Possible Second Round of Panic Hitting Financial Markets


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.


  1. 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 equally strong under the liberal party’s Barry Unsworth and John Howard as it is under the labor nanny staters.

    The failure of anti-globalisation movements to gain credibility provides executive government subversives the instruction on how the rabble might be managed and how a broad based rebellion may be usurped. With anti-globalisation dissaffected and thrill seeking youth is marshalled by a few loony anarchists and some old school utopian commies but they are backed by money from the greedy protectionist industrial unionists and the industrial subsidised farmers. However the rabble can be marginalised from the public’s view of the overall cause by the very troops that lead the charge and the campaign to date has been a failure of the dollars invested in it.

    I don’t expect this to be the end of it though and there could be many quoting Jefferson and trying to forge a more coherent platform with equal amounts of public force.

  2. 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 wrong about the stability of the Australian corporate sector.

    A bored investor
    Oliver Davis

    Oliver Davis
    April 12, 2009
  3. 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.

  4. My letter should be address to Mr Oliver Davies sorry

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

  6. 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.

    Oliver Davis
    April 13, 2009
  7. 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.

    If you make money from the SR, good for you I am happy for you. If you lose money, then you can’t say you weren’t warned by Dan. Some people do well from gambling, others lose their house.

    To better understand speculative trading, you might wish to consult look up the “Greater fool theory”.

  8. 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 with that, yet not adjusting your portfolio to market cycles is just plain stupid. If you couldn’t realise by the start of 2008 that it was time to move some money out of equities (as people did) then your more stupid than the general market, it’s that simple.

    People like me who are now trawling through the market for undervalued stocks simply can’t lose. 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.

    You talk about the risk of ‘losing money’ pete but how much have you lost in this major recession. Luckily for people like you, people like me are now entering the market to make sure your once overpriced stocks are now not overly underpriced.

    I feel sorry for people like you and my parents who stick with stocks through thick and thin, and this is an event without much precedent. Yet just because i picked the bottom and you couldn’t doesn’t make your ‘long term holding’ strategy the correct one.

    Come back to me Pete/Ross/Dan in a year and we will see whose stocks have done best. Your gold/cash deposits. Or my equities.

    Not impressed,

    Oliver Davis
    April 14, 2009
  9. 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!

  10. 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 an entire argument against value investing (basically that ‘value’ is a relative term that cannot be easily ascertained in such a volatile market), but I won’t get into that here. I think i’m tired of arguing that one.

    You can feel sorry for me all you like, but you don’t know me. I personally don’t play a longterm holding strategy on most stocks, I think that is foolish (I believe in constantly reviewing my investments).

    Perhaps you can explain to us why YOU think this is the bottom? That would be a helpful start. You will need to include some analysis of the economy (please).

  11. 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 chips go half price, the public will simply hold knowing there’s no use in selling now (the brighter ones).

    The sale in financials was being overdone and that was pretty obvious. If you really thought one of the big four in Australia was going to go bust, i think your another doom sayer that loves these kind of websites. If you need any more proof, Wells Fargo/Goldman Sachs have released positive profit results. If the banks in the US are making money guess what the banks in Australia (were- as well all know sub prime exposure and leverage levels are lower) are doing.

    I put money in a geared fund that invests mainly in large financials. Before the main stream media woke up to the fact that ‘oh this is going to wipe out some of the big 4’s tier two competition, WOW THE BANKS ARE GOING TO MAKE SOME SWEET MONEY WHEN THEY START LENDING’. And now the banks aren’t even passing on interest rate cuts, so they will be making even more money.

    You may be right Pete that something may happen to disharten markets again. The market may even simply go sideways for a little while before pumping up again on the realisation that demand from China/India will kick back harder than even the last commodities boom. If you want me to search back in my knowledge to Econ1001 in a recession supply will nearly always fall too far before demand picks up again.

    But if you see the ASX at 3100 again…i will personally make a note of coming on this site and apologising.

    Oliver Davis
    April 15, 2009
  12. 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.


    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 circumstances what you should invest in. Thanks!

    Oliver Davis
    April 15, 2009
  13. 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”. That is rare nowdays.

    Good luck and remember that half a worthless Bluechip is still half of nothing.

  14. 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.


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