How the RBA will effect the Aussie dollar

How the RBA will effect the Aussie dollar

I’m not sure where he’s going, but this week, Reserve Bank Deputy Governor Guy Debelle promised you he’d ‘go fast, go hard and not die wondering.’

That’s not the sort of comment you want to hear from your local central banker.

But what does it even mean?

Debelle wants to print money, rescue the Australian government from going broke, and cut interest rates to zero.

Only if it’s needed, of course.

Which begs the obvious question.

What sort of financial crisis could Australia be facing that requires its central bankers to ‘go fast, go hard and not die wondering’?

I think I have the answer for you.

I’ve just issued an alert to my UK readers about Australia’s coming economic crisis.

It’ll be similar to Ireland and Cyprus’ crash in 2008.

But first, the good news.

Unlike many countries that had a crisis in 2008, Australia still has its own currency.

That means the exchange rate can absorb a huge amount of any crash.

This was denied to the likes of Portugal, Ireland, Italy, Greece and Spain. They were stuck in the euro. And the euro didn’t go down much to help those countries recover.

Not only that, Europe’s central bank has a huge amount of rules about what it is allowed to do.

It can’t favour some countries because this would come at the expense of others.

The Reserve Bank of Australia has no such restrictions.

It could ‘go fast, go hard and not die wondering’ all day long. A bit like Zimbabwe’s central bank.

Put these two considerations together and you realise the opportunity.

The Aussie dollar is in for a crash if Australia gets into trouble.

So, all you need to do is get your money out of Aussie dollar-denominated assets.

Gold, foreign currencies and foreign stocks are a great example.

It’s surprisingly easy to protect yourself from a local crisis.

But protect yourself from what exactly?

Australia is heaven.

There’s no doubt about it. My family visited a dozen countries looking for a home before deciding Australia is the place to be.

According to Credit Suisse’ Global Wealth Report for 2018, Australians are the wealthiest people in the world.

And not by a small margin.

The median Australian is more than five times as wealthy as the median German. And more than twice as wealthy as the median Briton. (Those are my former homes.)

Check out this graph:

Source: Credit Suisse Global Wealth Report

That might seem extraordinary.

But it makes complete sense in the context of a housing bubble.

Especially a housing bubble in which anyone can participate thanks to lax lending standards.

It enriches the population to an extraordinary extent.

Until it bursts.

Then the whole wealth and prosperity machine goes into reverse.

That’s already begun.

Property prices are falling. Defaults rates rising.

Digital Finance Analytics recently published estimates on borrower distress:

DFA has released the November 2018 mortgage stress and default analysis update. Across Australia, more than 1,015,600 households are estimated to be now in mortgage stress (last month 1,008,000). This equates to 30.9% of owner-occupied borrowing households.

In addition, more than 22,500 of these are in severe stress. We estimate that more than 61,000 households risk 30-day default in the next 12 months.

Even the Reserve Bank has cottoned on to Australia’s deflating housing bubble.

That’s why Deputy Governor Debelle was so gung-ho in his assurances to ‘go fast, go hard and not die wondering’.

The question now is how far the housing bust will go?

According to The Age, Macquarie Bank expects property price declines of between 15% and 20% in Sydney and Melbourne.

AMP Capital, one of the largest non-bank financial institutions in Australia, predicts a 20% fall in the two cities between now and 2020.

Investment bank Morgan Stanley sees a fall of 15% in Australia-wide house prices.

Saxo Bank published a worst-case scenario summarised like this by news.com.au:

The Reserve Bank could be forced to step in with a $300 billion bailout program to rescue Australia’s banks if the housing credit crunch accelerates into a “doom loop” that causes property prices crash by 50 per cent, plunging the country into recession.

Yikes.

Then there’s the Royal Commission’s fallout.

How will the banking industry be punished?

The ABC did the maths:

If [Commissioner] Hayne’s view prevails, all 261,987 of Westpac’s loans might have breached the law.

At a maximum penalty of $2.1 million apiece, that’s a theoretical maximum fine of $550 billion — more than five-and-a-half times the bank’s current market value of $96 billion.

Shae Russell recently warned you about the potential for a class action from borrowers.

Australia is unique to other countries in that it allows borrowers who were the victim of loan fraud committed by lenders to cancel their loan and keep their home.

This leaves the bank facing a huge loss. They have to write-off the entire loan and don’t get any house to sell.

It makes me laugh when I read things like this in The Australian:

I’m not so worried about residential prices. This isn’t America where people just hand back the keys when they have negative equity. In Australia, a mortgage is a commitment and most people with mortgages will work their way through the problem.

This couldn’t be more wrong.

Australia is worse off than those few American states where borrowers could give back their keys and escape their debt.

In Australia, either the bank takes the whole loss, or the borrower is stuck in debt even after selling the home.

Imagine paying a mortgage and rent at the same time.

Apparently, you can ‘work your way through the problem’.

In Japan, an entire generation of homebuyers is stuck with a two-hour commute because of this issue. They can’t sell their house because it’s fallen in value too much. They’d be stuck with debt to repay and no home.

In Ireland, borrowers who faced negative equity decided to have debt wakes.

They threw a house party to say goodbye to their friends and family. Then immigrated to Australia, leaving the bank to sort out the problem of a house worth less than the loan.

Negative equity and a banking system sitting on a time bomb are bad news, not good news.

Australia’s secret sub-prime scandal, which I uncovered in 2012, is no longer secret.

It’s not hard to predict what it is now — a sub-prime scandal.

Get out of Aussie dollars however you can. Because when Debelle goes hard, fast and doesn’t die wondering, it’ll be your currency that gets flattened.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia