Possible Second Round of Panic Hitting Financial Markets

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The panic is over. The panic has yet to begin. Which is it? Or is it both?

We’ll take both. The panic in financial markets subsided in March and stocks rallied. Stocks didn’t make new lows on bad news and the bad news (as bad it was) ceased to get more bad, which was good.

But what about Main Street, what’s going on there? According to the Westpac-Melbourne Institute consumer index released yesterday, Australians were exactly 8.3% more confident in early April than they were in April March. See what a dose of low petrol prices, declining interest rates, and government cash can do for you?

We were searching for all sorts of entertaining metaphors to explain this, but the simplest explanation is good enough: be very afraid. The government has done its part to disarm people’s natural sense of caution by showering them with cash. But there is plenty to be afraid of, and plenty to suggest these confidence numbers will plummet in a few months.

The trouble is, all the other indicators in the real economy suggest that Main Street is going to get flogged later this year, mostly by rising unemployment. There’s also the possibility, which we discuss below, that a second round of real panic will hit financial markets when the Geithner plan fails to solve the toxic asset problem. And then you will have duelling panics in the corridors of power finance and in kitchens all over Australia.

If there is a recession out there in Australia, though, no one is telling first home buyers. With their pockets stuffed with wads of government cash, the FHB’s continued to single-handedly prop up Australian property prices, according to data released yesterday by the Australian Bureau of Statistics. Ah…the strength and vigour of youth.

The amount of money committed to housing rose 1.3% in seasonally adjusted terms, from $18.9 billion in January to $19.2 billion in February. You can credit that rise to the FHBs. Their share of the market for new commitments to owner-occupied housing grew from 26.5% in January to 26.9% in February.

Remember, in January of ’08-before the increase in the Federal FBH grant-new first home buyers made up just 12.1% of the housing finance commitments. Their contribution to the money flowing into the housing market has grown 122% since then. But will they get what they paid (borrowed for)?

We continue to believe that you are seeing the blow-off phase of Australia’s property bubble. It’s one of the last remaining housing bubbles in the world yet to pop. But the introduction of the FHBs into the market as a key support of property prices is a sign that it may be near its peak. And that is not good news for the FHBs.

The ABS reports that the FHBs are paying nearly 11% more for their new homes than other owner occupiers. According to the data, the average loan size for FHBs grew by six percent from January to February, from $264,500 to $280,600. Meanwhile, for everyone else in the market, loan sizes fell slightly, from $255,900 to $253,200.

Do you think mortgage brokers and lenders are giving the FHBs larger loans out of the kindness of their hearts? Or do you think the $27,000 difference between loan sizes has something to do with sellers and real estate agents squeezing as much of that FHB grant into their pocket as possible? Hmm

Meanwhile trouble is brewing again in the financial markets. As we mentioned yesterday, the IMF is predicting another $3.1 trillion in toxic bank assets. And there is growing scepticism in Washington that the Treasury Department knows what it’s doing.

A report released yesterday by the panel in charge of overseeing the deployment of the TARP raised the possibility that the Treasury is making a basic assumption in its handling of the crisis, namely that impaired assets will recover.

The report, which you can read here if you like, said “It is possible that Treasury’s approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth. The actions undertaken by Treasury, the Federal Reserve Board and the FDIC are unprecedented. But if the economic crisis is deeper than anticipated, it is possible that Treasury will need to take very different actions in order to restore financial stability.”

The report then went on to suggest what those “very different actions” might be. They include three main options: liquidation, receivership, and subsidisation. Since the first two options entail admitting failure (and watching several large U.S. banks go down, which could take down other banks and institutions as well) the third option is walking down TARP lane on the road to subsidisation (PPIP).

But that’s not so flash either, according to the report’s authors. They first describe how it’s worked so far and that what might not work later. “Subsidies may be direct,” reads the report, “by providing banks with capital infusions, or indirect, by purchasing troubled assets at inflated prices or reducing prudential standards. Cash assistance can provide banks with bridge capital necessary to survive in tough economic times until growth begins again.”

“But subsidies carry a risk of obscuring true valuations. They involve the added danger of distorting both specific markets and the larger economy. Subsidization also carries a risk that it will be open-ended, propping up insolvent banks for an extended period and delaying economic recovery.”

Subsidies also create zombie banks, a zombie economy, and a really angry populace that realises one industry and its legacy of mistakes are being propped up by its political supporters in the corrupt capital. It spells trouble.

“Dude, are you depressed?”

“No,” we answered. “But I will have another beer.”

“I mean everyday its ‘toxic assets this’ and ‘great depression’ that and ‘gold, gold, gold. If all I did was read your stuff, I’d think the financial world was coming to an end.”

“It is, at least the financial world as you know it. And I know you read other stuff. That’s why I write what I write.”

“What do you mean?”

“Well, if all I did was tell everyone what they already knew, or just summarise the news, who would bother to read it?”

“No one, except maybe your mother.”

“Maybe. But the point is, there is serious stuff happening out there. It started in 2007. There are a lot of people who want you to believe that the worst is over. Maybe they want to believe it themselves. But I think you should at least be prepared for the possibility that it’s not.”

“Doesn’t look to me like you’re doing much preparing. A lot of repeating maybe. Definitely a lot of writing. But preparing?”

“Well you’re a moron. The first thing you need to reconsider is whether or not now is a good time to buy into a rally. It’s not. Next you need to re-think your basic asset allocation. And you should probably rethink your basic assumptions about retirement income…your pension…the purchasing power of your savings, things like that.”

“Whatever. These things go in cycles. They’ll get better someday soon. Cheer up. Besides, who has time to worry so much?”

“I do. And so do people who have money and care about keeping it over the next five years when all the stuff I’m writing about goes down.”

“Hey I’m a little short. Can you buy me another round?”

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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14 Comments on "Possible Second Round of Panic Hitting Financial Markets"

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Ross
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And lets look at the likely forms of the expression of this anger ahead of time. In case one hadn’t noticed it isn’t only Joe Biden that has been lobbying to cut at the heart of “we the people’s” right to bear arms and the “lockemup” political right within both the democrats and republicans. Australia’s deteriorating record on systemic natural justice has been brought about by bipartisan arming of the police with legal rights for arbitary arrest, detention, and the criminalisation of protest. Bipartisan stay safe committees and the insurer lobby have also played their role and the capture is… Read more »
Oliver Davis
Guest
Mr Denning, i have finally come to the conclusion that your as clueless as the rest of the financial and investment fraternity. If people have listened to you over the last month or more they would have missed out on a 20% rally in stock prices and the probability of far larger rallies as US banks release solid profit outlooks. I got half through this collumn and realised that i’m not visiting this website again. You were wrong about gold which is back under 900 and has a pretty poor mid term outlook, your wrong about the bottom, and your… Read more »
Ronnie Bell
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Re MR Denning
During the last depression the stock market when up and down like a fiddlers elbow. 2009-Depression we will see it move like a whores pants. Spend your money as you see fit. Me I got out of shares, into gold Bullion and now silver…….I have made money since Sep 08. And I read the Daily Reckoning, it may not be the Bible but shit, it’s knows how to thumb through the last chapter. No whores pants for me…silver and gold, silver and gold.

Ronnie Bell
Guest

My letter should be address to Mr Oliver Davies sorry

Ross
Guest

Alas Oliver “you are” not reading this. But maybe reading isn’t “your” strong point.

Oliver Davis
Guest

Sorry Ross, but im the one that invested two months ago and have achieved 30% returns so far. Good luck with your gold stocks and bonds. Maybe if you troubled less over grammar and semantics and more over your poor investment advice you wouldn’t be being shown up by a student.

Pete
Guest
Oliver: I’m with Ross. You’re not understanding what Dan is saying. You said: “they would have missed out on a 20% rally in stock prices” He has pointed out that there ‘suckers rallies’ to be had. Investing in a suckers rally is fine for people who like to risk their money and speculate. Some people do really well out of this (eg Fortescue at $13 a share a year ago) The point that you miss out on is the LONGTERM economic fundamentals. Suckers rallies are for…suckers. You can make money, but you are also increasing the risk of losing it.… Read more »
Oliver Davis
Guest
Ok obviosuly we have a lot of sour people here who were still investing at the top of a cycle which was a certainty to be unsustainable. I am investing for the mid-long term pete but i didn’t do it in 2007 when even a blind deaf and dumb amputee could figure that the market was climbing too fast. Just like when the stock market was too high at 6800 it was too low at 3400 (when i started investing) and that doesn’t take a genious to figure out. I agree about investing in the long term. I don’t argue… Read more »
rick e
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oli put down the stocks you bought(price) so we can check them out in a year?
tell me when you sell?
only then i will shout your name out as my hero
who knows DR might have a spot for you!

Pete
Guest
Oliver: I think you have misunderstood. We’re not sour. We just don’t think you are on the same page. You said: “If you can find a stock now that is holding it’s earnings, has a full forward order book, a bottom of the barallel PE and still paying healthy dividends go for it -this is the chance of a lifetime.” Well, that could be the folly of value investing at the moment. How do you know what is really on the books? Do you know this current market well enough to know things even a company doesn’t know? There is… Read more »
Oliver Davis
Guest
Sure Pete I didn’t say we are at the bottom now. The bottom was at 3100. I called it at 3400 and invested everything in my meagre bank balance. (student style) in 2001 the market got to 2800 off the tech bust. That was eight years ago, i knew this support level wasn’t going to be reached but predicted that it would get close and it did. When you reach the kind of lows we did in the low 3000’s there just weren’t many people who were willing to sell. You don’t need technical analysis to know that when blue… Read more »
Oliver Davis
Guest
Rick i have written up the stocks and the prices i entered. yet i don’t want to just put it on the internet. Give me your email and i’ll send them to you. I don’t want to be descredited as another ‘ramper’ But in return i want your thoughts on the economy, your favorite stock or two… and a joke? If any one else wants my picks send me an email. eastsideisdebest@hotmail.com Also i am not liable for any representation made on Daily Reckoning. I have a high risk profile and you should decide for yourself, according to your own… Read more »
Pete
Guest
Oliver: I think you will find most people that visit this site will disagree with what you have said. Don’t let that dishearten you, it is your money and you should choose what to invest in (as you said). I wish you luck with your investments. I am in complete opposition to your strategy, and hope that no-one takes your advice without reading this site thoroughly first. It is nice that you show some accountability though when you said “But if you see the ASX at 3100 again…i will personally make a note of coming on this site and apologising”.… Read more »
Bob Dole
Guest

I too thought the Market had reached bottom, so I put a lot in Agri and Industrial….

ABB, AWB, UGL… they all went down and my stoplosses triggered just before the current rally.

When they trigger at -20%, all the left over went in to gold when it was at A$1300, guess what happened.

I feel very sad now. Just going to spend what I have left on a car… at least I can sit in it.

wpDiscuz
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