May 2009 - The Depression Update
The worst is over, and things
will gradually start improving from here is the view of the twits
writing in my local paper. On the other hand, someone complained to me
the other day "if just one more person mentions green shoots to me I'll
hit him".
So, is it all starting to get better..... or not?
Several things stand well out from the crowd. The US is the world's
major economy, and if the American consumer slows his consuming, world
trade slows. Look at Japan and China, both in one hell of a mess
because American purchases have slowed drastically. China can recover,
but not that fast. They have their own market to cater for, and that
will keep them happily chugging for some time, but that wont take the
place of the US consumer for 5-7 years at the earliest.
Japan is different, they will live on savings for another decade, but
the economy wont be going anywhere soon.
However, that means the two biggest investors in US debt are probably
going to stay away from the bond auctions.
US housing is still down by its worst amount in decades. There is more
to come, a lot more. The Alt-A mortgages are due to reset next year and
in 2011. In fact the resets peak in 2011. That means more loss of
wealth, more folks unable to pay their way, more bankruptcies, less
consumption.
We are also just entering the commercial real estate fiasco. We have
already had two mall owners go down. There are more to come, and with
them a whole slew of commercial real estate.
With all that hanging over the market, wealth is still vanishing in the
USA at a mega rate of knots. And who is going to pay (and how) for all
the bailouts? No country can move forward by supporting bankrupt
companies. You should support the new dynamic ones. You also do not
support a system that requires the spending of $2 to make $1, which is
where the US currently is. That insanity will lead to total bankruptcy
of the country if continued.
When did you last hear of a country whose currency was the reserve
currency having their creditworthiness demoted from AAA? Moody's has
already warned they are going to downgrade US credit-worthiness. That
will put the cat among the pigeons.
How does the US pay for their own mess? Either borrowing from China
through bond issuance, or printing money. The former is becoming
increasingly difficult, and can only be sustained if interest rates
rise, which will undoubtedly happen if the rating drops to AA. The
second traditionally causes inflation, which also causes interest rates
to rise. Rising interest rates kill the property market, and bankrupt
those who got in when rates were artificially low.
If we are headed for deflation, then low interest rates will help real
estate, and landlords will prosper. If we are headed for inflation,
then interest rates will crucify us, but after that house prices will
rise to mirror the inflationary fall in the value of money. In short,
under that scenario those with property will prosper so long as
interest rate rises dont wipe them out first.
I dont see good times coming to a theatre near me any time soon. Look
at this for godsake!
"The IMF estimates that the cost of the current crisis to the United
States will eventually reach 34% of GDP or close to $5 trillion.
However, the Obama administration, through its various implicit and
explicit guarantees, is already using a number close to $9 trillion.
And Reinhart and Rogoff's historical average of 86% of GDP implies an
ultimate cost of over $12 trillion!
The true cost is important, because it has to be financed through new
bond issuance, and it is my thesis that the sheer size of this tsunami
will eventually overwhelm the world's bond markets. Even using the
relatively conservative IMF estimates, the twelve largest
industrialized countries of the world will have to issue about $10
trillion worth of new bonds to cover the cost of the current crisis.
However, if you (like me) believe that IMF underestimates the true cost
of this crisis, Reinhart and Rogoff offer a more realistic approach.
Using their least costly case study (Malaysia 1997) as our best case
scenario, the true cost comes to $15 trillion. If one uses the average
of 86% instead, the cost jumps to a whopping $33 trillion. I didn't
even bother to produce a worst case scenario - it all got too
depressing!
I need to put the $33 trillion into perspective. Total global savings
(loosely adjusted for the big losses in 2008) are probably somewhere in
the region of $100 trillion. In other words, financing this crisis
could absorb one-third of total global savings."
- Niels Jensen.
Outside the Box. May 11.
An alternative way of putting that is: paying back all this debt is
going to empoverish everyone for a very long time. The Irish finance
minister recently claimed it would take 10 years of tax receipts to pay
for Ireland's existing bailout. And, being a politician, he is probably
under-estimating. So the Irish aren't going to be big spenders for some
time.
I think the important indicator is going to be how those balance sheets
recover, or not. But how are we to find out? At the moment there is
massive fudging. Just look at this. I missed a mortgage payment at the
beginning of the year. I have an insurance claim that I thought was
agreed, but the costs issue was unresolved so until that was sorted I
couldn't collect my dosh. That put out all my housekeeping. I have only
just resolved it. Meanwhile my bank was busy. Please note I did not ask
for what happened next.
My bank emailed me asking me to make them a request for €35,000 to be
placed in a savings account. They would use that savings account to
fund my mortgage payments for the next 18 months. I haven't signed
anything yet, so haven't seen the small print, but I am assured there
is nothing nasty in the terms.
"But why?" I asked.
"Because the bank's balance sheets are not good. We have many customers
who cant pay their mortgages. We are offering them all this deal, so
our balance sheets dont look so bad."
"But what happens in 18 months? I will be okay, but what about the
others?"
"Ah, but you see, this crisis will be over in 18 months so it wont
matter then."
Go figure, as they say t'other side of the pond.
This is happening all over Europe. In 18 months time there is going to
be another banking crisis in Europe. What then?
Guys, this is one hell of a mess! I'm keeping only property that is
very lowly geared; less than 50%. My cash I am putting into high return
quick get-out situations. I'm nervous, and I'm staying nervous. It's
safer that way. I've been right every time about these things for the
past 45 years. This is the first time I'm hoping to be wrong, but I
dont see how I can be.
I am not saying dont go into real estate. What I am saying is, keep
your gearing as low as possible, and make sure you get a good income
from whatever you buy, otherwise you will be wiped out when interest
rates rise. If you feel we are all entering a Japanese-like stagflation
then load up with everything you can because interest rates will be on
the floor for a decade or more. Now, if only I hadn't broken my crystal
ball!
best wishes
john
|
