The Credit Crisis Financial Stocks Short Journal

Quote from m22au:

Thanks for your post ralph, and for posting that link to the Scribd document (have not started reading it yet).

Have you read many articles written by Steve Keen?
http://www.debtdeflation.com/blogs/

To paraphrase Mish Shedlock (and I notice that on the scribd document, "mikeshedlock1399 read this 32 minutes ago"), Steve Keen will be proven right, but just very early in his analysis of the Aussie housing bubble.

edited to add:

While I agree that Aussie house prices are high by a variety of measures, one thing that may provide *some* kind of floor under the housing market is the tax treatment of investment properties in Australia.

Specifically, it is possible to make a loss on the operating costs of housing investment (eg. rent received less interest paid on loans less maintenance expenses), in the hope of making a capital gain.

So let's assume that the RBA cuts interest rates to 0.25%. In this situation there will still be demand for housing (and those who won't sell) given this generous tax treatment.
More...

I'm aware of Steve Keen and Mish and read them from time to time. They're a bit too dogmatic in their views for me, so I try not to pay too much attention..

As for tax treatment of investment props, it doesn't appear to be any different than here (and I own several apartment buildings). Lots of folks here buy stuff w/negative cash flow and negative income, write off the losses each year, and hope to make capital gains over the period of a number of years. Works well until it doesn't than its hello short sale, bk, foreclosure, or money pit or something of the ilk. The Fed has slashed rates to zero here, and its certainly better for ARM holders than rates at 5%, but it won't change the fact that they have a mortgage of $500K on a building worth $300K.
 
Looks like the next Fed bet will be when they will raise in 2011, 2010 hike is now totally off the table for real(inflation, resource utilization and inflation expectations are all supporting 0% rates). 1st meeting is on Jan 25-26, so the Feb or Mar contract looks attractive. 1 or 2 meetings more than my current bet, there is some juice left plus some kind of premium for an emergency hike(Which there is almost no chance of happening in my view)

But I will only buy after a decent sized decline, NFP day is when they typically happen
 
I'm pretty excited about NFP day. My guess is that we get an excellent number, Bob Barberra has another on-air orgasm, and the Kudlowites tell us that "our economy is fine, and what happens in Europe or China means nothing". It should mark an excellent spot to increase bets on continued deleveraging.
 
Nice, even somewhat level-headed piece from Steve Keen on why a slowdown in Oz is imminent, with or without the external shock of a China or European bust ...

http://www.debtdeflation.com/blogs/...source=feed&utm_medium=feed&utm_campaign=feed

Deleveraging returns
Published in May 25th, 2010
Posted by Steve Keen in Debtwatch

Market economists have spent the past few months searching each major data release for confirmation of their hope that the economy is returning to growth and that a ’sustainable recovery’ is underway.

Most currently argue that the fundamentals in Australia are good – low unemployment, a strong recovery in equity markets (notwithstanding the 14 per cent sell-off in the past month), a significant number of companies’ results beating expectations and so on.

The same economists and commentators (none of whom actually saw the GFC coming) then argue that if the recovery from the GFC is derailed, it will be because of an external shock – a China-led commodities slump, the sovereign debt crisis, or an abrupt carry trade reversal when the Fed starts raising rates (though the recent slump in the $A implies this is taking place now without the Fed’s assistance).

What these analyses overlook is the internal indicator which enabled me (and handful of other non-orthodox economists) to anticipate the GFC in the first place: the ratio of debt to GDP, and its rate of change. On this indicator, even if none of these other ’shocks’ eventuate, Australia still faces either a recession, or a return to the unsustainable trends that set the stage for the GFC.

To understand why, we need to think back to the early 1980s when the Hawke/Keating government allowed foreign banks to flood into Australia, and when “Bondy” and “Skacy” were regarded as national heroes—rather than as the Ponzi merchants that subsequent events proved them to be. This public embrace of Ponzi finance gave official backing for what was in reality a debt-driven economic system, rather than one based on real economic growth.

Rising debt became increasingly important for sustaining economic activity, and a culture of addiction to credit began that lasted (despite major disruptions such as the late-1980s interest rate blow-outs and the early 1990s recession) until 2008. Australians became increasingly comfortable with high levels of mortgage debt, because house prices were also rising; but their ‘comfort’ resulted from increases in asset prices that were themselves caused by even larger increases in debt.

That process came to an abrupt halt as 2007 came to an end, and the sudden withdrawal of debt-financed spending is what really caused the GFC, both here and overseas.

Australia then sidestepped the start of the GFC partly by fair means—a huge government stimulus, substantial interest rate cuts and a China-led export boost—and partly by foul—enticing households back into mortgage debt via the First Home Vendors Boost.

This government policy temporarily reignited the debt culture, but the continuing GFC (and a series of RBA rate rises) has finally convinced Australian households to return to the pre-FHVB tendency to delever—mostly through a sharp decline in owner-occupier borrowing, as I discussed last week in “Mortgage Finance Falters” (the data in these charts doesn’t yet reflect the substantial drop-off in owner-occupier mortgage debt; this may be because these aggregate debt figures aren’t seasonally adjusted, whereas the ABS data on new finance for housing is seasonally adjusted).

Small business borrowing has also seen dramatic declines. In fact, only one major group of borrowers – housing investors – continues to leverage up, based on current data.

But even they seem to be reaching a plateau at about 25% of GDP—and as might be expected, the increase in investor mortgage debt was triggered by the FHVB. Prior to its introduction, investor mortgage debt was trending down from 25.6% of GDP towards 24.75%. It then started to rise as the FHVB-inspired bubble took off, and hits its new peak of 26.2% in March 2010.

Widespread deleveraging is therefore the elephant in the room for economists hoping to find evidence of ’sustainable growth’ in company reports, and marginal changes to the unemployment data. If deleveraging gather pace, then unemployment will rise; if instead debt levels rise, then unemployment will fall, but based on an unsustainable trend in debt to income.

In the chart below I have used RBA data to demonstrate why this is so (the source files are D02Hist, G07Hist, and G12Hist, which themselves repackage ABS data). The key reason is that the more Australians borrow in relation to incomes, the greater is the proportion of aggregate demand that is simply recycling of debt capital. While this causes a boom as debt levels rise, this process also works in reverse.

I calculate the proportion of aggregate demand that is debt-financed by dividing the annual increase in debt by the sum of GDP plus that change in debt. From contributing nothing to aggregate demand at the end of the early 1990s recession, debt-financed demand rose steadily to hit a peak of around 19 per cent of demand in 2008.

Now, as private deleveraging gathers pace, aggregate demand is plunging, meaning that nearly a fifth of Australia’s ‘income’ is in jeopardy because Australians are no longer willing to borrow to fund the additional spending. The First Home Vendors Boost—which caused the turnaround in private deleveraging that is evident in the data for 2009—and the increase in government debt stopped the debt contribution from turning negative (as it did in the USA). Continuation of that trend is unlikely this year—and even if it did continue, we would be basing our continued prosperity on a return to the debt-induced growth that caused the GFC in the first place.

The final, disturbing aspect of the chart below is how closely unemployment correlates with debt-funded demand changes: since 1980, the debt contribution to aggregate demand explains 90% of the level of unemployment.

While correlation does not prove causation—and there are more causal factors than just the change in debt—in this instance the causal mechanism that would lead to recession and high unemployment is so simple that only a neoclassical economist could contest it. Our economy is demand-driven; as debt’s contribution to demand falls, aggregate demand slumps, and the number of jobs that can be supported by aggregate demand will also fall.

The odds are that Australia is headed for a very painful deleveraging-induced recession. We can only hope that the problem is not amplified by the “external shocks” from the still-extant GFC.
 
Yeah, what the 'Europe doesnt matter' folks are missing is not the trade or financial links but the stock market link. I'm on the view that this recovery was partially the result of a self-fulfilling prophecy created by the stock market, which spread to the corporate bond market, liquidity came back and enabled people to survive, that supported GDP. We are seeing that in reverse as people get out of risk assets. Interestingly enough in my view one of the factors in determining the short-term fair value of stock prices are stock prices
 
If the risk trade really collapses we will see the Morgan Stanley laughable theory of credit also collapse. They argued that the Fed Senior Loan Survey at record highs in terms of credit wasn't a big deal because its 2nd derivative had turned and historically that correlated with lots of issuance from the capital markets(essentially IG bond issuance), they were saying that travelling long distances and having a tire blow up was not a big deal, you just take the spare one and keep travelling, totally neglecting the fact that you didn't had a spare anymore(Not to mention the fact that only big business typically access capital markets)
 
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