In today’s Markets and Money you’ll get the long-awaited look at why America’s mushrooming mortgage fraud fiasco is bad news for Australian housing. All you housing bulls will have to tear yourself away from counting your rivers of gold for a second and pay close attention. But first, speaking of gold, take a close look at the man below.
In case you missed it, gold set a new high in the futures market overnight at $1,374.15. Minutes from the last Federal Reserve meeting showed the lunatics in charge of America’s money supply want Americans to fear inflation so they spend their money before it’s made worthless. The commodity markets responded with enthusiasm.
In fact, gold’s intraday high was fourteen dollars and fifteen cents higher then when Mr. T went on Bloomberg television to represent a gold company. Your first reaction when you see Mr. T on Bloomberg , draped in gold, might be “sell.” It’s a comic scene and apparently absurd.
But wait! Mr. T is not on television to sell you gold. That would surely be a sign of the top. He’s on television representing a company that BUYS your gold. And that’s how you know that the popular culture doesn’t really understand gold as money yet. When the man in the street thinks that high gold prices are a reason to sell your gold jewellery now, you know the gold bull has not reached the mania phase yet.
By the way, Mr. T is an eloquent speaker, isn’t he? He said that in ancient times gold was thought of (maybe by the Incas, or someone like them) as “the sweat and tears of the sun.” And if he really did buy gold back in the late 1970s, he’s a rich man now (although he had a fair bit of waiting to do before the post Bretton Woods global fiat standard money system began collapsing into ruin.)
But none of this is really big news here in Australia. The gold price in Aussie dollars won’t move up with monster truck force until the U.S. dollar gets stronger. Yet the Aussie dollar is fast approaching parity. No sign of weakness there, not yet.
Right now, Australia is the main global beneficiary of the risk carry trade. Cheap global interest rates are driving investors into high-yielding currencies and commodities. That’s double plus good for Australia. It’s going to take a reversal of the “risk” trade for Aussie gold to move up and the Aussie dollar to move down.
There are plenty of risks, too. One of them, for example, is the continued blasé attitude about Australia’s dependence on foreign capital to fund its real estate lending. “Talk of housing bubble hot air,” is the headline of Katja Buhrer’s article on page 58 of yesterday’s Australian Financial Review. IN a moment, we’ll see if you can spot the conflict of interest.
But in the story, Ian Graham, the CEO of QBE LMI says that it’s a good sign banks are increasing loan-to-value ratios from 90% to pre GFC levels of 95%. Seriously. He says, “It’s a positive sign that [banks] don’t have credit concerns about a 95% loan not being prudent or suitable for the borrowers…I wouldn’t see the banks as becoming less prudent. I’d see them as feeling more comfortable, particularly given the positive outlook for the economy.”
Because nothing could ever go wrong lending 95% of a home’s value to a borrower based on a good feeling about the economy. Of course not! To prove how good things are, or how bad they are not, why not trot out a study that tells you what you want to hear!
BIS Shrapnel managing director Rob Mellor, in the same article, suggested people like your editor just “don’t get Australia.” “We’re chasing shadows out there, looking for reasons why a worst-case scenario would happen, when we did all that back in the latter part of 2008 and the early part of 2009 and we got through the worst of that.”
“So why would we do it again until we see clearly the risk of something overheating…or some of the fundamental drivers of the economy changing that actually would lead to a reversal of the economic growth rates predicted and therefore a substantial rise in the unemployment rate.”
You’d think one of the “fundamental drivers” of the Aussie housing market is the fact that Aussie banks borrow about 30 cents of every dollar they lend from someone overseas. In another global capital crisis, this could be a problem. It could also be a problem that Aussie banks have 60% of their loan books secured by residential property. As Buhrer says, “the health of the economy is linked to house prices.”
That’s another way of saying the health of the economy is linked to the health of banks. Not a problem right? Not if house prices keep going up. And just a few pages later, we find that both QBE and BIS are predicting just that!
“Stronger markets’ prices tipped to grow 20pc” reports Michael Hobbs on page 61. He reveals that “median house prices in Sydney, Perth and Adelaide are forecast to rise by around 20 per cent in the next three years, according to new research.”
Whose research, you might wonder? “Mortgage insurer QBE LMI’s Australian Housing Outlook compiled by BIS Shrapnel found an improving economy and a shortfall in dwellings will fuel a rise in house prices.
How much exposure do you think QBE has to commercial and/or residential real estate in Australia?
Meanwhile, U.S. mortgages are the new asbestos. How long will it be before dozens of class action lawsuits are filed against U.S. banks? Pick your reason!
Homeowners can argue that banks illegally foreclosed on homes they couldn’t prove they actually owned. In a purely rational way, even if you WERE foreclosed on legitimately, or even if you KNOW you can’t keep your home, you might be able to keep it anyway by threatening the bank with legal action.
And what bout investors who can claim that the bank sold a security it didn’t own? If it were just a matter of the big banks versus hundreds of thousands of even millions of so-called “deadbeat borrowers,” bank lobbyists could convince the U.S. Congress to relax foreclosure laws and put these peons to the sword.
But the big investors in mortgage backed securities won’t be pushed around so easily. They have deep pockets. They have lobbyists too. And they have investors to answer to. Going to court is a real option.
Wells Fargo, another U.S. bank at the centre of the storm, admitted yesterday that it was guilty of the same “robo signing” process for handling thousands of foreclosures, perhaps illegally. It joins JP Morgan, GMAC, and Bank of America.
Jamie Dimon, the CEO of JP Morgan, thinks the banks will get off with a fine. He told investors on a conference call that, “We don’t think there are cases where people have been evicted?…?where they shouldn’t have been…Obviously it will increase our costs a little bit and maybe we’ll have to pay penalties eventually to some of the [attorneys-general]”.
Somebody tell him he’s dreaming.
for Markets and Money