Merged: Is the worst of the Global Financial Crisis behind us?

[Chimbu chuckles]

Seems to me all the economists singing from the same sheet is what got us in this mess - Pprune used to be about robust discussion - I really enjoy the cut and thrust with Gnads et al - I learn stuff all the time because they push back hard.

If some don't like it tough - someone holding a gun at your head to click on the thread?

[4PW's]

Bin the thread.

[Chimbu chuckles]

Im sparticus.

I can't have it both ways?

I am pretty sure I can

First some personal examples.

My father bought the last family home I lived in in 1970 for just less than 2 times his wage as a QF 707 FO. That same house last time it changed hands (he retired and had a 'Tree Change') was 15 times a QF 747 FO wage.

The first house I purchased in 1992 was very much a average little house on the Redcliffe Peninsula but as a Talair Bandit/Twotter pilot I was earning more than the Australian average wage and it cost me 2 years of my wage. I would guess it was worth 3 times an Australian single average wage at the time. Last I looked it was 7 times average wages and that was after it had done nothing price wise for a decade. All that price rise is since 2002.

The last house I purchased in 2002 was certainly not average in any way shape or form (4 bedrooms/3 bathrooms/waterfront/double brick/double garage/12m salt water pool at Carrara/Gold Coast) and it cost me 2 years expat corporate jet captain wages. I am not earning more 8 years later back in airlines but last I looked a year or so back it was closer to 8 times my wage now. There were other properties bought and sold between those in partnership with another person and the numbers were all pretty much the same.

Whatever real inflation has been in the last 30 yrs, and I guess about double what the Govt says, real wages have not kept up and yet we see that explosion in house values mostly crammed into the last 10+ years. When you compare the above personal experiences to the graphs seen in links on this thread you can't help but think 'bubble'. I was thinking 'bubble' in 2004. For every bubble there is a needle.

As an example of wages not keeping up with real inflation when I first left school in 1979 I was renting a modern 2 bedroom apartment on the beach at Balmoral (Sydney) overlooking the water - 50m from the beach for about 25% of my single wage - although I had flat mates most of the time. I also ran a car/learned to fly and ate/drank as well as any 19 or 20 year old single guy does

Now my daughter, just about a year out of college and with a good job, and her partner pay something like 35% of their combined wage for a 40 yr old wooden house at Stafford in Brisbane. I bought her a car and tip in a few 100/month to help out. I have mates with sons just starting out as young pilots/apprentice builders and all sorts of things earning less $ (raw number) than I did driving taxis in Sydney in 1980 and less than 1/2 what my daughter is earning!!

If they hope to buy a 'median' house sometime in the future, and trends don't change, it would cost them 4 times their combined wage or 7-8 times a single wage (she will be a mother by the time they buy a house). Yes they can buy a ****box fixer upper for less but the point is you didn't used to need to, it was a choice you made if you were that way inclined.

55% of residential property has no mortgage attached so that 2 trillion Australian personal debt burden is nearly all crammed into the other 45%. Many of the mortgages more aligned with the lending practices we have seen in the US/UK than we'd like to think - 110% loans etc. Lots of equity pulled out to buy 'stuff'. The major difference between the US and Australia is we don't have non recourse loans. That just means all the risk is with the borrower rather than, in the US, with the lender. Which makes what the mortgage originators were doing in the US even more bizarre.

What part of the above is sustainable?

I actually don't think the above multiples still apply across the board While we have seen some growth pushed by stimulus lately for well over a year now we have been also seeing distressed properties sell between 30-50% less than they were thought to be worth. That seems to be across the board as I know people with personal experiences across the board. I have related one earlier in this thread and I know of other examples. I think we have all seen examples in the media too. If unemployment hits the projected highs next year, and if the US double dips they could be conservative numbers, and a significant part of that 45% of residential properties default then it could easily, and some suggest will, lead to a great deal of wealth destruction.

I don't think we'll see the sort of wealth destruction the US will see and Japan saw because, as Gnads points out, not many new houses were built in the Boom just past, or to date depending on your point of view. In the US they built 100s of thousands of new homes and LOTS, entire streets, stand empty.

That developers could not do so profitably and as a result didn't is telling.

One very wealthy long term developer I met last year (taking delivery of his new helicopter at Redcliffe) thought there was going to be blood on the ground outside of major cities (and a couple of mates who have done such a development are struggling to sell them) and was not doing a lot of building. A high end residential development including the last approved canal blocks in SEQ stopped dead in its tracks in the last year right next door to YRED - after sitting doing nothing for years (just vacant land and half built canals) there was all of a sudden a burst of activity and then it just stopped and hasn't moved since - last I saw it a few months ago anyway - I was interested in a block of land in there - now I am happy to wait.

You'd have to suspect that developers know something most people don't - maybe they think prices are at unsustainable multiples and fear bringing a project to the market in 2010/11/12?

I am beginning to think that real estate in the not too distant future will again be viewed as our parents viewed it. As a place to live in/pay off and retire in rather than as an 'speculative investment'. Real Estate doesn't seem a very good investment of late - even with negative gearing - the immediate returns are not there compared to 5 years ago. Absent capital gain they are stupid returns - if you rely on capital gains you're not investing you're speculating - there is a difference. When the returns drop smart money deserts an asset class and goes looking for alternatives. Perhaps the run up of the stock market these last months is (partly) an example of that - I don't know and it remains to be seen. I do know that I would be completely uninterested in buying that Carrara canal home now for over a million bucks to get a return not so hugely different to what it attracted when it was worth 400k. When I bought it it got 450/week rent - it certainly doesn't get 1200/wk now. If anyone believes it will appreciate in the next 7 yrs as it appreciated allegedly in the last 7 is deluded. If someone bought a house like that now and say borrowed 800 - 900k, more than twice what I borrowed, to get maybe 50% more rent would that be 'investing' wisely? I don't think so - if it then depreciated 30% they would be looking pretty marginal - no equity and a ****ty return. The Real Estate agent I bought that place through once said to me that SEQ can and has had savage corrections followed by YEARS of no capital gain. Like the first place I bought that did nothing for a decade after. Food for thought.

For sure history shows that every bubble bursts - I thought it should have burst a few years ago but just because it didn't/hasn't/may not for a little while yet is not good news. Had it popped in 2004 it would have been a relative non event compared to it popping in 2010/11.

But some people don't believe there is a bubble at all - one thing I can absolutely guarantee is house prices can't go in one direction while real wages go in the other for ever. At the VERY least that has been happening for a VERY long time. When a fairly normal house costs 4-8 times the annual wage of an individual in the top 5% of wage earners (an airline captain) I just think something is not quite adding up.

Edited to change 25 times to 15 times due finger trouble.

[frigatebird]

I'll have to print that ! I know bugger-all about real estate. Have been too busy trying to stay employed around and in the Pacific. My family has lived in the house I paid cash for when I repatriated my National Provident from my first gig overseas now over 20 years, while I have only seen its insides about 5 or 6 total. As I sent money home regularly, and had to rent as well, there wasn't much left over to speculate with, and something followed from a distance can be fraught with just too much risk. It wasn't my passion anyway, so I guess I will just have to die poor because I couldn't Multi-task enough. But what gets me is the number of people who think there is no tomorrow, that they can do anything they like and there will be no consequence. Different generation I guess, they will inherit their consequences too, and even if they try to shift the blame, I for one will be glad it bites into their expectations.

[Transition Layer]

Chimbu/Gnadenburg/404 etc,

I have thoroughly enjoyed reading this thread, and while everyone knows you shouldn't take financial advice from pilots, it's clear some of you have a vast amount of knowledge on the matter.

However, Chimbu, you said :

Buying an asset that produces a negative return is not 'investing' its speculating on a capital gain - absent the capital gain (which is unsustainable in the long term) its a disaster waiting to happen.

Isn't speculation what capitalism is all about? When someone decides to start a business, they are speculating on what sort of demand there is and what sort of return they can achieve. If you relate it to Aviation, airlines speculate on routes/passenger numbers and therefore aircraft types and frequencies.

If no-one in the economy speculated, companies would not grow, jobs would not be created and there would be no growth.

Maybe I'm taking a simplistic view of things, but isn't speculation what makes the world go round?

[Foie gras]

All the above and more.

Here we are cruising along, sun's shining, blue sky, everything is roses.
Whether we like it or not we are in "coffin corner" country.

Let's lower the nose and go in for a hard landing yet a controlled one.
No, CEO Bernanke and board members Geithner etc are intent on keeping "Capitalistic Airways" afloat and squeezing every last cent of profit out of the operation. Hangover from previous CEO's "Greedspan's" indoctrination.

One of two things can now happen.
Highly unlikely, but possible...
We continue "quantative easing" ie printing money, or if you like, burning more kero.
Overdoing it, (to the extreme), will tip us over the curve and into a Hyper deflationary dive.
Alternatively, we sit on our hands and hope that everything continues on its merry way.
Chances are, (and highly likely) we hit a pocket of turbulence and unintentionally enter a deflationary dive.
God help us.

What are your recovery methods like?
That's my tuppence worth.... Prepare.

[bushy]

A gambling house??

I spoke to a man yesterday who told me the stock exchange was "a huge gambling house" that had little to do with reality.
He's right, and real estate can be similar.
He talked of a freind who had bought a house and land in Coolgardie for $500 in recent times. He checked the records and found that in the early 1900's the land (with no house) had been sold for 26,000 pounds, a huge ammount in those days.
Real estate in Alice Springs has gone crazy. Three years ago units had been appreciating by about 7% a year. Since then prices have almost doubled.

A computer expert I deal with has a saying,

Chaos reigns within
Repeat, repent, and reboot.
Order shall return.

I think that is appropriate here.

[Cravenmorehead]

All good stuff from some quite educated fellows. A good read if this thread turns your crank as it appears too do for many is Ozonomics by Andrew Charlton, printed by Random House, and Paul Kelly's book which I can hardly put down called March of Patriots.
Frankly to call the share Market a gambling house is ludicrous and crap, and by the way Australia is not printing excess money as one PPRuner said. If this were so the Australian dollar would be like the Pound and US dollar ie shrinking. Not at near record levels as it is now. The function of a low oil price, high Aussie dollar, mineral wealth and a hungry China and India not to mention the rest of Asia = what do you reckon. You don't have to be a rocket surgeon to figure it out.
The property market who cares? It always finds it's level. You always need somewhere to live.
The GFC in Australia was: an over reaction: in hindsight it seems we have applied to much stimulus, which will be backed off in time.
I think Kev and his advisers, the RBA and their board, and all the boffins have it sorted.
My prediction 12 months of low growth, then a bit of a slow boom for 5 years. All Ordinaries at 5000 by 2009's end, the Crows/Dragons for the flags, and buy Myer shares.
But then again I bought some of Babcock and Brown's satellite companies

[404 Titan]

Cravenmorehead

China and India are export driven economies. They don’t have anywhere near enough internal demand to drive their economies forward without the US and the EU buying their exports. It will take at least two generations, probably more for these economies to be self supporting. This whole idea that China will save the world is flawed, just as the argument that before the GFC China and Asia had decoupled from the US economy. Until we see the US and EU economies grow substantially and organically, rather than by government stimulus which by the way will run out by early next year, I’m afraid what we are currently seeing is a mirage. The chances of a “W” shaped recovery therefore in my opinion remains high.

PS: I personally thought the statement that the stock market is a “Gambling House” was a colourful but accurate description of it. Trading stocks or in my case trading currencies is speculating. Gambling, speculating, pretty much the same thing except maybe the level of risk. Look it up in the dictionary.

[Chimbu chuckles]

First of all a correction due finger trouble in my last post - I meant to type 15 and typed 25 instead - didn't notice it until just now.

That is my understanding, speculation is more gambling than anything else - you buy a house that gives a negative return and gamble you have bought well enough that the property will appreciate - and for the last 10-20 years that has certainly been true depending on the market - Sydney has always seemed a law unto itself as a property market - other places not so.

When you buy with the intention of holding long term a good quality blue chip stock at a reasonable price that pays a good dividend that to me is investing.

Buying a house, living in it for 3 years and flipping it is speculation. Buying on interest only terms, especially buying LOTS of houses as many have done these last years, is speculating not investing. If the houses appreciate the theory is after x years you sell a few and pay off the rest and retire on the interest. Works a treat too if you get in at the beginning of a up trend - can be a bit sad if you're late to the party and buy near the top. That is the gamble you take. I know young FAs working at Oz LCCs that 'own' 20 houses - well no dear the bank owns 20 houses and you're renting them with an option to buy later.

The fact remains all the get rich quick real estate schemes rely on short term trends along the lines of 'houses double every 7 years' - if they were long term trends houses would be unaffordable after 14 years and off the planet after 21 - such is the power of compound interest.

Don't get me wrong - lots of people make lots of money - I have done well at it in the past - but it is merely playing pass the parcel with houses and the person holding it when the music stops is in a world of hurt. The whole deal is made more 'interesting' when real wages are not keeping up and people are taking on more debt to fuel the speculation.

As to the US recovery fuelling growth? I was watching CNBC the other night and the latest months unemployment figures were released - 550 000 more people filed for unemployment benefits but because the figure was 26000 lower than market expectations the news was received well and the market reaction was positive!

What planet do these morons live on?

Geithner was asked in an interview whether unemployment would fall next year and was ABSOLUTELY certain in his one word answer

"YES".

When asked whether taxes rates would increase to pay back the trillions they are borrowing he used 87 words none of which was 'YES' but he might as well have saved his vocal chords and just answer yes because that was what the 87 words added up to.

I didn't see whether then asked him about interest rates because it was late and I went to bed.

Lets look at the last time the US Govt was spending like there is no tomorrow. The 1960s. Between the Vietnam war, Mercury/Gemini/Apollo programs and LBJ's social security spending by 1970 they had spent CUBIC money. In 1972 ish Nixon took the US off the Gold standard so he could crank up the printing presses and pay for it all. Inflation went into orbit and Fed Chairman Paul Volker put interest rates up to 20%.

Similar happened in Aus but we didn't have an space program - we were at war though throughout the 60s and early 70s.

Now in the US we have had a series of wars fought concurrently until recently, low interest rates and lax lending standards that have driven the US into recession at least and possibly depression and they have opened the money spigot to the tune of trillions - lots more than the 60s - and bailed out companies that were deemed 'to big to fail' - which really means 'to big to exist' in my book but there ya go. Obama is trying to socialise health care - money is being sprayed around GM/Ford and Crysler (the last two should not have been bailed out a decade ago but were) - truly cubic money - to the point that the US$'s reserve status is under threat - and they have an ongoing need to borrow trillions more at interest rates that are less than real inflation. Gold is up, USD down at lowest levels in a long time. Real estate values still falling and a faux rally on Wall Street that bares no relationship to fundamentals - to the point that 'the street' actively talks up a 'jobless recovery'

What happens next?

Well if the USD continues to fall, or the world threatens to REALLY lose faith in it as the reserve currency, or people demand a better return to lend money to the US then interest rates MUST go up to protect the USD.

The 70s were not nearly as bad as now and they resulted in 20% interest rates.

What would 10% rate hike do to what is left of the US residential real estate market - and credit card debt - and food prices/energy prices (being imported at a lower currency value) - and commercial real estate - and retail sales - and?

And then the US Govt puts up taxation rates to pay down the debt - higher taxation = lower employment.

Sorta backed into a corner aint they.

That is why I think they will double dip and why they will trudge on down the road already travelled by Japan and why I don't see Asia generally, and China, particularly saving our sorry arses to the extent people suggest.

And then we get to Australia's much more measured deficit spending You really think Tax and Interest rates won't go up in 2010 and stay up for a very long time?

Do I think the worst of the GFC is behind us?

Nope

[ferris]

I've stated that I am in the "chuck camp", but the economy in Australia does seem to be holding up. Does anyone else have examples of increased mortgagee auctions, and the like? Everyone I talk to has a totally different story.

Also, what do currency watchers think? The normal soothsayers (economists, commentators etc.) seem to have had no idea over the last 12 months. I set up a hedge fund because I work overseas and thought the USD had to tank, given the amount of money they were/are printing. Yet even the RBA seemed to think that .84 was the top. Does have me worried (and detracting from my desire to continue earning USD!).

[404 Titan]

ferris

The USD will continue to weaken as long as the equity markets rally and there is continued belief of a US led recovery. When, and it is my educated opinion, we see the double dip of the “W” recovery then I can see the AUD$ going south again because of the unwinding of leveraged carry trade positions. I have stopped buying AUD$ as of last month and am planning on holding HKD/USD for the foreseeable future.

[Che cows with guns]

Titan 404 what world are you living in of course we are being driven by China and in the future India. Why are China trying to buy Australian mining companies I ask you? Cravenmorehead is spot on.
The Aussie economy is doing OK. We are seeing good growth, the farm sector is set to rebound. The sugar price is at a record, not sure about wheat and other grains. Gold miners are all expanding. Iron ore and coal still need badly by China. China still records high growth figures.
Tourism will come back once the Swine flu thing abates which it has.
This will all see aviation pick up. I agree house prices are due to come down that will cause pain just as the deflating of the market did last year, bad luck if you bought at the top.
Goverment stimulus is designed to cushion the building sector once the first home owners grant evaporates.
Anyway my 3 bits worth.
Interesting discussion though.
Che
fighting for bovine freedom

[404 Titan]

Che cows with guns

Titan 404 what world are you living in of course we are being driven by China and in the future India.

Bullsh*t. We are being driven by the US/EU’s demand for cheap goods and services from China and India. China and India don’t have the natural resources and energy they need to supply this demand and therefore they buy a lot of it from Australia. That is also the reason why they are trying to buy our miners. So they can control the resources at a price that suites them and not the market.

The US GDP is still about 7 times the Chinese. EU is about the same as the US. US population 260 million. Average income US$50000.00. Chinese population 1.3 billion. Average income US$500.00. One billion of their population live in poverty. You do the maths. As I said the Chinese are an export economy. The Indians are predominantly a service economy for foreign companies and governments. They do not have the internal demand to drive their economies anywhere near the levels that is required to grow. Without exports and without government stimulus these economies would contract. Fact.

The US, together with the EU and Japan are the drivers of the world economy. The rest are just going along for the ride.

Regarding swine flu, tourism, the sugar industry, gold miners etc I could pick that apart as well but I don’t have the time right now.

[ferris]

The Chinese buying everything they can get their hands on? There's a reason, methinks. They are very, very smart. They are spending their worthless USDs, which they have truckloads of (even more than the US itself), and exchanging them for hard commodities/suppliers that they are going to need into the future to supply their growth. Look at what they are buying/have bought. Some absolutely audacious stuff (entire oil/gas production of some African countries for the next 50 years!!!). Tried to buy Rio etc. Ahhh, so many US dollar, so little oil/food/gas/coal etc.

As for Australia- that's why I ask. Overseas, things are grim in most places. Aviation has noticably shrunk. Even in the ME, things are much quieter. I've been looking keenly for signs that it is filtering thru to oz, with really mixed messages.

[stealthone]

Chimbu are you listening the Alex Jones talk show and maybe Gerald Celente? Ha ha. You are spot on but Ferris has nailed it. China is on a shopping spree because they are converting the worthless paper into commodities. Who is receiving the ‘toilet paper’? Australia. Yanks will never pay their debt, it’s over folks, and they crossed what we know as a PNR. Is there anyone else on the shopping spree? Yes, the Russian govt. They do not bargain, just keep dumping their dollars. The Mediterranean coastline is theirs, and companies worldwide. Most of the European govt’s are broke and practically lining up to obtain some cash from Putin in exchange for assets or near broke companies. Furthermore some of the loans have to be paid back in roubles. Yanks have driven themselves into insolvency trying to expand the sphere of influence, and just like Napoleon and Hitler they ran out of steam on Moscows door step.
Guys, try to find some info on the geostrategic development. The Russian govt faked the downfall of the USSR and the Yanks took the bite. The eastern European countries are like bottomless pits. They are chewing billions of dollars every year and those so called democracies are corrupted as ever. All those meaningless wars and NATO expansion had to be financed somehow? How? The printing presses were running around the clock. Of course, the Yanks did not foresee KGB’s coup d’état ie the appearance of Putin.
What is going to happen to some of our super money in case of US dollar collapse? The Wall Street had sucked in the money from Europe, Australia, and South East Asia. I think that we are in the deep s….t. Those with some cash reserves and no debt (full property ownership) would do just fine.

[Chimbu chuckles]

Geez I don't thinks its THAT bad

That is conspiracy nonsense - the simple answer is usually the right one - huge dollops of stupid caused the GFC nothing else.

I do agree with Ferris - Australia would be NUTS to sell a damn thing to the Chinese besides our dirt - mining companies are not for sale!! - The Chinese are very strategic thinkers with VERY deep pockets and no constraints on their executive govt.

I listened to the entire Geithner interview this evening on CNBC - I have gotta say listening to him and watching him I developed a great deal of respect for the man - I think I'd really enjoy a beer with him - he is clearly DEEPLY COMMITTED and DETERMINED and BELIEVES in every fibre of his being in the US and in the truth of what he was saying.

Doesn't mean he is right about everything but I would say he is a fundamentally honest an honourable man. I really liked his answer when posed an essentially 'poacher turned gamekeeper' question along the lines of "Why should we have faith in the people trying to fix this when they were in charge before?". With complete candour he turned to the interviewer and said something along the lines of "The operative word there is were."

I have my doubts that everything that NEEDS doing is politically possible but I find myself leaning towards what Warren Buffet said early this year - It has never paid to right off the US and it doesn't pay now.

Look what happened in Japan post 1990 - The world didn't end for the Japanese economy or people The world isn't ending for the US either, or Australia.

But I'd say the next decade will be VERY different to any previous decade that I have experienced. I think a little less globalisation will be good - a little more home based manufacturing and a lot less offshoring of jobs might also flow from all this. I tend to think globalisation is like booze - a little is great, too much and you fall over a hit your head.

[Cravenmorehead]

Titan 404. You are quite correct that China is an export driven economy. What you are forgetting is that it is also a Communist Country and State driven. When outside demand drops they ramp up their own stimulus (it was massive). Growth around of around 8% down from 12% is still pretty impressive. I saw fortunate enough to work there for 14 months, pre GFC, and witness some of the infrastructure work taking place . Mate it is unreal.
So in answer to Hat's original question; yes the GFC is winding back, we will start to see improvment and it will be driven by China's growth. India? Well I think they will be a big player but the conventional government and dis- organised nature of the place I feel will be an anchor to it's growth.
Bloody Crows. What a game tho'.

[Foie gras]

Ferris and Steely... Spot on.
This is.... serious!

But come on, let's loosen up.
Have a laugh...

YouTube - Tim Hawkins - The Government Can

In my previous post, I meant to say Hyper "INFLATIONARY" Spiral in lieu of
"Deflationary" dive.

[Chimbu chuckles]

The problem we have is Pollies that can't laugh at themselves anymore - Imagine Rickles on a Dean Martin Celebrity Roast today doing this to Nancy Pelosi/Obama/Reid/Rudd?



For the younger readers on Pprune take a look through the rest of the Dean Martin Celebrity Roasts on youtube and see how life was before political correctness clamped its vicelike claws around our throats - they blow my daughter away - they're funny without obscene language and NO ONE takes offence.

Thread drift I know but a laugh is what we need right now.