Discussion in 'The Economy' started by Tropo, 21st Jun, 2009.
There's worse to come for the economy
There's worse to come for the economy | Business | News.com.au
Only time will tell!!!
I'll be honest, I haven't heard much about the guy, and the way the figures are presented in the article seem airy fairy and headline grabbing (but that could just be the reporting) but I think he is on the money about there being worse to come. Just how bad and for how long, is obviously up for debate.
PS... did a little research on him. Good old wikipedia had this to say:
So for all those bulls out there, rest assured Harry Dent has been very wrong before! Dow to 40,000! LMAO...
Unfortunately he is not to good on the detail. I think it's mainly because what they study is demographics rather than charting or other related share market studies.
Never the less I certainly do not discount the message that he is putting forward because in the end the whole economy is about supply and demand and by his demographic analysis he indicates that demand is going to reduce.
I went to listen to him in Sydney over the weekend and the article reflects pretty well what he had to say.
If you are interested in his thought then his latest book is 'The great depression ahead' which really seems to regurgitate his previous books with updated stats.
From another article comes this quote
Mr Das says
He says the economy may gradually slip lower; that recent rallies in commodities, shares and housing markets almost mirror those seen in Japan after its bubble burst in 1989 and before "everything fell apart".
Nipped in the bud? | Herald Sun
So inthe interest of understanding what happened in Japan does anybody have or can point to the relevant chart to see what did happen.
Explaining Japan's Recession
US Recession Could Be Worse Than Japan's Lost Decade
If this prediction of falls in property and shares comes true, what do people think is worth having your money in? Is cash a good place to be during deflationary periods? Just wondering what people think would be a good investment in periods such as these.
I am a bit skeptical about his future forecasts. In 1987-1990 reports stated that house prices were high and that the economy was experiencing prolonged stagnation. People lost jobs and unemployment was high. Guess what?? House prices have tripled in some areas since then.
Recessions are a necessary part of any market. His view on property seems a bit vague. Yes maybe the top end of the market may take time to recover, but I cannot see houses in the middle ring (10 - 20km) from the CBD decreasing in value by 40%. You telling me that a 350k house will be worth 210k in the future???
If banks are forced to unwind their massively leveraged position, a 350K house may well fall below 200K.
The important thing to distinguish is that home prices have very little to do with the home itself (a house is just a house). House prices have a lot more to do with the currency and its value, ie the effects of inflation/deflation. Australia's home prices have been sky rocketing because the their has been an explosion in credit in the system. However an increase in credit in the system is basically just inflation, of course the RBA releases it fancy report on "underlying CPI" that is designed to make you believe inflation is only rising at 2 - 3% pa...
Hi Chris - can you talk more about the banks and their levaraging relating to housing prices? Sounds interesting. Thanks
Think of it this way. When you borrow money from the bank, to buy a house, does the bank hand over a suitcase of cash for you to make your purchase? no, they simply credit one persons account and debit another - there is no need for actual currency to be involved.
This is because under a fractional reserve based monetary system (which is how virtually all modern financial markets operate) banks hold deposits that are only a fraction of the value of the loans they have leant out. They get away with opearating like this because when someone actually puts some in a bank they only very rarely pull that money out of their account, allowing banks to lend or more than they actually have in deposits because they know that if only a small proportion of their deposits are ever going to be withdrawn then they know they can lend out more than they actually have.
The old rule of thumb used to be that banks would hold ratios of about 10 to 1 where their loans would be about 10 times the size of their deposits. However through "financial deregulation" over the last two decades or so, banks, both here and internationally, have been pretty much been given free reign to set their own reserve ratios. So bank in all seriousness have had a license to print money, it's just not the physical sort of money you put in your wallet, unless you include your credit card, but it is just as real as physical money.
In Australia we actually have no reserve ratio requirements at all, meaning that banks theoretically can lend as much as they want without holding any levels of reserves. I say this is theoretical because in Australia we the institution called APRA which is meant overlook the banks and make sure our financial system is secure which should prevent excessive risks (though I have my doubts about just how extensive their supervision is and whether just like the rest of the world our regulatory body has been underplaying the real risk). Either way the reserves held by most banks have been deminishing over the last decade or two which is well represented by the currency to M3 ratio which you can get from teh RBA financial aggregates they release every month.
Now the important thing to recognise in al this is that "credit" in our system for all intents and purposes is "money". So just like you can use money to buy a shirt you can use your credit card to buy a shirt and just rack up a debt that you need to pay back in the future. So for every dollar borrowed, it is another dollar injected into the economy.
Now when I say "bank leveraging" I'm referring to the banks taking on larger and lager reserve ratios, meaning that the system is being filled with "debt based money" or "credit" which has been faciliated by the banks which as a result inflates prices, including asset prices like houses, because under the simple assumption of economics of "MV = YP" if the amount of money (M) in the system goes up, holding incomes (Y) and the velocity of money (V) constant, then there will be a proportional increase in prices (P) aka inflation, because you just have more money in the system chasing the same amount of goods.
Now if you look at the credit expansion in Australia over the last 15 - 20 years then it's hard not to see the correlation between the explosion in credit growth and housing prices. However credit is just debt that one day needs to be repaid and if everyone repays their debt this reduces the money (broad money) within the economy and as a result you'd expect asset prices like houses, which are essentially just a commodity, to contract as well.
Now the reality is that broad money supply, which as the name suggest is the broad representation of money in the economy, which factors debt levels, has been growing at double digit rates for years and years now, just like housing prices, stock prices, food prices, education prices, health prices, etc... So my point is broad money supply is something that is worth considering when it comes to what housing prices are going to be in the future.
I also think it is very important for people to understand the process of credit growth within an economy so they can distinguish between real returns and nominal returns. Many people out their think that because their house prices and stock portfolios went up 15%pa for the last 5 years and they were told by the RBA that inflation was roughly 2.5% that they made a 12.5%pa real return, unfortunately I personally think this is just a illusion that is only possible if you believe the inflation rate is actually 2.5% and I think there are loads of Australians that really need to be wary of the reality of their financial situation.
Like for example anyone who is saving for retirement that is naively budgeting for inflation being 2 - 3% with their super gaining returns of 10% pa is going be shattered when their nest egg is eroded in the space of a couple of years given that the price of food, health, accommodation, petrol, childcare, holiday travel, clothing, and so much more are not even accounted for in the "underlying inflation" figure that is reported and it doesn't take a genius to work out that most of the above item's costs have been increasing at a rate significantly higher than 2 - 3%.
So all in all I'm just saying the level of debt growth within an economy is normally a better indication of house price growth than all the other rubbish that other people would argue make houses more valuable...
So perspectives on where debt levels within an economy are going to go in the future are just as important part of market analysis as any other "due diligence".
Chris - great explanation. Thanks for all the effort you put in with that. I wish I was as cluey as you at your age!!
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