I’m happy to admit that it’s very hard to hold a bear perspective, when all about there appear to be “green shoots”, yet according to my body clock it’s still hibernation time.
There are, however, four factors that keep me in my lair:
- Good History;
- Bad Economic Theory;
- Good Economic History; and
- Good Economic Theory
I’ll cover the last three in subsequent posts; here I rely on Mark Twain’s brilliant observation that “history doesn’t repeat, but it sure does rhyme”. A US blogger is giving us very good evidence of that with the blog News From 1930, in which every day he summarises the news from the same day of the year in 1930. As Alan Kohler also remarked recently, “one thing that comes through loud and clear is that they didn’t know they were having a Depression” (to which I would add the word “either”).
The entry for this day in 1930 (August 19th—a Tuesday as it happens) certainly make that obvious. Change the company names (and those of politicians and market pundits) to their modern equivalents, and you’d be hard pressed to decide whether you were reading a paper from 1930, or 2009.
Some excerpts:
- “Seasoned common stocks” are now selling to yield about 1.5% above commercial paper rate (3%). In 33 year history of the Dow Jones averages, stocks without exception have been profitable long-term investments when average yield was 1% or more above the commercial paper rate.
- R. Babson (the economist who predicted the 1929 stock market crash, and inspired Irving Fisher to make his “bull”statement that “Stock prices have reached what looks like a permanently high plateau” days before Black Monday wiped 13% off the market) … notes commodity production has declined about 30% vs. 10% decline in consumption; predicts shortages soon, restarting of production to supply demand. Doesn’t yet recommend buying stocks, but feels “time is approaching when buying opportunities may appear.”
- Harvey Firestone, Pres. Firestone Tire & Rubber, states America is on eve of greater prosperity than past 10 years. Expresses belief in Ford’s statement there will soon be work for everybody. Says company has met depression by cutting overhead and lowering prices; plant now running night and day, 6 days a week.
- Economic news and individual company reports:
- Fed. Reserve member banks report “all other” (commercial) loans up $9M to $8.481B in week ended Aug. 13; loans on securities down $58M to $8.376M.
- S.W. Straus report of building permits issued for July in 589 leading cities and towns finds volume of planned construction was $187.6M vs. $184.7M in June; reverse of usual seasonal decline, but down 36% from 1929.
- Labor Dept. reports retail food prices down 2.5% in month ended July 15, and 9% in year.
- Coca Cola seen taking advantage of low sugar prices by buying a year’s supply in advance. Has enjoyed increased sales every year since 1922.
- R.J. Reynolds selling about 49, earned $3.22/share in 1929, expected to earn more in 1930, yield 6.1% based on $3 annual div.
- Several cigar stocks selling at yields over 9%, including General Cigar (9.3%), Congress Cigar (16%), Consolidated Cigar (13.8%).
- Companies reporting decent earnings: Drug Inc., General American Tank Car, Fox Film, Fifth Avenue Bus Corp, International Salt.”
The general tenor of reports for August 1930 has “recovery” written all over it—though there is “bad”, or at least puzzling news amidst the good, such as the fall in prices.
It appears that, rather like an alcoholic who is an alcoholic long before she takes the pledge at an AA meeting, the public and commentators in 1930 didn’t realise that a Depression has started.
I feel the same way now—and the economic historians Barry Eichengreen and Kevin O’Rourke provide empirical support for this in their “Tale of Two Depressions”.
Of course, there’s more than merely rhyming history to our current situation: as Rudd pointed out in his recent essay, government fiscal stimuli is pumping something close to 18 percent of additional demand into the global economy over 3 years. So there are concerted efforts to ensure that 2009 plays a different tune to 1930. I’ll discuss whether our modern economic musicians are up to the task of composing a different economic concerto in the next installment.
More on the housing today – by Christopher Joye.
Seems to my simple mind that using the pure supply & demand arguement is OK, until prices reaches some tippng point. In the extreme everyone must acknowledge this, otherwise prices could rise to infinity.
In a debt financed economy, that tipping point must be where the price exceeds a certain multiple of income, and interest (mortgage) rates cannot be sustained by the same income.
Has anyone a calculation on this.
http://www.businessspectator.com.au/bs.nsf/article/dogma-does-not-gel-with-data-pd20090828-vc23p?opendocument&src=blb&is=property&blog=concrete%20detail
I agree KBH that on a purely new construction meeting new demand basis we are, depending on who you quote, about 20,000 buildings short every year.
However I do not belive that those in this school of thought take existing dwellings into consideration
If we believe that there is also approximately 800,000 vacant dwellings then it would take approximately 40 years for there to be real supply problem.
Again there are any number of variable that could vary this like where are the surplus homes, are there 800,000 vacant, is new supply really 20,000+ short.
As to your question about income and serviceability.
In the late 90′s I was a credit controller for one of the majors. Loan assessment guidelines were that loan repayments were not to exceed 35% gross income when assessed at 10% affordability.
Here is a real simple loan assessment model with affordability at 7%. If the average house in sydney is $570K and you put down 10% you have a loan of $513K. At 7% affordability repayments are $3626 per month. Based on the above 35% income requirement the family would need to have gross monthly income of $10300 ($124K+).
This is Steve’s concern with leverage and speculation. Just before I left the bank, they were lowering standards and accepting and assessing loans based on interest only repayments. This leads to the requirement that the only way to get ahead is to sell the housing asset for a great deal more than you paid.
For the last 10-20 years this has been possible but as can be seen from a lenders point of view loan serviceability is now at the point where unless you have 2 people earning above average wages the average new home loan cannot be serviced.
KBH the tipping point must be close
I think that argueing which school of economic theory is “right” and what is the correct model is largely a waste of time at the moment. That determination is set by those whom the population votes in or whovever is the ruling political entity in power. Models dont matter to politicians seeking to stay in power. What matters is what get’s them re-elected.
Currently, the rulers of the world are awash in triumphant Keynesian’s, headed by the Chairman of the FOMC and his ilk – Rudd is a cheerleader. They are pointing to “recovery” and saving the world. Nevermind that they have created decades of toxic debt loads and crippling taxes to pay them off. Great save!! You can be sure that it is only when they are prooved irretrievably and irrefutably wrong and then removed from office, will there be any reckoning or thought given to alternative “economic theory”.While debtonomics keeps delivering sheeple votes to the public trough feeding politicians, it will be embraced with almighty enthusiasm.
Contrary to what we here believe ,the overwhelming majority and those with the reigns of power are taking the position that Debt does not matter so long as the show goes on. Debt is a means to an end- the end being “economic growth” and employment. It will all need to fail utterly before Debt gets a bad name.
That “failure” may not be so far off;
http://danericselliottwaves.blogspot.com/
Thanks debtjunkies
I was just putting together my own spreadsheet on it.
With the current ratios, the whole thing currently smells like a pyramid scheme. Get in, get out, before the house falls in.
The housing market depends upon a bunch of uncertainties –
1) Perpetual Income growth for the term of the loan
2) Double Incomes for the term of the loan
3) Low Interest Rates for the term of the loan
4) Perpetual loan = interest only loans
Obviously, housing affordability is the issue that is being argued by the experts, and it depends upon most of the points above.
Perpetual debt or massive inflation seems the only way out, apart from a price crash.
Thanks for your response RustPenny, it’s what I had suspected; the massive numbers (of influenced people) and easy instant trading opportunities must exacerbate the situation.
So if that is the conclusion, what if we add this question to the mix:
Does UNDERemployment have the same effect as UNemployment on consumption reduction and therefore the deflation dynamic?
I think ‘yes’. The behaviour must be the same, musn’t it? The person who has suffered the cut back to hours must certainly be tightening their belt, bracing for the looming loss of fulltime work by reducing consumption. Can anyone shed some light on this question from their own personal experience right now? I do know this: I have a very well paid job – and I’m watching my pennies. I may be an extreme example since I am here on this blog, but even as a fully employed person, I am making more cautious decisions on spending.
What happens when we see the figures for (Aussie) underemployed and unemployed added together? How much of the population are we seeing that are cutting back or not spending? Anyone got the figures?
Regarding Information Technology…
I have no doubt that the instant access to the stock markets by millions of amature traders increases the instability of the system.
I know Baby Boomers who are semi retired and spend a part of there time gambling on the markets. When these people panic, there will be a bigger collapse than ever in the markets.
Even I am trying to time when to move my super fund to the cash option…
Steve posted;
“I have read Bernanke’s theories on what caused the Great Depression, and in my considered opinion he is a complete dummy on what causes Depressions. He and Greenspan have caused this because they don’t know how Depressions come about.”
I saw an interview with Geithner recently, questioning him on a myriad of issues. What was very clear was that Geithner and I’m sure so many others are absolutely crapping their pants at the thought of the Fed being auditted.Exposing the unclothed emperor would bring down the castle- there is no doubt about that.
Bernanke is far from dumb. I would say he is brilliant at what he does.He is the public face of those behind the curtain. He is there to fullfill a specific role and he is doing an exemplory job of it- of that I have no doubt. His job is to ensure the Fed’s shareholders are first in line to the public purse (tick) and will remain “the last men standing” when all else has collapsed. It is naive in extremis to even consider that Bernanke gives a “rats” about anything else than the Fed’s shareholder banks. Which explains to me that the face Bernanke has portayed and still portrays publicly, which includes his published theories, papers et al, are anthing but a facade erected painstakingly over time (you can call it a career) that has successfully placed him in the pool of candidates for Fed chief.
BO has been recruited into the fold. His role will be to do as he is told. It is a big mistake to think that something as inane as “economic theory” will hold sway in how Bernanke deals with this Crisis.For him it is only about one thing- Power. The Power to loot the public treasury in order to protect the finances of the Fed’s owners. Let’s see how long the US people allow this to continue.
I believe that several interesting factors are omitted in the discussion about housing shortages in Australia. I am not commenting on the article itself because I have no access to real (not manipulated) raw data at the level of granularity I think is required to say anything for sure.
1. A significant number of migrants are unable to buy a house for the first few years after the arrival. Some of them are willing to accept quite crammed conditions so the pressure on the market might be much lower than expected.
2. On the other hand there is a genuine shortage of apartments in the most sought-after suburbs (at least in Sydney). There might be a glut of houses elsewhere. We don’t have a single market. We have several sub-markets linked together.
3. The possible collapse may not affect the whole market in the same way. There may be suburbs or towns affected. This can be triggered by unemployment or rising mortgage rates.
4. There may be a considerable delay before people start defaulting. They will save on anything else before giving up on a mortgage. It is interesting to see that the buffer has been recently enlarged by the government.
5. It is possible to imagine a scenario when investment properties are offloaded what floods the market. These properties may or may not be cleared by first home lemmings.
6. The pool of potential first home lemmings might have been depletted and may not replenish itself for a few years time.
7. The social mood and herd behaviour may change suddenly if exchange rate of AUD changes suddenly what we cannot exclude.
8. As the bubble grows the margin of the “equilibrium” will get narrower. But we can still imagine a Japan-like scenario of Great Stagnation.
9. Baby-boomers may have to downsize. This can change the balance. The lifestyle expectations may also change. The article was written from the position of “elightened consumerism”. What if not much is left to consume?
The one thing that keeps me in the lair is watching what Benny and Da Banksta Boyz are doing.
March 18 was when the Fed first announced it would be buying $300 billion in treasuries over a 6 month period ending September. There have been average weekly Fed T purchases of $10-12 billion to date – that means $10-12 billion has been pumped into the US market every week since mid March. Small wonder then that da Boyz at Government Sachs and the other primary dealerz have been able to pump the US market (and don’t forget all those swap lines that Uncle Benny’s got pumping $s out to Aus and Europe to help keep everyone afloat just one more day).
OK, so I’ve been waiting for things to head south come mid September, but apparently the Fed is a bit scared that the tankage is going to be massive if Benny just stops monetizing those Ts and “supplying liquidity to the market” come Sept, so now the plan is that the Fed should spread what remained of that $300 billion (approx $31 billion ) out until the end of October. This means that the amount of play money that the Fed gives to the primary dealer boyz to go spend in the casino every week drops from $10-12 billion per week, to about $5 billion per week. I can’t imagine that’s going to keep the SPX etc on an uptrend. And things’ll get pretty rocky around the end of October unless Benny wants to keep on buying Ts.
Anyone watching DXY? I wonder what’s going to happen to the US dollar if the Fed keeps on with QE past October. Maybe it won’t be so bad if everyone else goes at it hell for leather as well.
Anyway, back to my lair to to install a nuclear bunker in it before the end of October rolls around…just in case da banksta boyz in the USA can’t come up with another new innovation to keep the world ponzi economy chugging along just a little longer.
ak,
The prices of Aussie residential property is primarily influenced by the sentiment that drives the prevailing supply/demand dynamic.
Demand can easily be ramped in our market when enough bullish sentiment creates the urge in a critical mass of people to “trade up”. Likewise, the sense of threat to job security and incomes removes that influence and a floundering market ensues. We have that now. declining prices will happen only when demand for property takes a major hit.Property prices have not hit a “tipping point” because sufficient support has been deployed to keep Australian’s employed, despite there being less hours worked and less income earned.
That finely balanced dynamic is in play right now.Jobs ,incomes and the perception of their security, will determine what the future holds for Aussie property prices. Meantime, our Govt and their property spruickers in the media are going hard at it ensuring we all continue to buy the “house prices can only go up” mantra.
I see 3 major determinants of Australian jobs and incomes;
1) The China story.
2) The stock indices (super/retirement security , consumer confidence and preception of our financial future)
3) The willingness of the Rudd Govt to hock the nation into obcene levels of debt.
Notably, 1 and 2 are outwith our control.
“Bernanke is far from dumb. I would say he is brilliant at what he does.”
I remember reading an article about how Bernanke had to hold a meeting with hedge fund managers because he didn’t know how that industry operated.
Dean Baker says it well:
“Of course if we were to grade his performance at the Fed, it would be hard to give Bernanke anything other than a huge “F.” After all, it was the Fed’s policy to allow the housing bubble to grow unchecked, with the idea that it could just pick up the pieces after it burst. This has led to the worst downturn since the Great Depression, likely costing the United States more than $6 trillion ($50,000 per family) in lost output.”
“Just to be clear, if Bernanke were in any other line of work, it would be absurd to imagine him being reappointed. He is the cook who burnt down the restaurant by leaving the stove on overnight; the doctor who amputated the wrong leg; the school bus driver who drunkenly drove into oncoming traffic. But even by the low standards of economic policymakers, Mr. Bernanke does not deserve another 4 years.”
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/bernanke-reappointment-campaign/
“But more importantly, Bernanke is waist deep in responsibility for this mess. Before becoming Fed chairman in January of 2006 he had served on the Board of Governors since 2002, and had been head of President Bush’s Council of Economic Advisors from June of 2005. After Greenspan, there was probably no one else better positioned to combat the bubble.
The attendees of GreenspanFest ’09 may not want to be so rude as to discuss their culpability for this disaster, but that should not prevent the rest of us from raising the topic. It would be an insult to the tens of millions of people who have lost their jobs, their homes, and/or their life savings to see Bernanke reappointed. Failure should have consequences, even for central bank chairmen.”
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/greenspanfest-09-and-the-reappointment-of-ben-bernanke/
On a housing oversupply, Chris Joye does make a good point when he says:
“One of the most laughable explanations that you sometimes hear is that based on the Census data there is a large stock of vacant homes that could serve as substitutable supply. But I addressed this myth in a previous post (see here). The short response is that because of the ABS’s survey methodology, Australia has always had a stock of 9-10 per cent of vacant homes in all Censuses carried since 1976.”
http://www.businessspectator.com.au/bs.nsf/article/dogma-does-not-gel-with-data-pd20090828-vc23p?opendocument&src=blb&is=property&blog=concrete%20detail
Philip,
It all depends on what constitutes Bernanke’s real “job”. It most certainly is not looking after the interests of hedge fund managers or the unemployed. If his job is to protect the Banksters then he has performed extraordinarily well. That is beyond question.
The problem is not Bernanke- it is the Fed itself, and the wealth theft mechanisms arrayed against US citizens. Not that the penny has dropped with most people. Baker misses that point. Changing Fed Chairman won’t change the Fed’s role/position – THAT is the key and core issue about Bernanke and his re-appointment.
Negative nominal interest rates on their way (as I have been predicting for a while now):
From the FT
“However, the Riksbank hopes that by charging banks for saving their money, rather than paying them, it will encourage them to increase their lending to individuals and businesses, boosting the economy. It also hopes that it might encourage them to divert the money into other assets, such as government bonds or even highly rated corporate bonds. This would bring down bond yields and act as an stimulant.
In the UK, there have been signs that banks are switching cash into short- dated government bonds following hints from Mervyn King, Bank of England governor, that the policy could be introduced there.”
A tobin tax would significantly dampen the potential effects of international currency speculators exploiting interest rate arbitrage that currently make significantly negative nominal rates impossible.
Once this potentially hyper-inflationary danger is removed its quite likely that moderate negative nominal rates on savings are sustainable over the long term, and it will also ensure that government deficits remain sustainable as investors move into long dated bonds to avoid potentially negative rates on deposits and short term bonds.
hi retired soldier,
i must concurre with contrarian, re silver,
actually there is an cautionary tale re getting too heavilly into silver,
in the 70′s nelson bunker hunt and his brother william thought it was a good idea as well,
infact they thought it was such a good idea they decided to corner the silver market
and they did for a while until silver thursday hit on 27th march 1980,
during this merry episode, silver went up from $11 to $50 and then back down again to $11,
in the end the brothers said goodbye to about one billion dollars of the family fortune
quite a substantial amount in those days, even for texas oil barons
some texans are interesting folk,
theres obviously no limit to their grandiosity,
they seem to have migrated from trying to take over comodity markets, to trying to take over middle eastern countries with their commodities in tow,
GSM:
Who controls the Fed? Who appoints its Chairmen? Who sets its policies? Is it conceivable that Greenspan & Bernanke are daft? Are Kohn and Geithner daft? In some peoples’ minds, Bernanke is a huge failure. In other peoples’ minds, he is a huge success. “Failure is Success” sounds Orwellian – like the “War on Terror”. Appearances can be deceiving!
Anyone who thinks that Obama is the one who made the decision to reappoint Bernanke (and appoint Tax Cheat Tim to the Treasury) is living in Fantasyland. Who “controls” America? Ariel Sharon knew it.
Do those in power give a “rats” about economic models, right or wrong? The ‘model’ they use in running the American (and Global) economy is heavy on Deception, Propaganda and LIES. THEY have a PLAN – and other peoples’ models are not part of that Plan – or ever will be!
Any economic model will shatter into so many pieces when it runs into the variable of power. Models are only right or wrong in the Ivory Towers of Academia. Of course, the endless debate will keep people like Krugman, Roach, Shedlock, Denninger, Roubini, Hudson, Whitney, Keen, etc, etc, etc. busy (and the rest of us entertained) ’til the cows come home.
Meanwhile THEIR PLAN is unfolding – and it CAN’T be stopped!
Dear Professor Keen
Good morning
I conduct property research and from time to time publish articles on the Australian real estate market. I read your blog today on the Australian real estate bubble and agree with some of your points about affordability, debt service ratios and loan to value ratios.
I have a media release about the first home owners real estate bubble eg FHO who have purchased homes at 90 to 100% LVR. What happens if the market stays flat or goes down. They will be locked into negative equity for how long??
With the threat of the upward cycle in interest rates mortgage (overall debt) stress will increase and home loan arrears, defaults may increase resulting in further home repossessions, bank fire sales and loss of equity (life savings) for individuals.
The effect is not just on the individual or family but has far reaching consequences for our economy and our society
Can you advise if you accept media releases or material for publication
Thank you
Kind regards
?
John Taplin
Synergy Trading (aust) Pty Ltd
Property researcher and buyers advocate
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