Surely this wasn’t it…

Tuesday, 20 February 2018
Melbourne, Australia
By Bernd Struben

  • Charles Ponzi wants to sell you a house
  • This could change everything
  • Trump: Oprah Winfrey Will be “Exposed and Defeated”

Is it over? The ‘correction we had to have’?

The mainstream headlines would have you believe so.

Following the 10% plus dive in US and European markets in early February, the financial news was full of expert opinions. While the ASX 200 only lost about 5%, there was no shortage of Aussie pundit’s eager to share their investing wisdom.

Most offered reliable old gems like ‘don’t panic’. And ‘the stock market always goes up in the long run’.

I particularly like that last one. While it may prove true, depending on your definition of ‘long run’, try telling that to investors who loaded up on Aussie stocks in November 2007.

At time of writing, the ASX 200 is still down 11.5% from its 2 November close in 2007. Buying at market highs and simply holding on in hopes that the stock market always goes up in the long run can require extraordinary patience.

But even as markets fell earlier this month, few analysts hinted that the rapid losses may be a sign of more serious issues — and potentially much larger falls — ahead.

With markets having clawed back much of their losses over the past two weeks, you’ll hear even fewer words of caution. Until, of course, the market turns back down.

Then watch for those headlines telling you not to panic.

(To prepare yourself before that happens, check out Vern Gowdie’s survival guide here.)

Let’s have a look at those markets now…

Markets

Overnight, the Dow Jones Industrial Average closed up 19.01 points, or 0.08%.

The S&P 500 gained 1.02 points, or 0.04%.

In Europe, the Euro Stoxx 50 index finished down 19.01 points, or 0.55%. Meanwhile, the FTSE 100 lost 0.64%, and Germany’s DAX fell 66.36 points, or 0.53%.

In Asian markets, Japan’s Nikkei 225 is down 222.77 points, or 1.01%. China’s CSI 300 is closed for the Spring Festival Golden Week holiday.

In Australia, the S&P/ASX 200 is down 5.99 points, or 0.10%.

On the commodities markets, West Texas Intermediate crude oil is US$62.50 per barrel. Brent crude is US$65.62 per barrel.

Gold is trading for US$1,347.68 (AU$1,703.34) per troy ounce. Silver is US$16.69 (AU$21.10) per troy ounce.

One bitcoin is worth US$11,403.10.

(Is bitcoin getting ready for a new run up to $20,000…or more? Get the complete story from our in-house crypto experts here.)

The Aussie dollar is worth 79.12 US cents.

Charles Ponzi wants to sell you a house

At time of writing the ASX 200 is now only down 3.2% from its recent peak of 6,121 points on 2 February.

That figure in itself certainly isn’t anything to panic about. (I had to say it.)

But beneath the surface there are some troubling signs. And they have nothing to do with company earnings, which so far have been mixed but reasonably solid.

The real elephant in the room here is debt. More specifically Australians’ ability to repay that debt.

As noted by Your Mortgage:

Australia’s household debt-to-income level has reached an unfavourable new milestone, hitting 200% for the first time. Total household debt has reached a record $2.47trn, or nearly $100,000 for every man, woman, and child.

Even after debt-free households are factored in, the average Australian household now owes twice the amount they bring in annually from wages, welfare, and other sources of income.’

The above excerpt contains some startling realities.

First, the $2.47 trillion household debt figure includes debt-free households.

Second, the income calculated in the mammoth 200% debt-to-income ratio includes sources like welfare.

I don’t have the statistics for the debt-to-income ratio if you take out taxpayer funded welfare payments and the debt-free households. But it’s certain to be significantly more than 200%.

So how did we collectively find ourselves neck deep in debt?

Australia’s exorbitantly priced property markets, of course.

According to the Australian Bureau of Statistics (ABS) home loans make up 56% of total household debt. ‘Other property loans’ constitute a further 33% of debt.

Putting two and two together, 89% of Aussie household debt — or $2.2 trillion — is tied into home and other property loans.

Just 5%, by the way, is owed on investment loans. The kind of loans you might expect to make a positive impact on the economy over time. And maybe even see wage growth outstrip inflation.

Now $2.2 trillion of debt tied into homes and other properties is all well and fine…so long as prices keep going up.

If prices significantly fall, on the other hand, the entire pyramid scheme gets turned upside down. And there’s a reason Egyptians built their pyramids pointy side up. They don’t tend to hold up well when they’re inverted.

Now Australia’s house prices aren’t crashing yet. But the pace of their losses is speeding up.

Sydney, which led the meteoric price gains over the past few years, is also leading the way down.

According to CoreLogic, dwelling values fell by 0.9% in Sydney in January. On a nationwide level, the average capital city home price fall for January works out to 0.5%.

You can see the results for January, as well as the quarterly and annual results below:



chart image

Source: CoreLogic
Click to enlarge


As you can see, the only city showing price gains for January was Hobart. Even Melbourne’s booming population wasn’t enough to keep the city from seeing a 0.2% decline in home values.

If everyone owned their homes outright, this wouldn’t be exceptionally frightening.

But Australians owe $1.4 trillion on their homes. If Sydney’s 0.9% monthly fall is any indication of the action to come, investors may soon find they owe more than their homes are worth. This could lead to a wave of defaults and bankruptcies.

All of which will drag on the economy, the stock market, and the already battered banks.

Even without the spectre of falling house prices, the Reserve Bank of Australia (RBA) just issued a new warning on interest only loans.

From the Australian Financial Review (AFR):

Reserve Bank assistant governor Michele Bullock told a conference in Sydney that a “large proportion of interest-only loans are due to expire between 2018 and 2022”.

‘“There is still a large stock of housing debt out there, some of which probably would not meet the more conservative lending standards currently being imposed,” Ms Bullock said…

Ms Bullock told a conference on responsible lending on Tuesday “there may, however, be some borrowers that do not meet current lending standards for extending their interest-only repayments but would find the step-up to principal and interest repayments difficult to manage.”’

Now a few billion dollars’ worth of interest only loan defaults won’t sink the lending industry. But you can see how this could turn pretty ugly for the banks. And between the Royal Commission and fintech biting at their heels, you’d think the banks would be looking to reduce their risk.

Not so.

Also from the AFR:

ING, Macquarie Bank and Virgin Money are reducing rates on interest-only investment loans despite regulatory efforts to curb these loans due to concerns about growing household debt.’

With time running short, and word count running long, I’ll let that last bit speak for itself.

But if you’re concerned about ballooning debt, falling house prices, and central banks that are running short on tricks to keep the whole circus running, you’re not alone.

Market veteran Vern Gowdie wrote a detailed book on the subject. And he includes a series of vital steps you should consider today to safeguard your investments from the almighty crash he sees coming.

Whether that crash has already begun, or is still years away, it’s a brilliant read. You can find out more here.

Having covered off the doom side, where to for the opportunities?

This could change everything

Last week I mentioned the new report Sam Volkering has been working away on for his premium investment service, Revolutionary Tech Investor.

That report is currently undergoing its final tweaks and coat of polish.

The stocks Sam recommends are working on the most revolutionary technology conceivable. Technology that could literally change everything…at work, at home, at play…and everything in between.

The companies that are the first to get this right should see their share prices rocket.

Keep an eye on your inbox tomorrow to find out how you can access the complete report.

If you’ve got the appetite for some risk — and the hunger for potential 10-bagger plus gains — you won’t want to miss this one.

And lastly, this, from The Australian Tribune:

Trump: Oprah Winfrey Will be “Exposed and Defeated”

It’s hard to imagine a more amusing 2020 US presidential race than one in which Donald Trump goes head to head against Oprah Winfrey.

The televised debates alone would be worth recording for your grandchildren to enjoy one day.

But in the world of US politics, stranger things have happened. And it sounds like Trump is already looking forward to it.

Trump has blasted Oprah Winfrey on Twitter over…’

If you’re fed up with sanitised, politically correct dogma cut and pasted from one mainstream source to another then The Australian Tribune is for you.

And it’s absolutely free.

Sign up here to get The Australian Tribune delivered free to your inbox five days per week.

You can visit our website at https://www.theaustraliantribune.com.au/ to read the complete article above now.

Cheers,
Bernd