The Unignorables


People used to save for the future. Then they lived paycheck to paycheck. Then they borrowed from the future for the consumption of today. The they borrowed to pay off their debts. When they couldn’t borrow any more, governments borrowed to bail out the lenders.

What’s next?

Well, emigration wakes are becoming popular again. At least in Ireland.

Several hundred years ago, the Irish used to hold emigration wakes for their friends and relatives leaving for the U.S., as they would probably never be seen again.

Now, with underwater homeowners facing prison for being unable to pay their debts, the Irish are once again holding emigration wakes. The friends and relatives who are off to Australia and the like won’t be able to return for fear of being picked up by police for their debt avoidance.

If you’re surprised that the Irish can go to jail for failing to pay debts, consider that it can happen in Australia – only if you owe money to the government though. (Doesn’t that tell you something about the nature of government!)

And the misery only continues outside of Ireland.

We are one shock away from a full-blown [food] crisis,’ according to World Bank President Robert Zoellick. ‘The financial crisis taught us that prevention is better than cure. We cannot afford to forget that lesson.’

But what does the World Bank President think we experienced during the financial crisis? Prevention or cure? Either way, he’s wrong. The crisis is the cure. Preventing it is merely treating the symptoms of the underlying problem.

There is something fundamentally wrong with the world economy. No, a whole series of things. Does the World Bank President think he can paper them over with laws, treaties and interventions? When has that ever worked?

No matter whether you think the government can solve problems or not, the governments of the world – the traditional ‘problem solvers’ – are the source of the instability now. The more money that goes to politicians’ bailouts, the more bailing out will need to be done.

Never before has S&P placed the full faith and credit of the United States on “outlook negative”.‘ Now it has.

What will citizens think of their Congressmen when the S&P500 falls because of poor budget management? How did you feel when the various resource taxes were proposed and ASX stocks plunged?

Yes, the irony of forcing you to save and invest for retirement is that suddenly the government is held responsible for any policy that affects the stock market. Not only do taxes matter when you vote. The party’s affect on the ASX200 is factored in too.

But don’t worry, the governments of the world are undeterred and on the case. Yes, having made a mess of their own balance sheets and economies, they have decided to scrutinise each other for financial misbehaviour. And they have decided to bring up one of their favourite political justifications for the crackdown: ‘Too big to fail’. In the name of PR, it has been changed to ‘Too big to ignore‘.

The U.S., Japan, Germany, France, U.K., India and China made the list of unignorables.

The seven ‘economies will face deeper scrutiny from their peers to ensure their policies don’t derail a global expansion that finance chiefs bet is strong enough to absorb recent shocks. Drawing up the list is part of a plan to spot imbalances in individual economies such as large trade gaps, and prescribe policies to fix them before they harm global growth…

Yes ‘fix‘ them. But wait – where do they come from? Government policies!

Interest rate manipulation, exchange rate manipulation, tariffs, quotas, taxes, tax breaks … it goes on and on and on.

Why not just leave people alone? What does it matter if a neighbour trades with his neighbour on the same side of a border or the opposite side of the border? To paraphrase a famous newsletter writer (we can’t remember who), ‘nation’s borders cover the face of the earth like a skin disease.

Slowly but surely, the skin diseases are killing off their sufferers – the taxpayers. But not without a curious pantomime to entertain in the meantime.

We don’t need assistance!’ … ‘We need assistance!’ … ‘We don’t need restructuring!’ … and now the Greeks say ‘We need restructuring!‘, although they still deny making the request.

It’s like a teenage tantrum. Economics guru Nouriel Roubini is the parenting expert:

The issue of Greece is not whether there will be debt restructuring, but when it will be done, and whether it will be an orderly market-oriented debt exchange or disorderly like in Argentina.

‘Clean up your room properly or you will go to bed without any dinner!

The fact that the entire EU could be at stake adds an element of fascination. Your editor pictures it in the following way (we’ve never been much of a cartoonist):

The EU members are in a lifeboat. Ireland fell out and almost drowned, only to be saved by the helping hands of its comrades. Greece fell out after too much Ouzo and the Portuguese decided to take a dip without knowing how to swim. Everyone’s rush to save Ireland, Greece and Portugal caused the lifeboat to tilt unexpectedly. If the rescuers pull too hard to save their soggy friends, they might capsize the boat. The Germans, seemingly resigned to letting Greece drown, have moved to rebalance the boat, making Spain and Italy sea sick.

The U.S. sales past in an ocean liner, throwing life rings down to the lifeboat, while heading for an iceberg.

David Watts, of CreditSights Inc. reckons a Greek bailout isn’t about Greece. ‘At that point it doesn’t matter how much you’ve saved by restructuring Greece, the fallout from Spain is much greater. The issue comes back to not knowing the ultimate cost.

Watts implies that bailing out Greece will make investors fret less about other delinquents. This justification for saving Greece is hollow. Spain might fail regardless of what the world decides for Greece. So you can’t justify a Greek bailout by pointing to benefits to Spain’s interest bill. The same justification was used for the other PIIGS so far and it proved to be nonsense. The same goes for the investment banks in 2008 after Bear Stearns was ‘saved’, but Lehman and the rest followed soon after. When Spain is up for a bailout, analysts will point to the U.S. with the same argument.

If the U.S. loses its AAA rating, banks will be in serious trouble. That’s because regulatory regimes, notably the various Basel rules, reference the ratings agencies ratings in their assessments of whether banks are adequately capitalised. If the world’s ‘risk free’ asset suddenly becomes risky, banks may find themselves in breach of Basel’s capital adequacy requirements. So, despite what you might read from Paul Krugman and Michael Pascoe, it is a big deal that S&P changed its outlook for the U.S.

Have a think about this for a moment. In a way, S&P and Moody’s hold one heck of a lot of power in their hands. Not only can they move interest rates by changing the ratings on U.S. debt, they can move bank balance sheets and stock markets. And how much do you know about them?

The words ‘standard’, ‘poor’ and ‘moody’ aren’t very inspiring when it comes to rating debt…

We went to the S&P website and were appropriately greeted with the following podcast: ‘Australian Property Security Funds Are On The Road To Recovery‘. As is often the case, just when you think you can’t make this stuff up, someone does. You’d think they learned from their colleagues in the U.S., who bravely rated subprime securities AAA until the bitter end.

Even the Herald Sun has picked up on the property bubble’s demise. It ran a front page that consisted almost entirely of the headline ‘Bubble Bursts‘.

‘… how do we maintain or increase Australian [house] prices?‘ asks Robert Gottliebsen at The Australian. The nerve! Who does he think he is to tell the market what prices should be?

But the question doesn’t go far enough for a property spruiker’s liking. If prices merely stabilise, what happens to all those negative gearing investors? Suddenly the capital gains justification for incurring their loss (rental income minus mortgage payments and other costs) is gone. Who wants to own an asset that loses money and doesn’t appreciate in value – an inherent contradiction in the first place?

We remember a Wall Street analyst calculating that U.S. house prices merely had to flatline for the subprime mortgage mess to implode. The negative gearing story could be Australia’s version of that. After all, what kind of investment can be justified on the basis that it loses you money and is therefore helpful with your tax bill? It still loses money.

Let’s finish this Easter edition with a smile. Coming from the comedy corner is the news that West Bengal, India, may be losing its Communist government. Its declining popularity is due to, get this, people ‘can’t find jobs‘. Communists without jobs! It’s priceless. (Pun intended.)

Nick Hubble

For Daily Reckoning Australia

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.


  1. And burn down the homes that haven’t been foreclosed on Lachlan and poison the land!

    Hmmm – Only an 8.6 month supply of houses on the market. With 6 months supply being balanced as I understand it? Seems the Yanks have slowly been getting their housing market back under control maybe??? (The QLD Gold Coast apartment market had about 6 years supply last I heard? :) )

    Though they – the Yanks (and we I suspect?) sure as hell better hope no-one pulls their debt rug out from under them. :D

  2. Yes, I do believe that author “recently escaped from academia”. The article is absolute mess. What is all about by the way? He just copied and paced pieces from the latest reports/ articles/ interviews. He needs to go back and finish that basic course he dropped.

  3. Ned in my family there is house which cost 390K @ 7 years ago coming up for sale. It is close to and north of you. I am hoping they will get 520K. Housing is still busy there even though the economy has cooled off. I’ll let you know the truth of the matter when it comes out whether pro or contra within the housing debate. At 520K it would be true that the place is still valued higher than at the outset of the GFC. We’ll see how they go.
    If it comes in under price I’ll suggest they bulldoze it ;)

  4. Hmmm – Only an 8.6 month supply of houses on the market. With 6 months supply being balanced as I understand it?

    Ned you have the comprehension skills of Biker Pete?

    If you are going to comment take the time to read it & comprehend it first?

    Lachlan link said!!

    “The shadow inventory of homes in the United States currently stands at 1.8 million units. That’s a nine-month supply. Add to that the current 8.6-month supply of existing homes on the market and you can bet home prices will decline further.”

    Pay attention Ned 1.8 million units = 9 months supply PLUS{PLUS he said} 8.6 months existing homes = 17.6 months!!! THAT’S 17.6 months.

    So for any other simpletons wishing to comment that is 3 times “NEDS” “SUPPLY BALANCE”

    Now Ned I will let you set the record straight about how you got that bit wrong!!

    Not Fooled By Property Spruikers Hype
    April 25, 2011
  5. So what’s a “shadow inventory” when it’s at home? Places that ‘could’ come on the market someday? But aren’t on the market! And if they aren’t on the market they aren’t affecting the current supply. With current supply being 8.6 months according to the article.

    Do a bit more research Fool – When push really started to come to shove in the 1930s, the Yanks apparently let their people go hungry for protein rather than drop prices in their milk and pork markets. So why would they give a rat’s about a few people potentially not getting to buy cheap houses …

  6. You amaze me Fool – You are so ignorant re anything to do with Oz I can only assume you aren’t an Aussie? But you are also so ignorant re everything else in the rest of the world I can only assume you don’t come from anywhere else on Earth either? Conclusion: Fool is an Alien! – Or a Earthling type nutter … :D

  7. A reply alluding to me coming from the “shallow end of the gene pool”, being a “pinhead”, or Biker’s ‘boy’ really isn’t going to cut it Fool – So come on … Show me what you’ve got? :D :D :D

  8. Showed you what I got!

    Showed you you could comprehend JACK!!

    Pay attention Ned 1.8 million units = 9 months supply PLUS{PLUS he said} 8.6 months existing homes = 17.6 months!!! THAT’S 17.6 months.

    Pay attention Ned 1.8 million units = 9 months supply PLUS{PLUS he said} 8.6 months existing homes = 17.6 months!!! THAT’S 17.6 months.

    Pay attention Ned 1.8 million units = 9 months supply PLUS{PLUS he said} 8.6 months existing homes = 17.6 months!!! THAT’S 17.6 months.

    Showed you up for the Chump that you are. My work is done here!

    You got it wrong & I showed it!

    Not Fooled By Property Spruikers Hype
    April 26, 2011
  9. His work was ‘done’ when he admitted, online, that two PerthNow contributors had caught him out in a string-of-foolish-lies, Ned.
    He _finally_ recognised how illogical and inconsistent these claims were!

    Show you what he’s got? He has nothing… . He’s admitted repeatedly lying about owning six WA properties. Add to that his string of prophecies so far from reality that he’s the next contender for Koscziusko.

    I notice he’s also gone _very_ quiet about the Perth rental market:

    During the last five years, the cost of renting a house in Perth rose on average 8.7 per cent each year compared to the value of houses increasing on average 5.3 per cent each year:

  10. This is a fuller version of the story. Make what one will of it:

    If you like good news, you can focus on the bits that say things like:

    “The so-called shadow inventory amounted to a nine-month supply of properties as of January, about the same as a year earlier, the Santa Ana, California-based real estate data service said in a report today.”
    (interpretation: the shadow inventory is not getting any bigger)


    “CoreLogic, which has its own price gauge, estimates values will fall another 5 percent before bottoming, Khater said.”
    (interpretation: the bottom is just about in)

    If you like bad news, you can focus on the bits that say things like:

    “Home prices in 20 U.S. cities fell an average 3.1 percent from a year earlier in January, according to the S&P/Case- Shiller index.”
    (interpretaion: yep, prices were still dropping as of January anyway)


    “Oliver Chang, a San Francisco-based analyst at Morgan Stanley, and Laurie Goodman, an analyst at Amherst Securities Group LP in New York, have estimated that the U.S. shadow inventory includes as many as 8 million properties.”
    (interpretation: things are way, way, way worse than most think)

    And just to complicate it all:

    “The House of Representatives voted 252-170 yesterday to eliminate the program, which pays banks and mortgage servicers to modify monthly payments for delinquent borrowers.”
    (interpretation: either guv reckon it’s so bad they’ve given up or reckon the bottom is just about in and it can make its own way from here) :D

  11. “He’s admitted repeatedly lying about owning six WA properties” – Seems like a silly thing to do Biker? Even the well meaning types in Blogdom can’t help someone out who fibs about their situation.

  12. Interestingly, the Straits Times I was reading while we were lunching at the Botanical Gardens today stated that US residential construction was now on the rise again, Ned.

    Fibs?! Let’s call a spade a spade. This troll has repeatedly lied, apparently to divert any suspicion he’s a tenant. That in itself is interesting. It implies he believes it’s shameful to rent.

    His grip on reality is tenuous and his argument continually inconsistent.
    Best of all, he has picked the least likely state in Oz to write-off.
    With a sense of timing second-to-none (maybe Keen’s?) he’s facing an uphill battle as WA’s population rises. Maybe he’ll pull up stakes
    and return to J O Blighty?~ :D

  13. “Pay attention Ned 1.8 million units = 9 months supply PLUS{PLUS he said} 8.6 months existing homes = 17.6 months!!! THAT’S 17.6 months”

    I fully expect this will be wasted on you Fool? – But What’s 9 apples plus 8.6 oranges? (And No, you aren’t allowed to answer 17.6 fruits you naughty chap you! :D )

  14. “J O Blighty” – Difficult bloke to get a handle on Biker – A frustrated kaffir basher is my gut instinct punt? Though we’ll pretty obviously never know.

  15. Well any market will consist of not only active sellers and buyers, but those waiting on the sidelines, i.e. people who will/may enter the market as buyers or sellers when they think conditions are right.

    Any estimate of the likely impact of potential sellers (the “shadow inventory”) would, no doubt, have a high degree of error. It’s not like you can see the queue of potential buyers and sellers anywhere, nor do they necessarily register their interest with any broker.

  16. Ned: “Difficult bloke to get a handle on Biker…”

    No, every mug I’ve ever seen had a handle, mate.

    Hells Bells, if this mug had any kind of conceptual framework other than cherry-picking data and name-calling, he might present a logical case for his argument, Ned.

    A problem with O C Bears is that they think a shotgun rather than a scalpel is the appropriate surgical tool. Yes, there’s a pattern, but it’s all over the shop. Had The Fool gone with one or two themes consistently (eg., “Our kids won’t be able to afford homes!” or “Negative Gearing is a rort paid for by ALL Australian taxpayers!”) he might have scored a few more goals.

    Instead he shoots off (his mouth) all over the paddock, including his own two left feet: “I’ve got six houses!” ; “One of ’em trebled in value in eight years!” “Who’d be a landlord??!!~” ; “Interest rates are really 22.5%”; “Property will fall 20% in 2010!”; “Owners’ costs will rise $180 pw in 2011!”, etc, etc, multiplied (c & p) a few thousand times… .

    Latest trick? Scare new Brit immigrants off West Oz. From what I’ve seen recently, he may be doing us all a favour… . ;)

  17. Not surprised about Perth rents as I can tell you that mining boom mark II is definitely on baby! This time, not only are the usual suspects up there – copper,lead*,zinc*,nickel but we have a new entrant – silver. I have been so used to looking at silver grades and going meh that it caught me by surprise the other day when a stockpiled gold ore turned out to be more a silver ore with a bit of gold in it when you did the numbers :)

    * – although these are not back to the levels in the previous boom, I have been in the industry a while and for me anything over 20 cents/lb for lead and 40 cents/lb for zinc I consider astounding. I remember before the Asian currency crisis hit in 1997, zinc had “spiked” to 55 cents a pound woo hoo! Now that price would be considered abysmal!! Sure the aussie dollar takes the shine off it a bit but it is still amazing to see it up there.

  18. Tut Tut Tut Bi-Ker Pete

    On holidays in Singapore & trying to breathe life into the Australian property Corpse?

    Amusing you quote me out of context yet again (Desperate)

    Keep making it about me fool!!

    FYI 6am Perth time 6300 hits from BBC site to my blog!!

    You keep Blowing Smoke in Neds direction while my message reaches real people!!!

    Tee Hee Hee

    BTW you can log on the BBC site & comment but you would be kicked off in a heartbeat!!

    FYI Get a Life! Stop sweating property Mr Desperate.

    Not Fooled By Property Spruikers Hype
    April 27, 2011
  19. No sweat, N Fool.

    6300 hits? Misery loves company, son! Watch the RSI… ! :D

  20. “The words ‘standard’, ‘poor’ and ‘moody’ aren’t very inspiring when it comes to rating debt..”
    coming soon ‘exceptionally’, ‘destitute’, ‘devastated’. rated XXX

    keep an aye on Fukushima. bad enough, then the southern antipodes are going to be very popular, immigration policies or not. too bad then we are all freakin’ doomed anyway.

    we need a new White Australia Policy to keep the poms out. :-)


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