Showered By the Sweat of the Sun

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In today’s Daily Reckoning you’ll get the long-awaited look at why America’s mushrooming mortgage fraud fiasco is bad news for Australian housing. All you housing bulls will have to tear yourself away from counting your rivers of gold for a second and pay close attention. But first, speaking of gold, take a close look at the man below.

“Sucka, you betta sell your gold now fool!”

Bloombery Television interview with Mr. T

Source: http://www.youtube.com/watch?v=pWAu7FmKbYc&feature=player_embedded# !

In case you missed it, gold set a new high in the futures market overnight at $1,374.15. Minutes from the last Federal Reserve meeting showed the lunatics in charge of America’s money supply want Americans to fear inflation so they spend their money before it’s made worthless. The commodity markets responded with enthusiasm.

In fact, gold’s intraday high was fourteen dollars and fifteen cents higher then when Mr. T went on Bloomberg television to represent a gold company. Your first reaction when you see Mr. T on Bloomberg , draped in gold, might be “sell.” It’s a comic scene and apparently absurd.

But wait! Mr. T is not on television to sell you gold. That would surely be a sign of the top. He’s on television representing a company that BUYS your gold. And that’s how you know that the popular culture doesn’t really understand gold as money yet. When the man in the street thinks that high gold prices are a reason to sell your gold jewellery now, you know the gold bull has not reached the mania phase yet.

By the way, Mr. T is an eloquent speaker, isn’t he? He said that in ancient times gold was thought of (maybe by the Incas, or someone like them) as “the sweat and tears of the sun.” And if he really did buy gold back in the late 1970s, he’s a rich man now (although he had a fair bit of waiting to do before the post Bretton Woods global fiat standard money system began collapsing into ruin.)

But none of this is really big news here in Australia. The gold price in Aussie dollars won’t move up with monster truck force until the U.S. dollar gets stronger. Yet the Aussie dollar is fast approaching parity. No sign of weakness there, not yet.

Right now, Australia is the main global beneficiary of the risk carry trade. Cheap global interest rates are driving investors into high-yielding currencies and commodities. That’s double plus good for Australia. It’s going to take a reversal of the “risk” trade for Aussie gold to move up and the Aussie dollar to move down.

There are plenty of risks, too. One of them, for example, is the continued blasé attitude about Australia’s dependence on foreign capital to fund its real estate lending. “Talk of housing bubble hot air,” is the headline of Katja Buhrer’s article on page 58 of yesterday’s Australian Financial Review. IN a moment, we’ll see if you can spot the conflict of interest.

But in the story, Ian Graham, the CEO of QBE LMI says that it’s a good sign banks are increasing loan-to-value ratios from 90% to pre GFC levels of 95%. Seriously. He says, “It’s a positive sign that [banks] don’t have credit concerns about a 95% loan not being prudent or suitable for the borrowers…I wouldn’t see the banks as becoming less prudent. I’d see them as feeling more comfortable, particularly given the positive outlook for the economy.”

Because nothing could ever go wrong lending 95% of a home’s value to a borrower based on a good feeling about the economy. Of course not! To prove how good things are, or how bad they are not, why not trot out a study that tells you what you want to hear!

BIS Shrapnel managing director Rob Mellor, in the same article, suggested people like your editor just “don’t get Australia.” “We’re chasing shadows out there, looking for reasons why a worst-case scenario would happen, when we did all that back in the latter part of 2008 and the early part of 2009 and we got through the worst of that.”

“So why would we do it again until we see clearly the risk of something overheating…or some of the fundamental drivers of the economy changing that actually would lead to a reversal of the economic growth rates predicted and therefore a substantial rise in the unemployment rate.”

You’d think one of the “fundamental drivers” of the Aussie housing market is the fact that Aussie banks borrow about 30 cents of every dollar they lend from someone overseas. In another global capital crisis, this could be a problem. It could also be a problem that Aussie banks have 60% of their loan books secured by residential property. As Buhrer says, “the health of the economy is linked to house prices.”

That’s another way of saying the health of the economy is linked to the health of banks. Not a problem right? Not if house prices keep going up. And just a few pages later, we find that both QBE and BIS are predicting just that!

“Stronger markets’ prices tipped to grow 20pc” reports Michael Hobbs on page 61. He reveals that “median house prices in Sydney, Perth and Adelaide are forecast to rise by around 20 per cent in the next three years, according to new research.”

Whose research, you might wonder? “Mortgage insurer QBE LMI’s Australian Housing Outlook compiled by BIS Shrapnel found an improving economy and a shortfall in dwellings will fuel a rise in house prices.

How much exposure do you think QBE has to commercial and/or residential real estate in Australia?

Meanwhile, U.S. mortgages are the new asbestos. How long will it be before dozens of class action lawsuits are filed against U.S. banks? Pick your reason!

Homeowners can argue that banks illegally foreclosed on homes they couldn’t prove they actually owned. In a purely rational way, even if you WERE foreclosed on legitimately, or even if you KNOW you can’t keep your home, you might be able to keep it anyway by threatening the bank with legal action.

And what bout investors who can claim that the bank sold a security it didn’t own? If it were just a matter of the big banks versus hundreds of thousands of even millions of so-called “deadbeat borrowers,” bank lobbyists could convince the U.S. Congress to relax foreclosure laws and put these peons to the sword.

But the big investors in mortgage backed securities won’t be pushed around so easily. They have deep pockets. They have lobbyists too. And they have investors to answer to. Going to court is a real option.

Wells Fargo, another U.S. bank at the centre of the storm, admitted yesterday that it was guilty of the same “robo signing” process for handling thousands of foreclosures, perhaps illegally. It joins JP Morgan, GMAC, and Bank of America.

Jamie Dimon, the CEO of JP Morgan, thinks the banks will get off with a fine. He told investors on a conference call that, “We don’t think there are cases where people have been evicted?…?where they shouldn’t have been…Obviously it will increase our costs a little bit and maybe we’ll have to pay penalties eventually to some of the [attorneys-general]”.

Somebody tell him he’s dreaming.

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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83 Comments on "Showered By the Sweat of the Sun"

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Chris
Guest

Not sure what tricks the government will pull out to prop up Australian housing, but we are sure in for a wild ride as the currency wars intensify!

Biker Pete
Guest

Strange day. Didn’t see the front page of Wednesday’s ‘West Australian’ but we hear it was a humdinger… . Three calls today about a block we’ve got for sale at present. Anything to do with the BIS/QBE prediction? We’ve no idea, but the block has had a sign on it for nearly three weeks, without any interest… and suddenly we get three calls, today.

Then tonight I read this:

http://www.watoday.com.au/wa-news/housing-money-flows-to-the-golden-triangle-20101014-16l5g.html

Interesting times… .

Ned S
Guest

Biker called neg gearing on PPORs (homes) a while back Chris – That would do it! :D

Biker
Guest
Reduction of stamp duty on land would also boost sales and construction, Ned. Despite the brilliance of the First Home Savers Scheme, it hasn’t been as popular as the government had hoped it might be. It appears the generation most likely to use it sees four years’ saving as forever. Both our kids jumped at it as an after-tax (haven) of 21.25% p.a. Apparently you ‘maintain the credit’ on home purchase until 65! Owner-occupied NG doesn’t really address the _main_ issue of decreased construction, which depletes the tax base and raises unemployment rates. It may well happen, but I think… Read more »
Ned S
Guest

But don’t tell anyone – It’s a secret! As is this:

http://www.bloomberg.com/news/2010-10-13/mortgage-flaws-may-lead-investors-to-challenge-1-3-trillion-of-securities.html

Still holding – Win a few; Lose a few … :D

Biker
Guest

Was that last sentence phrased euphemistically enough, d’ya reckon? ;)

Biker
Guest

So US housing becomes ‘unsafer’. Who’d have thought it possible?! And the already hazardous purchase of a home in America becomes even more fraught with Elm Street Nightmares.

No wonder our Bill seeks refuge in France and Argentina! :D

Biker
Guest

…and Ecuador!~ ;)

Biker
Guest

Ned: “But don’t tell anyone – It’s a secret!”

More than my cojones are worth if I leak the plan, mate!~

Ned S
Guest

Yep, no point worrying about what one can’t fix – Hedge and be happy if one is a dummy like me! :)

Biker
Guest

I see our mate The Realist disagrees with me… and agrees with you, Ned.
Nope, I see it all in the stars!~ :D

Ned S
Guest
I shake my head in despair at the American Financial types. And their politicos. No wonder Hank Paulson demanded immunity from prosecution before he’d roll out their bank rescues. While I might think Mr. T’s duds look like PJs of the worst possible taste, I don’t think I’ll tell him that face to face. Nice haircut though – Wonder what it’ll look like when he goes grey? For some reason the word ‘cockatoo’ comes to mind. Yes, poor ole Billy Bonner would seem to be smart enough to realize that he has a lot to be depressed about. If he… Read more »
Biker
Guest

What I really like about Bill is his ability to not-take-himself-too-seriously, Ned… . Gotta admire that… !

His concern for his kids also resonates with me… and his back-to-the-land tendencies also strike a happy chord. :D

Ned S
Guest

Ditto to both those points Biker!

I’m still naughty enough to look forward to hearing him ask Mr. T how come he doesn’t wear a “Stars ‘n Bars” type flag on his chest close to his heart though? :D

Brings to mind thoughts of the immortal Norman Gunston/Mohammed Ali clash! ;)

Biker
Guest

Thought Norman outside the White House* was a classic!~
(But I _was_ cringeing!~ :D )

* Back in the old daze, when I used to bother shaving… . ;)

Steve
Guest

http://www.perthnow.com.au/business/prices-down-as-wa-property-market-floods/story-e6frg2ru-1225939325755?from=public_rss

This one will cheer you up Biker,

HOUSE prices in Perth are on a downward trend with sellers reducing asking prices by 6 per cent as the local market floods with properties for sale, according to the Real Estate Institute of Western Australia.

And if the REAL ESTATE INSTITUTE OF WESTERN AUSTRALIA are saying that,
Then it really must be TRUE hahaha

Ned S
Guest

You really do seem to have very poor listening skills Steve? Biker has said on NUMEROUS occasions that he isn’t very worried about what house prices do. As he lives on the rents. You are the one who is worried about what house prices do. As am I to some extent.

Steve
Guest

Biker has said on NUMEROUS occasions that he isn’t very worried about what house prices do. As he lives on the rents.

Yes Ned, and pigs fly. Biker would rather higher house prices…

What do you want to happen to prices ned?

Biker
Guest

Difficult to explain anything to a fella who still hasn’t figured out how a question mark works, Ned!!~ ;)

DReAders may remember that a few months ago, Steven singled out the Perth beach suburb of Scarborough as a poor investment. I responded that it had scored a 19% rise last year.

This year, it hasn’t done quite as well:

http://www.watoday.com.au/wa-news/housing-money-flows-to-the-golden-triangle-20101014-16l5g.html

To save you the trouble of attempting to decipher the stats, Steven, here’s the gist:

“Scarborough, 340, $455,000, $242.772m, 14.8%”

Up 14.8%. Are you even _beginning_ to get the picture? :D

Steve
Guest

Just goes to prove my point Ned:

Biker loves house price rises, if he didn’t care as you put it
why in the last post did he get so excited about it, complete with a smiley face at the end?

Biker
Guest

“Are you even _beginning_ to get the picture? :D ”

Nope. Clearly not.

Ned is correct. It matters not a drot, as Shoes would mathematically intone.
Rents return us ten times your wage, mate… virtually tax free, annually.
Our _refund cheques_ almost equal your wage.

Why continually stir me up, son? Have a handkerchief ready, every time you try… . ;)

Ned S
Guest

What do I ‘want’ to see happen to our house prices?

I’d personally like to see them drop ‘a bit’ – As much for reasons of national indebtedness as anything else. But not to the point where that drop causes us the sort of hugely damaging problems we are seeing elsewhere.

Not sure I’ll get what I ‘want’ though – It’s possible they could even go up. But I’m not betting on that at all right now. Though life is like a box of chocolates as I’ve quoted before.

Biker
Guest

“…why in the last post did he get so excited about it, complete with a smiley face at the end?”

I’m always, smilin’, ya silly dork. :D

Why? Because I _act_ when I see a good buy. The only time I frown :( is when I miss a great deal! Unfortunately, you won’t ever see a good deal, even if it comes gilt-edged and tied with a big red bow. You’ll always think you’ll pick it up 40 – 70% off!~ :D

Steve
Guest

Would you like to see house price return to their historical levels?
3-4 times yearly income?
so for an average house in Brisbane to cost about 200K, thats average house, not a house in Ipswich or loganville?

Biker
Guest

Jeez… . I take it back! He used a question mark _correctly,_ four posts back. Will wonders never cease? Maybe my time here is not completely wasted!~ ;)

Ned S
Guest

“Would you like to see house price return to their historical levels?”

Sure – Over the next 20 years maybe. So it doesn’t damage the economy.

But it would need to happen in conjunction with some sort of ‘one family one job’ policy perhaps plus a huge number of other societal changes and changes in our expectations and even things like our super. That I’ve got NO reasons to believe Aussies are at all keen to embrace any time soon.

Steve
Guest

‘one family one job’ policy
Why is that?
Have women only been working since about the year 2000 since house prices went crazy?

Biker
Guest

Oh dear, now it’s Maths:

“3-4 times yearly income?”

Double incomes now, son: 6 – 8 times average income. Spot on for Perth.
Sydney? Well, we found you a place for 7.5 times your income. Room to swing-a-feline, too. Nope, you’ll wait ’til it’s <$180K, thanks… .

Good luck with that… . :D

Steve
Guest

I was asking Ned S, but thanks for the commentary

Ned S
Guest

“Have women only been working since about the year 2000 since house prices went crazy?”

There’s lot of issues Steve. That would seem to have impacted over decades. So no, I don’t feel to try and make a case for any specific one of them out of the broader context.

Biker
Guest

Leave ya to it, Ned. Progress is being made, but at the-end-of-the-day, nothing much has changed in the last few years’ mentoring.

Don’t think I’ve ever been forgiven for declining Steven’s online request to _give_ him one of our properties! Hell, I wouldn’t give either of our kids one of our properties… not that they’d ever even request a dollar!
Might _borrow_ from them, though!~ ;)

Steve
Guest

Biker I thought it would have been a fair proposition for me to buy one of your properties off you for the same price it cost you (Inflation adjusted).
So if it cost you 3 times average wage when you purchased it, then I would pay you 3 times the yearly wage for it, but you refused to take me up on the offer.

Steve
Guest

Ned the impression I got from you when you said ‘one family one job’ policy was that you thought that since women have been working that made the prices double.

Was I wrong to make this assumption?

Because I am quite sure woman have been in the workforce for quite a while now, and like I said I don’t think that when house prices exploded early last decade it had any thing to do with woman working (which they already had been for years before that).

Biker Pete
Guest

Well it wasn’t ON me, son. You could buy it FROM me, though.*
Like to see what you _really_ said?!~ ;)

Nah, tossed it up… . Talk to a doorpost or Steve?
Off to chat to the doorpost. It’s thinner, son.

Sorry, Ned. He brings out the very worst in me.
He’s all yours… . :D

* Should be charging you for teaching you English, Steven.
Where are you from again?!~

Biker Pete
Guest

Biker: “You’re a very attractive young doorpost!”

Doorpost: “That Bin 128 has gone straight to your head, Peter! :( ”

Biker: “You’re a very attractive blond doorpost, Tamara!~ ;) ”

Doorpost: “Which head is talking now, Biker????!!!!~”

Biker: “Tamara, on a site that plugs The Invaluable Great Mogambo, you can get away with just about anything. Unvesting is easy!” (Unvests and falls down the last three stairs.)

Ned S
Guest
“Ned the impression I got from you when you said ‘one family one job’ policy was that you thought that since women have been working that made the prices double. Was I wrong to make this assumption?” Yes Steve, you were wrong in making that assumption. I’m no expert but one big issue is probably deregulation of our banking back in the 1980’s. With lots of issues both before and since (including two income families) having contributed to how much income people have to leverage up on. Plus stuff like neg gearing and the poor returns on stocks and limited… Read more »
Ned S
Guest

“Unvests and falls down the last three stairs” – Good to see a bloke enjoying himself! At the end of the day, that really IS very important. IMO … :)

Biker
Guest

Rising groggily from bed this morning, I found a breathalyzer has been installed on my iMac, Ned! ;)

Don
Guest
@ Steve “Because I am quite sure woman have been in the workforce for quite a while now, and like I said I don’t think that when house prices exploded early last decade it had any thing to do with woman working (which they already had been for years before that).” That is very true Steve but remember that up until the late nineties, interest rates will still quite high as well as unemployment as well: Average variable Average Interest Rates Unemployment 1994 9.1 9.5 1995 10.5 8.2 1996 9.7 8.2 1997 7.2 8.3 1998 6.7 7.7 1999 6.6 6.9… Read more »
Don
Guest

OMG – it slaughtered my formatting!!!! sorry guys :(

Don
Guest

Average
variable
Interest Rates
1994 9.1
1995 10.5
1996 9.7
1997 7.2
1998 6.7
1999 6.6
2000 7.7
2001 6.8
2002 6.4
2003 6.6
2004 7.1
2005 7.3
2006 7.6
2007 8.2
2008 8.9
2009 6.0
2010 7.2

Don
Guest

Average
Unemployment
1994 9.5
1995 8.2
1996 8.2
1997 8.3
1998 7.7
1999 6.9
2000 6.3
2001 6.8
2002 6.4
2003 5.9
2004 5.4
2005 5.0
2006 4.8
2007 4.4
2008 4.2
2009 5.6
2010 5.4

Biker Pete
Guest

You’re not the first to suffer that, Don!

I guess the other relevant issue is the rise in women’s wages, in the last few years. The top classroom teacher’s wage in WA is now $90K+. (And my missus, a chalkie, got a 4% wage increase last week.)

Now that may not be considered a great single income*, but as a _second_ income, it certainly provides an edge in the home purchase market.

* I recall a female concentrator operator,the wife of a miner back in ’81, telling us her wage was $90K+ a year!~ :D

Don
Guest
The other factor of course is average wages – don’t worry after the last three failed attempts I wont post that – however you will no doubt see that increasing as well. Using your 3.5 times average household income formula Steve, I feel you will arrive at a base price for dwellings. Now if unemployment starts rising sharply to 90’s levels (heaven forbid) you will see that base price drop no doubt. Of course – as I keep banging on and on about – looking at Cairns (10-14% unemployment) you will see that the average unit/house price is about 100k… Read more »
Don
Guest

Heh you beat me to that one Biker – the wages I mean, not the schedule. So, Steve, when you are looking for a 40% decrease in house prices, you are effectively wanting either a massive increase in interest rates, a high unemployment rate or both. Interest rates I can handle, but bugger the unemployment for a joke :(

Biker Pete
Guest

Yes, Depreciation Schedules assist*, especially when you own rentals outright, Don.

Just got our land tax papers. They average $44.28 per property, including vacant lots. Nice to be able to give a state government kudos for a change…

* But they’re just one of numerous write-offs.

Stillgotshoeson
Guest
Comment by Biker Pete on 16 October 2010: The top classroom teacher’s wage in WA is now $90K+ Now that may not be considered a great single income*, but as a _second_ income, it certainly provides an edge in the home purchase market. A co worker and I were discussing house prices back before the GFC hit, one of the things he mentioned for the house prices escalating so much over the last couple of decades or so was women joining the workforce in larger numbers.. he specifically says from around the early 80’s recession it become more and more… Read more »
Biker Pete
Guest
We’re seeing more for sale signs, too, Shoes. We think it may herald an upturn in the economy here. Aussies traditionally changed houses around every five years. The plateau means many have extended out to seven or eight. We’re now seeing a lot more sales in the $400 – $700K market here. A blogger made a very interesting comment elsewhere recently, noting that it’s _not_ the folk on ‘average’ wages who are actually buying houses, which confirms your point; but at the same time may affirm that these high-waged double-income earners present serious competition to a single bloke on the… Read more »
mike
Guest

…real estate in coastal cities rises in price more quickly and declines less quickly than inland localities…any bird can tell the difference between half a city and a whole one…people crowding into half a city drive valuations up, while for example a city along a river has two equal halves, or indeed along a railway line, although there’s always a premium for locating on the right side…as opposed to the wrong side!…

Biker
Guest

Growing up on the Swan River we’d sail past the East Perth slum of Claisebrook. East Perth was unquestionably the ‘wrong side of the river’… and the ‘wrong side of the tracks’. A virtual no-go zone in the fifties, we were warned by our parents to avoid it.

Half a decade later, it’s one of Perth’s jewels, with countless superb apartments clustered along its shores, none less than a million bucks. Missed that one… !~

wpDiscuz
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