To Be Unsure

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We interrupt this update on Australia’s protracted electoral standoff with news that hangover from the global debt binge of the last 30 years just got a lot worse. Bad headaches. Indigestion. A rumbling from below.

Our story begins today in Ireland. Ratings agency Standard and Poor’s has lowered its long-term sovereign credit rating on the Emerald Isle to AA- from AA. S&P said, “The downgrade reflects our opinion that the rising budgetary cost of supporting the Irish financial sector will further weaken the government’s fiscal flexibility over the medium term.”

To be sure, to be sure, you get the feeling S&P could be saying that about a lot of governments in the next few years. Financial sectors in the Western world are still burdened with high levels of debts backed by commercial and residential real estate. To prevent those firms from failing, governments have assumed or backed their debts.

But that transfers the ultimate liability for failed private sector investment to the public sector. And the question then becomes: how much debt can the government guarantee before government debt itself comes into doubt? In Ireland, net government debt is headed toward 113% of GDP by the end of 2012. That’s too high, according to the S&P.

Stocks in Europe reacted as you’d expect. Most of the big indexes were down over one percent. And then came the very unwelcome news that the collateral underlying so many bank assets is under massive attack. Well, that’s how we’d put it. Technically, it was U.S. existing home sales. And officially, they were awful.

The U.S. National Association of Realtors reported yesterday that existing home sales in July were down 27% versus June and 26% from the same month last year. That’s about twice as bad as “the experts” had predicted and the lowest annual rate since the NAR began keeping track of such day.

The fact that there is now enough existing home inventory to meet demand (at this pace) for the next 12.5 months may not seem like it has any significance at all to Australia or Australians. But it does. To be sure, to be sure, one aspect of the U.S. housing bubble was a massive inventory expansion by homebuilders to meet the bogus “demand” created by cheap credit.

That inventory expansion never happened here in Australia. Hence the constant repetition of the idea that there’s a housing “shortage.” Blah blah blah. This is one of the facts cited by the bulls that apparently proves a crash cannot happen here.

But what yesterday’s U.S. numbers really reveal is that not even low interest rates can spur demand for credit when an asset class is in a bear market. The U.S. managed to “bring forward” housing finance demand with a tax credit for first time buyers that expired in April. That goosed demand for a bit.

It’s gone now, though. And what’s left is a market where the only buyers for houses are speculators. All these easy money tricks have exhausted any potential demand that might be out there. No, the prudent thing to do is wait for prices to do what they always do when demand flat lines: crash.

This is the possibility that spooked equity markets yesterday: that America isn’t growing in the second half of this year at all. In fact, the housing numbers indicate that the American household sector is in a world of hurt and could see more of its net worth wiped out.

Unless Australian share markets start tracking China and stop tracking America, this U.S. housing wipe-out part II is going to be a big fat negative for shares. And more importantly, investors are now realising that the huge household and sovereign debt problems in the West are nearly impossible to simply grow out of.

What are we looking for on the ASX/200? Keep 4,180 in mind. That is about the year-to-date intra-day low for the index. It reached those levels once in June and once in July. If the index breaches them in the next month, look out below.

But wait! What if all that is doomer porn and balderdash? Last night we ventured out to Flinders Lane to hear an alternative and intriguing presentation on what’s moving the markets and where they’re headed. During that presentation we were warned to keep our eye on one specific day: September 7th. Tomorrow, we’ll tell you why. Until then!

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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AustraliaDebt.org
Guest

What do you reckon about October!!

I reckon a crash will happen in October….

Paul
Guest
Great website, Very thought provoking. One thing that I have not seen raised in your commentary on Australian house prices. The government has a huge appetite for migration whilst at the same time stating there is a housing shortage. Even during the GFC when there was a call from far and wide of “Jobs Jobs Jobs” the government still brought 360,000 migrants to the country. The source of many of these migrants is Asia (Including India) and these peoples are accustomed to paying 20 times their wages to buy a average home. So the seemingly over inflated prices here of… Read more »
bearamundi
Guest

Shhhh!! Paul, we don’t mention ‘housing prices’ around here as we don’t want to stir-up the ‘Investors’ that populate this site. I’m back down in my dig mate, watching you, a lone soldier of truth running at that machine gun post. Pretty soon you’ll be jerking around as the bullets perpetuate a sorry semblance of life for a few seconds more…
If you’re gonna take ’em out we need a co-ordinated approach :)

John Murray
Guest
Hi Paul, A little piece on news ignored by the market may be of interest to you as regards undersupply. Seems we don’t have one! Undersupply might be a reality if you think everyone should have 3 houses; our massive mansions (worlds largest homes!) with 2.3 inhabitants is also a product of our recent debt orgy, and long term trends show occupancy rates of greater than 4 to be the norm. From http://www.brokernews.com.au/news/breaking-news/hometrack-we-have-enough-houses/34665 Hometrack: We have enough houses By Agnes Gajewska | 02 Apr 2009 “……Darcy [CEO Hometrack- Brendan Darcy] said that widely quoted views of many property market commentators… Read more »
Biker
Guest
“Pretty soon you’ll be jerking around…” Hey, keep it clean, Bear…. this is a family-approved site. Seriously, sorry to learn that you’ve been mortally wounded by the property bulls. If you’d been wearing your fluoro vest, we’d have aimed lower. ;) Paul is correct. WA, for example, needs workers to meet our expansion needs. Australia needs more taxpayers to pay the pensions of those who failed to invest in tangibles. (And the last kiwi to leave, really _should_ turn off the lights!) Soon we’ll be overrun by US citizens escaping America, if Bonner (who has already escaped) is correct. :)
Biker
Guest

“Undersupply might be a reality if you think everyone should have 3 houses”

Well, there you are, Bear. John says everyone has a couple spare.

Following that logic, reduced construction _isn’t_ a problem.
Waiting lists for public housing (25,000+ in WA) don’t exist.

No need to send Private Paul out to storm the machine-gun nests.
You can come out of the trenches, Bear.
(I’d be queueing for those extra two houses, instead, mate!~ :) )

Bearamundi
Guest

Confucus say: “I like, see good in bad”. Nice Biker, but I ain’t sticking my head up on this one, you’re too good a shot!!
One day heh,heh ;)

Lachlan
Guest
“I’m back down in my dig mate, watching you, a lone soldier of truth running at that machine gun post. Pretty soon you’ll be jerking around as the bullets perpetuate a sorry semblance of life for a few seconds more…” Thanks for the crack up Bear ;) I get heaps of leaghs from this website. I’ve issued all the dire warnings I pretty much need too Bear but I am suprised at the resilience of the Aust economy to date. I take it that things are just so much worse every where else that people and money gravitate to the… Read more »
Biker Pete
Guest
Well, y’know, John is not _totally_ incorrect. We keep one 3BR house (the chalet) vacant for friends, rellies and RTW bikers. Has a pretty high turnover, but it’s empty at times. We think the current lack of construction really does work for us. We’re now getting about twenty inquiries about rentals every week. Not everyone wants to pay our prices, but tenants stay for extended periods once they realise how much more our rentals offer. Sales are still slow(er) in WA, though. That may change next year, but it’s not a priority. Keeping all our rentals leased… and our tenants… Read more »
John Murray
Guest
Biker, Not saying everyone has a spare house- greedy bastards betting their retirements on housing super profits have ensured that that isn’t the case! What I am saying is that our housing ‘needs’ today are not what they were traditionally, and that we have fundamentally changed the market for a profit motive (rather than a shelter motive) that the market can no longer support. Sydney median price is now $630,000, average Sydney wage is $62,000, and you can’t get a bedsit within 30km of the CBD for under $200,000! Those are figures people simply can no longer sustain- even with… Read more »
John Murray
Guest

insert [wouldn’t base their economy on!]

Biker Pete
Guest
“Was that a grenade……..?” You’re probably too young to remember Guy Fawkes Night, John… but that was a fizzog. ;) “…people in WA might just be able to afford a place to park their Harley Davidsons, 800 inch plasmas and bloated arses…” Sorry, none of the above here. “What I am saying is that our housing ‘needs’ today are not what they were traditionally…” We agree, but apparently the public doesn’t. Our three-bedroom project has been least popular. All our 4BRs rent like hotcakes…. and for far, far more. “….you can’t get a bedsit within 30km of the CBD for… Read more »
John Murray
Guest
Public believe all sorts of things Biker- and while it is cool to observe them, I prefer not to follow, nor to rely upon them. Have my home, a farm, and because of work rent two properties, one in Sydney and another in a major rural inland city (cannot believe the expense on that….but public as you well know!) Enjoying my financial position and set up for what I believe will eventuate; actually feel real sorry about that. Time served. Even with conscription I would only be involved in training the kiddies to become heroes….. a leading roll in the… Read more »
Biker
Guest

“Have my home, a farm, and because of work rent two properties, one in Sydney and another in a major rural inland city…”

Well done, John.

My sincere apologies for suspecting that you might be a ‘greedy bastard betting (your) retirement’ on that… . ;)

bearamundi
Guest

“…people in WA might just be able to afford a place to park their Harley Davidsons, 800 inch plasmas and bloated arses…”

Nice work, John. 2 out of 3 ain’t bad(Biker rides a Duke) ;)

John Murray
Guest

Cheers for the happy thoughts Biker.

It really is nice not to have to rely on others meaningless indoctrinated sacrifice to get ahead.

Hope we still have a few primary produces when I pass on.

All those people servicing each other sure make things messy. Especially where they congregate in their little bolt holes.

My view of it through the purple petroleum haze is rivers of resources flooding in, massive waste streams sluggishly flowing out.

And now they not only believe house prices will continue to rise, they all vote Green LOL.

bearamundi
Guest

“purple petroleum haze”

What? We’re meant to waste ’em not get wasted :D

John Murray
Guest

:roll:

bearamundi
Guest

sorry John, I thought you thought you were back in Nam for a moment…:D

John Murray
Guest

Bearamundi-

time to dismount my high horse.

The dizzy heights weren’t quiet a flahback- but a head spin.

Biker
Guest

“…a flahback..”

Second US aerial run at a target(?) ;)

John Murray
Guest

Comprox only made me itchy it was the insect repelant that made me mad.

Did nothing to the critters tho :-)

bearamundi
Guest

Not on you life John, don’t get off your high horse _they_ hate it. If all else fails I too reach for the loud-hailer:”Yoo-Hoo, yes you, I’m talking to you”…works a treat :D

John Murray
Guest

Your right, and I was enjoying it up there!
Heady though.

Biker
Guest

That impoverished fella in the fluoro vest in his 4WD is gonna open the driver’s door and knock ya right off ya high riser bicycle one of these daze, Bear. :D

(Where DO ya ride, BTW?!~ ;) )

bearamundi
Guest

I ride to work Biker. I live in Newcastle and commute 10km each way on an Italian Colnago Master Light Art Deco with Durace (Lance’s preferred Gruppo). I’m totally addicted to utilitarian cycling for some reason.
I meet my best mate about 10mins into my ride and we cycle together until I turn off just before my work. It is a great privelege, ‘processing’ information (aka talking sh*t), and I look with compassion at the cagers ;)

Biker
Guest

Yes, Yes. Tell me more!~ What do you _wear_? What coloured helmet?
These are important details in my cosmology!!~ ;)

peterg
Guest

bearmundi, I’ve apparently worn my knees out (at 46 yrs) partly riding like that in Newcastle. and it was almost all flat land.

BP(any relation to tricycle trevor, or skatboard steve?) , good point about sustained prices and the prospect of less houses built.

btw. what ever happened to the mission against suburban sprawl? it seems that only peak oil will kill off the gold foil plated goose.

“doomer porn”… good one.

Bearamundi
Guest

peterg, I didn’t think that was possible. I’ve cycled all my life and knees seem fine. Are you sure you are right? My feeling is use it or lose it…the body is built to be worked…might have to get the KLR sooner :D

Biker
Guest

“BP(any relation to tricycle trevor, or skatboard steve?) , good point about sustained prices and the prospect of less houses built.”

‘Kwaka Trevor’ is a mate, but haven’t noticed Steve at the local skatepark for years. Think he’s outgrown it.

Funny thing how our tags change, though, peterg. I used to know a bloke just like you, some years back. Very talented fella. Maybe he went east, but I doubt it… .

You might have noticed that sometimes I’m Biker, other times Biker Pete.
Weird, that… . Computers! Can’t live with ’em, etc…. ;)

Ned S
Guest

“the mission against suburban sprawl” – I just read some developer is putting in a 90-storey apartment job in Melbourne:

http://smh.domain.com.au/real-estate-news/housing-shortages-fuel-apartment-boom-20100825-13s6x.html

I reckon Brisbane is into the start of price correction. But bar the world going pear shaped (and the US and the UK may no longer be the world regardless of how much they might like to think they are), I suspect rumours of an imminent property crash here are significantly overstated.

Anyway a pear shaped world might be OK – That would just mean the big lumpy big is down the bottom for a change wouldn’t it? ;)

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