The RBA’s Very Own Bubble

Solid rock, Standing on sacred ground
Living o-on borrowed soil
And the winds of change are blowing down the line
Solid rock, Standing o-on sacred grou-ound
Living o-on borrowed ti-i-i-ime
And the winds of change are blowing down the line

Goanna – Solid Rock

The Aussie housing industry is standing on shaky ground. Like sand, the support for prices is seeping away. (We’re told sand is actually quite a good foundation for a house, but the simile sounds good.) So here is the analysis, broken down:

“About 58 per cent of Brisbane residents with mortgages now meet the “stress test”, up from 36 per cent a decade ago, according to a National Centre for Social and Economic Modelling. That tops the 56 per cent ratio for Sydney mortgage-holders, a level little changed over the period… Melbourne’s ratio, meanwhile, has jumped to 53 per cent from 36 per cent, as the city’s house prices surged.”

  • Now to the reason for those figures, according to the popularised analyst Jeremy Grantham:

“The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times)… Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be.”

  • How will it play out?

“The weak-point of the Australian outlook is consumer indebtedness” – Melbourne Institute

“Prepare for rate pain Australia – IMF

  • And the symptoms that the bubble is popping now:

“Auction clearance rates recovered in Adelaide and Brisbane, while Melbourne experienced a low weekend. Buyer advocate David Morrell said: ”Super Saturday was a super flop” and the market was being driven by the bottom end.”

Construction activity in Australia slowed for a fourth straight month in September, with the home building sector showing particular weakness.”

  • In summary: Uh oh.

Kochie to nationalise the ASX

Yes, he is “all for free markets,” but when it comes to a foreign takeover (sorry, merger) of the ASX, Sunrise presenter David Koch is not happy. He sees it as some sort of invasion from Singapore for the two exchanges to merge. Better still, he advocated, on national TV, having the Australian government take over foreign stock exchanges!

The news about the merge is causing some confusion and going by the outraged looks on the faces of the Sunrise presenters, people seem to think this sort of event is of national importance. But there is no added significance from the ASX being bought, or merged, to other companies experiencing the same thing. The ASX is merely the company which provides the service of a stock exchange. Corporate law functions without it. The fact that the ASX is itself listed on the stock exchange illustrates that point.

So calm down Sunrise watchers. There is no reason to panic. The change isn’t even terribly symbolic. European and US stock exchanges having been doing the same thing for years. Hey, it’s even the same guy who is up to his old games.

As for benefits from the merger, a lot of people are getting rather enthusiastic: “The Australian and Singapore Securities Exchanges have unveiled the perfect merger. I’ve never seen one better, or indeed one that comes even remotely close. It really does make one and one add to three.”

That last bit should have you worried.

The winners, the losers, and the politicians

Like slow motion dominoes, banks keep falling in the US. 7 on the Friday before last for 139 so far this year. But they are all small. The larger companies are relatively safe, even if they make a mess of things. That’s because they have friends in high places. And by friends, we mean politicians that receive their donations.

But things can turn on a dime in the political world. Politicians that were against many of the bailouts seem to be faring very well in terms of donations from bailed out companies!

Back to bank failures, how does the mess stack up compared to previous crises? features an article that puts things into perspective:

“We’ve only had 294 failures this cycle, but it is a big deal: adjusted to current dollars, the Depression banking crisis was $100 billion, the S&L crisis was $923 billion, and the current crisis is nearly $8 trillion.

“So while FDIC chairwoman Sheila Bair said the current crisis would be “nothing compared with previous cycles, such as the savings-and-loan days,” it’s actually much bigger, because the financial sector had grown to be nearly half the economy by 2006 – as measured by the earnings of the S&P 500.”

So for all those claiming the GFC wasn’t as bad as it seemed, the US continues to prove them wrong. But not just on the banking side of things, as CBS’ 60 Minutes showed:

“The economic jam we’re in has topped even the great depression in one respect. Never have we had a recession this deep with a recovery this flat.” Wow, who would have guessed? But wait a second… it’s exactly in line with what Austrian economic theory would suggest. Government action will delay the recovery, not stimulate it.

Foreclosuregate comes home

Obama has become everybody’s favourite punching bag. With his approval at an impressive 37%, even Federal Reserve Economists from Massachusetts feel perfectly comfortable giving him some stick.

“One of the Federal Reserve’s top economists denounced the Obama administration’s approach to stemming the growing foreclosure crisis, saying it’s part of “three years of failed policies” intended to help homeowners avoid losing their homes.”

“The vast majority of these homeowners now owe more on their home than when they signed up for Obama’s plan, because of the fees and surcharges that have been rolled into the mortgage.”

When it comes to good intentions, but disastrous results, nobody outdoes government.


Markets are pretty much a measure of Ben Bernanke’s body language right now. If he slouches, markets fall. If he smiles, they fly. That’s because the world is trying to work out how much QE will be decided on. Having already sparked rising prices in commodities, Ben knows his tight wire act is looking very very risky.

That’s why he has called in the real experts for advice. You know, the ones who stand to profit from the massive asset purchases. “Fed Asks Dealers to Estimate Size, Impact of Debt Purchases” Bloomberg reports. This is genuinely satirical. Except for the fact that the Federal Reserve is of course owned by the big banks. “How should we serve you”, they ask of their owners.

We are all Austerians Now

Meanwhile, Austerians are rejoicing, with impressive UK growth figures in the face of massive budget cuts (and in the face of the likes of Krugman and Stiglitz). In fact, the growth isn’t just impressive: “… official figures showed the economy growing at its fastest rate for a decade.” Wow, a decade of debt binging and the country does better under austerity! Then again, Germany did much the same right after its budget cuts. And the trend continues, with German unemployed numbering below 3 million, which is where the figure was before the GFC hotted up. So even the statisticians should be Austerians now!

Bloomberg Spikes the Animal Spirits is doing all it can to revamp the economy. It’s pushing the good news right up to the top of the column. Here is a quick rundown of an article encouragingly entitled “U.S. Economy: Confidence Increases More Than Forecast“.

The 1st paragraph begins with “Home prices in 20 U.S. cities rose at a slower pace than forecast in August from a year earlier, reflecting slumping sales as the effects of a tax credit waned.” Oh, that’s not good. Perhaps the 2nd paragraph will be positive? Nope, it outlines just how disappointing prices were. The 3rd paragraph explains why the outlook is bad and the 4th paragraph elaborates: “Prices are declining in line with the widening imbalances between housing demand and supply, and we can expect this trend to continue.”

But finally, by the 5th paragraph, we get to the topic the title highlights – confidence. It’s all about the “animal spirits”. If people get confident, they will spend. The fact that they have no money is irrelevant. They will borrow more. A lot used to be written about a recovery requiring the releveraging of the consumer. Here are some stats that will have Keynesians worried: “Home lending in the U.S. will fall below $1 trillion next year to the lowest level since 1996, according to the Mortgage Bankers Association.”

That’s ¼ of 2003 levels!

Shooting yourself in the rhetoric

Merv King, head of the Bank of England, has caused quite a stir. You wouldn’t pick up on the controversy from listening to the speech, unless you understood quite a bit about banking. Merv, it seems, actually advocated getting rid of fractional reserve banking! He also came up with some other pearls of wisdom, including pointing out that failed bank Northern Rock was actually the safest bank according to Basel II criteria! But the highlight came with this admission: “Of all the many ways of organising banking the worst is the one we have today.”

This from the guy who has the most influence over the very thing he criticises! Someone throw a shoe at him…

Gotta love capitalism

There is nothing like the profit motive for bringing people together. Reuters reports that Palestinians are building Jewish housing! Alongside Jews too! Sure, they don’t like it much, but they get paid, so that’s that. One Palestinian worker sums it up: “What difference does it make? We have lived with Israelis and we will have to live together in the future. I’m pleased that I will be able to make a living.” The best part is that the Palestinians are defying their leaders by ignoring the imposed boycott.

Treasure your Treasuries while you can

Reuters reports “China minister says dollar printing “out of control. And they haven’t even started QE2 yet! Rhetoric is rapidly approaching the Tea Party’s ad showing China’s future generations laughing at American mistakes. But if I owned a pile of treasuries, it wouldn’t seem so funny. Who’s the greater fool here? The fool, or the one who lends money to the fool? Of course, there is not necessarily any true consequence for China if the value of its US treasury debt holdings were say halved. That debt was bought with printed money too. No real loss then. But political clout, you betcha!

Bondies pay the price

“An Englishman’s word is his bond.” As for the Irish, it seems bond holders are going to take a hammering, despite government intervention. “Holders of around €370m of even higher risk junior debt were offered just 1c per €1,000 of bonds — though that is sweetened with a 5pc fee for accepting the offer.”

Yes, bondholders are taking hits. But this is only a warm-up round. When sovereign debts start to go, bondholders won’t know where to leave their money. Oh wait, what about gold? Of course, we hope that austerity manages to turn everyone around before things get desperate. But doing the math isn’t an inspiring exercise in that respect.

Random bits at the end

“More than one in 10 [Australians] are currently living below the poverty line,” according to welfare organisations. And speaking of 1 in 10, the NBN continues to rouse controversy, being labelled a ponzi scheme.

The US Election is … well … very American. Candidates include Young Boozer, Krystal Ball, Rich Whitney, whose surname was misspelled “Whitey” and four candidates named Strange.

“Insider Selling Volume at Highest Level Ever Tracked”

“We can’t predict recession, says Bank of England deputy governor Charles Bean”

Until next week,

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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