The stock market has lost 51% of its value since its peak, a decline we’re told now exceeds the destruction of value seen in 1987. On the ABC News tonight, Alan Kohler grimly pointed to an index (tradeable, I think, but don’t quote me on that) of future sentiment which is apparently dire, and which apparently depressed that reified hive mind “the markets” even further. On Lateline Business, a British fellow in a very smart three piece pin stripe suit bemoaned the fact that all rationality in terms of valuation had departed from equities market, and what was left was “pure human sentiment” which apparently “isn’t pretty”. I think John Maynard Keynes might have had something to say about all that.
The stock market’s fall may also have had something to do with evidence of a growing deflation in consumer prices in America, or so opinionators opined. Well, I guess we don’t have the “inflation dragon” to kick around anymore.
And we’ve had another outpouring of deficit aversion, bipartisanship at last (!), in response to Glenn Steven’s expression of the belief that the government had a responsibility to “borrow to invest”.
And, yet, we’ve had a piece of prime silliness – to put alongside all these other signs of the times – in Crikey‘s editorial:
There’s not a lot politicians can do. The Government handing money to low income earners who’ll have virtually no choice but to spend it makes sense, but there’s only a limited number of times a $10b heart-starter can be administered to the economy. Even the Opposition has been doing its bit lately, prefacing virtually every statement on the economy with the mantra that Australia is best-placed to weather these difficulties.
And there’s not much businesses can do without demand. It’s actually up to us consumers to realise Australia’s economic fate is in our hands, and act accordingly.
Righteo. Hopefully there’ll be another Herringbone sale again soon and I’ll try to do my duty. The rent went up $200 a month – does that help?
But Crikey’s leader writer might like to think about household debt being at 160% of earnings at a time when – even if unemployment is yet to really hit home – the evidence is in that hours and overtime are being cut back all over the shop. And while the mortgage rate may be down, there’s been very little or no discernible movement in credit card rates – something Kevin Rudd acknowledged some time ago, and vaguely promised to look into now that consumer credit is to be regulated by the Commonwealth. If citizens – also known as consumers – are trying to do their own “deleveraging” and get their balance sheets back to something a little more realistic, I hardly think that’s a matter for the loud condemn. Or for that matter, people choosing not to buy more, well, stuff. Do you like stuff? You can never have enough stuff – apparently.
I’d much rather go with Glenn Stevens’ view and look to the government as investor and consumer of last resort.
I’m considering spending money by buying Woolworths (UK) – the whole shebang is going for 1 pound, apparently.
This is the problem that John Maynard Keynes identified in the General Theory in 1936 as the “paradox of thrift”. Yes, it would be great if people used the moment to pay down their credit cards and get their budgets into a better state (I know I’m doing that). But, if everyone chooses to save rather than spend, that will generate a downward spiral in consumer sales and, with that, business investment and jobs.
Strange as it may seem, the Crikey editorial has a point due to the paradox of thrift.
Kev’s $10B pump-priming is 1% of GDP. Private debt at the peak of the bubble was 165% of GDP. You tell me how much impact the government can have when everyone simultaneously decides its time to pay down their debt?
I reading a lot of Steve Keen these days. After being laughed at for years, he is looking like a dead set Nostradamus right now. Here’s a comment of his on his blog today:
It’s all extremely funny in a morbid kind of way. Even the ancient Egyptians knew to expect seven lean years after seven of bounty but in our enlightened age, a few months of lean following 15 years of fat has people running round screaming “OMG THE PAIN IT BURNSMAKE IT STOP SOMEBODY MAKE IT STOP!”
The big sleeper in all this is the “18 months” interest free terms that a lot of people, mainly the working class variety, have bought their plasmas on. First up, the interest rate is zero for 18 months but then goes up to a whopping 25%. So people have been badly caught, but they’ve been keeping up the payments.
However, this is where the real kicker starts. If they miss just one payment, the 25% is backdated to when they bought the plasma. Once people start losing their jobs and are unable to make payments, there’s going to be not just mass unemployment, but mass bankruptcies as well.
I’d be much happier if instead of simply giving everyone a bit extra to spend, Kev used the money for infrastructure and nation-building projects, or even just nation-improving projects. Public transport, solar energy R & D including manufacturing plants (soak up some metal and electrical trade and process workers from the dying motor industry!), water tank construction, stormwater systems and the list goes on. And employ fulltime workers doing these things. That would have the effect of stimulating spending while doing some actual good and diverting the money to a lot of people who would otherwise be out of work, instead of to a lot of people who might be thinking of taking a cheaper holiday but are otherwise still quite OK.
I’m not putting my hand up to spend more right now, but it’s true that if we all stop spending at once, recession is more or less inevitable.
As for Steve Keen, we mock what we don’t understand. I heard about him about six weeks before the financial crisis, and couldn’t find the flaw in his reasoning (I’m a practicing micro-economist). Mainstream economists ridiculed him personally, but none were willing to challenge his numbers. His view is increasingly being borne out in reality. I recommend his website:
http://www.debtdeflation.com/blogs/
Is Steve Keen seriously saying that governments should collectively cease to pay their debts, and crash the global financial system?
If so, I take it he has no need for superannuation when he retires, no intention to start a small business, and no assets that are vulnerable to inflation shoudl he wih to sell them at some later date.
Its one thing for Keynesian economics to be back, but another for calling for a return to Jack Lang economics!
Terry @ 8:
No not government debt (at least not in Australia, God knows what the Yanks will do) he’s talking about a moratorium on the trillions in private debt that went into non-productive assets (e.g. housing, consumption). His view is that as debt deflation takes hold it will become increasingly apparent that paying off the debt will be impossible, and any attempt to do so will drive the economy further into recession.
Helen @ 6: Agreed, a “Green New Deal”.
Yeah, gonna be a lot of cheap 4WDs on the market. Good riddance. Maybe we can drive them all together somewhere in the desert, and create a white elephants graveyard, for future civilizations to ponder.
Carbonsink, point of clarification:
Why is housing an unproductive asset?
Personally, I’d be delighted to have a moratorium on my mortgage repayments, as it would increase my after-tax personal income dramatically. I would just have to hope that I never need to borrow money again.
A moratorium on debt repayments will cause every financial institution in the country to fail. The economy will simply stop. We will become Somalia, without the pirates (who at least have a some entrepreneurial ideas and know how to implement them).
I could hire some Somalian pirates with the windfall profit that would be made from a debt moratorium on mortgage repayments.
Probably. The alternative, as Keen sees it, is a deflationary spiral where the relative value of debt increases, asset prices continue to fall, and everyone stops spending so they can pay down debt.
This is Kohler put it this morning @ Biz Spectator:
Question is, how do you stop a deflationary spiral? Personally, I don’t see why the govt can’t print million dollar notes and hand them out to a grateful public.
Houses don’t make things.
As I’ve said on other threads, I intend to sapend most of my $1400 windfall on books from Amazon. But apparently the dollaar is right now at 50 something cents to the US dollar.Hopefully, very hopefully, it will be better in December, otherwise all that money will burn a hole in my ATM card and I’ll spend it on useless trifles, like a set top box, choco;ate biscuits, Southern Comfort, etc.
Let me clarify on why housing is (mainly) unproductive:
Most of the debt bubble money went into inflating the price of existing housing stock of owner-occupiers. No new accommodation was provided, no income stream was created, the asset just became more expensive. Only a small amount went into new housing, or housing that was rented and created an income stream.
Paul Burns @ 15: Sadly the AUD is still trading above 60c. $0.6110 as I type.
The ‘houses don’t make things’ argument is b.s. and an artefact of 19th century economics, just as the Physiocrats in the C18th believed that true wealth could only come from the land.
To state the obvious:
* Workers need houses to live in;
* People are employed on building and maintaining houses;
* A lot of people conduct their business in houses
* Children are reared in houses, and they are the next generation of ‘human capital’ (if you want to put it that way).
Also, if you recall Keynes, he favoured ‘unproductive’ expenditure in periods of economic downturn, as it did not add to the surplus of unsold goods and services. ‘Unproductive’ is not the same as useless here – public works are an obvious case in point – but it did mean not subsidising the production of things people do not want to buy (Aussie cars?).
carbonsink wrote:
Well, I suppose they could (and contra to Steven Keen, it is possible for governments to initiate inflation, although it’s usually of the OMG PANIC variety like Argentina and Zimbabwe).
For the vast majority of people overburdened with consumer credit, a chunk of actual, government money printing inflation may well be a simple sledgehammer out of this mess for them. It is, after all, the reason your parents and grandparents owned their houses. For everybody else (especially banks, who no longer have domestic savings to loan from and have to pay back their own loans with foreign dollars) it might be a total disaster.
However, I think it would be exceedingly difficult to engineer in such a way that our trading partners wouldn’t shove the value of the AUD into the pennies.
A factor that I’d like to see discussed is “the velocity of money”. Roughly I think it goes like this. $100 paid to the building worker on 1st July is spent at the shop; some goes to GST, some is paid to the shop assistant, some to the wholesale suppliers. The shop assistant spends the wages on 1st August. The wholesaler pays suppliers, and some wages. Some is banked, some is spent. More GST and income tax (PAYE) to Govts. The Govts spend most of that in the following three months on wages, goods, etc.
The $100 circulates. It might circulate 5 times in a year. In national accounts a good portion of that $500 might appear as wages paid: say $350. The circulation is keeping the whole show moving. Even “saving” (in a bank) doesn’t bring the motion to a halt: the bank lends the $ out: voila, more circulation. Perhaps a lower velocity, but not zero.
OK, so my questions are: in a recession, does the velocity of money drop drastically, or only by a small proportion? In good times, does the velocity of money vary much from month to month, year to year? Does it correlate strongly with an index of “consumer sentiment” or an index of “business confidence”?
About 40,000 new dwellings a year were constructed in Australia between 2002 and 2008, or 240,000 over that period.
http://www.abs.gov.au/ausstats/abs@.nsf/mf/8750.0
In 2007-8, this was worth $8.7 billion, excluding non-residential building construction.
This hardly sounds like “no new accommodation” to me.
Terry @ 17:
Sure, it was cheap shot. See my clarification @ 16.
Terry @ 20:
But much, much more debt money went into simply inflating the price of existing housing stock.
David Rubie @ 18:
Printing is clearly a bad idea in any normal economic environment, but if deflation is an intractable problem, it seems a preferable option to a debt moratorium and crashing the economy.
Bernanke certainly seems to think so. From wiki:
@ 17
People also like to furnish their new houses with lots of sparkly consumer things, to keep them noice. Much more likely than in a rented house. This further increases spending.
carbonsink@16, must be my bad eyesight. I thought I read it at 50 something at a site I saw this morning.
carbonsink wrote:
Maybe we’re headed for a colossal thump that’ll make the 1930s seem like fabulous prosperity that would justify that kind of desperate measure, but I don’t think it’s quite that bad. Not sure I trust Bernanke to have any special insights either – he’s one of the Greenspan breed that are currently re-writing their own internals to adjust to reality, so anything he said in 2002 is likely to have been discarded.
If deflation is on the horizon, which is pretty unlikely, but suppose it is, then the Reserve Bank has better get cracking and drop interest rates to zero or close it. They are a long way above that now.
David Rubie @ 24:
Bernanke is supposedly a lifelong scholar of the Great Depression and very familiar with deflationary spirals. Whether he has a good answer or not we’re about to find out.
Spiros @ 25:
Steve Keen (in his blog) puts the odd of deflation at 70:30, but would have it at 100% if not for peak oil and climate change. Ok, you may say he’s a nutter, but he’s been a helluva lot more accurate in his forecasts than mainstream economists recently.
Carbonsink is spot on: the real failure of Howardian socio-economics was encouraging private debt which produced nothing but a housing bubble. Some debt is an investment in future productivity.
Kohler is on fire this week at Biz Spectator. Here’s today’s effort:
End of the debt delusion
(registration is free if you can’t read it)
Keen made the right call that households were accumulating too much debt and this was going to lead to trouble. He deserves kudos for that.
But it doesn’t follow that deflation is sure to follow. A little bit of perspective is needed here. The last time we had deflation was the Depression when unemployment was 30%. We’ve had really bad recessions since with no deflation. So deflation is really only going to happen if it’s the end of the world as we know it.
Australia’s newest political party, the Sex Party – you better believe it – sauggests because of economic recession/depression we’ll be spending a lot more on sex and sex aids because its cheaper.
Suppose there’s a silver cloud to every lining.
Spiros @ 29:
Well, ok, read Keen’s post from yesterday where he walks through Fisher’s “steps that lead from a debt crisis, to falling prices, and a Depression”.
Seems to me the way out is for “Helicopter Ben” to drop money on a grateful public, but that seems extraordinarily unlikely in today’s “we can’t go into deficit” political reality.
In some ways they already started (700 billion bailout). This won’t make the Chinese very happy, who are probably looking at all those USD denominated IOU’s they’ve accumulated via trade imbalance with increasing nervousness. Printing enough money to try to solve the crisis would basically *be* a debt default from their perspective (although, they might be sanguine about the whole thing and be happy with cents on the dollar as long as their factories keep running).
I’ll still be spending. Food, rent, power, transport [rural living has its downside], so as is usual there wont be much if any left over. The government handout will be spent on bills waiting and due so I’ll have little left over for any extra spend-up. However I’m thinking of helping others to ratchet up their spending by holding a garage sale of items I’ve no more use for. Might need to call them antiques ‘though broken down lawnmowers and chainsaws and old tools probably wont fetch too much..
Carbonsink, according to your link
Step 2
“Assum[es] as above stated, that this fall of prices is not interfered with by reflation or otherwise”
This seems to be critical. We haven’t got falling prices. In fact inflation is still >5%. It won’t stay that way, but to assume that prices will start falling everywhere is a big ask.
And as you say, the RBA can always handout the $100 notes. That’ll get inflation going.
“today’s “we can’t go into deficit” political reality.”
That reality will be gone by Christmas. The RBA Governor started the softening up process earlier this week, and we’ll have bipartisan support for deficit spending.
Yer, spend, spend, spend because it is good, good, good.
Unless of course you are THAT kind because Premier Barnett and his like just know all your choices will be bad, bad, bad.
http://www.abc.net.au/news/stories/2008/11/18/2422967.htm?section=australia
(And you can bet that he would tell you that there is not a racist bone in his body.)
You may be pleasantly surprised, zorro; I heard an expert in bailing twine economics this morning saying that the price/earnings ratio of a decent, working chainsaw at today’s secondhand price, is very good: way below the trend line. Of course the chainswa’s fundamentals have to be sound. You may find the “bargain hunters” out in force. Got any rusty nails? I need a few to influence the colour of some hydrangeas.
The say sheep sh*t futures are gunna go through the roof.
Zorronsky – if any of your old tools look like they were last used in 1953 and are in good nick, they’re antques and you can demand premium prices. But you’ll need a tool fancier to visit your garage sale.
Although ironically, they might well be able to boast that communism brought down capitalism “without firing a single shot”…
Terry @ 20 – new dwellings doesn’t necessarily mean and equivalent number of net extra dwellings though – as some of that is going to be people knocking down old places to replace them with new houses. There’s quite a lot of urban renewal going on around the older suburbs – though often its replacing one house with 2.
There’s a lot of gushing around the left-wing weblogs these days about the ‘End of Capitalism’. It worries me a bit that the left seems to be cheering on a recession that will hit most those who are least able to afford it. Let’s get realistic here. Capitalism is not dead, it’s just going through yet another correction from some of the excesses that get built into markets when people lose sight of fundamental value. It happens regularly – this is just a more severe correction than usual because it is following a period of greater excess than usual.
We’ll go through 6-12mths of relative pain, and then things will normalise. Until it all happens again in a decade or so.
By the way – for those able to ride out the downturn in the next 6 months with cash on hand. You’re probably looking at one the best investing opportunities for decades. Have a look at a long term chart of the ASX200 – we’re now as far below trend as the peak was above trend late last year. You can buy AA rated Australian banks on a 10-11% fully franked yield today. Wow! Their earnings will come down next year – but when they rebound, you’ll potentially double your money in a very short time frame!
Or lose your hand catching knives. In a market climate where margin calls are taking up most of brokers days, I’m not sure taking Andrew’s advice is particularly wise.
Nobody is cheering on a recession Andrew, that’s your fevered imagination talking.
Nobody’s suggested capitalism is dead. However, I *would* suggest deregulationist models of neoliberal social policy have taken major hit – one which is quite possibly fatal.
That is to say, an ideology, rather than an economic system, is officially in crisis.
“deregulationist models of neoliberal social policy”
Classic lefty (pun intended) gobbledook….
David Rubie – I wouldn’t buy today, I’m just saying – watch markets closely in the next six months. Once this finds a floor (and the floor is close) the upside is massive. Stocks haven’t been this cheap for decades. It’s a generational opportunity to get set in equities.
But we have to reach the floor first, right Andrew? Can you give us a tip about how that’s verified? Steady rise of (say) 10% over several weeks??
Rightly or wrongly from Rudd’s point of view it is all about being able to say in 12 months time Aust did not go into a technical recession. If he and Swan can say we didn’t get 2 quarters of negative growth whilst the USA was absolutely walloped he will claim this is evidence of excellent economic management. So he has to manage expectations to keep aggegate demand at some base level that doesn’t allow 2 negative quarters. The worst recessions last 5 quarters. I think the US is in for a 5 quarter recession. Europe bar Iceland should get out of it with a two quarter recession I’d say, ie start switching back to positive in 3rd qtr. Japan may well do a 5 qtr but it seems unable to do much better than anemic gorwth anyway. Indeed Western contintental “old” Europe by Anglosphere standards is little better but I think it will return to these levels by Xmas 2009.
So I’d say certainly by this time next year we’ll be talking about how we dodged the bullet and most of the world is trending back up bar maybe USA, Iceland, Japan and a few others.
If the one grand/person etc giveaways get the retail figures up for Xmas that gives him the circuit breaker on the negative news cycle. He could easily do it 2 or 3 times in the course of next year to “get us through” and budget should have a reasonable chance of being in balance 2010 and surplus again 2011 in ime for his next election. That’s his game plan and whilst I’ll never vote for him I wish him luck with it.
Where I find the media and the politics as a whole frustrating is if you make the assumption some pump priming for 12 months to avoid a recession until confidence is restored is a good idea why do we have to get into this situation where if it turns out treasury predictions are wrong and we do need to go into deficit temporarily that is a scandal?
I also agree with Andrew broadly – its a superb opportunity for investment provided your timeframe is certianly 1 year plus and I’d argue 5 years to get the real lollapalooza results. Whether banks are the pick of the bunch I don’t know but people WILL look back on this in say 3 years time and say why oh why didn’t I load up on quality blue chips. Forget worrying about catching falling knives, you’ll never guess the exact bottom.
Listening to an interview with an American economist, Adam ???? from Carnegie Mellon on ABC Radio. The economist is upset because Obama plans to raise income tax threshholds so that households earning under US$75,000 virtually pay no tax. This means income tax will be collected from the top 40% of households. The journalist has failed to point out, check or state that the bottom 40% of American households live in poverty at the moment.
In the 1930s NSW Premier Lang proposed a debt moratorium and upset all the conservatives. There was eventually a debt moratorium and we climbed out of depression. Steve Keen has been telling anyone who would listen that today the debt is private debt and is 3 times our GDP and growing fast. I expect some people like George Soros or Malcolm Turnbull will be getting rich while most of us who have been forced into privately funded superannuation become poorer.
Ambigulous,
Something like that would be a good sign. In reality – we won’t know when the floor’s been reached until after the fact. There’s a few ways to play this -
1) Be brave – buy now and then save yourself the stress and don’t look at the market again for 12 months.
2) Wait for signals for the bottom (your 10% rise over several weeks would be one sign the worst may be past)
3) Take a middle ground approach. If you’ve $100k to invest in equities, put $25k in now, $25k in the new year, $25k if we hit new lows, and $25k once you think the market is rising again.
This is a huge opportunity for those with cash or the ability to sensibly borrow.
Andrew @ 40:
Yes I’ve been looking at the banks for a while, and if this were a normal environment you’d be mad not to buy. Michael Pascoe has been banging on about this in the media this week. However, Michael Pascoe had a good old laugh at Steve Keen’s expense last month, and as every day passes Steve Keen looks more and more right, and Pascoe (and the mainstream economists) look more and more wrong.
I’d like to see that knife stop falling a few months before I nibble.
Is capitalism broken? Probably not, but in the future central banks will explicitly target asset inflation and debt bubbles, and much closer scrutiny will be give to the financial engineers who invented CDOs, CDSs and other derivatives.
Adam “Lerrick” billie @46.
And Michael Duffy is not a “journalist” but a propagandist. Neither parties in the interview seemed to understand, that just because you do not pay tax in the U.S., you still have a right to exist.
http://www.abc.net.au/rn/counterpoint/stories/2008/2420011.htm
I agree carbonsink.
As I said in the earlier post – the current correction is correcting ALOT of excess thanks to the smartie-pants financial engineers who hid risk in SPVs. Risk is risk – hiding it under the bed doesn’t make it go away!
Still – markets overshoot on the way down as well as on the way up. We’ve way undershot this time. Huge buying opportunity when the knifes stop falling.
The banks are interesting thanks to their yield. With interest rates falling we’re heading into very low risk territory. You can borrow say $100k at 7% interest rates (perhaps lower early next year) and buy a basket of blue chip banks on a franked 10% yield. The dividends then cover your funding cost with change. Put the shares away for a few years – come back when we’ve all calmed down and hey presto! You’ve doubled your capital and been paid a small income for the pleasure.
Andrew wrote:
From who exactly? Heard of the credit crunch?
What’s sensible borrowing? Run out and fill up the credit card buying banks? I thought that’s what happened.
Ambi.. Tool fanciers frighten me. I’ll let you handle that.
Indeed. Government’s helped get us into this mess, they should get help get us out.
“Increasing home ownership was a goal of both Clinton and Bush administrations.[81][82][83] There is evidence that the government influenced participants in the mortgage industry, including Fannie Mae and Freddie Mac (the GSE), to lower lending standards.[84][85][86] The U.S. Department of Housing and Urban Development’s mortgage policies fueled the trend towards issuing risky loans.[87][88]
In 1995, the GSE began receiving government incentive payments for purchasing mortgage backed securities which included loans to low income borrowers. This resulted in the agencies purchasing subprime securities.[89] Subprime mortgage loan originations surged by 25% per year between 1994 and 2003, resulting in a nearly ten-fold increase in the volume of these loans in just nine years.[90] These securities were very attractive to Wall Street, and while Fannie and Freddie targeted the lowest-risk loans, they still fueled the subprime market as a result.[91] In 1996 the Housing and Urban Development (HUD) agency directed the GSE to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased to 50% in 2000 and 52% in 2005.[92] By 2008, the GSE owned or guaranteed nearly $5 trillion in mortgages and mortgage-backed securities, close to half the outstanding balance of U.S. mortgages. The GSE were highly leveraged, having borrowed large sums to purchase mortgages. When concerns arose regarding the ability of the GSE to make good on their guarantee obligations in September 2008, the U.S. government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers expense.[93][94]” http://en.wikipedia.org/wiki/Subprime_mortgage_crisis#Government_policies
Andrew @ 40:
That’s the kind of “free money” thinking that got us into this mess. By all means invest your own money (i.e. money you’ve actually saved) but investing on margin in this environment is a) unlikely, because no-one will lend you the money, and b) downright dangerous.
Ambigulous: “Got any rusty nails? I need a few to influence the colour of some hydrangeas.”
Unless the nails are made of aluminium, then (rusty or otherwise) they aren’t going to change the colour of your hydrangeas.
postg – the fact that mortgage lenders lent to some people who were never really able to afford the homes they were buying, regardless of whether they were encouraged to by governments or not, isn’t anywhere near enough on its own to explain the global financial crisis. Those debts, while bad, made up a tiny portion of the total amount of excessive leveraging that one was going on elsewhere. Without the CDOs/CDSs/SPVs/etc. that were use to bury all the risk so deep that nobody understood it, the worst that would have happened is a bunch of foreclosures and perhaps a few mortgage lenders going under.
Were governments responsible for the crisis? Given that we expect governments to sensibly regulate the financial industry and central banks to maintain sensible interest rates, and there’s good evidence that they did neither, then yes, absolutely they take a huge share of the responsibility.
OTOH, that they pushed home-ownership on those that we now know couldn’t afford it was symptomatic of excessive confidence in the ability of the market to behave itself and correctly price the risk it was taking on with lower-income borrowers. If there really a need to make housing more affordable for such borrowers, there were much more proactive steps governments could have taken, such as simply funding more public housing.
Ambigulous & David Rubie,
Well I’ve just done it. I’ve set up a $250k facility with NAB – I’ve put $75k of that already into some bank shares.
Thanks Joe @46.
Andrew @ 57: Were you required to put up any of your own money?
BTW, looks like the (inevitable) bear market rally is on.
What Andrew proposes also existed as an opportunity coming out of the last recession particularly with the NAB whose balance sheet was very strong thanks to the stewardship of Clark and then Argus. If I remember correctly the yield was even around 10% and fully franked. You would have made serious money if you’d done this.
Hi Rebekka,
one of my late grandmothers swore she could achieve pinkinsh tones by applying rusty-nail-water around the roots. Was she mistaken??
Zorronsky: if tool fanciers frighten you, I urge you to affix a prominent sign: “No Tools Here” to your garage when it’s in Garage Sale Mode. Whether that will scare them off, is another matter. Tool fanciers can be very stubborn.
Geez Andrew – I hope you don’t value those massive cojones. My guess is you’ll be kissing them goodbye
Carbonsink – well ultimately it’s all my money. I’ve linked the NAB facility to my house. I haven’t put any of my cash in.
So David Rubie – it won’t be my cojones I lose – it’ll be my house.
But I actually think it’s a low-risk bet – don’t need big cojones. Even if the price of the shares fall further I’m under no stress becuase of the dividend cashflow. Ultimately unless the banks go kaput I’ll come out way ahead. The day banks like ANZ and NAB go kaput then we’ll all have bigger things to worry about than whether I’ve lost $250k in the sharemarket!
Andrew @ 63: That was my next question. Did you borrow against the house?
It all makes sense unless the dividend collapses in line with the share price. The banks say they’re going to main their dividends going forward, but banks have said a lot things recently that turned out to be total bullsh*t.
BTW, did you buy ANZ and NAB? The only bank I’d be touching ATM is Westpac, and even then I’m not sure they know what surprises the St George loan book has for them.
It seems there are a lot of Andrews buying this afternoon.
Yes – ANZ and NAB. NAB because they’ve just raised $3bn in capital and have a strong balance sheet now – the risk of further dilution from here is pretty minimal.
It’s always possible that the dividend gets cut – but very,very unlikely. It’s much more likely that they fully underwrite a dividend reinvestment plan which hurts the shareprice not the dividend cashflow.
You’d have to say, given NAB shares are pretty much back to 1999-2000 levels, that they must be undervalued – even if it’s true that all the gains between 2000-2007 years were chimerical, there’s no way NAB is a less profitable business than it was back then.
However I wouldn’t borrow against my house at this point. There’s a better-than-even chance that the property market hasn’t bottomed out yet.
wizofaus wrote:
I’m somewhat astonished NAB set up a facility like that (although Andrew may well have shedloads of equity in his house or own it outright in which case I’m less surprised).
wizofaus,
Yes I agree – property prices are likely to fall further. So by borrrowing against my house and buying bank shares I’m effectively trading out of property into shares.
It’s a Warren Buffet trick – if you want to sell an asset without selling it you borrow against it. Buffet uses it as a way of avoiding capital gains tax which he decribes as a transaction tax. If you don’t transact you don’t pay it.
Buggered if I’d borrow at the moment, this has a long way to fall
http://sonofchaos.blogspot.com/2008/11/how-we-got-here-wall-street-tale.html
Hi Ambigulous,
“one of my late grandmothers swore she could achieve pinkinsh tones by applying rusty-nail-water around the roots. Was she mistaken??”
Fraid so! The colour of hydrangeas depends on the uptake of aluminium from the soil – pink is with less aluminium, so to get pinker hydrangeas you have to stop the plant taking it up, usually by increasing the pH of the soil, or by using a high phosphorous fertiliser, which stops inhibits the plant from absorbing aluminium (and rusty nail water definitely wouldn’t help with that, as iron oxide-hydroxides will bind phosphorous).
To make them blue, you add aluminium and reduce the pH!
RobWindt – it’s always easy to pessimistic in a storm and optimistic in fairweather. You don’t make money from the here and now – you make it by attempting to pick the turning points.
It’s interesting – allow me an observation – I find most of the threads on left wing blogs such as this one unduly pessimistic. My theory is that most left wingers are naturally ‘glass half empty’ type of people. Mostly lots of pointing out the flaws in Western Liberal Democracy rather than celebrating why we live in such a great society. The right wing blogs, on the other hand, are excessively optimistic. Always glossing over the flaws in Western Liberal Democracy and underplaying the positives of other cultures.
I wonder whether those tendencies also manifest in investment approaches? Do left wingers miss out on opportunities because of the worry that things will keep getting worse? Do right wingers lose a lot of money at the top of market because they gloss over the looming storms?
I’m probably hopelessly over-generalising, but as a self-described centre-moderate – it’s just something I’ve observed on the weblogs.
Andrew wrote:
Confirmation bias is my guess Andrew.
Excellent link RobWindt.
thanks Rebekka, another ‘old grandmother’s tale’ bites the dust. That took approx 44 years.
Only half through that article that Rob (indirectly) linked to – but a great read, and does a good job of explaining how relatively few bad subprime loans blew up into such a catastrophe (search for the paragraph starting “That’s when Eisman finally got it).
Frankly Andrew @57, I’d have more respect for NAB if they’d set aside the money to provide three $80K overdraft facilities for small businesses with coherent business plans. We got an overdraft facility of $60K in 1986 when we started our company and we couldn’t have done anything without the overdraft. We now employ 40 people and have laid off a total of 3 people in 22 yrs. What are your goals apart from speculation and self-enrichment? I regard people like yourself as spivs, useless perverted antisocial blots on the landscape.
don’t hold back, Paul H
Andrew @ 65:
Investors in Britain’s second biggest bank (RBS) probably thought much the same six months ago, but now RBS’s share price is down ~90%, its had to be partly nationalised, and there’s no prospect of dividends being paid for the foreseeable future.
Of course, it can’t happen here, but then our property market really hasn’t turned down sharply yet like it has in the US and UK.
RobWindt @ 69: That’s one hell of a yarn. I recommend it to everyone: The End of Wall Streets Boom
The whole economic discussion is very funny. People earnestly discussing whether the government can cling to its surplus and the chances of avoiding a recession … the disconnect with reality is staggering.
The impact on economic activity and thus employment has barely begun.
Come on Paul H – knife catchers like Andrew provide a very useful service in the economy. They offer something that is usually priceless in falling markets: liquidity.
I hope he makes a few bucks out of it. I honestly don’t think it’ll happen (our property crash is probably 12 months away) but you have to admire the chutzpah.
As Dave Rubie noted, this is the knife-catcher’s rationale.
Because of the dirth of capital, and because of the coming partial eclipse of American pension funds, there is a dwindling supply of capital to turn this optimism into the actual purchase of assets, especially shares.
Moreover, there is a great deleveraging going on worldwide. This means that there is far more money trying to get out of assets than is trying to get in.
At the moment, despite enormous volatility, volumes of transactions haven’t been particularly large. Large investors, especially US pension funds, are sitting there a-hopin’ and a-prayin’ that this storm will pass.
But eventually, their subscribers, out of work and desperate for cash, will want access to their funds. The pension funds will have to start selling. When that happens, who is going to buy these assets?
Any increase in volume is likely to mark a sharp break to the downside.
The dealings of CalPERS, the largest pension fund in the US, is a good indication of the issues facing this sector of the market.
Katz @ 80: But as David Rubie points out, Andrew provides a valuable service in this market: liquidity. When everyone’s a seller we need a few buyers.
Apart from the pension funds there are other systemic risks in the near term:
- GM’s debts of $600B USD. If they default it will trigger another round of credit default swaps with unknown consequences.
- Citigroup, which was the largest bank in the world as recently as last year, is on the precipice and may need to be bailed out before Christmas.
- Australian real estate prices relative to income are some of the highest in the world. Every other real estate market with such high price-to-income ratios is now in freefall (US, UK, Ireland, Spain…) but so far real estate prices in Australia have remained relatively stable. A sharp downturn in prices is increasingly likely as household incomes fall, and there are a lot of “low doc” loans out there.
If any of these events occur the Australian financial system won’t escape unscathed.
The situation is quite different in Australia than the US though isn’t it? Under normal circumstances people over here can’t access their superannuation, whilst in the US accessing the 401k funds is quite straightforward with only a tax penalty. I wonder how much the compulsory superannuation funds in Australia stabilise the local stockmarket – it really does force long term savings.
“It worries me a bit that the left seems to be cheering on a recession that will hit most those who are least able to afford it.”
Andrew the ‘least able to afford it’ will do it tough either way. Just ask those who are underemployed, or getting such a low wage they are unable to make ends meet AS WELL as indulge in some patriotic spending.
Why not increase wages? Some would argue that this will result in lay offs (and it may) but most business need a minimum number of people to operate and cannot go below this, it will just cost a bit more.
This will benefit them in the long term as more people have disposable money, to spend on non essential goods and services.
Even with low wages people are still going to lose their jobs, but companies are still paying exorbitant salaries to CEO’s. So IMO it is more a question of protecting the incomes of the wealthy.
Ultimately they bite off their own noses and then expect taxpayer handouts. Not to protect jobs, but their own income.
Those ‘with the most to lose always will be’ until we once and for all reject greed and extreme capitalism.
http://www.peakoil.org.au/charts/population.growth.gif
Over consumption got us in to this mess and the reality of finite resources suggests that we can’t spend our way out of it. http://www.theoildrum.com/node/4770
We’ve been here before, see this link for an interesting history -
http://chronicle.com/temp/reprint.php?id=477k3d8mh2wmtpc4b6h07p4hy9z83x18
or this one for some local flavour, see if you can spot the similarities with recent shenanigans -
http://nakedmechanic.blogspot.com/2008/09/everything-old-is-new-again.html
Here’s my investment advice fwiw
Keep enough cash on hand to last you 2-3 months, bank closures tend to happen quickly.
18k rings and things are handy for bartering and don’t leave a paper trail in the event of gold seizures
spam filter?
What worries me the most are those that went dipping into their home equity four or five years ago to finance share purchases – and are now getting margin called and have no more equity left to cover what they owe. That spells trouble if enough people are involved. I have no handle on exactly how many people this might be, but the SMH this weekend intimated that it was a cause behind a drop in values on the mid and north coast holiday property markets – too many sellers. If that happens in the mid-value property market in Sydney I think it could be rough (or at least return values to around a reasonable multiple of wages).
I’m starting to see property values in my town (Armidale) starting to wobble, a few more ads here and there indicating distressed sellers or foreclosed homes which have been hard to spot in the five years previous. More builders are advertising for work too instead of relying on word of mouth for the next job which indicates that bank finance has dried up.
I don’t think it’s time to invest in tinned food and fire arms though.
RobWindt – that seems to me rather overly pessimistic – especially with the government deposit guarantee? If they’re unable to supply the money its not gold you want to have, but canned food, bottled water, guns and ammo
Nah, tinned food and ammo run out at some point, have spent some time with the “beans, bullets and bandaids” crowd and reckon they are no better off than the “peace, love and brown rice” mob, neither has much of a future.
I’m content to live in a small town with a good social network and to make myself useful, I convert cars to lpg at the moment and am bringing some old technology up to date in my spare time http://woodgas.googlepages.com/home, if things turn to shite this old tech’ can keep local emergency services and a few mini buses running, if they don’t then I can flog off generator/ water pump packages that run on the waste from bushfire reduction thinnings.
Not overly pessimistic here, just planning for all eventualities – best case, worst case and just in case
Katz, David Rubie & Carbonsink -
Yes I guess that’s one way of looking at it. I’m providing a valuable service – liquidity! David – I think the property crash is already here, if you haven’t noticed, houses are selling for 20-30% below what they were six months ago.
Wow PaulH – an ‘antisocial blot’!!! That’s a bit harsh isn’t it? What’s so bad about buying shares?
Panic. Oh my God. it’s a recession. Panic. Panic panic panic panic panic.
.
Jeez. Relax it’s a beaut thing the recession makes it much easier to git on tha dole ‘ey? Oi’m movin da Nimbin ‘n seel pot f’r extra. Drink beer all day – sweet.