This could make an Aussie property collapse so much worse Trade tensions still cloud the horizon America’s ‘Franz Ferdinand’ moment
By Selva Freigedo in Albert Park The recent OECD Economic Survey for Australia comes in with a warning label for the government. That is: ‘prepare contingency plans for a severe collapse in the housing market. These should include the possibility of a crisis situation in one or more financial institutions.’ What’s the problem? After years of spectacular growth property prices are now plummeting. Both Sydney and Melbourne have dropped 9.6% and 5.8% respectively from their peak last year. While they don’t see it likely that there will be a flood of mortgage defaults, the fact that property prices are falling could shake consumer wealth and, in consequence, consumer spending. This could affect the banks and send ripples through the whole economy. While the OECD thinks that Australian property will make a soft landing…they concede that these are ‘rare’. As they wrote: ‘Financial supervisors and bank regulators should be prepared in the event of a hard landing in the housing market.’ But, if the Spanish property boom and bust is anything to go by, we think that mortgage lenders could have more to worry about than just decreased consumer spending. Spain went through its own property bubble between 2002 and 2008. The country saw property values rise six times higher than the average salary during that time. There was a large influx of immigration. This, coupled with the fact that getting credit was easy, helped inflate property prices. But, once it popped, everything collapsed. ..............................Advertisement.............................. | PROJECT: U On 2 July, a world-class energy initiative kicked-off in the South Australian outback. And it has the potential to send three ASX listed miners sky-high by up to 1,750% starting today. Click here for everything you need to know. |
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Unemployment soared and property values plummeted. All of a sudden, people were unable to make their mortgage repayments. Finding a buyer was tough, property had become toxic. And even if you did, you were selling at a loss. The wave of defaults left banks sitting on a large stock of repossessed homes, which were left empty for years… …and then came the court cases. 10 years on and Spanish banks and consumers are in the middle of a battle…yep, still. You see, during the frenzy people had to be quick to snap up properties — and mortgages — or they risked losing out. Sound familiar? This brought in a lot of…ahem… ‘irregularities’, which are now coming into question. Like the ‘base clause’. You see most interest rates for mortgages in Spain are calculated from the official Euribor rate plus an added differential, which is usually about 1–2%. So for example, the Euribor is currently at -0.369%. If your differential is 1%, your mortgage interest rate payment would be a low 0.631%. But, if your mortgage has a ‘base clause’ of 5%, your interest rate would always be a minimum of 5%, no matter how low the Euribor went. In other words, you wouldn’t benefit from negative interest rates. Most people didn’t notice this clause until rates went down to negative…and they couldn’t benefit. Some courts are now ordering banks to repay overcharged amounts. Litigations have become so common that they are still affecting earnings. Many major Spanish banks have lost quite a bit of value since the height of the property bubble. 10 years on and we are still seeing the negative effects of the property excesses. Now in Australia, property sales are slowing, prices are falling and banks aren’t so keen on lending. Banks exposed to property could have a hard time maintaining the same profitability as in recent years. Yet, as we have seen with Spain, mortgage lenders are not only exposed to the property fallout but also to any legal action that could come in the aftermath of the frenzy. UBS is already contemplating this as one possible scenario. One where they see prices collapsing 27–30% and a wave of lawsuits. This is how UBS sees this this devastating scenario play out, courtesy of The Australian Financial Review (AFR): ‘The nuclear option is the most severe of five potential scenarios outlined by the investment bank's increasingly bearish analyst Jonathan Mott. ‘Titled Catching a falling knife, the note asks whether the likely impact of the Hayne royal commission on the supply of credit has been factored in to the share prices of the banks. […] ‘Under the "deep recession and mortgage mis-selling" scenario, recommendations from the Hayne royal commission for the banks to obey the law and verify all borrower income and expense information sees credit dramatically curtailed, triggering a chain of developments. ‘As credit dries up, expectations for house price falls rise leading to a slump in demand, "sentiment in the housing market turns from FOMO (fear-of-missing-out) to FONGO (fear-of-not-getting-out)". ‘UBS says banks would first cut dividends before suspending them as the falls accelerate and credit losses rise. Home owners slide into negative equity, signing up to mortgage mis-selling class actions in record numbers.’ There are already a number of class actions in the works already. A housing downturn and the possible legal action could mean more trouble ahead for mortgage lenders. Best, Selva Freigedo, Editor, Markets & Money PS: Author and economist Harry Dent sees a ‘wealth wipeout of epic proportions’ coming to Australia. He thinks the next economic upheaval is very much at our doorstep. To find out more click here. ..............................Advertisement.............................. | Introducing: The most compelling Canadian pot play for 2019 (that you’ve almost certainly never heard of) |
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Trade Tensions Still Cloud the Horizon By Terence Duffy in Melbourne, Australia A lot could still go wrong in the US–China trade talks. That’s what I wrote in last week’s update. Well we didn’t have to wait long. The arrest of Huawei CFO Meng Wanzhou by Canadian officials at Vancouver airport sent markets into a spin. It was the biggest thing to happen to markets last week. Ms Meng is among China’s elites. A part of the inner circle. To the US however, Ms Meng is a wanted offender. Investigations into Huawei and Meng Wanzhou have gone on for some time. It’s alleged Ms Meng covered up Huawei links to a firm which imported US made computer equipment into Iran. Therefore violating US laws and sanctions. So, when the US got wind of her travel to Canada, they pounced, requesting her extradition. If extradited, Ms Meng would face charges of conspiracy to defraud. They’re serious charges. She could face 30 years’ jail time if found guilty. News of the arrest couldn’t have come at a worse time. To say that this might complicate trade talks understates matters. The news rocked markets last week. US officials are trying to put on a positive spin on it. They’re sticking to the line, that the two matters are not related. But the market wasn’t buying it. All the major US indices plunged on news of the arrest. Markets already looked like they’d put in their bottom back in late October. But the news of the arrest has all the major US indices heading downward, retesting their October lows. We’ll just have to see how US markets digest the news, and if those October lows can hold over the next week or so. Trade war uncertainty is weighing down the market. Still, I’m unsure, this is the time right now to go all bearish. Or to go short on the market. Because what got lost in all the news from last week was more really positive data coming out on the US economy. Last week the Institute for Supply Management released their November purchasing managers' index (PMI). This index tracks US manufacturing. Remember, a reading above 50%, indicates expansion. This factory gauge showed a big surge up in November. The PMI reading came in at 59.3%, well up on the October number. That means factory orders are picking up and that US manufacturing is booming right now. Also last week, the US Federal Reserve released their beige book survey on the US economy. That showed the US economy continues to strengthen. Employers just can’t find enough qualified workers to fill jobs right now! Also from last week, the Bureau of Labor Statistics released the November numbers. The jobless rate remains at 50-year lows of 3.7%. Again from last week, the US Federal Reserve released their consumer credit report. Consumers still have their wallets open, if that report is any guide. Consumer credit surged last month, which suggests some confidence they’ll still have a job next month. And it’s not just the US which is strong right now. Analysis by UBS investment bank, released last week, shows Global unemployment has fallen to its lowest level in almost 40 years. That’s really bullish for the world economy. The bank’s report suggests the jobs boom might be far from over, with employment growth accelerating to a 10-year high during the first half of this year. So, does all that set off alarm bells on the US and world economy? Is now the time to bail out of stocks? You can see now, why the market is struggling to find a direction, up or down. So, what does it all mean for your investing? Well, in such a volatile state, it may be quite difficult to find your footing in the market right now. And it’s likely to get only more volatile as everyone tries to second guess the markets direction. To find the best stocks and ETFs to trade when it does eventually settle, go here. Terence Duffy, Chartist, Phil Anderson’s Time Trader ..............................Advertisement.............................. | ‘Thank you so much for your emails with valuable information. ‘I have subscribed to many people over the years, they do not come anywhere near the level of what you give us. Please keep up the good work.’ Phil Anderson’s Cycles, Trends and Forecasts reader Wayne Phil Anderson has just released a research report that maps out how he believes markets will move for the next eight years. It’s flat-out fascinating. You can get your hands on it here. | .......................................................................... |
America’s ‘Franz Ferdinand’ Moment By Bill Bonner in Baltimore, Maryland Whatever good was done by the Trump/Xi trade war truce in Buenos Aires was likely undone by what was done in Vancouver Airport earlier this month. Bogeyman programme The US stock market warmed to the idea of a ceasefire last Monday morning. Then came word that the US government had arrested Meng Wanzhou, the chief financial officer of Chinese technology firm Huawei. The feds got the Canadians to collar the poor woman while she was changing planes in Vancouver. Few people in the US have ever heard of Huawei. Still, the event had a pin-like look to it. And by the end of the week, investors had lost $1 trillion. This morning, by inference from futures trading, they are set to lose a half a trillion more. What was Ms Wanzhou’s crime? Mass murder? Grand larceny? Nope. Even she didn’t know what the charges were. But whatever they were, the US government had not only made a federal case of it, but an international ‘cause célèbre,’ too. What Ms Wanzhou is accused of is neither a genuine crime nor a misdemeanour. Instead, she apparently ran afoul of the Deep State’s bogeyman program. Officially, her company is accused of using shell companies to access the Iranian market in defiance of US sanctions on the country. That is, it is not enough for the feds to regulate every living creature and every transaction that takes place in the 50 states. They also claim authority over the rest of the world. No money can change hands without the consent of the US (which controls the world’s reserve currency — the dollar — and the international banking protocols — the SWIFT system — that allow people to transfer money from one country to another)… Nobody can trade with a foreign country if it doesn’t meet US approval… And no sparrow can fall anywhere on the planet without a shove from the Pentagon. Ms Wanzhou was told to jump. She apparently didn’t jump high enough. Deep state hysteria Ms Wanzhou is the CFO of the second-largest cellphone maker in the world, and the daughter of its founder. Huawei has 170,000 employees. It is as important to the Chinese government as General Motors once was to the US Of course, Ms Wanzhou has nothing against Iran. China has nothing against Iran. Most of the whole bloomin’ world has nothing against Iran. But the Deep State pretends to protect Americans from bad guys — in this case, Iranians — by imposing sanctions on people all over the Earth. You can imagine what a hullabaloo would follow if the Chinese pulled a similar stunt. Suppose they tried to boss other nations around with a ‘sanctions’ list that included some half a million of the world’s leading business and government officials. And suppose, honouring a Chinese warrant, the authorities in Singapore picked up Mark Zuckerberg or Bill Gates. The Chinese, for example, regard Taiwan as their territory. And they regard the present Taiwanese government as illegitimate traitors. They could easily announce ‘sanctions’ against anyone trading with Taiwan…which would implicate thousands of American businessmen, politicians, and government employees. Then, stopping at Singapore airport for refuelling, perhaps en route from a conference in Moscow back to a home office in Sydney or San Francisco, an executive could be nabbed by the Chinese — for an offense that Americans might find silly, irrelevant, or plain stupid. If humans were cows or tree squirrels, no offense might have been taken. But we homo sapiens live in a world of jealousy, hate, and revenge. The US would be outraged. It could be an Archduke Franz Ferdinand moment — the kind of event that is hard to reconcile with today’s power politics…and hard to ignore or forget. In the present case, the Chinese, who value ‘face’ more than money, took offense. They see the arrest as illegal, high-handed, and a breach of the ceasefire reached only a week earlier. That kind of deal Trade deals are win-win deals. They are tit-for-tat deals. They are give-a-little, take-a-little deals. And the trouble with the seizure of Huawei’s CFO is that there was no give in it. The Chinese must have said to one another, ‘Oh, it’s that kind of deal, is it?’ And yes, they were right; it is that kind of deal. A raw power deal, where might doesn’t necessarily make right…but it prevents anyone from saying anything about it. The Deep State’s imperial britches are very large, in other words. But arresting Ms Wanzhou may have signalled that the Trump foreign policy team has outgrown them. Not that the US is not still the muscular man for whom they were made long ago. But in the last 40 or so years, it has added more than a little fat around the middle. It has troops in 170 countries. Its government has 20 times the debt it had in 1980. Its people suffer 100 times more regulatory control. Its stocks (in Dow terms) went from being valued at 1 ounce of gold in 1980 to more than 20 today. The flab is everywhere — debt, waste, boondoggles, cronies and zombies, regulations, fantasies, absurd myths, fake news, BS statistics, phony money, claptrap wars…and trillions of dollars’ worth of promises that can’t be kept. Many of those promises are marked to market each day — in the stock market. Prices go up. Or they go down. We’ll see what they do next. Regards, Bill Bonner ..............................Advertisement.............................. | Be one of the first in Australia to get a hold of Sam Volkering’s… In it you’ll discover: How to BUY, SELL and SECURE your cryptocurrency… How to set up your own personal crypto wallet… And the details of a brand new crypto king that could soon overtake the $112 billion behemoth that is bitcoin. 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