In today’s Sydney Telegraph we read that, “Low-documentation loans worth more than AU$8 billion were written in the past financial year.” Uh oh. Are Aussies being led down the same subprime path that has led to the utter financial destruction of so many Americans?
“Low-doc loans – where borrowers self-certify their income in the application process – grew 26 per cent in Australia to AU$8.37 billion in the 12 months to June. The Reserve Bank recently said low doc loans had ‘become more common over recent years’ and now accounted for about 7 per cent of all outstanding housing loans.”
Ah. Well 7% is not so bad. In 2001, subprimes accounted for less than 10% of all new mortgages in the US and total loan volume was $US173. Over the next four years, things really took off. Subprime volume exploded both as a percentage of mortgage activity and in dollar terms. From 2002 to 2006 over US$2.1 trillion in subprime loans were made.
“Markets fear banks have $1 trillion in toxic debt,” reports the Independent in the UK. Do you begin to see the problem here?
By the way, we are not suggesting that Australia has exactly the same kind of subprime problem as the US. It doesn’t. But it DOES have a love affair with dangerous debt. And that’s not good.
What we ARE suggesting is that there is massive earthquake coming in financial stocks. American banks and brokerages are being forced to take back on the balance sheet billions in loans that may, in fact, be worth half of their book value. And that’s being generous.
What is not clear to anyone just yet is whether this chasm forming in the credit market and in financial stocks will have any impact whatsoever it the “real” world and in the “real” economy. We’d humbly suggest that it will.
Meanwhile, “Borrowers hit with interest rate rise,” reports Nicki Bourlioufas at News.com.au. Yep, interest rates have moved up again.
The Reserve Bank did what nearly everyone expected of it and raised the cash rate to 6.75%. “The latest rise of 25 basis points takes official rates to 6.75 per cent and means variable interest rates will soon rise to 8.57 per cent, an 11-year high, up from 8.32 per cent. On an AU$200,000 home loan over 25 years, repayments are set to jump by AU$34 a month.”
Will these steady body blows to the personal balance sheets of Australians begin to tell on the overall growth rate of the economy? Yes. But when? Your guess is as good as ours. We are constantly amazed at how comfortable so many people are taking on so much debt with little prospect of ever repaying it.
The hallmark of every noteworthy financial panic is some particular event in which public perception changes and the psychology of the boom gives way to the despair of the bust. Emotions turn from greed to fear. That event hasn’t happened yet in this epic credit bubble. But it will.
Meanwhile, the “Mining boom just gets bigger,” writes the AAP. “Access Economics said the total value of definite projects in the September quarter is now AU$178 billion, an increase of 20% over the previous years. The value of projects in planning had reached a staggering AU$357 billion.”
No wonder the economy is overheating. This will have to go down as the greatest boom of all time in resources. The only question now is how long it will last. Jim Rogers and other resource bulls say that, volatility notwithstanding, it could have another seven to fifteen years. And he could be right.
Another big question mark as we near the end of the year, though, is how healthy China’s economy is. We believe the resource bull market could survive an American recession and even a much worse situation in the credit markets.
However, China has a bubble of its own in its local stock market. The economy has been growing at break-neck pace for years now…at the expense of the environment and public health. China is industrialising at precisely the moment the world is facing a structural shift higher in energy prices.
Something has to give. Gold is at US$822. Oil nears US$100. The bear market in credit threatens to erase equity and capital in some of America’s most prominent financial firms. And the Dow rallies. Who ever said markets are rational?
Markets and Money