Demanding Demand

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Everything in the financial world just keeps getting stranger and stranger. The sea of credit that floated the world’s asset markets for the last twenty years is evaporating and receding. It’s leaving some assets high and dry. And it’s causing investors to herd themselves into a narrow isthmus of bonds that are perceived as “safe.”

But let’s not be so cryptic. Let’s deal with the Federal Reserve’s announcement today that it would sort of extend its quantitative easing program; the one begun last year. It wasn’t exactly QEII, and for that reason the market didn’t quite know what to make of it. Is it time to flee risk assets and pile into bonds? Or is this more free money to change your life?

What the Fed said in its statement is this:

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.

What does that mean? Well, that means the Fed is going to “roll over” its existing holdings of Treasury, Agency, and mortgage backed securities, and, for now, keep the asset side of its balance sheet north of US$2 trillion. The anti-deflationists at the Fed (pro-inflationists) believe that not rolling over the debt will lead to a further contraction in credit and the U.S. money supply, which would lead to contracting GDP too.

Of course, when households and businesses pay off their debts and borrow less based on their unease about the future, of course it’s going to lead to lower growth (and probably higher unemployment). This is what happens on the downside of the business cycle and in a balance sheet Great Correction. You put your financial house in order.

But the Fed doesn’t want prudence. It subscribes to the blinkered Keynesian worldview that if households and businesses aren’t buying, the government must stimulate demand. It presumes that buying Treasury bonds from banks and institutions will force cash into the economy and that cash will go forth and multiply. The cash is being stubborn though, and is desperately clinging to short-term government debt.

So here we are treading water stagflationally. There’s not much more to add to our core argument that, absent some unexpected surge in US growth, the Fed is going to have to go unconventional on the economy and find a way to monetise debts and/or lend directly to households. But in the meantime, the very sad fact for U.S. savers is that they are getting smashed because of low yields.

The even sadder fact is that the giant risk-aversion that’s implied by the Fed’s negative outlook on the U.S. economy attracts an ever larger number of investors into the death-trap that is the U.S. bond market. Of course if you believe that deflation is inevitable, then short-term bonds and cash are the goer. As we explained in last week’s e-mail update to Australian Wealth Gameplan readers, deflation is not politically acceptable. Money will be created by the Fed and spent by politicians, whether it exists or not.

A good example of this is the $26 billion emergency blah blah blah package passed by the U.S. House yesterday and signed by the man presiding aloofly over America’s fiscal decline, President Obama. The emergency bill forked over $11 billion to U.S. States to pay teachers. Another $16 billion increased Medicaid payments to U.S. States so the States can pay other people, like fireman, police officers, and valuable public workers sitting at desks.

The States are the Federal government as Greece is to the European Union. In fact, America’s sovereign debt crisis maybe a trickle-up affair, as States and municipalities pass the buck on up the ladder to Uncle Sam. This is why, deep down in our contrarian bones, we know the U.S. dollar is doomed as a store of value.

What about here in Australia, though? The amount of money being lent for housing fell by 3.9% in June according to the Australian Bureau of Statistics. It was the lowest amount for housing finance since February of 2001, which was over nine years ago. What does that tell you?

It tells you that the largest factor on “underlying demand” for Australian housing is the price of money. When the price of money is cheap, the demand for housing goes up. When the price of money goes up, the demand for housing goes down. This insistence that there is a structural shortage of housing in Australia is the rubbish you get from spruikers at the height of a credit-fuelled bull market. Spruik on!

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. The perfect time to buy my next bit of real estate in Australia is soon approaching :)

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  2. Your -3.9% comes from? Here? http://www.abs.gov.au/ausstats/abs@.nsf/mf/5609.0 or..? Dan, some of the ABS data, especially for established dwellings look sick enough to support your figire, but you’d get more cred if you actually quoted the ABS data source or better still just provide the link. It’s just too easy. You’d either have to be getting sloppy or do it on purpose for some propaganda reason.

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  3. “When the price of money is cheap, the demand for housing goes up. When the price of money goes up, the demand for housing goes down.”

    Whaddya know? I thought it was just a litle more complex than that!~ ;)

    Thanks for demuddifying the Australian property market… . :)

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  4. Says Bill, DR(US), today:

    “When houses were doubling in value, mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats…
    … the amount of bad home equity loan business during the boom is incalculable and in retrospect inexplicable, housing experts say. Most of the debt is still on the books of the lenders, which include Bank of America, Citigroup and JPMorgan Chase.”

    The banks actively _promoted_ these suspect loans, in the US and UK (and probably across Europe). In Britain, in 2005, we saw immense billboards pushing the practice. A gullible public bought this spruiking; and bought the expensive toys.

    An equally gullible world bought the banksters’ bad loans.

    Say what you like about Aussie banks, but they certainly protected us (and themselves) from almost all of this sleight-of-hand corruption.

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  5. Biker, have you watched ‘The Keiser report No 68’ on youtube? It is one of the best episodes so far and goes into what you just mentioned. I’d be interested in you opinion of the show. In the second half this regulator called Black just lays it all out and it is accessible.

    bearamundi
    August 14, 2010
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  6. “When the price of money is cheap, the demand for housing goes up. When the price of money goes up, the demand for housing goes down.”

    I have said this before and ill say it again,
    Australians are like little kids at a lolly shop, if its there (cheap credit)they just have to have it
    They can’t help themselves
    They don’t have any self control to say NO

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  7. Ahhh, but you also said (25th April 2010):

    “Biker Property is a NEED everyone VAULES it, just like I VALUE oxygen, just like I VALUE food, just like I VALUE water.”

    I have said this before and I’ll say it again: Steven will do and say anything to get cheap property. He ‘vaules’ it, in fact.
    He has absorootedly no control. ;)

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  8. “mom and pop making $80,000 a year were taking out $300,000 home equity loans for new cars and boats” – And Big Bad Ben can’t figure out why his private banks aren’t rushing to lend any more money to these people? :

    http://www.nytimes.com/2010/08/12/business/12debt.html

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  9. Wonder if/when(?), the American Congress is going to say, the economy needs some jobs, and this free market stuff isn’t working out like planned, so it’s protectionist tariffs and be damned! Round about then, things could start to get really entertaining.

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  10. “…$300,000 home equity loans for new cars and boats…”

    It was interesting to compare the UK situation in 2005 and mid-2009, Ned.
    My mate Nick forecast the crash in England in ’05 (showing us examples of some of his neighbours who had succumbed to banks’ inducements); then showed us the aftermath in ’09: repossessed Rangerovers, Jags and Mercedes, broken marriages, lost businesses, etc.

    In the States, non-recourse loans combined with equity loans _had_ to be a recipe for disaster. Can you imagine banks ignoring risk in _that_ scenario? Keep lending against loans that can’t be recouped?!?~
    Sheer lunacy. ;)

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  11. It’s right through their whole economy apparently Biker? – People of relatively modest means who put $40,000 worth of clothes on tick, and are now saying stuff like Maybe I shoudn’t have taken those Sex and the City shows as a realistic model for MY life? I guess I first got a hint of it when I read some stuff by one of their Home Financial Guru Advisor types outlining how since the dishwasher had broken she was going to make the sacrifice of doing the dishes by hand while she saved up for a new one – As opposed to galloping straight out and putting one on tick. Crazy people! :)

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  12. My comment got moderated – It had the S*x word in it – Try again:

    It’s right through their whole economy apparently Biker? – People of relatively modest means who put $40,000 worth of clothes on tick, and are now saying stuff like Maybe I shoudn’t have taken those S*x and the City shows as a realistic model for MY life? I guess I first got a hint of it when I read some stuff by one of their Home Financial Guru Advisor types outlining how since the dishwasher had broken she was going to make the sacrifice of doing the dishes by hand while she saved up for a new one – As opposed to galloping straight out and putting one on tick. Crazy people! :)

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  13. “…It’s right through their whole economy apparently Biker…”

    What can one say about a nation which goes nutz when petrol hits four bucks per gallon, Ned?! ;) Big reality check needed… . :)

    Just watched Bear’s Keiser Report 68. Well-spent 26 minutes. It clarifies the lack of bank regulation in the US… not simply prior to the GFC, but also in its aftermath… . The claim that _real_ regulation will commence in 2018 is perhaps the most frightening point made.

    Yes, I found Black’s comments absolutely spot-on, Bear. Hope your download speed allows you to watch the Report, Ned. It provided a lot more depth to my understanding of the _criminal weakness_ of US regulators, in actually _rewarding_ the criminals… .

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  14. Can’t do vids here Biker. Re the other matter though, I would be dirty if a bunch of people who figured they were flash on borrowed loot (and their bankers) tipped us into Great Depression II – While they might be able to sell the idea at home, I sure as heck can’t see any reason I’d want to defend The Great American Way.

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  15. Certainly not Rockwell’s Americana, is it, mate?!~ ;)

    I figure we have comparative immunity. There may be some hiccups along the way (always have been) but our conservatism and relative isolation work for us…. and our resource-based economy doesn’t hurt. Excellent item in today’s Weekend Australian, pointing out that our Asian markets are much more significant than simply China… .

    DR (US) probably isn’t far off the truth in its attacks on US financial systems… and it’s clear Labor has stuffed up some critical stimulus programs… but I think we’re in far, far better shape than the Northern Hemisphere, by-and-large. Small population, huge export potential for at least the next four decades.

    Have to chuckle when folks tell us we’re _the same_ . :D

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  16. There’s certainly a lot of good reasons we could hold up better than most Biker – Not least being our role in Asia! Bit of Jolly good luck that – Although I’m sure both Abbott and Gillard would reckon they are personally responsible for it if asked. I guess the other thing that goes through my mind is that if the big money developed nations can’t get real returns at home then they are eventually going to have to try channelling some serious loot into Asia where they might hope to do a bit better – Rather than just running hot money trades? With some possible positives for this poor little dag hanging off the bottom of the developing world … :)

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  17. “…if the big money developed nations can’t get real returns at home then they are eventually going to have to try channelling some serious loot into Asia where they might hope to do a bit better…”

    Watched a TT doco on Hyundai’s robotic plant the other night. Are they really the only company with its own steel manufacturing plant, I wondered? Takes Henry Ford’s production line to an extreme Ford could never have imagined, watching Terminator-like robotic arms rotating and welding panels; a car every knocked out every 18 seconds… .

    The US is falling behind(er) very day.

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  18. Rockwell – Sometimes suspect Washington and Jefferson might say No, no, this isn’t what we meant! What are these bloody Amendment things?

    I think the US’s days of total dominance are numbered too Biker – And just hope they have the wisdom to accept it with the good grace of old age. But strongly suspect they mightn’t! :)

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  19. Great Biker, I’m glad you watched Max and thought well of the show. I watch him religiously every thurs and fri as the episodes are loaded on to youtube. I find him very funny most of the time and his guests are usually credible and equally interesting. It motivates me to keep at self-sufficiency/survivalism/ “defensive position” as I get the big picture on ‘volatility’.

    bearamundi
    August 15, 2010
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  20. Happy to just be called ‘Biker’, Bear! ;)

    Keiser: We thought most topics were addressed well, with the exception of China. It’s claimed that the majority of those buying as an investment are paying cash. While that doesn’t mean their property market(s)won’t rise and fall (as ours do) it suggests investors will probably hold through flat periods (as we do.)

    Given their stated plan, to move millions of Chinese into urban areas, it’s likely that the bubble, if one exists, will take over two decades (2035?) to pop.

    In short, China is different (too). :)

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  21. I reckon the nasty tenants have usurped my job description Magnus – I’m the renter and they’re the rentee surely? But then English never was my long suite??? :)

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  22. “it’s likely that the bubble, if one exists, will take over two decades (2035?) to pop” – If Steve Keen has started thinking along those lines then it’s no wonder he’s got the dirts! :)

    You know my solutions – More higher density stuff close to city centres and bullet trains from far flung ‘burbs. Both with planning regs that support them.

    I gave a bit of thought to geronticide and taking old people’s houses off them – But guess I’m a bit biassed in some regards?

    But what about that tenant/renter thing? Someone must be able to help me out here surely? – Am I the rentor and they’re the renter??? This is important in Oz! – Right up there with omnicide!!!

    Time for a late afternoon nap … :)

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  23. How a comma changes everything :)
    Max can get a bit far-flung at times,but that is half his charm. “Chinese paying cash”, don’t they often use a credit-union type arrangement that is akin to a shark loan? I think China may be in trouble because of this, and I’ll try to track down the article.
    John Williams from shadowstats.com gives USA 6 months to a year max before it collapses so it might be time to bunker down and err on the side of caution.

    bearamundi
    August 15, 2010
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  24. The USA has already collapsed. But it would seem that it doesn’t suit their creditors to publically advise them and others of that fact at this time.

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  25. Erring on the side of caution, we signed up for four more solar electricity systems, today. Great deal: Each is 1.5 kW, with an inverter capable to 1.9 kW. Total cost to us just $1974 per house.

    My reading of the Chinese property situation is that investors a.) pay cash; b.) leave properties empty. It appears that’s what happens if you _don’t_ have negative gearing or capital gains credits… . Why would you rent an investment property if your government didn’t provide some damned good reasons for doing so?!~ :)

    US Collapse: I’d give the USA a little longer than that. ;) More likely they’ll grind along, presses printing, systems failing… being brought back to life… given intensive care… expiring (and being relaunched, renamed). It’s possible there will be some major shifts in lifestyle*.
    Just re-read Toffler’s Future Shock (1970), to see if he’d predicted any of the likely social changes. Unsurprisingly, he hadn’t, but may yet get more of it right, as the sense of security into which US citizens have been lulled becomes Present Shock.

    Perhaps technology can save them! :D

    * Maybe the Hippies were right after all… . :D :D :D

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  26. “I’m the renter and they’re the rentee…”

    Yes, that makes very good sense, Ned.

    Your terms are acceptable. I’ll make it my duty (in addition to resurrecting the comma) to correct this misuse of the term ‘renter’ in any blogsite I find it abused. Wouldn’t be surprised if we find the correct term, tenant, becomes popular again. :D

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  27. Biker, here is a longer article by John Williams. I’d appreciate your thoughts, it is exhaustive, a bit long but easy to read.

    http://www.shadowstats.com/article/hyperinflation-2010

    bearamundi
    August 15, 2010
    Reply
  28. For a good laugh, google the number of _billionaires_ in:

    * China

    * USA

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  29. You can huff and you can puff,
    But you can’t blow my share portfolio down!
    Damn!!!
    Why do I always f’ up at ‘Nursery Ryhme’ time?
    :)

    Little Johnny
    August 15, 2010
    Reply
  30. And my gut instinct says they’ve got a lot of their billion bucks in property and maybe a little bit in bullion Biker – With at least some of that property being in Oz. Hey, you can always pick up and retool an existing factory if things change – But by and large things don’t change regarding places people figure are nice to live.

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  31. That’s a terrific deal on solar 1.5 KW Biker, same price as my 1KW system. I read in America I think solar added up to a 10K+ average increase in value of a home at sale.
    I’ll keep looking for that J Williams interview transcript as it is shorter. There is a very recent radio broadcast upload on youtube too which covers same ground. The article link above says a collapse in 5 years, but he has bought that prediction forward recently. He is credible.
    It won’t be long before China overtakes USA in billionaire stakes, interesting.

    bearamundi
    August 15, 2010
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  32. I can’t believe I found it, this is a beauty everyone, can be a pain in the arse reading someone else’s recommendation but this is worth it. Interestingly, John seems to like AUD

    http://www.marketoracle.co.uk/Article21676.html

    bearamundi
    August 15, 2010
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  33. “Why would you rent an investment property if your government didn’t provide some damned good reasons for doing so” – Jolly good point Biker – We know they specifically target nominal inflation of 2% to 3% pa (and that it’s almost always higher) and that they regard 4% to 6% pa house price appreciation as ‘good’ – And if it gets a bit higher it doesn’t exactly freak them out … All good in the Land of Oz mate! :)

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  34. “Why do I always f’ up at ‘Nursery Ryhme’ time?”
    And spelling… ;)

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  35. Must admit I’m starting to suspect that either they don’t have a plan or that if they do then it goes along the lines of all the cashed up old farts can buy the houses and rent them out to the youngies at 2% – Which will allow the banks to lend their loot to our busted arsed businesses that are likely to go broke at 6% maybe?

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  36. That Little Johnny bloke has NO redeeming features or points to reccomend [sic] him to a future employer (a mother even?) that I’ve ever noticed Biker? ;)

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  37. I’ll read the Williams download, Bear. Working on a lot of other stuff at present, but I’ll get to it later this week.

    Increasing the value of each home wasn’t our primary motivation for solar:
    1.) Giving more back to tenants was… and it helps _keep_ good ones;
    2.) We _really_ need more tax write-offs;
    3.) We believe in supporting better, cleaner technologies;
    4.) Does the property value no harm whatsoever… .

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  38. Periods of rapidly increasing capital gain don’t hurt, Ned!

    Theoretically that old chestnut about ‘property doubling every seven years’ seems to have taken a hit, with new data suggesting it took ten years to double (9.9% per year) since 2000. Never put much store in the seven year rule myself, having seen it double in three… or sit quiet for five, then go utterly ballistic.

    No idea what’s happening these days, other than that it’s all working well, apart from the current flat period we’re going through. :)

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  39. Just nice to have the income as you say Biker – Only three more years and my little $10 to 12k pa tax free superannuation rental earner will hopefully start coming my way … Patience, Son … Patience! :)

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  40. Biker – Has it ever crossed your mind that a least part of the reason the kiddies aren’t rushing to buy in the boondocks (and slum holes like QLD and WA) is because they figure capital growth potential could be better in the big smoke? As well as having better opportunities to party regularly perhaps – Jeez, I DO hate myself for being such a cynical old man! :) :) :)

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  41. Whenever I try to figure out what the younger generation is doing, I reflect on what our own kids are doing, Ned. Both have investment homes; and both _rent._ They own houses, yet they rent _apartments_.

    I think the party factor is right, though. Both ours travel continuously.

    No question that a.) capital appreciation has been greater in the city; and b.) that the slight correction we’ve seen in WA lately has been lower than in Perth (-2.5%); as opposed to regional WA (-6%). Mining projects will see some reversal of that trend within two years.

    There’s no question that the mining tax scare has affected confidence in WA and QLD. We think that’s a bigger factor than the question of interest rates, but we have no problem with the RBA believing it’s the latter. ;)

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  42. We don’t even have problems Biker and our wise old men want to give away money to solve them on the off chance we just could have them one day. Yep, we are definitely way more fortunate then most I suspect? :)

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