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blue skies

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  1. Euro zone currency crisis is only beginning

    In this section »

    * European markets can 'rally further'

    SERIOUS MONEY: THE SECOND phase of the financial upheaval that began during the autumn of 2007 is under way. History illustrates that banking crises are typically followed by sovereign debt crises and the current episode is proving no exception, with Greece being singled out as the weakest link among fiscally stretched developed nations, writes CHARLIE FELL

    The €45 billion EU/International Monetary Fund (IMF) debt contingency accord at concessionary rates of interest, coupled with the European Central Bank’s (ECB) decision to relax its rules on what is deemed as acceptable collateral, provided the Greeks with only temporary respite.

    Sounder minds prevailed. Investors appreciated that while the measures taken may reduce short-term liquidity risk, they do nothing to alleviate medium-term solvency concerns. This would almost certainly result in lower recovery values for private debt-holders, because EU sovereign loans are likely to receive higher priority.

    Inevitably, the improvement in market interest rates proved temporary and 10-year government bond yields have since climbed to more than 7.8 per cent, or almost 475 basis points (4.75 percentage points) above their German equivalents. The Greek fiscal situation is simply unmanageable at current market rates, and a debt restructuring or credit event is almost certain to be triggered. It is highly improbable however, that Greece will elect to leave the European Monetary Union, and they cannot be compelled to do so. Greece cannot conceivably leave the euro zone because, as Barry Eichengreen at Berkeley points out, the decision would precipitate the mother of all financial crises. First, the decision to leave could not be taken overnight; it would require extended preparations and would have to go through some democratic process. A run on the banking system would ensue, as domestic depositors attempt to secure the value of their funds and shift them elsewhere in the EU.

    The exiting country could not block the capital outflows by decree, since there is unrestricted capital movement in the EU. Thus, only an exorbitant rise in interest rates could prevent a banking system collapse.

    Second, the seceding country could not conceivably re-denominate its outstanding stock of euro-denominated debt in the new currency, as access to international financial markets would close and foreign investment would collapse. Furthermore, borrowing costs would soar, as investors demanded a sizeable inflation and liquidity risk premium. Thus, the real value of the debt-to-GDP ratio would rise, and real interest rates would remain punitive.

    Finally, the improvement in the seceding country’s competitive position as a result of the large drop in the external purchasing power of the new currency would, in all likelihood, not persist for long because labour would be unwilling to accept a drop in real living standards. Thus, the drop in the external value of the new currency would be quickly followed by an equally sharp decline in its internal value. The economy would become increasingly prone to periodic bouts of high inflation, economic volatility would rise, and foreign investment would leave.

    There is no incentive for a fiscally challenged country to leave the euro zone but actions taken by the EU and the ECB in response to Greek distress have served to undermine the credibility of the euro as a hard currency, and have increased the chances of an eventual break-up nevertheless. This is because the EU/IMF debt contingency accord at below market interest rates, combined with the ECB’s softer collateral stance, has erased the credibility of any threat that a recalcitrant fiscally challenged euro zone member will be allowed to default.

    The removal of this threat introduces serious moral hazard concerns.

    Fiscally stretched countries are now aware that the EU will climb down should market rates push borrowing costs to unacceptable levels. Furthermore, ailing euro zone members are also aware that the ECB will accept their debt as collateral so long as at least one of the three rating agencies has not downgraded their securities to below investment-grade status. The need for aggressive action to turn around public finances has become less urgent, and it has become increasingly likely that the euro zone will succumb to fiscal profligacy and higher inflationary pressures over time.

    It is unlikely that stronger countries, such as Germany, will accept such increased price instability, and the accompanying degeneration of the euro into a soft currency. Playing the role of “bailer-of-last-resort” is already deeply unpopular, and a jump in long-term inflation expectations combined with currency weakness could ultimately motivate the stronger countries to leave the euro zone. The crisis in Europe has only begun.

  2. Rock and Hard Place

    By Puru Saxena • April 21st, 2010 • Related Articles • Filed Under

    About the Author

    Puru SaxenaPuru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

    See All Articles by This Author

    * Federal Reserve Wants to Debase the U.S. Dollar

    * Transfer of Wealth

    * US Dollar As Reserve Currency Not Working Very Well

    * A New Bretton Woods Vs. The Old Bretton Woods

    * Will Synchronized Rate Cuts Solve International Financial System Problems?

    Filed Under: Currencies • Market • The Americas

    Tags: debt • default • deficit • inflation • interest

    Rock and Hard Place5.8106

    The developed nations are over-extended, their debt levels are ballooning and their governments are creating copious amounts of money. Put simply, most industrialized nations are now caught between a rock and a hard place.

    After years of excesses, the developed world is slowly beginning to realize that you cannot continue to live beyond your means and spend your way to prosperity.

    Today, US national debt stands just north of $12 trillion. Its fiscal deficit for this year alone should come in around $1.6 trillion and the nation faces mind-boggling deficits for as far as the eye can see. Furthermore, demand for US government debt has begun to wane and this implies that the Federal Reserve will have to resort to creating even more money over the following years.

    Make no mistake; the US cannot afford higher interest rates and in order to keep a lid on the government bond yields, we are convinced that the Federal Reserve will resort to debt monetization. In other words, the central bank will create new dollars in order to fund the deficits. Needless to say, this money-creation will be extremely dilutive and end up undermining the viability of the world's reserve currency.

    If our assessment is correct, within the course of this decade, the interest payments on the existing government debt will become so large that the US Treasury will need to issue new debt just so that it can keep paying interest on its outstanding debt. When that happens, you can be sure that foreigners will not be eager buyers of US government debt. Therefore, the Federal Reserve will have to create additional money, just to keep the Ponzi scheme going. And when all else fails, the US will simply debase its currency, thereby repaying its creditors in significantly depreciated dollars.

    Although our prognosis may sound far-fetched, we want to remind you that throughout history, currency debasement has been the norm rather than the exception. Let us put it simply, the US is now left with three options:

    * Sovereign default (unimaginable)

    * Severe economic contraction (unlikely)

    * Currency debasement (most probable)

    Due to the risk of being thrown out of power, the policymakers will certainly not admit to an outright sovereign default. For such an event would cause a revolution within the US and shock-waves throughout the economy. So, this drastic measure can be ruled out.

    Next, we are also sure that policymakers in the US will not swallow the bitter pill and pursue sound monetary policies. So this option is also out of the question.

    Finally, it is obvious to us that policymakers in the US will have no hesitation in opting for the inflation solution. By diluting the supply of money and eventually debasing their currency, policymakers in the US will create the illusion of prosperity via rising nominal asset prices.

    Unfortunately, severe monetary inflation and currency debasement is likely to occur in many Western nations, not just the US. Remember, a host of nations such as Ireland, Italy, Spain, Greece, Portugal and the UK are also swimming in an ocean of debt. Moreover, their populations are ageing and this trend will put further pressure on these countries' finances.

    So, in this 'new era', whereby most of the 'advanced' economies are on the edge of bankruptcy, various paper currencies will come under pressure. The more nations that move to debase their currencies, the more that the paper monies of the world will depreciate against hard assets such as gold.

    Although currency debasement and inflation are good enough reasons to hold on to some gold, the biggest bullish factor is that real (inflation-adjusted) interest-rates are now negative in most nations. Thanks to the central banks' reflationary efforts, short-term interest rates today are way below the official inflation rate. Therefore, holding cash is now a loss-making proposition and thus, forward-looking investors are turning to gold.

    On the supply side of the equation, it is worth noting that central- banks have now become net buyers of gold. After years of selling bullion, the public sector has done an about-face and this is very positive for the yellow metal. Currently, the creditor nations in Asia are sitting on mountains of foreign exchange reserves and in an effort to diversify out of paper, they will surely add to their gold holdings. Recently, we have seen China and India buy huge amounts of gold and you can bet your bottom dollar that they will continue to add to their tiny positions.

    Gold is in a secular bull-market and every investor should own some bullion as an insurance policy. At present, gold mining stocks are undervalued relative to gold bullion, so those seeking extra leverage should consider investing in dominant gold producers. Finally, in our view, the high-cost South African gold producers, who do not hedge their production, offer the maximum leverage to gold. And at current prices, these companies are being given away.

    Regards,

    Puru Saxena

    for The Daily Reckoning Australia

  3. Greek bond yield shoots to new high of 8.5%

    Thursday, 22 April 2010 11:58

    The interest rate demanded to lend money to Greece jumped above 8.5% today after EU data showed that the Greek public deficit last year was worse than previously estimated.

    EU estimates today put the Greek public deficit last year at 13.6% of output instead of 12.9%. The yield on Greek 10-year bonds jumped from an already high interest rate of 8.086% yesterday.

    The rate or yield rose sharply yesterday as experts from the International Monetary Fund and European Union began talks in Athens on details of a debt rescue, which many analysts said was looking increasingly likely.

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    Greece must raise about €10 billion by the end of May to avert a partial default.

    The EU Commission also warned today that in view of uncertainties about the quality of Greek data, its latest estimate of the Greek public deficit could rise by a further half percentage point.

    The revision means that the baseline for huge budget cutbacks and reforms imposed by the EU on Greece is higher than had been estimated.

    Greece is already committed to making an unprecedented reduction of the deficit in the space of a year by four percentage points. But it assured today that the new worse data from Brussels did not change its deficit reduction target.

    A month ago the yield on the Greek 10-year bond was about 6.3%, which the Greek government said was already unbearably high.

    The difference between the rate at which Greece has to borrow on international markets and what the euro zone benchmark country Germany borrows has now widened to 5.25 percentage points.

    Hmmmm I wana see higher interest rates

  4. Having looked briefly yesterday at who would win if Keen's predicted property price slump comes to pass, this morning I ask who wins if property prices continue to rise at recent trend rates.

    This goads Keen into yet more fulmination on the 'FIRE' industry. The ratio of private debt to GDP in Australia has risen from 17 per cent in 1990 to 89 per cent in 2010, he says, and the biggest beneficiaries of this massive growth in lending have been the FIRE businesses.

    The problem, he says, is a divergence between house prices and other consumer prices and GDP – the difference being filled with debt finance.

    Business Spectator later digs up data to see if this assertion is within the ballpark and, while the credibility of ABS data is often the subject of debate, the data confirms Keen's assertion (see chart) – the past seven years' results show average annual growth rates of 2.6 per cent for GDP, 2.8 per cent for CPI and 7.8 per cent for established homes.

    [Click to enlarge the image]

    click the image to enlarge

    There are many ways to skin a statistician, but even sophisticated indices, such as the RP-Data/Rismark hedonic index (used by the RBA), document house-price growth levels well above GDP or CPI levels.

    Indeed, it is the strong growth in house prices that has led Rismark – the company founded by Business Spectator property blogger Christopher Joye in 2003 – to spend much time and money developing a product to allow investors to buy into Australia's most valuable asset class (current housing stock is valued in excess of $3.2 trillion), without being 'owner occupiers'. As Rismark points out, this asset class offered “attractive risk-adjusted returns and outperformed virtually all other asset-classes throughout the global financial crisis”.

    Joye, and others, have argued that the divergence of house price growth from GDP growth stems from a long-term under-supply of housing resulting from a severe mismanagement of available land by government, and inflamed by record levels of immigration – 440,000 last year alone.

    However, though Australia's migrant intake contains exemplary levels of humanitarian refugees (around 13,500 a year, who arrive with no capital), many, perhaps most, of the remainder of the huge migrant intake bring some capital to Australia with them.

    That would help explain house price growth (they can bid up houses), as well as part of our current 7-8 per cent per annum housing credit growth (they would be expected to leverage what capital they have with a home loan).

    However, migrants would not cause the private debt to GDP ratio to rise – while they add their share to the national debt stock, they also add to the workforce and contribute to GDP growth.

    For Keen, whose economic modelling is founded on the financial instability theories of American economist Hyman Minsky, the divergence between debt and GDP growth takes a long time to reach an “irrecoverable” crisis point, as economies move through series of shocks that grow successively bigger.

    He argues that the debt/GDP divergence that led to the US housing-led 2008 calamity had been going on for 65 years. In Australia, he says, the two have been divergent for 45 years.

    Surely, then, the Australian economy can enjoy strong house price growth for another 20 years before the housing market collapses?

    No, says Dr Doom as more ointment is slapped on to his thigh – the US has historically been able to carry more debt than Australia, he says, because it has retained a broader manufacturing base than Australia's 'houses and holes in the ground' economy.

    Keen doesn't believe that 7 per cent house price growth can continue much longer without triggering a mammoth 'Minsky moment' (as David Llewellyn-Smith discussed on Monday in relation to the dotcom bust) – the tipping point at which debts become too big to service on current incomes, leading to buyers leaving the market, prices falling, and finally a cascade of forced sales leaving Australia with an economy looking a little too much like the first instalment of the Mad Max movies. (Watch for a spike in muscle-cars and gun sales…)

    Even without embracing this cataclysmic view, it's clear that the growth in Australia's stock of debt finance has failed to produce adequate housing infrastructure – recent reports suggest the affordability problem is getting worse, despite the Australian economy carrying four times the private debt per unit of output it had in 1990, in real terms.

    Optimists argue that after a period of overheated growth in prices, the market will cool to reach a new equilibrium. Alan Kohler wrote on Friday, for instance “a plateau this year would hardly be surprising; in fact another 12 per cent rise [on the 2009 figure] in the national median house price in 2010 would be staggering”.

    Yet there are reasons to think a plateau could take a little longer to arrive.

    Stephen Bartholomeusz reported on Monday: “Another small sign that the banks' levels of risk aversion are falling came last week when the ANZ told its broker channel that it plans to increase its maximum loan-to-valuation ratio for housing and investment property lending from 90 per cent to 95 per cent.

    “Again the relaxation of LVRs that were tightened during the crisis isn't open-ended - it will apply only to existing ANZ home loan customers with at least six months standing and good credit ratings - but it does signal a cautious return to business-as-usual, an improved appetite for risk and confidence in the economic outlook.”

    Further, if equity-sharing products, such as Rismark's highly innovative 'Equity Finance Mortgage' product, gain wider success, the debt secured against each dwelling will be able to keep rising beyond current levels. First home-buyers currently excluded from the market will be able to continue to enter the market, to underpin future house price growth. Indeed, if house prices were not expected to keep rising – rather than plateauing while incomes caught up with prices – the product would not be needed. Nor would it be attractive to investors.

    If house prices are able to get around the constraint of affordability in this way, anyone 'getting out' of the market will do extremely well – the more the disparity between incomes and house prices grows, the greater that profit for anyone able to downshift or sell out of the market altogether. The drawback for the householder, however, would be that less equity withdrawal would be possible – if you own half the house, you get withdraw half as much equity.

    There is a certain appeal, therefore, in the idea of fixing the affordability problem with financial innovation.

    That said, the idea of securing even more debt against the same dwelling is anathema to Steve Keen. For him it is the last act of the FIRE industry - the final step towards a credit system crash from which, he argues, our economy would take generations to recover.

  5. Poll: How do you view current real estate prices:

    Poll form

    1. Please select an answer. 20% or more overvalued

    2. 0-20% overvalued

    3. About right

    4. 0-20% undervalued

    5. 20% or more undervalued

    6. View results

    20% or more overvalued

    65%

    0-20% overvalued

    19%

    About right

    11%

    0-20% undervalued

    2%

    20% or more undervalued

    3%

    Total votes: 4580.

    Would you like to vote?

    You will need Cookies enabled to use our Voting Feature.

    Poll closes in 2 da

  6. Hey pondy, I was chatting with a couple yesterday, I asked about the GFC? it drew blank expressions , that is a fairly common example of the depth of thinking here and every were else.

    People belive the properganda from the newspapers.

    I just shake my head when I look at share prices and property prices.

    People are so use to making money on shares and property it is hard wired in the brains.

    Where can you park money right now? I get allmost 6% but I worry that when this mother of all bubbles deflates the central banks will do the same trick of lowering interest rates,

    Who was it that said Stupidity is doing the same thing but expecting a different result?

    March 29 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan’s warning that rising yields on government debt will drive up American borrowing costs is resonating with the world’s biggest bond traders, who say this month’s losses in the market for U.S. Treasuries are just the beginning.

    Yields on 10-year notes, the benchmark for everything from mortgages to corporate bonds, climbed as high as 3.92 percent last week from a low of 3.53 percent in February. The 18 primary dealers of U.S. debt forecast the rate will reach 4.2 percent this year, the highest since October 2008, according to the median estimate in a survey by Bloomberg News.

    Higher yields are the “canary in the mine,” Greenspan said in a March 26 interview on Bloomberg Television’s “Political Capital With Al Hunt.” The increases reflect concern over “this huge overhang of federal debt which we have never seen before,” he said. The budget deficit, which hit $1.4 trillion in fiscal 2009, will drive Treasury sales to a record $2.43 trillion this year, a February survey of 10 dealers showed.

  7. Preposterous Property Spruiking

    The Northern Star journalist Alex Easton must have been working overtime on April 17th. We hope his endeavours have been amply rewarded because he produced the following items.

    The first two stories were sent to us from Money Morning reader, A. Nonny-Mouse:

    "Future demand inflates home market"

    "Million reasons to buy"

    The third came from Money Morning reader Jim:

    "House prices soon out of reach"

    Jim claims that in the print version of this article the headline was, "We will all be rich."

    He's offered to scan and email a copy of the article so we can confirm it. But whatever, even without the fabulous "We will all be rich" headline, these three articles have gone to enormous lengths in the effort to keep pumping that property bubble.

    All three articles are worthy of a Walkley Award. I suggest you read them for yourself, but we can't help but point out a couple quote-worthy quotes:

    "By the time they're 36, Gavin Calnan and Olivia King will be millionaires."

    Not 'could be' or 'may be', but "will be."

    How are they going to do it? Starting a business perhaps? Working hard? Or even saving up a few dollars a week? We're sure they work hard. And that they'll save as much as they can. But that's not where The Northern Star sees their fortune being made:

    "By the time the final brick has been put in place, Mr Calnan said the couple expected to have spent about $460,000 - just under last year's median price for Ballina of $475,000.

    However, projections from Australian Property Monitors suggest if the couple can stay in their new house for a decade, their home will be worth nearly $1.25 million."

    According to our Canan TX-220TS calculator (we dumped the Canon LS-100TS after it made a mistake by not multiplying a number when we told it to) that gives Mr. Calnan and Ms. King a $790,000 gross profit.

    Minus say $250,000 in interest payments, that'll still leave them with a profit of around $510,000, or about $51,000 per year.

    That's the equivalent of about $65,000 in pre-tax income. All they have to do is go to the bank each year, get the house revalued, extract the "equity" and they'll never have to work again.

    After ten years they can sell the house and walk away owing nothing. Or they can just keep on getting the house revalued and withdrawing "equity." What could be easier than that?

    It's easy money this property lark.

    The other quote we liked was from the "Future demand inflates home market" article. According to Easton:

    "Mr Shay [of LJ Hooker in Ballina] said property prices in Ballina had doubled or trebled every decade since he moved to the town from Lismore 10 years ago."

    Do you spot the oddity there? Correct us if we're wrong, but isn't a decade 10 years. So "every decade" within a 10 year period is, erm, one decade. We suppose technically he's correct, but seriously.

    As we said above, these are beautiful examples of property spruiking by the mainstream press. Feel free to send more property spruiking stories to [email protected]

    Cheers,

    Kris.

  8. This is the third daily dispatch from correspondent Rob Burgess who is accompanying economist Steve Keen on his walk to Mount Kosciusko.

    Day 4

    Oh dear. I hope Macquarie’s Rory Robertson hasn’t thrown out his walking boots.

    Day four of the trek brings a coffee-sputtering revelation on the sunny verandah of our Cooma motel. (For last Friday's instalment see: KEEN'S DEBT MARCH: Honk if you're a bear.)

    The Keen-Robertson bet that culminated in this march through the Australian Alps, turns out to be not quite what it seemed.

    One of the Keen entourage, between earnest discussions of endogenous theories of money supply and the failings of sine-wave-based descriptions of business cycles, lets slip that the terms of the original bet are recorded in crystal clear audio, on the website of the parliamentary library in Canberra.

    Business Spectator hurried off to have a chuckle over the audio record of the duo’s now-famous intellectual jousting, but was astounded at what it found – this bet has four years to run.

    Worse, based on the recording, the post-GFC financial environment now looks very much like a scenario the ‘winner’ of the bet, Robertson, suggested would not be seen for “a generation” to come.

    No financial commentator likes to be reminded of what they said 18 months ago – yet the recording contains the natural corollary to the reporting (including by Business Spectator) of ‘loser’ Steven Keen’s humiliating march to the nation’s highest peak.

    The Australian, for instance, last Friday ran the headline ‘Keen the loser walks’. In that article, The Australian’s Michael Bennet quoted an email reportedly sent to a number of journalists by Robertson. Bennet wrote:

    Robertson...took issue with [The Age reporter, Chris] Zappone's reporting of Keen's view that the second part of the bet – that home prices will sink by 40 per cent within 15 years – remains open. “Contrary to various reports, however, there is no ‘second part’ or ‘second half’ of the bet . . . the one and only bet that was made has been won and lost’."

    Not so. Since listening to the audio version of the bet, Business Spectator has been forwarded several emails – correspondence between Robertson, Keen and our own property blogger Christopher Joye (who has written on Steve’s misjudging of the economics at the heart of the bet, and on reports of a subsequent redrafting of the bet), that show some later private discussion over the terms.

    Nonetheless, the bet that was witnessed by more than 70 parliamentary staff in 2008 cannot be overlooked. Here’s what the audio reveals:

    Keen, when unexpectedly challenged to the bet, loudly and clearly interjects that his forecast was for a 40 per cent nominal fall in house prices “in a 10 to 15 year timeframe”. Robertson, does not respond to the interjection, and continues with his presentation.

    In audience question time, some 20 minutes later, Keen describes how he sees the Australian economy foundering in a way quite different to the American experience: “Americans had a housing crisis, a credit crunch and then macroeconomic (downturn)… we’re going to go through a macroeconomic, housing, then credit crunch after that – and I see this taking about five years.”

    At this point, Robertson responds: “I’m still only going to give Steve five years to get his 40 per cent.”

    Note too, that in the first articulation of the bet, Robertson generously offers to walk if house prices fall 40 per cent peak-to-trough, with Keen required to walk only if prices fall by less than half that – 20 per cent.

    Giving Robertson full benefit of the doubt, therefore (given that he appears at first to accept the 10-15 year timeframe, only later suggesting the 5 year timeframe), the bet is this:

    Keen must walk to Kosciusko if nominal house prices fall by less than 20 per cent before October 2013.

    What then, is this 230 kilometre struggle if it is not a lost bet? It is looking increasingly like Keen’s sly way of warning the nation of something that in October 2008, not even the more bullish Rory Robertson expected – yet more ‘cheap money’ asset inflation.

    At that time – admittedly amid the confusion of the post-Lehman losses – Robertson answered a question on regulation thus:

    “…This is sort of self-regulating, in that people who’ve lost a fortune playing the equity markets aren’t going to play again. So there won’t be a bubble [pauses]. This is the bubble to end all [pauses] – the Great Depression cured people of wanting to take on debt for generations. You know, all of us had parents or grandparents who said we should save to buy a car rather than borrow to buy a car.

    “This problems that’s unfolding now [in October 2008] won’t be a problem for another generation, is my guess.”

    No economist, including Steve Keen, has foresight of what is to come. Yet after a 3.8 ‘peak-to-trough’ fall in property prices during the GFC (the basis for Keen’s apparent ‘losing' of the bet), Australians have returned to asset markets with gusto – the S&P/ASX 200 is hovering around 5000, and house prices seem unstoppable. On Friday AAP reported:

    “First home buyers are rapidly being priced out of the property market as cashed up investors snap up properties amid a housing shortage…a buoyant economy and strong jobs prospects have spurred established home owners to invest in property or upgrade their homes as house prices continue to rise…Average loans now were 40 per cent larger than in 2005, although the number of loans had not increased greatly…

    “First home buyers, on average, now put 40 to 45 per cent of their income aside for mortgage repayments while established owners were paying between 25 and 30 per cent…”

    This, for the bulls, is evidence of a sustainable recovery from the horrors of late 2008 and the first quarter of 2009. Perhaps, later today, the delayed market reaction to Goldman Sachs being charged with fraud on Friday will give some clue as to how robust the current global asset inflation is.

    But over steak and chips at the motel in Cooma on Sunday night, as Steve Keen holds court amid a dozen tired walkers – a disparate bunch of economists, businesspeople, mathematicians, soldiers, public servants – it is evidence of something far less hopeful.

    There’s no doubt the bet is still on – still for the taking. Yet the thought of Keen winning this bet remains a terrifying prospect

  9. "Property clock is ticking"

    We think this article goes down as the worst property spruiking article we've seen... ever! And that's saying something. Especially for such a short article. Here's the best bit:

    "An international survey by Colliers International claims we have passed the bottom (6 o'clock) and are now at 7 o'clock on the property clock, in which 12 o'clock is the top of the market. And our clock is ticking fast, with many respondents claiming we could hit 8 or even 9 o'clock next year."

    And maybe 10 o'clock the year after? If you can't cope with the suspense, [spoiler alert] we'll guess this we'll be followed by 11 o'clock and then 12 o'clock! Ha, ha, ha, ha... we didn't stop laughing for about an hour after we read it yesterday.

    We think the clock could be ticking on Beveridge's career if that's the best he can come up with.

    But it gets better [Reader's voice: surely you mean worse], based on the Aussie market being at "7 o'clock" Beveridge quotes Felice Spark from Colliers:

    "This will clearly put our property market in a state of upswing."

    Stop it. We can't take any more. We'll be back in a moment after we've recovered. While you're waiting, an interlude...

    ..

    The second article was from David Nankervis in the Adelaide Sunday Mail. According to the article:

    "House prices in the town overlooking Hardwicke Bay have jumped from a median $71,600 a decade ago to $382,500 and, at this rate, will pass $2 million in the next 10 years."

    There you go. Buy in Hardwicke Bay today and in ten years you'll have made a cool $1.6 million. What are you waiting for?

    But don't think about selling in 2020. You'll be a mug if you do. Because "at this rate" the price will pass $10 million in 2030:

    Point Turton House Prices

    Ha, ha, ha. David Nankervis is another journalist who could find the clock ticking on their career following that effort.

    Anyway, enough of the property tomfoolery for today. Guess what today's subject is? That's right, Goldman Sachs.

    You may have seen the news reports over the weekend. As the US Securities and Exchange Commission puts it on its own website:

    "SEC Charges Goldman Sachs With Fraud."

    This comes as no surprise to your editor. In our opinion the entire banking system - including the central bankers - should be up before the beak on fraud charges.

    According to the SEC charge:

    "Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. ('Paulson'), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps ('CDS') with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure."

    In other words, Goldman's structured a product to sell to investors. The firm Goldman's relied upon to structure the CDO - Paulson & Co - shorted the fund by buying a CDS.

    Buying the CDS means Paulson & Co was betting that the CDOs in the portfolio would fail. It was betting against the performance of the investment product it had designed!

    The architect of the deal was Fabrice Toure, who worked for Goldman Sachs in Paris. But before I go on, you shouldn't think this is some kind of rogue trader, acting alone. There's little doubt in my mind that this is how the majority of investment banking deals are structured.

    And furthermore, it's you shouldn't think Australian banks are any different. It's just that they use different products - the property market. But more on that later...

    After spending the weekend reading over the news and watching clips from the so-called financial news channels, two points about this story stand out:

    1. The blasé reaction from fund managers - fund managers who are either customers of or suppliers to Goldman Sachs

    2. The 'assets' on the US Federal Reserve balance sheet

    3. And, how are Goldman's actions any different to other banks and the central banks?

    For the first point I suggest you take the time to watch this video. It's about fifteen minutes long, and contains the coverage from CNBC shortly after the Goldman story broke.

    We were stunned when we watched this video. The reaction of the fund managers left us speechless.

    In a nutshell their general response is, "So what? Goldman Sachs will survive, they'll pay a fine and move on. This looks like a good time to buy Goldman Sachs stock."

    In one sense they could be right. The litigation will go on for ages and eventually when everyone has almost forgotten about it they'll settle out of court with Goldman's neither admitting nor denying any wrong doing but paying a fine of $X million.

    But the fund manager reaction goes to show what we've being saying all along. You can't trust anyone else to look after your money for you. Let me just make something clear, Goldman Sachs is being charged with fraud.

    Fraud. Er, last time we checked the legal dictionary that was a pretty serious charge.

    Although it's only a civil action and not a criminal action, in our mind there's little difference. Fraud is fraud. The fact that these fund managers couldn't care less, and see the 12% price drop of Goldman's as a buying opportunity shows you they know which side their bread is buttered on.

    Clearly they're more concerned about maintaining their relationship with Goldman Sachs than they are with speaking out about the disgraceful business practices of the former investment bank.

    These fund managers are more interested in making sure they get access to Goldman research, Goldman investment deals, and invites to the next Goldman cocktail party than they are about how client money is being invested.

    But it also brings us back to something we wrote a couple of weeks ago on April Fool's Day, "Deals Lovingly Crafted by a Caring and Responsible Investment Banker."

    In the article we wrote how the US Federal Reserve had finally published details of the assets and liabilities it held on its balance sheet following the collapse of Bear Stearns. There are thousands of them. As far as we can see, they're all crap.

    They're assets which the Fed paid par value despite the market pricing them at mere cents on the dollar. A great deal for the US taxpayer, not!

    As we pointed out:

    "But the way we see it, much of the cause of the excesses in financial markets is due to financial engineers having too much access to investor's cash, too much access to bank-created credit, and too much of an incentive to get create new products and investments for the sake of earning a fee rather than because it's a good investment for the punters."

    And then we read the following extract from the SEC charge sheet. The SEC is quoting from an email sent by Goldman Sachs employee and financial engineer extraordinaire, Fabrice Toure:

    "More and more leverage in the system, The whole building is about to collapse anytime now...Only potential survivor, the fabulous Fab[rice Tourre]...standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"

    In another email he wrote:

    "[T]he cdo biz is dead we don't have a lot of time left."

    He's telling the truth. These guys don't have any idea what they're doing. They've got no idea about the implications of the investments or even what they are. All they know is how to package something up and sell it off to suckers.

    Then it's in the hands of the traders. And they know even less.

    There's a general misconception in the financial markets that these trader dudes at the big banks and broking firms are the brightest sparks ever to walk the earth. The reality is they aren't. Despite all the fancy screens and expensive software they use, the facts are they may just as well have two big buy and sell buttons in front of them which they can bash alternatively like a two year old playing with a Fisher Price toy.

    Again, as we've pointed out before, the guys that were trading CDOs and CDSs were the same guys trading energy contracts for Enron and before that they were trading tech stocks during the tech boom, and before that they were trading interest rates for Long Term Capital Management.

    Broker: "Buy, Sell, Buy, Buy, Sell, Buy, Sell, Sell, Sell, Oops! What's next? Box Office Futures? I'm in Mr. DeMille. Which is my best side? Buy or Sell?"

    Mr. DeMille: "The opposite of what you tell your client to do. Ha, ha... more champagne?"

    If the market and the fund managers really think this is an isolated case then they're living in a dream world. Every single investment product crafted by the investment bankers, whether it's Goldman Sachs, JPMorgan or Macquarie Group, is crafted for the benefit of a select group of people...

    The firm that created them and their buddies in the business. Not their clients.

    Bankers don't earn millions of dollars by sitting on their thumbs. They've got to come up with the next great investment product that the brokers (salespeople) can flog to the clients.

    And each product has to be better than the last. The salespeople don't care what's in the product because they wouldn't understand it even if they did know.

    And as Fabrice Toure admits in his emails, he didn't "necessarily understanding all of the implications of those monstruosities!!!"

    Finally, there's the third aspect of this. Let's refresh your memory. Goldman Sachs invited hedge fund manager John Paulson (no relation to ex-Treasury Secretary Hank "Hank" Paulson) to select a bunch of CDOs that it could stick into a fund and then market to Goldman Sachs' clients.

    Not surprisingly, Paulson chose the CDOs he thought were most likely to collapse considering that he was already short selling the CDO market and would also short sell these particular CDOs as well using a CDS contract.

    The thing that gets us is, how is this any different to the actions of central bankers? OK, you may think we're drawing a long bow here, but in our opinion the comparison is valid.

    In the case of Paulson and Goldman it was selling to investors assets that would lose value - knowingly if we go by what we've seen so far.

    It seems to us that this is exactly the same charge that could be levelled against the central bank and retail banks. It issues money which it knows will lose value. Not that it openly tells you that.

    The bankers talk up the strong economy and increasing asset values and how Australians' wealth has improved. Yet all the while the banks reside over an ever devalued currency. A currency which has lost around 90% of its value in the last forty years.

    Isn't that fraud? Telling you one thing while the opposite is actually the case. Sounds like fraud to me.

    But whatever, the fact is, the banking system is broke and this is further proof of it. But also remember that the ultimate fault for this fraud doesn't lie with Goldman's. The ultimate crime is committed by the central bankers and governments who allow the initial fraud to take place.

    The initial fraud being the creation of money from thin air. Money that is then given to the banks which they then use to weave their magic on unsuspecting investors and clients.

    Even so, we're sure the shills in the mainstream Australian media and analysts will spruik that the Australian banks are different and that they wouldn't dream of doing the same sort of thing as Goldman's.

    Oh yeah? No one could accuse the banks of encouraging individuals to buy into a sky-high asset class - housing - when anyone with an ounce of grey-matter could tell you it's massively over-valued and on the verge of collapse.

    Goldman's are being charged with fraud for misleading clients. The Australian banks should be charged with fraud for misleading property buyers into thinking the Australian housing house of cards will never crash.

    The important point to remember is that the mainstream press and commentators only ever warn about asset bubbles after they've burst. Until then they spruik and cheer about rising prices and increased wealth. And if they do mention bubbles they're quick to call on anti-bubble 'experts' who tell them not to worry.

    Only when the stinking and putrid building collapses do they take note about the dangers of boom and bust economies. But that doesn't last long, because as we've seen over the last year or so, everything is forgotten and they're out there cheering on the next bubble.

    Make no mistake, the Australian banking system and Australia's banks stink just as much as Goldman Sachs. You shouldn't for a moment believe that the actions of our banks are any nobler than those in the US.

    The only difference - if there is one - is the US banks were shafting individuals using CDOs and subprime loans, whereas the Aussie banks are shafting individuals by baiting them with cheap money to buy overpriced real estate...

    Same proverbial, different shovel.

    Cheers,

    Kris.

  10. well I for one have personally witnessed their diminishing numbers

    Bear cubs honour I will be here in 2016 for the slump phase of this cycle, will you be ?

    The fact is Bardon you drive out any one who dares dissagree with ramping of property!

    Its no coincidence that you have a picture of Mad Max sporting a shot gun' why is that?

    Your a wana be Australian , A wana be bigshot,

    The reality a Troll trying to control a very little bridge

  11. Well this graph goes to show that being a bear is a mugs game.

    So clearly we have house rices and rents rising.

    Meanwhile debt value and repayments are eroded by inflation, poetry in motion.

    This is a great example of the tri vector a real pearler this one.

    Great chart, clealry dispels all bear myths.

    Ha ha Bardon driving down the free way at 100Km

    His eyes fixed only on the rear vishion mirrow

    Yes its all clear ahead.

  12. Some questions off the top of my head:

    Cash flows increasing 7% yoy with with underlying asset value up double digits. What point is this guy trying to make?

    If the clever renters are happy to round the increase in the money they're paying to "mugs" up to $20 each quarter, how will they feel when it turns out their rents are up 8% at the end of the year?

    Am I correct he assumes houses are 100% debt funded with his mortgage cost increases vs rent increases section?

    How is a 1.25% increase in SVR a 30% increase in mortgage payments? When were SVRs at 3.75%?

    Do you pay fore this newsletter, BS?

    His analysis of gross vs take home is rather simplistic but I'm not sure where to start.

    I get the feeling he posted this whole thing from his Blackberry from the bar.

    Yes a bit of a rant Bardon

    But does bring up some interesting points

    I recon rents will likely continue to go up in line with interest rate increases.

    It comes down to supply and demand as long as heaps of new australians keep comming that is.

  13. "Rent rises accelerate nationwide" blabbed yesterday's The Age.

    According to journalist Chris Zappone, "National rents rose by 1.5 per cent in the March quarter of this year."

    Wow! Get ready for a whole bunch of renters defaulting following a 1.5% rent increase. Goodness me, the poor renters who were forking out $1,000 per month at the end of 2009 now have to dig deeper into the pockets to find another [sob!] $15 per month.

    This must be the beginning of the great rental surge the property spruikers have threatened to unleash on the market for, ooh, about three years now.

    Forgive us if we don't get on the blower to Eddie McGuire asking Channel 9 to organise a telethon for all the debt unladen renters out there.

    Let's be honest, a 1.5% increase is pretty pathetic. Odds are most renters would have laughed and said, "Here, round it up to $20 you mug!"

    But then again, maybe the reason landlords haven't passed increases on is because they'll get to lose more money. After all, isn't that the name of the game for property investing? Lose as much as you can on the income because you get a bigger tax break.

    As we've said before, it takes a genius to come up with an investment strategy like that!

    I mean, let's put it in context. Since the middle of last year mortgage rates have increased by... 26%. So, landlords suffer a 26% increase in their mortgage repayments, yet they only pass on a paltry 1.5% in the March quarter, and according to Zappone, a pathetic 2% during the whole of 2009.

    Don't forget, mortgages are leveraged, rents aren't. After the Reserve Bank of Australia has increased interest rates by 1.25% that means all those poor first homebuyers have seen nearly a 30% increase in their mortgage repayments.

    Yet an increase of 1.5% by a landlord to the tenant? So what, do your worst.

    But a classic example of the misinformation comes in a report back in January from the Commonwealth Bank that one Money Morning reader was kind enough to send us (apparently they were alerted to it after following the link provided by one of the bloggers on the Money Morning website).

    It's the typical rubbish from the banks. The CBAs big reveal is that "about 85% [of households] spend less than 30% of their gross weekly incomes on housing; about 10% spend between 30% and 50%; only about 5% of all households spend more than 50%."

    Did you spot the classic bit of misinformation? Read it again, it's right there.

    That's it, "gross weekly incomes."

    That even 5% of households are spending more than 50% of their gross income on housing is frightening. But gross is irrelevant. There's no tax deduction for an owner-occupier. Net income is the figure you want.

    Just to put that in perspective. If the gross household income is $100,000 with two earners each earning $50,000, that means the household is spending $50,000 per year on housing.

    But if we assume the after-tax income is around $82,000 (and we're not even including the medicare levy or compulsory private healthcare or any other taxes) then for the same household you're actually looking at 61% of net income going towards housing.

    Even those that spend just 29% of their gross income on housing, using the same numbers above, the after-tax equivalent is bumped up to 35%.

    If the CBA was fair dinkum and used after-tax rather than gross incomes, that seemingly small figure of 5% would blow out to a much bigger number.

    But it's typical of the chicanery of the banks to paint a rosy picture on the housing market. The more suckers drawn in, the further the bubble can expand. There seems to be no end to the stretched truths Australia's banks are prepared to come out with.

    Anyway, that's enough of that for today. Now over to Alex Cowie, editor of resources based investment advisory Diggers & Drillers for his take on the global copper market...

    Cheers,

    Kris.

  14. The big problem for people in high office is that they cant say it as it is. Why?

    Because their coments will become self fufilling such is the blind faith in authority.

    Here is a example Stevens says I am gona devalue the dollar what happens?

    A stampeed out of the dollar.

    Stevens tip toed around the housing bubble, why in the hope that some may listen to his sutle warnings.

    How do you save the stupid and greedy from themselfs?

  15. Hmmmmmmmmm Dont under estimate the madness of the mob, just because the writing is on the wall, dos'nt mean this bubble will implode straight away.

    Right now the media is talking property stabilizing, yer right like it will never go down.

    I recon the last of the sucker money is being invested. it is a great personal sacrifice as these people after years of conditioning are gona get burned.

    The tissue of lies will be removed to expose the mountian of debit. Will the government do a MANA and keep property prices up?

  16. SuitablyIronicMoniker SuitablyIronicMoniker is online now

    Community Team

    Join Date: Feb 2010

    Location: Australia

    Posts: 524

    Default Two Articles

    There were two articles in the Sydney Morning Herald today about a possible bubble in China.

    China property prices surge, fuel bubble fears

    Quote:

    China's property prices rose at a record pace in March, indicating government efforts to stem gains aren't working and more drastic measures may be needed amid concern of a bubble in the nation's housing market.

    Residential and commercial real-estate prices in 70 cities climbed 11.7 per cent from a year earlier, the National Bureau of Statistics said on its Web site

    Quote:

    To damp speculation, the government in January re-imposed a tax on homes sold within five years of their purchase, after having cut the taxable period to two years in January 2009 to bolster a then flagging market.

    The People's Bank of China is targeting a drop of 22 per cent in new lending this year from 2009's record 9.59 trillion yuan and told banks twice this year to set aside more cash as reserves.

    The other article looked at what would happen to Australia if the Chinese boom slows.

    Time to act on China bubble? | Greg Hoffman

    Quote:

    If China's economy were to sharply contract, our resources industry would bear the brunt, potentially more so than in the past now that BHP Billiton and Rio Tinto are moving away from yearly contracts towards day-to-day, market-based pricing.

    Quote:

    As 2008 starkly illustrated, when conditions deteriorate, global markets can quickly become correlated in surprising ways. And it may be that a Chinese downturn could provide a catalyst for an Aus

  17. Would be interested to know the source for this Blue Skies.

    The first three points are spot on. It's hard to see a way out for the US and it makes a very compelling argument for housing being doomed as an asset class this decade.

    I'm not entirely sold on point four. I think the jury's still out on whether you're going to get huge inflation. Yes they're pumping money like crazy but that's a response to MASSIVE deflationary forces, and I don't think anybody knows how its going to come out. No matter, you will get rising interest rates anyway, maybe with inflation, maybe with deflation.

    I couldn't see point 5, is that in part II?

    [/quote

    moneyandmarkets.com This bloke is interesting, the part 2 is comming.

    As for inflation or deflation I recon will get 4 seasons in one day , the reason for this is the constant finantual enginering by governments.

    From my information construction in Perth is falling, but rentals are so very tight its a crisess point, in my humble opionion.

  18. Kosciuszko Walk 1pm Thursday 15th Federation Mall

    Published in April 12th, 2010

    Posted by Cassander in Debtwatch

    7 Comments

    On Thursday April 15th at 1pm, Steve Keen will begin a walk from Parliament House to Mt Kosciuszko, to fulfill the famous bet with Rory Robertson over house prices.

    Keen claimed that, just as Japanese house prices had fallen 40% since its Bubble Economy burst in 1990, so too would Australian house prices. In October 2008, Robertson challenged him to a bet that this would never happen at a debate in the Parliamentary Library, where the loser would have to walk from Parliament House to Mt Kosciuszko.

    Since then, Australian house prices have rebounded from their biggest ever quarterly fall of 3.8% in September 2008 to their biggest ever quarterly rise of 7% in 2010. In December 2009, house prices were 8.3% higher than the previous peak in March 2008, and 14.5% higher than the low they hit in March 2009, just nine months earlier.

    Keen is therefore doing the walk, but he has turned it into a protest at government policy that has deliberately pushed house prices higher.

    “This latest house price bubble began when the government doubled and even tripled the First Home Owners Grant,” Keen observed. “Along with the decision to allow open slather purchases of Australian properties by overseas buyers, the Rudd Government lit a fuse under house prices.”

    “These policies reversed the GFC inspired trend for Australian households to reduce mortgage debt, and played a major role in reducing the GFC’s impact on Australia. But they did so by reproducing the conditions that led to the GFC in the first place—Australia has taken the “hair of the dog” approach to curing a debt hangover, by borrowing yet more money,” Keen said.

    Keen and over two dozen supporters will set off from Federation Mall at 1pm this Thursday, wearing Tshirts emblazoned with the words “I was hopelessly wrong on house prices; ask me how”, as required by the bet.

    “The Tshirts also carry answers to that question,” Keen noted, “with graphs highlighting how the First Home Owners Grant has caused house price bubbles, the historic level of private debt that Australia now carries, and how Australian house prices compare to Japan and the USA.”

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    Keen plans to complete the 225km trek to Mt Kosciuszko by Friday April 23rd, running roughly 15km each morning and walking 15km each afternoon. “Supporters will generally walk, but some are coming on bicycles, and even stilts! I’m the only one who is required to do the whole distance on foot,” he said.

    Keen notes that Roberston may one day have to follow in his footsteps. “My call was always over the longer term—when house prices fall, they fall a lot slower than share prices. The government has simply delayed the inevitable by engineering this latest bubble.

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