Surprise Attack

Why is it that politicians only ever speak the truth when they leave office?

The front page of The Australian on Wednesday 21 March 2018, had the headline…

‘Costello in Warning on Rates Pain’

Here’s what our former Treasurer had to say…

Of course they [households] are [indebted] because we made money so cheap. And we made money cheap because we wanted them to borrow, that was the whole idea…We wanted them to borrow so they’d get the economy moving.’

Ever since June 1991 — our last official recession — the textbook approach to generating GDP growth has been to encourage households to borrow to ‘get the economy moving’.

Australia’s central bankers — past and present — are not the authors of this economic textbook. They simply played ‘follow the Federal Reserve leader’…Greenspan, followed by Bernanke and then Yellen.

The Australian article stated that household debt in Australia ‘had risen to 120 per cent [of GDP] – higher than in any other country except Switzerland.

Our economic ‘success’ has really been a massive failure…setting households up for an extended period of financial pain and in some cases, ruin.

Our recession-free world record is nothing more than a statistical sham. The more we borrow, the more we have to spend. Therefore, the higher the amount of recorded economic activity.

We have borrowed our way to economic ‘prosperity’.

Japan did the same in the 1980s, and Ireland in the early 2000s.

Neither were economic miracles…they were economic mirages.

Both countries paid a heavy price when the assets backing the accumulated debt plummeted in value. Severe recessions are the ‘yin’ to the ‘yang’ of an extended period of debt-fuelled GDP growth.

We are headed down the same path. The die is cast.

Recession is Coming

A brutal and nasty recession is coming.

And probably a little sooner than anyone expects.

If you’d like to find out all about how to counter the effects of a recession, be sure to have a read of our free article here: ‘The Aussie Recession Survival Guide’.

Australian households took the RBA’s ‘cheap money’ bait, hook, line and sinker.

Now it’s simply a matter of time before that ‘cheap’ money becomes not-so-cheap.

Interest rates are on the rise…but most Aussie mortgage holders don’t realise it.

According to (emphasis added):

The Reserve Bank of Australia may not begin lifting interest rates until 2019 after reinforcing its expectations for only gradual improvement in wages growth and inflation over the year ahead.

The central bank’s cash rate remained at a record low of 1.5 per cent for a 19th consecutive month…

Phew, we have some breathing space. Rates are not going up until 2019.

The RBA may have no intention of raising rates, but that’s not what’s happening beyond the shores of our island nation.

The US Federal Reserve — you gotta love this logic — is desperately trying to increase interest rates so they have a buffer to decrease them again when the next debt crisis hits.

I know they tell us it’s because the US economy is heating up, but that’s an illusion. The real reason is that they need some interest rate ammo for GFC Mark II. As reported by The Wall Street Journal:

The Federal Reserve said Wednesday [21 March 2018] it would raise short-term interest rates a quarter-percentage point [to 1.75%] and signaled it could lift them at a slightly more aggressive pace in coming years to keep the strengthening economy on an even keel.

For the first time in over 17 years the US cash rate is higher than ours.

Despite commentary to the contrary, the RBA won’t be in any hurry to follow suit.

Our central bank will be happy to maintain the difference for as long as possible…hoping our dollar will weaken against the US dollar.

Making our exports cheaper and imports more expensive.

So nothing to worry about? Not really.

According to The Australian article…

Experts fear a series of rate hikes on mortgages – out of cycle with the Reserve Bank – has begun…

Both Suncorp and Westpac have announced modest increases in mortgage rates and business loans.

Why? As The Australian article notes…

Australia’s banks are heavily dependent on offshore sources of funding, which are influenced by US interest rate movements.

And those interest rate movements are not solely determined by the Fed.

On 21 March 2018, Bloomberg published an article titled…

‘Soaring U.S. Libor trickles into funding markets worldwide’

What is ‘LIBOR’?

This is from the US Federal reserve site:

London Interbank Offered Rate [LIBOR] is the average interest rate at which leading banks borrow funds of a sizeable amount from other banks in the London market. Libor is the most widely used “benchmark” or reference rate for short term interest rates.

LIBOR is the rate banks use to borrow money from each other.

For several years the rate hovered between 0.2% to 0.3%. The not-so-technical term for rates at this level is ‘cheap money’.

LIBOR is the rate banks use to borrow money from each other. 23-03-2018

Source: Federal Reserve Economic Data
[Click to enlarge]

However, since 2016, LIBOR has been on the rise. The rate is currently around 2.3%…a hefty 2% increase. That’s a cost that has to be passed on

Here’s an edited extract from the Bloomberg article…

From Riyadh to Sydney, short-term funding markets worldwide are starting to feel the effects of soaring U.S. dollar Libor rates.

The surge in recent weeks in this key global short-term financing indicator may have a mostly technical explanation, meaning it’s probably not flashing warning signals like it was during the credit crunch or the European sovereign debt crisis. Nonetheless, it’s still making funding more costly for some borrowers outside the U.S.

The three-month London interbank funding rate rose to 2.27 percent Wednesday, the highest since 2008. The concern is that the Libor blowout may have more room to run, a prospect that borrowers and policy makers in various markets are just beginning to grapple with.

False Security

The prospect of having no official rate rise until next year has given highly indebted Aussie households a false sense of security.

What people don’t realise is that the RBA is only one part of the interest rate equation.

If the LIBOR rate continues to climb higher, our banks will be forced to pass these higher costs onto borrowers.

The era of really cheap money appears to be over.

There’s a surprise attack coming and it’s going to be a really nasty.


Vern Gowdie
Editor, The Gowdie Letter

Vern Gowdie has been involved in financial planning since 1986. In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners. His previous firm, Gowdie Financial Planning was recognized in 2004, 2005, 2006 & 2007, by Independent Financial Adviser (IFA) magazine as one of the top five financial planning firms in Australia. He has been writing his 'Big Picture' column for regional newspapers since 2005 and has been a commentator on financial matters for Prime Radio talkback. His contrarian views often place him at odds with the financial planning profession. Vern is is Founder and Chairman of the Gowdie Family Wealth advisory service, a monthly newsletter with a clear aim: to help you build and protect wealth for future generations of your family. He is also editor of The Gowdie Letter, which aims to help you protect and grow your wealth during the great credit contraction. To have Vern’s enlightening market critique and commentary delivered straight to your inbox, take out a free subscription to Markets and Money here. Official websites and financial eletters Vern writes for:

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