Australia Has Highest Household Debt to Disposable Income Ratio in World

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Paul Volcker is fronting the U.S. Congress to push for restrictions on the proprietary trading desks of U.S. banks. The RBA stunned economists yesterday who had unanimously predicted the central bank would raise the cash rate to 4%. It did no such thing. Stock indexes in the U.S. rallied over one percent, but jobless figures come out later this week. And that makes everyone nervous that despite the nice recovery narrative, the economy still sucks for real people.

So we’ll see how it goes in Australia today. Our general survival strategy at the moment is to gradually reduce exposure to all but a select portfolio of stocks that are leveraged for big returns. As to the first issue – reducing exposure to stocks – now might be a good time, according to Morgan Stanley economist Gerard Minack.

Minack reckons we’re in for a correction after this 9-month “relief rally.” In a note to clients Minack wrote, “We see the rise from March 2009 as a typical relief rally that follows major bear markets. Those relief rallies can occur regardless of underlying macro conditions, regardless of liquidity conditions and – most importantly – regardless of what happens next….The fundamentals did improve this time – systemic financial crisis ended – but we think risk assets have swung to pricing a better outlook than is likely.”

Minack says that while the rally could take developed market equities up to 75% or so from their March lows last year, a 25% correction is now in order. To be fair though, he doesn’t think the market will make new lows after that – only that it’s gotten way ahead of itself at these levels.

The Grand Old Man of Dow Theory, Richard Russell, is even more direct. He’s predicting a “second round of pain” for stock markets. He wrote, “I note that most analysts are now bullish, and that they are recommending stocks for the ‘continuing advance.’ At the same time, most economists are optimistic, arguing that the ‘longest recession since World War II has ended.'”

“Typical, last March everyone was bearish and the market was establishing a temporary bottom. Now that everyone is optimistic, the stock market is topping out and the public (the amateurs) are about to receive their second round of pain,” he wrote. Ouch.

To protect investors from this pain, the editors of our three financial newsletters have been using trailing stops and stop-losses on open positions (as rough guides). They are not always popular with readers. But they do save you from having your capital destroyed in bear market moves. If you’re not using them, now would be a good time to seriously reconsider it.

With the Boomers now heading slowly for the exits of the share market (converting their portfolios into income they can consume) the ‘weight of money’ argument for owning a basket of blue chip Australian stocks has never looked so light.

We could be utterly wrong, of course. But why not own a handful of smaller miners and small caps where business growth leads to real earnings growth and higher share prices? Surely this is a better bet that buying and holding for the next ten years, isn’t it?

The best financial survival strategy of the coming years begins with not expecting the share market to be a retirement machine. True, the compulsory super tribute will probably be raised and this should bring more liquidity to stocks (and government bonds). But what you’re looking for are good businesses, not just a good stock market.

Australia’s household debt to disposable income ratio

Australia's household debt to disposable income ratio

Source: Australian Bureau of Statistics

Did you know that Australia has the highest household debt to disposable income ratio in the world? It’s even higher than America’s. Bigger homes. Bigger waistlines. Bigger debts. Australia is in the middle of its own credit boom, complete with all the social consequences. And the financial consequences.

The chart above doesn’t have the most recent data. It appears to show a gentle decline in the household debt-to-disposable income ratio. Since then, though, due to higher debts and income growth that’s not quite kept up, the ratio has turned up again. It’s around 156% today, largely thanks to the mini-boom in mortgage lending spawned by the diabolical first home owner’s grants.

Speaking of which, Fitch Ratings chimed in with a gloomy forecast for Australians overnight. It said that rising interest rates in 2010 would trigger more home loan and commercial mortgage defaults. It said this would cause some “deterioration” in the quality of assets that underpin mortgage-backed bonds. Hmm. That sounds soooo familiar.

Even though Aussie rates did not rise yesterday, they are at the low end of their historical cycle. You’d expect them to go up more this year. And Fitch says that’s bad. “The improvement in Australia’s structured finance asset performance, which was experienced during 2009 thanks to historically low interest rates and a resilient economy, is unlikely to continue during 2010,” said David Carroll, the director of Fitch’s Australian structured finance team.

Fitch is talking about bonds and structured products made up of mortgages and commercial real estate leases. That’s an interesting story and will affect the quality of bank assets (and perhaps mortgage funds and listed property investments). But the real story, politically, is whether all those first home buyers who encounter mortgage stress will want to vote for Kevin Rudd again.

By the way, we copped it big time from dozens of readers for dipping our toe into the climate change debate a few weeks ago. We were told – sometimes not so politely – to stick to our knitting (even though the topic has clear implications for the economy and financial markets). By bar the most often repeated objection to our “infantile” thinking was that the science behind climate change is not disputed and that it’s all peer reviewed in a process that’s non-political, objective, and thorough.

Harrumph. The bigger the lie is, the harder it falls.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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127 Comments on "Australia Has Highest Household Debt to Disposable Income Ratio in World"

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Bertie
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Is there a glacier out there that is not shrinking?

kylie
Guest

There is- 2 in fact. The Fox and Franz Josef glaciers in NZ have made small gains in the last decade (after decades of shrinkage), primarily due to increased precipitation.
Whether or not you can consider that evidence of no climate change I do not know.

TV
Guest
Increased precipitation can make a glacier “bigger”. Warming can also make a glacier “bigger” – bottom melting on the bedrock increases the flow of ice and you end up with more ice at the head of the glacier. But what you end up with is more ice visible at the head of the glacier, and much less inland as it drains itself to death. What is the lie Dan? Scientists are fallible, and sometimes they make mistakes, but I have not come across anyone who can definitively tell me why a global consensus of scientists would come up with a… Read more »
Deo
Guest
Having read your full of insights web columns in last couple months I have developed bad feeling about Aussie economy in the next few years. The million dollar question is how we prudently protect our wealth ? I agree with you that sharemarket in general looks pricey, but what is the alternative ? real property is more pricey and overvalued. Gold and other precious metals plus commodities also look pricey, at least compared to price 6-12 months ago. Fixed income / bonds are risky due to possible interest rate increase if central banks moved to contain inflation plus credit rating… Read more »
Sambo
Guest
TV: Climate scientists wouldn’t get hired by the Oil industry or a Biomed. Plus, if they are tree-hugging types, they wouldn’t want to. The issue that doesn’t get discussed so much is that this is not one issue. This is at least three issues that get rolled into one by the media. Three issues: Pollution, carbon emissions, climate change. Is pollution bad – yes. Is climate change bad – probably, yes. Are carbon emissions bad – unproven. So roll them all into one, call it climate change and then ask if we should reduce carbon emissions to stop it? Of… Read more »
Ross
Guest
TV, scientists are too often compulsive obsessive liars. They and their “solutions” have been the biggest threat to human existance ever since the renaissance. Anything to get their research and funding up and to make a name for themselves (the mad scientist is not some old wives tale). We need external auditors to safeguard the peer review and full investigations of smoking guns when a publication editor is attacked and we need them to understand a hypothesis is not a solution and we aren’t to be the guinea pigs of their experiments. And when they get outed for fraud their… Read more »
Ned S
Guest
So to continue on from yesterday’s theme of “Australia’s millions of baby boomers retire … From the looks of it, the stock market will crash, government finances will be stressed, and the economy is going to slow” … The “best financial survival strategy is”: Reduce exposure to Australian blue chips (and housing I guess?) and “own a handful of smaller miners and small caps where business growth leads to real earnings growth and higher share prices.” With that “select portfolio of stocks” being “leveraged for big returns.” And “using trailing stops and stop-losses on open positions”. Because “they do save… Read more »
Ned S
Guest

As challenging as PB’s mental condition might be, I lost interest in it once I figured it out. So moving on to new challenges, does anyone have any better financial ideas than we are all pretty much stuck where we are – Apart from taking up DD’s kind and totally self-disinterested offer?

Dan
Guest
All depends on your stage in life. DD’s advice of getting out of shares (basically) is reasonable. Even optimists didn’t think the ASX 200 would reach 5k. Bargains are probably there, but I don’t know of any – nor do I care at the moment. Pay off debt, and be ready for inflation, so don’t hoard too much cash. And with the cash it’s hard to know where to put it – brainstorm and think of something productive … maybe upgrades around the house to make it cheaper to run and longer lasting, maybe get a bit of land you… Read more »
Lachlan
Guest
I tried some goats milk recently Dan and it was pretty good. Some friends of mine have Boer goats and also some milkers. Goats were prominent in Aussie history (European settlement). Although I dont know the future maybe one day they will make a comeback. My feeling is that people wont turn to self sufficiency unless they just have no other choice. I imagine with our current consumption based economies and taxes that if people opted for self sufficiency that bankers and politicians would lose most of their wealth and power very quickly. I suppose I love simple living but… Read more »
Lachlan
Guest

Im sick of shares too. Got a couple of minor punts left which I couldnt give two hoots about. All others sold. A relative of mine is very unhappy with his small cap portfolio lately. The AUD is looking toppy. What ya reckon Ross?

Coffee Addict
Guest
Dan stated “Our general survival strategy at the moment is to gradually reduce exposure to all but a select portfolio of stocks that are leveraged for big returns. ” I totally agree and over the last 2 quarters I have successfully invested in micro-Aussie energy stocks with prospects and operations from Namibia to the US (with an emphasis on the US). It is a roller coaster ride in this sector and not every prospect will be a success BUT a key investment criterion for any punt of mine is that the potential upside must far exceed the likely impact of… Read more »
Matto
Guest
On climate change: as far as i know (little) methane is 25 x stronger ‘climate effecting gas’ than carbon dioxide. only thing is that methane doesnt come out of dirty factories, tends to be largely invisible and also tends to correlate well to the provision of a nice steak. so we’re tackling carbon cause its dirty & ugly but if we were really serious we’d be tackling methane. until methane gets firmly on the agenda, im not taking any environmental lobbying seriously. on investing, im also looking for ideas at the moment. yesterday i called my superfund and got them… Read more »
Justin
Guest
Matto, keeping track of the open market operations of the RBA, http://www.rba.gov.au, in tandem with other interesting data, makes me think that the value of the AUD against gold has not yet been discounted for what has already come to pass, let alone what is yet to come. Debt markets are sick, no doubt about it. I think the RBA & central banks everywhere (governments) have no choice but to continue buying whatever investors won’t, which is anything (unfinished real estate, empty matchboxes?), or else. So you shouldn’t underestimate the seductive drug of currency inflation & its effect on asset… Read more »
Matto
Guest

Justin – further currency expansion/inflation would lead me to look at ‘hard’ assets such as commodities and real estate, youre saying the all ords in general could become a focus for printed money? and also gold is yet to rise against the AUD in regards to the deficit situation?

Matto
Guest

– just to confirm.

Joe
Guest

Deo,

Not million dollar question, $500,000 … err $250,00. … no wait, $100,000 que …. Damn … Anyone give me $50 for this question?

Joe
Guest
Sambo, Are carbon emissions bad – unproven. So what level of carbon emissions is good ? When you consider the planet spent billions of years burying all the stuff we dig up and burn, you can imagine how throwing it back into the atmosphere in a little over 100 years might not be good for life. Our World is finite. It’s resources are finite which includes our atmosphere. The population seems to know no limits and our consumption (based on burning ever more stuff) knows no bounds. Basic science proves that Carbon Dioxide has an insulating property compared with the… Read more »
Matto
Guest
Just read Deo’s post: I think in terms of protecting capital cash here in australia isnt bad, theres reasonable rates available and AUD inflation (hidden or real) doesnt seem to be a problem over and above these rates at the moment. reasonable defensive blue chips could be ok but im not bullish on aussie stocks so that only leaves neutral and bearish, which exposes you to risk without the reward. What im looking for is particular plays to try to make money at the moment rather then protect capital (that will already be a seperate portion of money i have).
Justin
Guest
Confirmed. But you should think less in terms of inflation as an increase in the money supply & more in terms of a debt quality issue. Just because the RBA is expanding the supply of currency doesn’t necessarily mean it is ‘inflating’. The RBA has been & continues to reduce the quality of the securities it holds to collateralise its liability, that is the AUD. I believe they have no choice, as it’s curtains for the world as we know it if they don’t, the debt markets will fail. It’s curtains if they do, but they can stretch it out… Read more »
Matto
Guest

Justin – like the US Fed pumped piles of money into the system to secure credit default swaps and subprime funds that should have collapsed, in the end the funds havent hit the economy to cause inflation but a loss was not taken and an equal amount of funds were created to ‘shore-up’ the endangered assets, thereby saving some temporary pain but jeapordising the security of the currency and the federal reserve?

Matto
Guest

…and the long and the short of all that is that gold is still good vs. AUD.

i’ll look into the RBA’s on market transactions as soon as i get a chance.

Justin
Guest

Indeed, the situation is no different in the US than here, except for that the USD is a far bigger, far more liquid market than the AUD. Think Eurodollars.

I have some regard for the idea that the USD is the strongest of all, regardless of the fundamentals of the US economy, which are no doubt terrible. Having said that, the securitisation market was very large & liquid, up until the day it wasn’t.

Matto
Guest

thanks justin, i’ll be bearing it in mind for sure.

Bargeass
Guest

Just wait til rates really rise and the cost of servicing debt goes ballistic ala Labor economics

TV
Guest
As Joe says, the greenhouse principle is fairly basic science. That isn’t to say that a whole pile of confounding factors make it difficult to work out the quantitative effect. But a couple of salient facts always get me. 1. The global AVERAGE temperature difference between a glacial (ice age) and an interglacial (such as the last few thousand years) is around 3-6 degrees C. The climate change happens slowly (1000’s of years) when going into an ice age, and a bit more quickly (i,e hundreds to a couple of thousand years) coming out of an ice age. We came… Read more »
Matto
Guest
TV – i visited a friends place on the weekend with 5 acres in northern nsw. the place is covered in fruit trees with a large vegie patch and next they are looking to get 1 or 2 cows and maybe a goat. it doesnt seem like much but the 5 acres they had was producing more than enough food (heaps actually), without requiring too much upkeep (its only 5 acres after all) i think the trick was that everyone else around them was on at least the same amount of land so the other houses were pretty much out… Read more »
MadJak
Guest

TV,

re : “2. We have added 0.7 degree celsuis to global average temperatures in under 100 years”

Mannmade change? Yes, due to manipulated and corrupted data and models combined with the gross politicization of the science.

And no, I am not just talking about a few emails, i am talking about models with “Fudge Factor” code in them, I am also talking about how GISS picked 1500 weather reading stations out of 8000.

You might want to revisit this one. Just like last time around, you’re not going to get this information from the mainstream media.

TV
Guest
MadJak. I don’t get my info from the mainstream media. But I do know where you got your information from – a certain ultra right-wing fringe columnist? Or perhaps just someone paraphrasing him? Temperature anomalies for these records are calculated locally from local baselines. They are not, as you assert, ‘picked’ by NOAA or Goddard, they are provided independently by the WMO and freely available to all. So it isn’t up to NOAA or Goddard to ‘decide’ which stations to use – they use what they are provided with. Does this mean that the WMO is in on the conspiracy… Read more »
MadJak
Guest
TV, Good response (better than I have seen elsewhere I must say). Yes, I do refer to Mr Delingpole occasionally and I do try and keep my sources as broad as possible. Some of it, like the code mentioned previously has come from the CRU, yes, I know it was stolen, big deal. And yes, I have looked at the code and I am apalled. Being that selective with data is inexcusable though, don’t you think? I don’t trust any scientist that admits to creating “Value added data” to that extent. Yes, I would like to see a graph using… Read more »
TV
Guest
Madjak. Do you want them to release data, and in particular models so that you can have a crack at re-analysis? I’m afraid I know bugger all about modelling, I deal with measured observations mostly so I stick to those. The one thing I don’t get, and that no one has ever been able to explain to me, is why this huge collection of scientists worldwide would be involved in some sort of climate conspiracy. Why? What’s the point? Who benefits? And you can’t use that tired old line of “they are grabbing their funding wherever they can”. If a… Read more »
MadJak
Guest
Hi TV, Good call, and no, I don’t buy into the “they do it for the grants” argument. Having said that, for scientists who have made very public political stands on an particular matter, they will find it extremely hard to back down – particularly when governments are making decisions based on these things or an ex US VP releases a video full of fallacies which get quoted by powerful people. I really didn’t buy into the whole consensus argument either. 2,500 scientists agree with the IPCC – BS. So many comments were ignored in the IPCC review – proven… Read more »
MadJak
Guest

And the news just keeps on coming:

http://www.rnw.nl/english/article/error-dutch-polder-data-undermines-trust-ipcc

According to the IPCC 2007 AR4 report (the one that got the IPCC a nobel peace prize with Al Gore), and yes the same one that said the Himalayan glaciers would disappear by 2035, and yes the same one that apparently had a graph from wikipedia in it when it was released..

It now turns out that that the section around rising sea levels was wrong too -apparently acording tot he IPCC half of the netherlands should be underwater.

If this keeps up, no one will ever believe a scientist again.

Bertie
Guest

In New York there is a lot more concrete than there was in the old days and concrete holds the heat nicely.

Dan
Guest
If you think it’s impossible that climate change is a pack of lies, take a lesson from an expert on deception: “All this was inspired by the principle–which is quite true in itself–that in the big lie there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily; and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie, since they themselves often tell small lies in little… Read more »
MadJak
Guest

Bertie,

Yep – the effect is called urbanization and many of the stations around the world were farmland 30 years ago, and are now surrounded in concrete. Even NASA has had to admit this.

MadJak
Guest

Dan – do you reckon Buying a pallet of snow chains for Melbournes winter this year would be a good investment?

I am actually seriously considering doing something like that. Yes, it’s risky, but judging by the winter up north and some of the ocean readings down this way, maybe it could be a play worth making?

Dan
Guest
You could be right, MadJak. I think that regardless of the current debate the climate in Australia is changing. Ask any farmer, or anyone who has lived in one place long enough. It looks like there was a cooling phase at the first half of the 20th century (it was about as hot as now around 1900), with a bit of a warming phase at the moment, but who the heck knows what’s really causing it all – so who the heck can realistically predict anything? Modelling is mostly rubbish. Anyone can do modelling and get it completely and utterly… Read more »
MadJak
Guest

Dan : RE: Models. Agree tortally. Unfortunately when people see al gore shwo them a graph from a computer people goe “wow, it came from a model so it must be true”.

Case in point : CRU Code :
* Snip
; Apply a VERY ARTIFICAL correction for decline!!
;
yrloc=[1400,findgen(19)*5.+1904]
valadj=0.,0.,0.,0.,0.,-0.1,-0.25,-0.3,0.,-0.1,0.3,0.8,1.2,1.7,2.5,2.6,2.6,2.6,2.6,2.6]*0.75 ; fudge factor

* Snip

If your saw this sort of thing for a Stock graph with someone saying “we have been experiencing exponential growth in profits over the last year”

What would your response be?

invest or run?

mike
Guest

…try swallowing a glass of tabasco sauce…notice how hot your mouth feels and naturally you breath much faster to alleviate the sensation of heat thus converting oxygen into carbon dioxide quicker than usual…truth is…sun’s activities affect earth’s metabolism much the same as tabasco sauce affects YOU…duh!…

Lachlan
Guest

Does CO2 cause a greenhouse effect? In a greenhouse an insulative shield is the principle mechanism. Since hot air rises the hottest part of the structure will be under the roof/apex. This may be relieved through ventilation. What do we find in the atmosphere as we climb higher…hotter temps or cooler?
There is no insulative shield high above.
Does CO2 trap heat? Only to a minimal degree and the point of saturation is quickly reached discounting CO2 as a significant (taxable) contributor.

Lachlan
Guest

Why would I bother believing any claim by the IPCC.
A recent error for example. In 2007 the IPCC claimed that 55% of the Netherlands was below sea-level. Now revealed as a falsehood. Its in fact 20%.

Moray
Guest

The Global warming issue is a bit of a smokescreen. The real issue for us all is whether we think it’s wise to keep on polluting the planet and using up all of resources at the current rate? I think not.
Short of a cull of the population there are going to be far too many people for the resources we have.
This is where the “climate change” issues are valuable. It’s about the resources stupid, as Bill Clinton may have said, before lighting that cigar.

Dan
Guest

Cull the population?

MadJak
Guest
Uhm, Moray, No-one likes to Cr@p in their own backyard. One thing is for sure, combatting C02 will not make a monkeys uncle of difference to the pollution levels. Why because it is a trace gas, not a pollutant. C02 is essential for plant life on this planet. In fact there is research to suggest that increased C02 levels have actually boosted the crop yields in many locations around the world. Yes, we can thank C02 for helping us to feed the masses. With regards to overconsumption of resources, that argument has been made since the early 1900s. Too many… Read more »
Sambo
Guest

Great comments on this article, thanks to all who contributed.

Ned S
Guest

Don’t know about you Dan; But I gave the Aussie snow chains idea the skip – And loaded up on European bulldust filters instead. Purely precautionary of course! :)

Ned S
Guest

I’m pining for “Penicillin Pete” prozac – Yunno – The bloke who comes out with witicisms like “just a juvenile in a senile old mans clothing. And messing with you is just so much fun … And I couldn’t give a rats if you don’t find this funny. All the more point to it!”

Come on – MJ’s a bit lame – Show us the naked clawed insane creature shrieking at the moon again … Woof, Woof! :)

Ned S
Guest

Hey PB – It’s the weekend – Come out and play … Crazy Jakke the old Dutch pirate’s waiting for you in Vondelpark. Woofy, Woofy! :)

Ned S
Guest

Come on prozac … Pop ya head up out of your hole – There’s a few cartoon characters like Mickey Mouse and Little Black “Sambo” and “Bertie” Beetle and Mad Jack the Pirate who’ll all be totally lost to us without you … Yap, Yap! :)

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