Archive for the ‘Housing’ Category

Predictions for 2010

December 4, 2009 7 comments

As the year comes to an end, let me list my predictions for 2010.  Note: Anyone who says their predictions are based on modelling is an idiot or a liar.

As was clear from our experience in 2009, politics, connections, favours, and plain old everyday third world corruption play a major part in any economic outcome today.

The “logical” prediction for 2009 would have been the bankruptcy of AIG, the bankruptcy of a number of major US and UK banking institutions, deflation, a continued stockmarket collapse, a spike in long-term interest rates (caused by a decline in demand for T-bonds due to US govt deficits), a collapse in the value of the US dollar and a spike in gold.  Almost none of these happened because of the multiple, trillion dollar interventions of the Fed and the US Treasury.  AIG was saved, US and UK banks received hundreds of billions in bailouts, swapping toxic trash at the discount window 100 cents in the dollar, the stockmarket was artificially supported, the long end of the bond market was (allegedly) supported by the Fed, and gold was shorted relentlessly by the primary dealers.

So predictions for 2010 are really political predictions and these cannot be taken very seriously.  Nevertheless, it’s fun to speculate, so here goes:

1.  A CRE and housing bust in Oz in the second half of the year due to (a) wholesale funding costs jumping for Cth Bank and Westpac in particular and a fight for deposits (b) APRA liquidity requirements kicking in (c) high $A killing exports and local manufacturing, combined with a generally slowing economy due to a fall in Asian growth and a crisis in Japan (d) pullback of the FHBG and other handouts from Rudd Bank (e) pull back on the govt backing of Oz banks, exposing them to “market” rates for wholesale funds especially for LT debt (f) housing prices already being ridiculously too high, as Steve Keen has pointed out many times in the last 3 years.  It should be a bloodbath in CRE in 2010. 

We’ll see whether the govt and the desperate Oz banks can hold back the receding tide.  Unlisted funds with illiquid assets were massacred in 2009 by the govt’s bizarre, indiscriminate bank guarantee (thereby predictably and savagely killing off the supply of liquidity for unlisted CRE trusts).  This should mean that the marginal players in the finance industry have simply had their executions stayed, not commuted. Will this now infect the whole CRE market, as supply continues to overwhelm declining demand due to liquidity tightening for the dumb Oz retailers of debt?  Bank guarantees should have engendered moral hazard in the marginal lenders.  This should have made the problem worse.  This problem may be deferred until 2011, but something tells me this Ponzi-scheme can’t be sustained throughout 2010.  We’ll see.

2. S&P 500 down for the year, with a “crisis” in early and/or mid 2010 due to (a) the fallout from the bubble being delayed this year – meaning that the bust will be even bigger and flow into 2010 (b) a significant portion of consumers (70% of the US economy) being bankrupted in unsustainable debt (c) debt levels threatening the long-end of the US bond market (d) unemployment continuing towards 15% in official terms and 25% in unofficial terms (e) a possible US dollar/bond crisis, with an unprecedented volume of bonds being needed to be flushed into the market (f) the banks being supported, but the bulk of US industry being left to die.  The S&P 500 includes much more than just Goldman Sachs (which will continue to perform well, given they print their own profits).

3. Gold up – for all the reasons in (2) above, plus the fact that the Fed will continue to pour e-dollars out into the market in the trillions, without any effect (see Japan over the last 15 years).  So gold will be the only place for the e-dollars to go.

4.  Silver to go up more than gold – for all the reasons in (3) above, plus the fact that silver is a tighter market with the massive short positions in silver finally having to be unwound on reality.

5.  Oil higher.  Inflation’s got to go somewhere.   And Peak Oil has arrived.

6.  Food and food inputs higher.  Possibly significantly higher.

7.  Fed Funds Rate probably around where it is now.  The big story will be everything BUT interest rates.  Interest rates will stay low (to save the banks) but chaos and volatility with be a tempest around stable, low rates.  The debt load is massive and people will be killing themselves to extract themselves from this killer debt-load by repeatedly trying – and failing – to spark a new bubble in the stockmarket.  Then in desperation they’ll spark a bubble in oil, food, gold and silver.  Currency volatility will be unprecedented.  There is the real prospect of a US dollar meltdown.  If so, gold will soar on its angelic wings.

The overall theme for 2010 will be continued unprecedented volatility.  Price swings, especially in the stockmarket, will be violent as liquidity sporadically dries up due to the unsustainable debt loads and banks desperately juggling debtors to stave off insolvency – both in their clients and themselves.

The Makian Distribution predicts increased volatility with increased debt.  We have increased debt.  So, according to the theory we must have increased volatility.


“There is no clear, easy way out for housing”

November 29, 2009 1 comment


I prefer to say “There is no clear, easy way out once a Ponzi scheme has been exposed and the suckers’ savings have been stolen and the criminals are protected by the government and the central banks.”

And be forewarned: Australia is the US with a 5 – 10 year time lag.

I can’t wait to see how the Oz banks are going to handle a housing bust in Oz.

If Asia sneezes, Oz will catch cold and then housing is going down.

Watching Oz banks running around trying to negotiate cramdowns whilst hiding their bad debts from APRA and trying to appear solvent – that is my dream.  My dream.

Please Eternal Monetary Gods, punish the evildoers who stole the people’s gold coins out of their wallets and melted them into IMF bullion.  Teach us all what real, timeless money is.  By giving us the Mother of All Housing Busts.

I vote deflation

November 27, 2009 1 comment

I’ve finally gotten around to dragging out some discussion material on the hoary old deflation/inflation debate from the website here, where I explained my position.  It will (mainly) be deflation, oscillating violently between the two.  Here is the detailed discussion:

Most people just support their own little position (Rothbardians scream that govt everywhere is evil and must be killed. Some may have supported the repeal of Glass Steagall, as signalling a reduction in govt regulation. Idiots if they did). The real evil is central bank supported FRB. That’s what kills an economy through cancerous malinvestment. Socialism is preferable to fascism, if that’s the choice we have to make.

Similarly, there’s a debate between Keen/Mish debt-deflationists and Gary North/Jim Sinclair hyperinflationists. In a sense they are both right. There is and will continue to be both deflation and inflation – JUST IN DIFFERENT SECTORS OF THE ECONOMY. [I use the terms in the “modern” terminology (not in the old Austrian way – meaning an increase/decrease in the total money supply).]

Let me explain my position because I think this is interesting.

Near hyperinflation DID (already!) occur. For a decade. In HOUSE PRICES. Because housing prices were grossly underweighted in the CPI (housing is essentially a consumption good) this didn’t show up in conventional measures. But I agree with Keen/Mish – credit is money and debt issuance results in “money” (purchasing power) being created when some sucker goes into debt and buys whatever is on offer. What was on offer for the last decade was housing. It had the features of a classic bubble/Ponzi scheme with people looking at returns rather than yield. And because the asset was security for a loan, this could go on for many years longer than consumer credit/debt bubbles, which generally peter out because the issuance of debt “leaks” into consumption goods and doesn’t go back into an asset so doesn’t generate the recursive cycles that asset bubbles generate.

The “winners” in this game (like always) were the recipients of the debt money – property developers like Triguboff who rezoned land from industrial to residential and sold units en masse to the sucker public. They got debt and a 30 year mortgage. He got the debt money into his account. Magic! Where did the hyperinflationary money go? Into the pockets of the FIRST RECIPIENTS of the debt money – mainly residential property developers.

Now that the bubble has burst, the Japan deflation scenario is kicking in, because the main source of fresh debt money into the economy is fresh suckers going into debt to buy housing. The property market is double the value of the stockmarket.

But now that Ponzi scheme is over the Triguboffs are looking for a safe place to stash their cash. They don’t want their bank to blow or the exchange rate to collapse. So they take the money out of circulation (don’t keep developing units) and stash it overseas in gold or buy land and sit on it. Money velocity slows as the beneficiaries of the Ponzi scheme collect their winnings, take the chips off the table and stop paying their contractors and leave for Europe.

OK, that signals DEFLATION. Big DEFLATION. Keen/Mish are right – we’re turning Japanese.

But, hold on, what about North and the Austrians? Base money has exploded. It’s sitting at the banks. The problem is the banks can’t find a credit worthy borrower to “give” the new money to. If they could another bubble would quickly form. Bernanke is also keeping the powder dry by paying interest on the money held with the Fed. Why would a bank lend in this economy (at risk) when he has a risk-free client willing to pay interest income on the money just created? It’s like a mouse trap pulled back, waiting to snap. All that money just sitting there – like a dam waiting to burst into the next asset bubble.

When either (1) interest stops being paid or (2) the banks find a new bubble, then things will get interesting. What is the new bubble? It’s ALREADY HERE!

The new bubble is govt debt. Private clients have proven unexpectedly risky. Businesses and household default rates have spiked. Stuff them. Lend only to the Fed or the central govt (not even States or councils can get comparable rates to the biggies). “At least we’ll get paid back,” say the big gun-shy banks.

So ultimately this new govt debt money is going to govt employees (mainly) and on govt payouts. The size of govt is actually increasing in this recession. Incredible. For the first time a govt employee is paid more in the US that the average private worker.

So there is an “inflationary” bubble RIGHT NOW – in govt employment. These idiots sit around writing reports, writing regulations, filling in non-existent potholes. They exist simply to spend the money back into the economy. They are like zombie-consumers, doing nothing that is actually “needed” by the real economy but existing solely off coercive taxes/debt issuance from the govt. If the govt couldn’t counterfeit the money the whole apparatus of excessive govt employment would collapse and these guys would have to find real jobs.

But what happens when you have a bubble in govt employment? You have skills sucked out of the private economy. What skills are required most (that would be evident if the money supply was stable and govt couldn’t sell bonds to the Fed)? Sustainable technologies, agriculture, farming, etc. Govt sucks the factors of production away from where they are needed to where the money is – WITH PARASITIC GOVTS.

If this continues, who will actually do physical labour? Who will plant the food we rely on to survive? SUCKERS. Stupid people who don’t understand the game. But stupid people are the least qualified to produce sustainable agriculture!

So like the budding nuclear scientist being “sucked” into parasitic banking by the screwed by pricing structure from central bank supported FRB, now budding farmers/labourers are being sucked into the police-force, the local and State govts etc as useless pen pushers.

So it is inevitable that a destruction of our farming industries will occur, with “quantity” adjusting (ie a reduction in the quality and quantity of food) rather than price, because indebted dumb farmers can’t price adjust – they are trapped in debt (as Rowbotham has pointed out). That doesn’t mean there aren’t consequences. It just means quantity/quality adjusts, not price.

So North is wrong to see “hyperinflation” coming up soon. Hyperinflation is here in the West – in the form of zombie govt employees. Deflation for the private economy will continue. Then eventually starvation for low-income countries as oil spikes, food prices spike and availability becomes scarce.

Spotting asset bubbles is dead easy

November 14, 2009 Leave a comment

Weekend cartoon special

November 14, 2009 Leave a comment

This is too good to pass up…


Cramdowns = Moral hazard

November 11, 2009 Leave a comment

Cramdowns and permanent debt modifications (1) are an admission that the loan should never have been approved (2) let some borrowers off the hook when others are left to drown (3) often are administrative nightmares to finalise and police and (4) don’t work anyway.

Good luck to those American banks trying to negotiate cramdowns whilst trying to stay alive.

You’re gonna need it.

Feeling sorry for Steve Keen

November 9, 2009 4 comments

I feel sorry for Steve Keen.  Which makes a pleasant change from feeling sorry for myself. 

I often ask myself:  How can I remain completely ignored despite predicting (indeed, screaming!) about the GFC 12 months before it occurred again and again?  Then I think of Ron Paul, Peter Schiff, Frank Shostak, The Mogambo Guru (ha ha ha!), Bill Bonner, Robert Landis, Mike Hewitt, the guys at and about 500 other Austrian School thinkers and realise I’m far from alone, both in predicting the crisis and being completely ignored (or ridiculed or hated) by the mainstream.  So feeling sorry for myself is completely unjustified and very unhealthy.  Perhaps I’m just a garden variety Austrian surrounded by mainstream idiots who don’t want to listen?  Being Austrian may be special (especially here in Oz!) but there’s nothing particularly special about my analysis within Austrianism.

Turning to the more healthy, productive task of feeling sorry for Steve Keen, I’m worried he may get heat stroke and die on his trek up Mt Kosciusko.  He looks pretty frail to me and as an academic with reasonably thick glasses he doesn’t look like the hiking type.  I hope he gets through the ordeal.

The reason for this bout of masochistic self-flagellation on Steve Keen’s part is that he lost a big public bet with Rory Robertson.  Badly.  I try to bet alone, discreetly, so if I lose only I know.   Much better for the ego.

If one of Steve Keen’s students was “out” by the orders of magnitude Keen was out in his prediction (up to 40% decline in house prices when they actually went up, albeit marginally), I suspect she’d receive an “F” with a “Must do better next time” message scrawled across the top in big red letters.

To quote Bloomberg:

“The concession follows a report published earlier today…shattering Keen’s forecast…Robertson, 43, challenged Keen to hike Mount Kosciuszko if values fell by less than 20 per cent.

“Keen could scarcely have been more wrong,” Macquarie’s Robertson said today in Sydney. “I wish Dr. Keen well on his long walk. The Sydney academic will do the walk wearing a tee-shirt saying: ‘I was hopelessly wrong on home prices! Ask me how’.”

Ouch.  The humiliation!

I have some sympathy for Keen’s overall analysis of credit money, which (after much brutal, hand-to-hand combative edit-warring) I finally succeeded in sticking into WP here.  As someone with broadly similar views (and some sympathies with Minsky’s analysis – although not his policy prescriptions) I reflexively (ha ha ha George Soros!) feel the need to come to Keen’s rescue.

Aside from Keen’s own pet excuse (the damn govt-manipulated FHBG rigged the market!), I think there may be other deeper, more secular factors at work as well.  The FHBG can’t explain all the massive discrepancy in prediction.  It existed at the time Keen made his prediction – although he argues the subsequent unexpected hike in the grant skewed the results even further.  His point about the correlation between any housing subsidy and a disproportionate, spiked response in pricing (because of extreme levels of leverage in the market) is valid – and made more pertinent by the fact that this particular distortion in the market would have had more of an effect on median house prices than other sectors of the housing market (such as the upper quartile). 

The proceeds from the FHBG most likely went to median house buyers, who then used the fresh proceeds to bid up the prices in the median tier.  Most mainstream analyses you see from institutional (institutionalized?) economists focus on the effect the FHBG had on the lower tier, forgetting the funds actually flow to the vendors (something Keen picks up in his analysis).  Given house prices are invariably (and very strangely) measured by the median (why not the mean average?), this would certainly have had some – but not all – of an effect.

The second, most obvious, reason for Keen being wrong is that he was simply early.  Lots of commentators predicted the GFC “too early” and paid the price by having to remain in relative obscurity forever.  Landis was spot on in August 2004.  Arguably nobody listened because he was too right.  You could say that pro-gold submissions incorporated in the Report of the U.S. Gold Commission twenty-some years ago were also prescient.  And wrong, because they anticipated hyperinflation way, way, way, way too early.  Hyperinflation only looks like a possibility in 2011-2012 and even then an unlikely possibility.  Japanese-style boa constrictor-style stag-deflation looks more likely, frankly.

In a sense, very perceptive analysts such as Murray Rothbard and Robert Landis can often be too right – seeing deep underlying trends before they manifest in the market and seeming to jump at shadows, only for the ghost of fiat paper nightmares past to come haunt us years after their plaintive screams were silenced by the mainstream.

As Ron Paul has repeatedly stated, predicting the collapse in confidence in the paper dollar system is impossible.  As impossible as predicting the exact date and time Madoff would be found out.  How gullible are your clients?  How good is your cover?  How long can you run from the authorities?  How long can you keep bribing them with lunches, seminars, conferences, papers, academic economists, employment prospects, day trips, and hookers?

It’s impossible to quantify something as ephemeral as people’s gullibility.  Housing’s gonna have a bust in Oz, but predicting when is virtually impossible.

The third, more subtle reason is that we may not be (completely) in a  pure housing bubble.  Unlike the US and the UK, our supply of housing stock is tight.  As tight as a drum.  And funding problems have resulted in a squeeze on new building projects, so this supply problem is not going to switch over into oversupply any time soon.  The tight rental market puts a floor on any drop in demand caused by marginally higher interest rates or falling employment.

Another aspect of this very un-Anglo “floor” in housing prices may be the particular ethnic mix of new migrants to Australia and the slightly more pronounced “Asianisation” of Australia compared to the UK and US.  I must choose my words carefully here, and fortunately my readership numbers are miniscule (and hopefully will remain so!) but I think this point has to be made.

Let’s take this slowly, calmly, step by step…

(a) Price-to-income ratios in some Asian cities for housing stock are insanely high – much higher than in Oz – due to population pressures (and therefore higher numbers per household living in the one apartment) and the unequal distribution of income.  Check out price-to-income ratios in Hong Kong, Shanghai, Beijing, Singapore, Mumbai and I’m sure you will be shocked.  And Hong Kong house prices are spiking up from even these lofty levels – yet again!

(b) Meriton and other bulk apartment builders deliberately target the Asian market, putting a floor on any adverse price movements here in Oz.  Asian buyers often buy not for yield, but for their kids or for strategic reasons (I may need to escape if my country explodes).  So prices for these kinds of apartments have a “natural” floor.  Money created by the Fed, finding its way to Asia and then being recycled here in housing stock.  Quite a round trip.  Unless another Asian financial crisis hits, these cashed-up newly wealthy buyers will keep the Australian housing market bubbling (ha ha ha!) away.

(c) Migrants (of all kinds) may “under-report” tenant numbers for a whole host of reasons.  One tenant may sign the lease and then get 5 friends to live in a two-bedroom apartment to pay the rent and offset his costs at university.  This happens.  Often.  This means that each apartment can potentially support higher rental than the historical rental “limits” for 2 bed and 3 bed apartments.

(d) Fertility rates in Australia remain stubbonly healthy.  Household formation has been growing in recent years.  I personally think the carrying capacity of this dry land of Oz is quickly being reached and I’m mildly suicidal over the thought that the govt is planning to allow increased immigration to “permit” the population to get to 35 million (has Rudd checked out drought-affected farmland? Poisoned rivers?  Poisoned land from the rising watertable?  This is insane!).  Nevertheless, it’s probably going to happen because the govt lives off the taxes and other funds that a higher population brings forth.  The simplistic analysis of govt mandarins in Canberra: If we have a budget problem, just bring in more people.  It works.  Until it doesn’t.  If you know what I mean.

This is obviously speculative and, as the head of the RBA, Glenn Stevens, often says, “I don’t want to get the hares running!” – but I do think there could be a secular trend towards higher housing prices in the major cities at any given income level.  I would hesitate to say that indigenous Aussies are being “squeezed” out of the housing market by foreign cashed-up invaders (that would be too harsh) but at the margins there are good (fundamental) reasons why housing may continue to detach (apparently “bubble-like”) from its historical mean average ratios (in terms of debt-to-income, price-to-income, and rental yields). 

Before some 20 year old gears up to the gills to buy a Meriton apartment (bad idea in any case!), please note the following qualifier:

I do think we are due for a housing “correction” at some point.  The private debt levels in Australia are unbelievably scary.  But any housing bust will be underpinned by a number of…of…”exogenous” factors that may put an unexpected floor on any precipitous falls.

Of course, if there’s a synchronised bust in Asia and Australia in the next few years, then watch out below!