strategies to minimse that risk

 

[tonyc00]

Hi

Sorry this is a long post (but I luv this stuff).

We were told that having a degree in Economics will not keep you from the unemployment queue, but at least you will know why you're there. (A silly economist joke ??).

I agree with Bill.L that a war will kickstart inflation.

Why do I agree ? Probably because Bill and I have read some of the same literature eg see J. Bradford DeLong (2000), "America's Historical Experience with Low Inflation", Journal of Money, Credit, and Banking at http://econ161.berkeley.edu/Econ_Articles/woodstock/woodstock4.html

That article states "The two highest peaks ... had come during World Wars I and II--and one expects to see considerable inflation whenever one's country is engaged in a total war".

In addition there are many other instances where a massive Keynesian deficit financed stimulus has subsequently lead to a jump in inflation.

And a war has to be probably the best Keynesian stimulus. And throw in tax cuts, increased monetary supply, low interest rates, record trade deficit (and a US President facing re-election in 2004 who knows that inflation at least gives the illusion of greater wealth).

However as Bear924 states, high inflation does lead to interest rate increases. And he make makes an excellent point about whether the pain of the payment of high interest rates will offset the pleasure of increased asset values caused by high inflation.

In other words, will the people who bought near the top hold or sell their property investment.

One answer (to high inflation), as he says is "make sure Debts levels are manageable". Good point.

In addition one could also adopt my previous suggestion to Hedge your (variable) interest rates by buying a forward interest rate option.

Moving on. I'm sorry if I confused my previous message by speaking about economic policy being linked politicians expectations. I was speaking in the context of western economies, but XBenX is absolutely right that the Governor of the RBA is independant from the politicians.

However I suspect that there would be few instances where a Governor disagreed with the directions of the Government, and lived to survive. But still you are correct in what you say.

Which bring me to the reference to an excellent article by see-change (and one which I also flagged to this group several weeks ago). You may care to note that Michael Croft wrote a brilliant reply elsewhere on the forum regarding that article. It certainly made me think about why there may not be the "bubble" as described in the article.

AndrewG. I'll try to find what the rate for 5 year fixed loans were in, say 1985, and compare that to what the (variable) rates actually were 1990. But that would only prove what idiot's economists are.

It wouldn't take away your point that we should be fixing our investment rates now for 5 years hence.

Which by co-incidence brings me back to my point about hedging rates. Because for me to convert from 7 variable loans (Westpac prof package) and refinance would be expensive, and possibly outweigh the advantages of a fixed rate v a higher variable rate when a cheaper option (assuming a maximum level of interest rate of 10.45%) is a Hedge package.

Again sorry its a long ramble. I really enjoyed reading the posts.


regards

Tony

PS I'm sure BIS Shrapnel also forecast a significant downturn in 2006/7.

 

[see_change]

Tony re

" Assuming a maximum rate of 10.45" ???!!

I know I'm not the only person on the forum who can remember rates of 18 % ...


see change

 

[Kieran]

If you want to minimise your interest rate risk and position yourself to be countercyclical.... then consider my "Interest Rate Averaging" concept which I developed in 1998 as a result of the impact the "Asian crises" driving down interest rates down internationally. At the time it ocurred to me that if int rates could drop so quickly then some other events may actually cause int rates to spike at some stage. So I set about finding an answer to the interest rate risk dilemma. And I created IRA as a result. In NZ thousands of property investors have now embraced this technique to protect themselves and to position themselves to be countercyclical if interest rates rise significantly. Lets face it, none of us want to be in the unenviable position of suffering from a large increase in our interest costs and having to "cash up" properties as a result. We all know what that means! (It's the stuff that property investment nightmares are made of).

 

[XBenX]

Originally posted by tonyc00


In addition one could also adopt my previous suggestion to Hedge your (variable) interest rates by buying a forward interest rate option.

I just re read this post this morning... I dont know why you continue with this.... just so that you dont hurt forum members with your "harvard" knowledge why is it that you asked a question about hedging HERE yet your claiming it as your own previous suggestion ?

Some of the stuff here is dangerous for forum members who read your posts and take them on face value as you are a harvard graduate. That is Harvard Business School right ?

Originally posted by tonyc00


However I suspect that there would be few instances where a Governor disagreed with the directions of the Government, and lived to survive. But still you are correct in what you say.

The whole idea of the way the RBA is setup in Aust is so that the RBA doesnt receive "directions" from the Govt - and any governor would simply announce the govt's position to the press if they tried to pressure him into a decision (and create a pollitical scandal)

The warning is - alway question the information you receive - you never know if the info being provided is correct or even if the information being provided is being tainted or massaged to suit a persons motives.

Well meaning or not tony, dodgy info and trying to pass stuff off as your own doesnt inspire too much confidence or any benefit to the forum (infact its negative)

 

[tonyc00]

Pathetic.

I think it is naive to expect a Governor of any Central bank to disagree with or refuse the "wishes" of the Government.

Who appoints the Governor?, who reviews his/her performance in office?, who approves the budget funding allocation to the RBA?.

Now tell me again how independent the Governor of the RBA is from the Government.

Alternatively, if there was a fundamental disagreement between the Governor of the RBA (appointed by the Government) and the Treasurer, and thereby the Government (elected by the majority of the voters), who do you think would win such a disagreement and stay in office.

Dumb answers not accepted. Answers should be restricted to a choice of either (1) the Governor or (2) the Government.


A propos Harvard, interest rate hedging is an option but only for those who understand it's complexity, and have the courage to use it.

.

Disclaimer. I have no financial interest in selling or marketing interest rate hedges/ options.

I previously raised the issue that hedging was a possible tool (giving my personal scenario of having seven IP's and being on a variable package, and expecting interest rates to rise in 2004 through to 2006).

And, thanks to the personal replies, I found several people who provided empirical evidence of its availability in the context of real estate in Sydney. Great, I'm happy, I'm covered.

But as stated it would not be suitable for everyone.

Thanks again to all.