There may be a simple economic explanation for the best September on Wall Street in 71 years. No double dip recession…improving labour market numbers…rebounding house prices. Except none of that is true. So what is left?
Well, as near as we can tell, everyone seems to be front running central banks. Is the Fed buying stocks? Not yet. But if it’s committed to some form of Quantitative Easing, it looks like investors have gambled that this will support stock prices (and commodity prices too), even if it doesn’t (and can’t) reverse the long process of household deleveraging in the U.S. economy.
It sure was an entertaining month, though. In the September issue of the Australian Wealth Gameplan, we highlighted the risk of D2 (shorthand for “The Second Great Depression”.) It should have been obvious that throwing down the gauntlet about the social and economic crisis ahead would precede a record month on Wall Street. At least we got gold right.
Now, though, you have to wonder what happens next. Overnight we learned that the cost of bailing out Ireland’s Anglo Irish bank is a whopping €34 billion. That’s 32% of Ireland’s GDP, which is another way of saying that Ireland’s government doesn’t have the resources to do the job. Which is another way of saying that the European Central Bank must do it.
The ECB doesn’t have the money either. But it does have a license to print money. And that should do the trick – even if it means weakening the Euro.
The European debt problems have not really gone away. They just went to ground over the Northern Hemisphere summer, or were buried under a truckload of indifference and wishful thinking. However we’ve yet to see any large funds or banks take a write-down on the value of their sovereign bonds.
Give it time.
And in the meantime, keep an eye on social tensions in Europe. If Ireland tries to bailout Anglo on its own, it will mean more spending cuts. But as you’ll see, people don’t take kindly to having their standards of living reduced in order to bail out banks. Mind you the expectation that the government can keep spending money it doesn’t have to achieve a socially compassionate society is at odds with a little word called reality. But people will eventually adapt, the easy way or the hard way.
As an investor, adaptation to a world of massive quantitative easing by central banks is a risky proposition. It means becoming a speculator and surfing asset prices higher on the liquidity wave. But that isn’t really investing. It’s just going along to get along.
Hey! Was that the sound of a key plank being kicked out from underneath the rickety argument of Australia’s housing bulls? Yesterday’s Age reports that the country’s net immigration slumped by 37% in the March quarter. Immigration and population growth has been held up by the housing bulls as an irresistible force behind higher house prices.
But the immovable object here is that immigration – like interest rates – is variable. That means it changes. It can go down as well as up (or rates can go up as well as down). Population growth fell by 15%.
Granted, the slump in national house prices for the quarter was mild, just 1.2% according to industry data. This is reportedly a “soft landing” that moderates house prices and is not unexpected given the Reserve Bank’s rate rises. At least that’s the mainstream story.
But the clowns in the industry have no imagination. In addition to talking their own book, they refuse to recognise that Australia’s house price boom was inflated with money borrowed abroad. That dynamic puts Aussie households at dangerous levels of mortgage debt and makes the Aussie banks doubly vulnerable to falling house prices and/or a foreign lending crunch.
Don’t take our word for it. The Treasury warned the incoming Labour government of it in its “Red Book.” This kind of document is true testament to the unexamined faith in central planning and the power of bureaucracy to regulate life for the good. It’s also given that title without any sense of irony.
You’ll find that there’s a lot missing from the Red Book. There are obviously some things too valuable or important for you to know as an Australian citizen. In fact, if you check the table of contents, there’s a whole “attachment” to the book – Attachment G – that’s been entirely redacted. What it’s about…who wrote it…and what it said…have all been completely erased from the public version of the document. Below, you can see the redacted table of contents and then the utterly redacted “Attachment G.”
“Attachment G” could be anything from how an emissions trading scheme or carbon price will raise the retail price of energy and cripple Australia’s industrial economy to the necessity for massive new fiscal stimulus in case of a second phase of the Global Financial Crisis. But we prefer to believe it’s about Australia’s housing market and the dependence on foreign lending.
Mind you this is utter speculation. But there is a section in the “Red Book” on housing, with the critical passages redacted from public view. You’ll find it below:
Click here to enlarge
What did the Treasury say about Aussie banks and Aussie housing that’s so dangerous/important that you’re not allowed to know? Well, probably nothing you don’t already know. But probably something the Treasury doesn’t even want to admit it’s considering. Shocking. Truly shocking.
for The Daily Reckoning Australia