Banks Could Face Serious Trouble from Losses on Residential and Commercial Real Estate

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The task of today’s Daily Reckoning is simple: ignore the largely irrelevant earnings news driving short-term stock prices and try to determine is the entire market is about to get smashed by another round of deleveraging in the financial system. This would result in another collapse in bank collateral, tighter Australian credit, slower economic growth, and falling equity and house prices (plus rising interest rates).

But before we make the conclusion, we should make the case. There is an Australian grouping of evidence. And there is an American grouping of evidence. Let’s deal with American evidence first. And let us call to the stand Reserve Bank of Australia assistant Governor Guy Debelle.

“While most of the recent jitters have been associated with sovereign concerns,” Mr. Debelle said in a recent speech, “I think the risks stemming from the financial sector are still there. A significant risk is that that we are still yet to see the full impact of the weakness in the North Atlantic economies on the loans on the books of financial institutions.

It might seem strange to begin the case for a further write down in bank collateral with an Australian central banker. But the good Mr. Debelle has done our work for us. He told a crowd in Sydney that, “We are now into the phase where weakness in the global macro-economy is feeding back into the financial sector…We are not all that far advanced in the adverse cycle that normally accompanies recessions.”

In other words, if we understand those comments correctly, there are more losses to come. It’s not just sovereign nations that are feeling the weight of bad debts. It’s the banks themselves – even after a year of recapitalisation and profit growth thanks to low interest rates – that could face serious trouble from a second of losses on residential and commercial real estate.

“For the North Atlantic economies,” Debelle concludes, “this was a big recession which, combined with large falls in both commercial and housing property prices, should result in large losses.” He goes on to point out that the government-guaranteed larger lenders might survive these larger losses. But smaller regional banks might not.

If those regional American banks fail you can expect two results. First, a larger burden the Federal Deposit Insurance Corporation (FDIC), the U.S. (underfunded) entity that insures bank depositors against just this sort of thing (up to US$100,000 per account). The other result would be a second-cousin of what happened when the Fed raised interest rates in the Great Depression: a contraction in credit.

Banks are the engine of money creation in the modern economy. If you have fewer banks, you have fewer engines of credit creation. Meanwhile, national assets and liabilities get concentrated on fewer and fewer but larger and larger balance sheets. It’s the collectivisation of finance, which in corporatist style, greatly benefits Wall Street money centre banks.

And this is all at the private and corporate level. In the world of public finances, American deficits are already spiralling out of control. The Federal Reserve, through its System Open Market Account, is taking an increasingly active role in supporting U.S. bond auctions. This is a fancy way of saying that as foreign investors refuse to finance U.S. deficits, the Fed must print money to paper over the gap itself. More details on this operation tomorrow.

Today, let’s ask the direct question: so what?

Why should Australians care if the United States has begun to monetises its debts? Well, it’s not certain, but you we’re pretty sure that U.S. monetary and fiscal policy is going to give rise to inflation, and higher interest rates. It will make credit harder to come by globally, just as it did in 2008 when the investment banks blew up.

This is bad news for Australia on two fronts. At the banking level, something terrible has happened since 2008. Bank collateral has not, in our opinion, materially improved. On the one hand, it still consists of huge chunks of U.S. commercial and residential real estate. Collateral damage!

On the other hand, those same U.S. banks have loaded up on another kind of equally toxic collateral. They replaced something bad with something equally bad, but perhaps less putrid (sovereign debt). U.S. banks, then, face a double collateral whammy this year from falling house prices and falling U.S. government debt prices.

Even if Australian banks don’t own U.S. backed real estate (and some do, mind you) and even if Australian financial institutions are not direct holders of U.S. sovereign debt (and some no doubt are), they’re still directly exposed to a world of tighter credit. And that world would be an accomplished fact if U.S. banks either ceased to exist or, as a result of more credit write downs, stopped lending globally.

The prosecution for another massive financial deleveraging in America rests. But what about our promised Australian evidence? Won’t things just be fine here, especially since China’s savers are set to become Australia’s creditors?

Well, maybe not. A speech today by RBA Assistant Governor Phil Lowe shows that Australia faces a similar collapse in private demand as in America. In turn, business investment is falling. Government is trying to fill the breach with a larger fiscal deficit. The end result may be economic stagnation and higher public debts and interest rates.

This all goes against the grain of the positive, earnings-driven news about the economy. But remember, the modern economy runs on huge supplies of credit to consumers and businesses. Take away that credit and you take away the fuel of GDP growth. Not even government intervention can offset the massive write downs in asset values required to put the economy on a sounder footing.

But how about the visual evidence. Mr Lowe provides the first chart below which shows falling private demand in the U.S., Europe, and Japan. This doesn’t include Australia. But we’d expect Australia to follow these trends if global credit becomes scarcer and asset values fall. Households and businesses will retreat into a more conservative cocoon.

Domestic Private Demand

Speaking of cocoons, Lowe’s next chart shows’s a figure specific to Australia: business credit growth. It’s fallen over 7% in the last year. Whether it’s because demand for credit is down or because supply is down (the willingness of bank’s to lend) is a relevant question. But the chart itself suggests another credit contraction, leading to more shockwaves in financial markets.

Business Credit Growth

This slump in business credit growth has not yet affected access to capital for Aussie companies. Well, it has for companies on the margin of the mining business. But many other companies have turned away from the debt market (only the big banks got government guarantees to borrow). Instead, Aussie firms have tapped the equity markets. The chart below shows that listed companies raised over $85 billion in new share sales last year alone.

Equity Raisings

With a steady flow of compulsory super annuation money into the system, you could argue that Australian firms are going to have access to equity capital no matter how tight credit gets globally. And that might be true to a certain extent. But even assuming capital is available to listed companies, how will Austrlian firms grow profits in a world smothered by another credit crunch?

Quite clearly, they won’t. That, anyway, is the case for how a second round of deleveraging – driving by credit writedowns at American banks – will crush the Aussie market rally. There is, though, one saving grace. Maybe.

That saving grace is that if the sovereign debt risk in America supersedes the banking story, you will see an outright U.S. dollar crisis this year. That ought to benefit higher-yielding currencies like the Aussie dollar, although truth be told no one really knows how other paper currencies would fare in a full-blown dollar crisis.

What we do suspect is that the dollar crisis will be inflationary in nature. The monetisation of U.S. debts (public or private) will lead to a weaker dollar. And all things being equal, that ought to lead to much higher precious metals and oil prices.

Whether than translates into higher prices for precious metals and energy shares is also an open question. Do you want to be in the equity markets during another round of deleveraging? Last time around, resource stocks proved no refuge at all. And commodities themselves were as inflated as anything else. This time around, what is the best refuge?

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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Comments

  1. i dont see how speculation driven commodity/stock increases will offset the fall in underlying demand, except perhaps in the case of a few distinct metals.

    the best refuge, so far as i can tell, will be on the short side (if they dont ban it)

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  2. I am not reading reports of the detail of the RBA speeches elsewhere and appreciate moreso reading them here.

    In my mind a significant sovereign debt crisis will trip a deleveraging globally like any mark to market event. Iceland is tiny and that even went close. If the originating leverage is fake (just like mezzanining) the collateral is not worth the colour and the events cascade on fear on the bona fides of all collateral from there onward. Thus uncontrollable deleverage in all risk assets and commodities.

    If the USD isn’t worth the paper and the USD’s leverage has powered the AU current account deficit (including the pass the parcel of otherwise irredeemable USDs run back through China and Japan) then the AUD goes down. It has been the same here for every global economic crisis in history, we get the raw end of the stick on both capital constriction and demand for commodities.

    The only time that might change is if we have a “On the Beach” moment (without irradiation reaching us) and that wouldn’t be pretty either. Note that Greece is talking to Russia and that Russia has reserves. We should talk to China and Japan, this union/racist yellow peril thing had us white ant Britain’s alliance with Japan eary this century and get into bed with the US’s Asian imperial adventure, but we need to recognise that it is over, and cast off any association with the “at your knees or at your throat” power projection mentality of our big thuggish mate who is being systemically dropped by slingshot fire.

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  3. Oh and DOW futures down 94 even before EU trade, ASX was flat, jumped on Stevens comments and then went sharply backward. AUD down the last 3 day’s gains. Good thing I retired from daytrading on the hunch. Wonder how the caring and sharing medicated young gentleman went today?

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  4. Ross – Bill Goss’s latest commentary from Pimco is worth a read. just skip the first 2 paragraphs and remember that one of his charts shows the aussie public debt scenario without considering the private debt.

    http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/February+2010+Gross+Ring+of+Fire.htm

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  5. Matto, I enjoy reading Bill Gross but look for the twist because one thing you can count on is that he nevers wastes a breath when given an opportunity to talk his own book. Reminds me of Kerry Packer the way he plays governments more than anyone else.

    The twist in the one you have linked is that everything he says makes perfect sense … and he runs his book in the very gap you identified. Underserviced private debt and junk collateral is a venereal disease being transmitted to government who will offload them to their mates at mates rates. Plenty of opportunity as the parcels are made and being shipped back and forward.

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  6. You underestimate the power inflation Matto. Hallucinogenic it is.

    Ok, so the Treasury & RBA has suddenly found prudence, but it can’t last. Maybe if we’d ‘come down’ about 20 years ago, but not now.

    Banning the short side is just another in their bag of tricks.

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  7. power of inflaton

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  8. inflation

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  9. Justin, my *guess* is that inflation will come about gradually (over months)while the issues mentioned in the article will lead to a much more sudden shock/correction. i see australia going down hard in the near term but fairing better through inflation driven recovery in the mid term.

    friday!

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  10. Fed raises discount rate to 0.75%
     US central bank moves to further normalise lending on improved conditions.

    This was the headline on business spectator. Actually, the improved conditions had little to do with it. Try the public statements by one of the Federal Reserve governors saying if they don’t ‘tighten’ there will be trouble.

    There will be trouble anyhow, this ‘tightening’ is the source of the current shock/correction. There’s only one road out of this & it leads straight off the cliff!

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  11. one road out of this swamp, would have been a better description

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  12. One of the best articles I’ve read is this one;

    War against Gold: Central Banks Fight for Japan

    at http://www.goldensextant.com

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  13. Gross: “Of all of the developed countries, three broad fixed-income observations stand out: 1) given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country… ”

    Interesting comment. Bank of Montreal shares fell from around $55/share to $26… but recovered quickly, as did our own banks.

    Property remained relatively unscathed. Some provinces may have fallen around 6%, similar to our own across-Australia figure. What is even truer for Canada than it is for Oz, is that there’s _immense_ disparity between home ‘values’ province-to-province, ie., state-to-state. A mansion in Nova Scotia may cost a sixth or even a _tenth_of the same in Ontario or BC. Greg’s perception of a ‘property market’ as ‘property marketS’ is even truer for Canada than for Oz.

    Our initial perceptions were based almost entirely (and wrongly) on the weather issues… and location issues (mostly right); but it was a little more complex than that. As locals explained, some provinces had _never, ever_ experienced a boom. Nova Scotia’s last two real booms, for example, were 70+ and 100+ years ago (ship-building and fishing). Magnificent old homes, built in those eras, can still be purchased for crazily low prices. Construction labour can be as low as $8.00 per hour… .

    Drive west as far as roads go and BC is the opposite end of the continuum.
    Prices in Vancouver and Victoria now exclude all but the very, very wealthy… . Our cities seem almost cheap by comparison… .

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  14. Pray for my mate who is off to the Abbott-oir* to be slaughtered tomorrow. He’s bidding on a $1.2M house in Williamstown, for which he’ll have to borrow some 700K, or half of his pay packet.

    *Abbot-oir, since Tony will likely preside over the blood letting after next election. You heard it here first!

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  15. …canadian bank shares did indeed fall by nearly 50% causing shock and fainting spells among ottawa bluebloods, but…lo and behold…73 billion canadian dollars of stealth stimulus later what do you know…banks stocks did recover…what a coincidence, n’est-ce pas?..

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  16. Our view is that Canada _may_ have got better kilometrage from stimulus spending than Australia did. Again some provinces _appeared_ to benefit more than others, but that may be a superficial observation. Quebec’s roadworks certainly made driving around that province a slow(er) experience. No doubt that stimulus spending insulated both economies from the disasters we see in the UK, US, and U-rope… . Long-term effects for Canada and Australia? Who knows? Think I’d rather be in either/both, than weathering the falling ash from the Ughs…

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  17. Mike/Biker, I am interested in the flexibility/variability of asset prices in Canada. I have often thought that the US and WA have much in common with their can-do and their ghost towns linked. In the US you can still see it despite the “extend and pretend” of the major banks the regional banks are getting knocked down like pins and asset prices are responding like this

    http://money.cnn.com/galleries/2010/real_estate/1002/gallery.most_and_least_affordable_markets/index.html

    So I am interested in your thoughts on how much a factor people packing up their households and going to chase work in other regions is a factor in Canada. I am interested to get others view as to whether the Canadian banks are turning the volume of lending or risk assessing LVR’íng up or down according to regional economic prospects.

    I am convinced that we can never again let ourselves in Australia get trapped in the position where we can’t let asset prices adjust without systemic total collapse. The differentials in real estate between regions have never been so narrow in our history as they came to be in the ninety-norties.

    I think Canada is a good relative risk bet compared to Australia due to its current account surplus. Not so much in real estate because I know little of the market, and those Vancouver anecdotes I have heard are troublesome. I am though watching Viterra because it trades on the ASX based on a Canadian exchange made price and it has the potential to be a double lever based on relative moves in grain and currency. It hasn’t hit my price sweet spot yet but is getting close to thereabouts. Risk remains if grain traders get caught carrying the parcel like happened to fertiliser if derivatives fall over. It is a medium term play rather than one as long as Buffet’s Burlington Northern because I don’t like management captured companies like these.

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  18. “Indeed the temporary breaks in the market which preceded the crash [of October 1929] were a serious trial for those who had declined fantasy. Early in 1928, in June, in December, and in February and March of 1929 it seemed the end had come” (John Kenneth Galbraith, The Great Crash 1929, London: Penguin Books, 1992, , p.98).

    “Corrections do what they have to do. They will flush out latecomers, top-callers, in-and-out traders, the timid … emotional investors and momentum players. None stand to reap much benefit from this historic bull market…

    “Ignore the media’s take on markets. They have no real idea of what is going on, and if they did, like dissidents in China, they would not be allowed to publish their views. Most news is extraneous to market movements; and for the financial media, news serves merely as a convenient excuse to explain whatever the market did in a given day.

    “The best timing clues are technical. These include overbought signals, or in this case, oversold charts that can be subjective but very helpful. And of course there is sentiment, which I have found to be the most useful…” (Chuck Cohen, A True Believer Is Relaxed About Gold, rickackerman.com, January 28, 2010).

    “In less than 4 weeks, this Bull Market will be celebrating its first birthday party – that is, if it hasn’t already expired (which we doubt). It’s not that bull markets can’t end in less than one or two years. But the last time one ended with less than 12 months duration was during the Great Depression in 1938. And one hasn’t ended in less than 24 months (2 years) since 1947… over 60 years ago.

    “It’s not only the historical odds that are in our favor, but we still feel that technical and economic odds also suggest the bull market has further to run…” (James Stack, Happy Birthday, Investech Research Market Analyst, Vol.10, Iss.2, investech.com, February 12, p.1).

    “If this is a genuine recovery, it would be very unusual for the stock market to stop on a dime here. Usually it spurts up before the recovery begins and then goes on gradually to get about 60 percent of the gains after the recovery has begun” (John Dorfman, Chairman, Thunderstorm Capital Llc, Market Monitor, pbs.org/nbr, January 29, 2010).

    “Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. and one of the two most accurate forecasters of the S&P 500 last year, said today his prediction that the index will reach 1,300 by year-end may be too conservative.

    “The selloff is done,” Lee said on Bloomberg Radio. “You want to buy the groups that got hit the hardest — the basic materials, energy and technology stocks” (Elizabeth Stanton, U.S. Stocks Rise to Cap Biggest Three-Day Rally Since November, bloomberg.com, February 18, 2010).

    “… first rate hikes seldom kill a bull market. In most cases over the past 50 years, profitable gains were still available for 7 to 12 months or longer – until subsequent rate hikes started to take their toll” (James Stack, Investech Research Market Analyst, Vol.4, Iss.6, investech.com, April 30, 2004).

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  19. Abbot-oir…LOL…good one…but seriously…who borrows $700K???? Does this person, who will bid on a $1.2m house in Williamstown know no fear?

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  20. Watcher, despite precedent I am having a hard time swallowing this one and I am one long AU equities. Where is even the smell of those US green shoots? Where is the trading volume? Adam Carr is one running on the smell of activity and inflation grabbing the reports that are always rerated down the following month and doing his best to ignore the lack of lending on main st and the unemployment and the regional banks imploding and the state tax bases evaporating. I am on the Bill Bonner bent toward deflation, and the unravelling of the extend & pretend. Yep higher rates to douse a fire never do short term but where is the fire in the US? There is a bit of a one in AU but it is one built of consumers that learnt their economics in the land of OZ where Whitlam is still some sort of hero and the public servants think they are both sustainable and in control.

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  21. Ross: “…how much a factor people packing up their households and going to chase work in other regions is a factor in Canada(?)”

    Canada is a little ahead of us in the ‘retirement flow’, Ross. We attended a dinner party for twelve people our age one night… found ourselves just slightly older than anyone else… and the only people present who were still working. Everyone else had retired at 55 – 57 years of age. Their pension plans are more generous, less means-tested, more flexible and ‘guaranteed’ (ie., not market-linked). It seemed to us that the economy is more focussed on the elderly. There seemed to be no financial penalties for growing old! So the _’packing up and moving’_ often occurs at retirement; and the flow is to the warmer lifestyle Oceania communities.

    Gyms we attended in Canada served an entirely different niche. Our gym here is for 20 – 40 y.o.s (we feel much older); while our Vancouver Island gym served 20 – 85 y.o.s (many of the elderly very fit); and we both felt relatively young… .

    Early retirement must come at some cost to the country, although most people we know contributed to their pension plan, compulsorily, from Day 1.
    I guess by 2035, the same may apply here, unless retirement age is raised to 73… .

    Blue-eyed sheiks, Albertans who have benefited from that province’s oil wealth for decades, seemed to be a large group moving west; as did farmers from the prairies who had sold large acreages, often to family.

    You’re correct that miners follow the flow, the oilsands projects being a recent example of the ups-and-downs of employment based on commodity prices. I’m not sure anything has changed there, whether we compare the Californian gold rushes, the WA goldfields rushes, those of the Klondike in which my wife’s granddad participated; or the wildcat oil strikes (in which her other grandfather was renowned as the only oilman who ever had a complete oilrig stolen, while he was absent in Edmonton.)

    Immigration, especially from Hong Kong, has kept Vancouver realty high. Possibly no other city in the world has ‘benefited’ more than Vancouver.
    My wife’s old highschool in Shaughnessy, BC, is now around 90% Asian.
    The Rolls, Porsches and Bentleys belong to the kids. The realtors all seem to speak three or more languages.

    As in Australian cities, there have been plateaus and dead spots in west coast Canadian realty during the last two decades. I always thought that homes in the $700 – $800K range were over-priced. More fool me. Seeing those same homes at twice and three times the price now, I figure the rents (even for _basements_!) would have paid the damned things off by now… :)

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  22. Should have added that I enjoyed the link, Ross. Thanks!

    Here’s one for the Shaughnessy suburb I mentioned. Remember that most of the homes in both our links are chipboard or ply, sprayed with stucco; or cedar clad… .

    http://www.shaughnessyhouses.com/ShaughnessyHouses.php

    I know two of these streets fairly well. Check out 3995 Maple Crescent; and 1162 West 26th Avenue. The houses are nothing very special… and make Sydney look fairly cheap… . :)

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  23. Nothing makes people agree to something better than the feeling of vulnerability.

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  24. Bard Luck: “There is nothing either good or bad, but thinking makes it so.”

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  25. ah repartee and good ones too.

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  26. Holy moly at those house prices Biker! I have often entertained the thought of finding mining work in Canada or at least checking them out to see how things are done over there. Checking out concentrators and mines might not sound very stimulating for some but they seem to do things very differently over there and more knowledge is not a bad thing. Where do all the mines tend to be situated? If Australia is any guide, I suppose they are in the middle of nowhere :)

    There was a story going around years ago about a young exploration geologist who pointed out that the best place to explore for new ore bodies was near the major highways as it was obvious that is where most had been found in the past :)

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  27. Im barely long any stocks but if the usual suspects are buying up equities on every shake out then it will be harder and harder (in the immediate sense and presuming the suspects hold) for an equities correction of the predicted 1930s style. It may be a central planning objective to hold equities at least in stagflation mode since the social disorder that would result from a brutal sell-off. I agree over the cliff is the only way out of the swamp in the final sense. Maybe for now though its just a flush out of weak hands/short termers then rally again.

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  28. Doesnt Benny have a second date with Printing Press.

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  29. Whenever I read that there’s a limit to what people can and will pay for location, I have to reflect on the Vancouver situation. It’s extreme, granted, but it is an interesting property market I’ve watched for three decades now.

    Remember too, Don, that these are very, _very_ ordinary Canadian homes. Clifftop and waterside homes we stayed in during the last three months were valued at many times those prices. Our friends’ Whistler chalet made all those examples look very cheap indeed… . Thirty years ago, the Oz Readymix fella had an $8mil holiday home close to their previous holiday house. Who knows what it’s worth now? Can’t imagine… .

    I know very, very little about Canadian mining, even though my wife’s people were brokers, engineers and, at times, miners*. Mines we passed seemed very small-scale in comparison to Aussie outfits. I concluded most of the action is much further north, up in the less-hospitable permafrost zones… .

    * I know the family still owns penny stock related to mining in the Similkameen/Kamloops area. Sold ours September ’87 at a record high.
    Pure _luck._ It had doubled in value, so I sold at 22c… . Within a month it was back to 10c. Inlaws agreed I had more ‘ass than class’! :)

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  30. Wish I had a girlfriend so generous….she just keeps on giving.

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  31. Thanks for that Pete. I know the name Kamloops – they have a major metallurgical laboratory (of the same name) and I have come across their work quite a few times over the years. I suspect that their mines are similar to the ones in north queensland that I work on. Sh*ts and bits, high grade but rarely above 1 million tonnes or so. Makes life interesting for sure and I find smaller mines don’t have the big swinging d*ck syndrome that the big operations have. Politics and associated crap seems to go up exponentially with mill tonnage – under 1 million tonnes per year is the sweet spot for me although there are exceptions…

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  32. We drove through Kamloops back in ’95, returning from the Calgary Stampede.
    Have a feeling you’re right about the size of operations there, Don. Couldn’t generate enough interest from the rest of the family to chase up the mine Granddad Rand had floated. It was called ‘Makaao’, but I think it’s now ‘Similkameen’. This URL may or may not relate to the original site: http://bcgold.com/mining-properties-14.html Rand held numerous US patents in his time.

    It’s Mexico which really intrigues me, Don. I’ve no idea what the state of goldmining is in the Sierra Madres, but swimming in clear-water high mountain streams sparkling with gold dust is an unforgettable experience.

    If I was half my age, I’d ‘shut shop’ here for a few years and attempt to set up a little operation there. Of course banditry might be an issue!

    Never fully understood gold fever until I ‘panned’ a line, below a waterfall, using an old styrofoam meat tray. Missus was highly amused.
    Nice reminiscence to nod off to… beats counting sheep. :)

    (Must find out more about amber. One of the old fellas gave me a chunk the size of a goose egg during our recent visit. You can see where his oil drill sheared it off on one face. The main deposit could have been quite large… .)

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  33. Gotta laugh, Don… missus just looked at my coordinates and reckons my URL is nearly 200kms or so off. Inlaws have drawerfuls of the scrip. Can’t be worth much now, anyway… ! :)

    With very ‘local’ knowledge, I found the site the Rands picked up:

    http://minfile.gov.bc.ca/Summary.aspx?minfilno=092INE002

    Copper was the main objective, apparently. The price of gold and silver made exploration unfeasible at the time… . Makaoo (correct spelling) had registered 61 different claims including up in Alaska. As I suggested, it never moved much from the penny stocks, later swallowed up by bigger fish… .

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  34. Ahh the hit and miss of exploration. Nothing worse than getting half a sniff and then finding bugger all afterwards. I was involved in Cobar Consolidated Resources as a seed investor and then the market float etc etc. Did ok and they are still going on but similar story in the beginning. Found a few stringers – follow up drilling found nothing and they are now in the process of seeing if they can make a buck from the old Womawinta silver/lead oxide deposit south of Cobar. That deposit is much easier – shallow enough for RC drilling (instead of expensive diamond), metallurgy doesn’t look too bad but silver grade is still a tad low but we shall see. I am out of it now – had to pay off a bit of the mortgage for my piece of mind :)

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  35. “This time around, what is the best refuge?”

    Large Multinationals with less cyclical earnings — namely consumer staples, healthcare (careful of US reforms), insurance (provided no massive catastrophes).
    I agree with your assessment re: resources equities performance. China has bght more raw materials than they need short term and stockpiles of alot of base metals are at/near March 09 highs. Regardless of whether China continues to grow or not short-intermediate term its a lose/lose for commodities and anything commodity related (including countries riding on the commodity “slip stream”)
    The AUD destiny relies on the carry trade. If you overlay the DJIA against either the AUD and CAD you find theres a strong positive correlation. So if you think the US market is going up then so will the AUD, fueled by carry trades and risk appetite.
    If risk aversion rises and China slows the AUD is in trouble.
    Regarding the USD its actually about to begin a multi-year bullrun after being in a secular bear for several years. The fact that everyone is calling for its demise and every mum and her dog is calling for the end of the USD only strengthens this. I’ve been bullish USD since about October 2009 and continue to be. More US stimulus will be difficult when the government is already over leveraged. Likely there will be future tightening and withdrawal of stimulus which are both USD bullish (infact early signs of this have already occured).

    Regarding inflation the latest US CPI figures show very little if any. Core shows deflationary pressures. There is historically a time lag between monetary inflation and price inflation, and the time lag can be great in some circumstances. So many people are on this inflationary “bubble” bandwagon, they maybe right but may be waiting awhile.
    Better to go with what the data is telling us now then trying to predict what will happen and speculate.

    Also US banks are beginning to emerge from this mess. US hedgefunds are madly buying perceived dead banks as loan losses are falling.
    Heres what the smart money is doing:
    http://www.gurufocus.com/StockBuy.php?symbol=C

    These banks are absolute cash cows when their loan losses subside at their current valuations. There will be further deleveraging but this doesn’t mean banks will have more loan losses — the worst is over and is already priced in!

    Remember above not advice, just discussion, seek financial advice/info from a financial adviser.

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  36. My accountant reckons the US isn’t going to run a surplus for 100 years!

    He’s pretty thorough. So I’ve got no reason to suggest his thought isn’t correct? But along the way, one might expect a few practical issues to pop up perhaps??? With timing same being REAL dodgy! :)

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  37. @Ned
    Sounds analogous to what was said in the States about property prices just before the collapse ;)
    When people feel euphoric and definite about certain ideas its usually (not always) a better idea to move in the opposite direction.

    Remember above not advice, just discussion, seek financial advice/info from a financial adviser.

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  38. I’ve got no real big opinions on anything financial at the moment Anon. Except that if one is amongst the 5% (?) who have trading skills, then the world has opportunities perhaps? But with the other 95% of us being well advised to hedge our bets; remain vigilent; and prepared to move if a clear trend regarding inflation/deflation should reveal itself in relation to our national economy. And Yes … Certainly just IMO as you say.

    Reply
  39. @Ned
    “Except that if one is amongst the 5%”

    lol i think thats a generous percentage ;)

    Remember above not advice, just discussion, seek financial advice/info from a financial adviser.

    Reply
  40. I’ve never played the game as such – Because I surely do know I DON’T have the skills – But Yes, given the bit of general reading I’ve done on various things, and a few personal impressions, I’d expect 5% would wrap it up. And the percent probably is lower. Because at about that level, one starts to get in amongst the truly competent professionals beginning to joust. And a good number of THEM still lose. It’s a tough game – I take my hat off to traders as I’ve said before.

    Reply
  41. Fundamentalists or chartists… all those I knew in both camps were badly burnt when the ASX fell 54.5%. Maybe 5% emerged unscathed(?) Meanwhile Oz property averaged a 5.5% fall across Australia… .

    Anon: “When people feel euphoric and definite about certain ideas its usually (not always) a better idea to move in the opposite direction.”

    And that’s why we _bought_ two more blocks at perhaps a 10% discount during that brief plateau. Counter-cyclical. Think those days, or ‘worse’, will come again? You’ll _buy,_ won’t you? I know we will… . ;)

    Reply
  42. “Fundamentalists or chartists” … there are those who are neither. Still though, Pete, at current variable rates (and as they rise), it all becomes a bit of a squeeze on disposable income. Can’t see wages rising fast enough at the moment, to be honest.

    Reply
  43. “Fundamentalists or chartists” … there are those who are neither.”
    Agreed. Our son plays a very different game, which he appears to be winning; and which is a little more complex than our own very simple strategy.

    We may be watching a phenomenon play itself out, as WA’s regional centres already appear to be losing catering and restaurant staff to the attraction of remarkably high(er) wages in the north-west. And we’re told that the boom hasn’t started yet.

    If that’s right… and it seems inevitable… the cities are about to lose population to the northern mining centres, job vacancies will expand in the south, wages will rise to attract replacements _from other states_ (since the government is about to close the gate to 457s who seem to comprise a very high percentage of chefs, wait staff, service personnel, etc) and our housing shortage may become critical in WA.

    As others have contended, all this is dependent on China, India, Korea and Japan maintaining their growth. Who knows how long the boom might last? Perhaps _not_ the two decades proclaimed by politicians and bankers. It means good timing and a necessity to take respectable profits, rather than aiming for the silly money… . ;)

    Reply
  44. I reckon the North West is relatively uninhabited for a reason, and in the long term that won’t change (expect it to be dotted with ghost towns at some point) unless there are actual efforts to make at least some of the coastal land arable. Desalination, perhaps? Still it is an expensive way to do things and it’s a lot easier just to rape and run, as miners have always done.

    Reply
  45. Dan, you’re correct about the current situation. FIFO enables young couples to easily crack over $200K per year… and ‘live’ a thousand kms south. But it is changing. I think we’ll all be surprised at the extent to which the Kimberley develops, as technology advances. Desal plants are springing up in the south, but water may still be pumped from immense reserves in the Ord, if desal costs aren’t feasible.

    And yes, ghost towns are common around the planet wherever booms go bust. Could be different this time. (Now where have I read _that_ before?! ;) ) If I had the chance to do it all again, I’d probably live on the north-west coast; or the Ord.

    When one of our tenants paid almost a couple of mil for two rentals in the north-west, I was skeptical. But he’s making over 12%, which is higher than our rental take… and he has long-term contracts with government agencies… while paying me a measly $450 per week for a beach house!!
    Higher risk, yes, but not a bad return in times like these… .

    Reply
  46. “And that’s why we _bought_ two more blocks at perhaps a 10% discount during that brief plateau. Counter-cyclical. Think those days, or ‘worse’, will come again? You’ll _buy,_ won’t you? I know we will…”

    Well was a very ballsy move given you bght when American housing was falling off a cliff. Buy when blood is on the streets? I guess a mistake alot of us make is to assume if the equivalent US market tanks, Australia follows. It certainly hasn’t for housing, but will it in the future? Who knows, but the media preaching of a housing crash is not a good sign for the bears.
    Given property prices in the US, UK and Japan the margin of safety in Australian housing is non existant for the typical non-professional residential investor. In the US you can get rental yields that exceed 10% + buy the house for less than replacement cost.
    Biker are you buying US residential property atm? ;)

    Remember above not advice, just discussion, seek financial advice/info from a financial adviser.

    Reply
  47. Apologies for the long post but I found this on a real estate article – in the comments below. It appears that Steve Keen does respond to online critics in obscure places. What is the chance he will turn up here? :)

    Steve Keen Writes:

    As I’ve said many times – to the point of going blue in the face over it – my call was always over 10-15 years, not a year or less, and still less one where prices were deliberately manipulated by the government in what I prefer to call the First Home Vendors Boost.

    I observed that a policy like this would be a very bad idea if the financial crisis I predicted actually struck in my first Debtwatch Report in November 2006:

    “Debt has reached unsustainable levels, and whether its reduction is done smoothly or abruptly, economic growth has to slow in the meantime. If households reduce their debt levels smoothly, they will have less disposable income to spend and retail sales will slump. If bankruptcies become widespread, the sales downturn will be overlaid with a financial crisis…

    In this situation, doing anything–like increasing interest rates to “contain inflation”, or increasing subsidies to home buyers (as happened in 1991 with the doubling of the First Home Buyers’grant)–will be worse than doing nothing at all.” (http://debtdeflation.com/blogs/wp-content/uploads/2007/03/SteveKeenDebtReportNovember2006.pdf)

    I attacked the government over the policy as soon as it was announced (prior to being ambushed by Rory with the bet over house prices when speaking at Parliament House)

    “Many elements of the recently announced package are justified. When the economy is about to go into a debt-induced recession, government spending both boosts demand, and provides the private sector with cash flow needed to meet its debt repayment commitments… But yet another increase to the First Home Buyers Grant??? Is this because, um, house prices are, like, maybe too low?”
    (http://www.debtdeflation.com/blogs/2008/10/19/rescuing-the-economy-or-the-bubble/)

    And I took another swipe at it in March last year when the first figures were announced:
    The First Home Owners Boost (as it is officially known) has certainly given the Government bang for its buck. By spending roughly $200 million of its own money to date, it has added about $3 billion to the housing market. But the additional $2.8 billion has come from increased mortgage debt taken on by those most vulnerable to a serious economic downturn, at a time when the latest “unexpected” increase in unemployment indicates that, like it or not, the global downturn is coming our way.
    (http://www.debtdeflation.com/blogs/2009/03/22/fhb-boost-is-australias-sub-prime-lite/)

    Of course Australia hasn’t yet experienced any real pain from the GFC – about the only country in the world that hasn’t, with only a 25 per cent increase in its unemployment rate versus doubling for the US and so on – and the First Home Vendors Boost is part of the reason why, as I explain on my blog for the walk (which I realised I’d be doing as soon as I heard the news in May 2008 that the government was going to extend the FHVB for another six months):

    “Without The Boost, the reduction in mortgage debt levels that was in train in late 2008 would have reduced expenditure in the economy by roughly 3 per cent of GDP. Instead, the Boost enticed households into a dramatic 6 per cent increase in mortgage debt during 2009. This effective 9 per cent turnaround in debt levels is a major reason why Australia has avoided the worst consequences of the GFC to date.” (http://www.keenwalk.com.au/).

    Now I apologise for being stupid here, but I can’t see how the bubble is going to continue without regular injections of $100 billion in borrowed money, as the FHVB arguably inspired. And I wonder how many bloggers here would argue that house prices would be rising without the impact of that grant?

    my comment: I love how academics can make big calls and then when they don’t come to pass justify it because of this and that and the other. I guess that is one benefit/problem with education – you learn more excuses :)

    Reply
  48. US property? Well, we looked, Anon. Friends recently bought cheaply in Tucson. They say they’ve bought well. We’d be more interested in a NH location in which we’d actually spend some time ourselves. For us, that’s not the US. We’re happy with our returns in WA. Our tenants are often just a lot smarter than we are. ;)

    “Who knows, but the media preaching of a housing crash is not a good sign for the bears.” Sorry, I don’t understand that comment.

    “Well was a very ballsy move given you bought when American housing was falling off a cliff.” Not really. We spent a lot of time looking… and we only found two. Both were really exceptional buys at $135K and $144K… . No risk at all, considering that includes fencing and $7K and $9K worth of landscaping. Great locations in a great suburb and nice homes will be up on both by year’s end.

    In terms of risk, the only real mistakes we’ve made over the years are selling too soon… and too low. We once sold a beachfront block for which we paid $18K… for $23K a year later(!) No CGT, but it would be worth $500K+ now. Another? Quickly doubled our money on 7.5 acres of beach well south of Perth, but that special rural would be worth six times our profit less than a decade later.

    We’ve never viewed property as a risk, perhaps because we work hard to find value. We’ve walked entire suburbs street-by-street, with a camera, looking for blocks or homes which meet our criteria. Keeps us fit… . :)

    Reply
  49. The Aussie real estate bubble built by unholy trinity of Labor politicians, their developer buddies and the Greedy-Boomers will bust of that there is no doubt.
    The unholy trinity now has the Australian economy in a death embrace and is slowly strangling it like an Anaconda.

    Bargeass@yahoo.com
    February 21, 2010
    Reply
  50. Greedy-Boomers? Love it! When Keen was ridin’ high… along with interest rates… it was Stupid-Fools. I’ll take the new term as both a promotion and a compliment, Bargearse. :)

    Reply

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