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Australia

Intel Australia

  • 160,000 Reasons we Dodged a Recession

    (And only one reason why we can’t avoid it any longer)

    Unless you’ve been living under a rock, you’d know it’s a federal
    election year for Aussies.

    Come May, we will have the chance to choose the next leader
    of our country.

    Perhaps one of the few upsides of our political leaders is
    that they never last very long.

    There’s too much party infighting for them to meddle with
    our country.

    The topic set to drive this year’s election?

    Immigration…

    The migrant cap means nothing

    Today, thank a migrant.

    Some who chose to move here and make Australia
    their new home.

    Because of them, they have kept Australia out
    of a recession for over a decade.

    Although, that may be about to change.

    The explosive population growth, particularly
    if you live in Melbourne or Sydney, is something you can see all around you.

    The trains are full.

    The trams and buses are crowded.

    Public schools are bursting and underfunded.

    There’s a long wait at bulk-billing medical
    facilities.

    And traffic is getting worse.

    Right-leaning politicians are quick to jump on
    these perceptions.

    Former prime minister Tony Abbott is crying
    out for annual immigration to be cut from 190,000 to 110,000. Minister for Home
    Affairs Peter Dutton is another calling to drastically reduce the intake of
    migrants.

    Prime Minister Scott Morrison has said he will
    cap current immigration at 160,000 for the next four years. That may appeal to
    conservative Liberals. But that’s a largely symbolic gesture.

    While Australia has the ability to offer
    190,000 permanent visas each year, we only offered 162, 717 permanent visas for
    2018 anyway.

    Meaning Morrison’s grandstanding about
    reducing the number of new migrants means nothing.

    In my view, they all miss the point.

    Australia is a country founded on migrants.

    It began with the exile of convicts.

    Then a flood of mostly Welsh and Cornish settlers
    looking to strike it rich in the gold rush.

    Not long after, this was followed by the
    abhorrent White Australia policy of the early 20th century and the influx of
    refugees in the aftermath of the Vietnam War.

    Ultimately, migrants who settled here and made
    Australia their home are an integral fabric of our cities and towns.

    Yet what anti-immigration proponents ignore is
    the fact that our immigration policy is a key factor keeping Australia out of
    recession today.

    Blind luck and government intervention

    Australia is in its 28th recession-free year.

    This record-breaking period of economic growth
    comes down to blind luck and occasional intervention.

    The relaxation of bank lending in the
    mid-1990s allowed Australians to take advantage of the reinstatement of
    negative gearing in the final years of the Hawke government.

    Meanwhile, Australia’s tiny tech sector was
    the only real casualty of the dotcom bust, leaving the stock market and economy
    untroubled.

    Following that, the Aussie construction boom
    that began in 2001 coincided with China’s rise as an economic powerhouse,
    putting a rocket under Australia’s iron ore export sector.

    Similarly, in 2008, we avoided the financial
    crisis when China unleashed a credit-fuelled construction boom, once again boosting
    Aussie iron ore exports.

    Truck
    drivers and diamond drillers were making as much as doctors and lawyers. No
    price for a house was too great, so banks lent freely because everyone knew
    that housing ‘always’ goes up.

    Don’t
    get me wrong. The Aussie stock market barely went anywhere during this time.

    Yet
    in a period that crippled international markets, Australia sailed through
    relatively unscathed.

    The
    digging and lending cycle that defined the start of this current decade led to
    Aussie banks becoming the most profitable in the world. At one point, Aussie
    bank profits alone made up 2.9% of national GDP.

    Less
    than four years ago, Australia defied recession once again after China’s yuan
    devaluation in August 2015.

    Not
    long after, though, the situation required intervention.

    Prices
    for commodities dropped. People reduced spending. Wage growth officially became
    stuck. Construction — a sector that employs 11% of the Australian economy —
    began to disappear.

    In
    light of this, the federal government stepped up in late 2016 and began
    announcing massive nationwide infrastructure projects.

    Anything
    to keep our enviable recession-free run going.

    But
    the only reason this blind luck and economic intervention worked was because of
    high migration numbers.

    Broke eight times in a decade

    Australia’s
    population has grown 50% in the past three decades. And if it weren’t for the
    constant flow of migrants to our shores, Australia would’ve been broke four
    times over.

    The
    definition of a technical recession is two consecutive quarters of declining
    GDP growth.

    As
    you can see in the chart below, when you strip down the numbers to show
    economic growth per person (red bar), there are eight quarters in the past 10
    years in which Australia faced the real prospect of recession.

    Take
    a look:

    Economic growth per person

    Australia Per Capita GDP

    Source: Business Insider Australia

    Economic
    growth per capita went backwards.

    So
    even though the Australian population has grown, our individual share has
    gotten smaller.

    In
    other words, productivity per person is shrinking. As this falls, it takes
    spending with it. This suggests that an Australia-wide economic recession could
    be in the near future.  

    The
    graph would’ve looked much worse if we didn’t have the influx of new migrants
    coming to settle in Australia permanently.

    The
    point is, Australia’s booming population, at 25 million, is one of the few
    things keeping us out of recession.

    The
    simple reason for this is that the more people there are, the more spending
    there is in the economy. That applies to both the public and private sectors.

    In
    addition, the waves of new workers settling in Australia should help balance
    out the 25% of the population retiring over the next decade. We simply don’t
    have enough young people to fill this gap.

    Whether
    some people care to admit it or not, the ongoing prosperity Aussies enjoy now
    heavily relies on new migrants.

    If
    policymakers put an end to that, the rug will be ripped out from under the
    Australian economy in time.

    And it would almost surely take our record-breaking recession-free run with it.

    Kind regards,
    Shae Russell,

    Editor, The Daily Reckoning Australia

    The post 160,000 Reasons we Dodged a Recession appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Banks Ready for Biggest Credit Boom in History

    It was only yesterday that I showed you more than a million Aussies with mortgages are in financial distress…

    …yet Aussie banks wouldn’t tell us that.  

    That’s because they keep their nearly bad debts information close to home.

    There’s no way they want you or I to know exactly how many people are struggling to make regular repayments on their mortgages.

    Plus, the big banks assure us they have changed their ways.

    In this post Royal Banking Commission world, our banks are telling us they are far more cautious about who they lend to.

    Hand on heart swearing they’re lending even less and responsibly…

    What if I told you, these promises were being made with their fingers crossed behind their backs?

    The vicious cycle of continuous spending

    Ask yourself this, just how important is lending to the Aussie economy?

    In short, it’s crucial.

    Let me show you why…

    Aside from exporting rocks to emerging markets, Australia produces very little.

    Which is why consumption is so important to keep our miracle economic growth story continuing.

    And part of that consumption, is our incessant obsession with building houses and paying ever larger amounts for them.

    Building those houses and apartments are more than one million construction employees. Roughly 11% of the total full time work force.

    Then we have the indirect jobs associated with houses. Real estate companies and home improvement store employees…

    Let’s not forget too, that as long as people feel their houses are increasing in value, they are more likely to spend money.

    When houses prices increase, people will upgrade their five-year-old car for a brand new one. Perhaps even get that boat they’ve always wanted.

    Essentially, increasing house prices mean Aussies will use their mortgage as an ATM for the big purchases.

    Then, there’s the little things.

    If you’re feeling flush with cash, chances are you’re more likely to go shopping. Eat out with friends, head to the movies or even a family night out bowling.

    But if you keep hearing that property prices are falling, chances are you’ll start to spend a little less.

    Go out once a month for dinner rather than twice. Probably rethink that Uber Eats order. Shave $50 bucks off that wedding gift you’re about to buy.

    That thought process — the reduction in spending — feeds into the bigger things.

    The plans for the renovations get shelved.

    And if you hear banks are reducing what they’re willing to lend, refinancing the mortgage to buy that boat doesn’t seem like such a good idea anymore.

    And really, you don’t need a new car just because the current one has approached the end of the warranty period.

    Nope. Give it a thorough service, new windscreen and a clean, and you’ll get a few more years out if it.

    Imagine this process happening in every Australian house hold right now.

    All around the country, people are reducing what they spend.

    And the less you spend, the harder it is for businesses to make a buck.

    The harder it becomes to turn a profit, the more likely it is businesses will slowly reduce their staff numbers.

    And if people find themselves without work, chances are they’ll stop spending money in the economy on the fun things.

    The longer people are out of work, the harder those debts are to pay.

    It’s not a recession…yet…but it sure as hell isn’t a sign the Aussie economy is doing well either.

    And our banks have noticed this…

    Thought bankers were bad in 2017? Just wait…

    As long as Aussie banks keep lending, we can continue to buy all the things we want.

    Over the last 12 months though, banks have repeatedly told us they are reducing what they are willing to lend.

    The mainstream press back this up.

    Telling all sorts of stories about people being quizzed on how much they spend on take away.

    Then there’s the data from Digital Analytics that says mortgage refinance rejections were six times higher over 2018.

    With every mortgage knock back — and every media story that confirms this — the reduction in the supply of credit has compounded the current house price falls.

    Which in turn is forcing consumers to spend even less…and putting Australia dangerously close to a recession.

    However, our banks have been telling us only what we wanted to hear.

    The Royal Banking Commission is done an dusted. And those lending machines are set to fire up once again.

    This time, it will all begin with ANZ bank.

    Free from restrictions on investor lending, spokesperson from ANZ said they ‘…have decided to increase our focus on the investor market. These changes demonstrate our continued appetite in the investor market, while ensuring we remain in line with our APRA requirements.

    Just how will ANZ ‘target’ the investor market?

    With some seriously explosive lending techniques.

    The maximum loan-to-value ratio for investing lending is going to increase from 80/20 to 90/10.

    Meaning ANZ will now only seek a 10% deposit on an investment property rather than 20%.

    Oh, and they will also increase the maximum interest only period from five years to 10 years.

    That’s right.

    ANZ are doubling the interest only period for investors.

    This is truly terrifying.

    Not only that, it doesn’t take long for this unrestrained form of lending to filter through to all mortgages.

    Bankers only know how to make money one way. That’s by lending ever larger amounts to us.

    It won’t be long until 2018’s Royal Banking Commission was nothing more than a nosy government in bank practices. The stories of corruption and rampant lending will become just that…stories.

    ANZ targeting investors with unheard of loan conditions is step one. After this is successful (and the bankers will say it was) that will flow through to owner occupiers…

    …and Australia is about to see perhaps the most irresponsible lending of our time.

    If you thought the past decades’ credit boom was big, I’d say hold that thought.

    If ANZ’s new lending plan is anything to go by, we are about to witness the biggest credit boom in Australian history.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

    The post Banks Ready for Biggest Credit Boom in History appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • The Real Problem with Modern Monetary Theory

    • Understanding the problem
    • What is money?
    • Only faith backs a currency’s worth

    Up until the financial crisis, few people outside of economic circles had heard of quantitative easing.

    And even fewer people could pronounce it.

    In the aftermath of the financial crisis, ‘QE’ became a household phrase alongside terms like ‘derivatives’ and ‘subprime’.

    Things that were once only talked about by people with doctorates were now up for discussion over a morning coffee.

    Essentially, QE became the defining phrase of this decade.

    Well, I have a new one for the new decade ahead: Modern Monetary Theory.

    It’s an economic idea that’s been around for a few decades now. And generally, it’s been widely ignored.

    Large US deficits mean this idea is gaining more traction with influential economists.

    However, as Jim explains today, MMT is not going to solve the US debt problems. If anything, it’s going to make them far worse…

    Read on for more.

    Kind regards,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia


    The Real Problem with Modern Monetary Theory

    Jim Rickards, Strategist

    Jim Rickards

    There is one great irony of the Modern Monetary Theory (MMT) debate.

    MMT supporters will point to 2008 and say, ‘Just look at QE. In 2008, the Federal Reserve balance sheet was US$800 billion. But as a result of QE1, QE2 and QE3, that number went to US$4.5 trillion. And the world didn’t end. To the contrary, the stock market went on a huge bull run. We did not have an economic crash. And again, inflation was muted.’

    Fed Chairman Jay Powell has criticised MMT, for example. But its advocates say Powell and other Fed officials hoist themselves on their own petard.

    That’s because they are the ones who actually proved that MMT works.

    They point to the fact that the Fed printed close to US$4 trillion and nothing bad happened. So it should go ahead and print another US$4 trillion.

    The Fed criticises MMT, but it was the Fed’s very own money creation after 2008 that MMT advocates point to as proof that it works.

    Their only quibble is that the benefit of all that money creation went to rich investors, the major banks and corporations.

    The rich simply got richer.

    MMT advocates say it will simply redirect the money towards the poor, students, and everyday people who need healthcare and childcare. It would basically be QE for the people, instead of the rich.

    And it will go into the real economy, where it will boost productivity and finally give us significant growth.

    Understanding the problem

    When I first encountered these arguments, I knew they weren’t right.

    Both my gut feeling and my more rigorous approach to my own theory of money told me MMT was wrong. But I must admit, their arguments were more difficult to answer than I expected.

    I had a tough time uncovering the logical flaws.

    Their points are internally consistent, and they did have a point.

    After all, the Fed did create all that money and it didn’t produce a calamity. Who’s to say they couldn’t do a lot more of it?

    In other words, the Keynesian argument does not hold water when you look at the facts or certainly recent economic history.

    Without doing any more serious thinking about it, I probably would have lost a debate with any leading MMT proponent who’s done a lot of work on it, despite ‘knowing’ they were wrong.

    I couldn’t easily refute their basic arguments.

    You can never win a debate if you don’t understand your opponent’s position.

    Over the past several years, I got dragged into endless gold versus bitcoin debates, and I always thought they were silly because gold is gold and bitcoin is bitcoin.

    Contrasting them never made sense to me, but that’s what everybody wanted to hear, so I participated in a lot of these debates.

    I won every debate according to the judges or the audience, but the point being I had to understand bitcoin in order to see its shortcomings.

    I wasn’t about to debate somebody about bitcoin and get blindsided or embarrassed because I didn’t understand their arguments. I had to become a complete expert on bitcoin to win these debates.

    The same applies to MMT.

    If you’re going to debate somebody on MMT, you’d better know it better than they do or you’re going to lose that debate.

    What is money?

    It just so happens that I’ll be debating a leading MMT proponent on 3 April, in just over a week. So I had to immerse myself in it to learn it inside and out.

    I knew I had to go beyond the standard arguments that we can’t afford it, that it would explode the deficit, etc. I’m happy to say that I worked out an answer refuting MMT, but it wasn’t easy.

    It took a lot of hard thinking. Today, I’m giving you a preview of what I’ll argue at the upcoming debate.

    Here’s what it comes down to…

    The real problem with MMT can be traced to its very definition of money.

    The MMT advocates say they know what money is. Money derives its value from the fact that you need it to pay your taxes. In the US case, money is dollars.

    But their definition of money is flawed.

    In other words, the whole theory is built on quicksand. And this is the point that everyone is missing, including the usual critics. No one else has raised it.

    The basis of money, the definition of money, has nothing to do with paying taxes.

    I can think of a hundred ways to hold money and store wealth where you don’t owe any taxes. Here’s one example…

    If you buy a share of stock and stick it in your portfolio for 10 years without selling it, how much do you owe in taxes? Zero. You don’t owe any taxes until you sell it.

    This is one of the reasons why Warren Buffet is so rich, by the way. He pays very little taxes.

    But it’s not just stocks.

    The same applies to gold.

    You buy it and stick it in a safe for years. If you don’t sell it, you don’t owe taxes on it.

    That’s my point.

    In other words, there are innumerable ways to convert money into assets that preserve wealth where you don’t owe any taxes. You don’t have to pay taxes if you have stores of wealth and don’t sell them.

    The bottom line is, people have lots of alternatives.

    They are infinitely resourceful when it comes to getting out of the tax system and preserving wealth without having to pay taxes. So the whole idea that money derives its value from taxation fails.

    Money is not based on paying taxes at the end of the barrel of a gun.

    What is money based on then?

    Ultimately, it’s based on trust.

    We all need to trust in the money we use or else it wouldn’t be of much value. I could offer you seashells as a form of payment, but it’s highly unlikely you’ll accept it.

    When it comes your turn to buy goods and services, you need to know that someone else will accept your money.

    It’s that trust in the system that creates value.

    That system is very fragile and can be lost. And once lost, it’s almost impossible to regain. That’s why fiat currencies always fail in the long run.

    Only faith backs a currency’s worth

    MMT advocates say trust has nothing to do with it — that you need to pay your taxes with money, or else. But look at a place like Venezuela today.

    It’s one of the worst cases of hyperinflation in the history of the world. I don’t think anybody in Venezuela is worried about paying their taxes.

    They’re worried about finding food and water so their family doesn’t starve today.

    And if they happen to have some local money, they’re getting out of it as fast as they can. If they can find gold or dollars or euros, they’re buying it.

    They’re dumping their currency faster than the government can print it. When confidence is lost, when trust is lost, people get out of rapidly depreciating money as fast as they can.

    That’s where the whole Modern Monetary Theory breaks down, at its foundation.

    It fails because they substitute the threat of violence and jail for what really drives money, which is trust. They don’t understand that. And this trust can be lost very quickly.

    MMT advocates also seem to think inflation can be dialled back or tweaked at will.

    Maybe they’ll say, ‘We’ll only spend US$90 mln on a Green New Deal instead of US$97 mln.’

    They think they can dial it down.

    But they can’t. Once inflationary expectations set in, they take on a life of their own. It’s a non-linear system.

    It’s like moving the control rod in a nuclear reactor.

    If you get it wrong by just a little, you can melt the reactor down and kill a million people. It’s a non-linear system.

    So, my point is that MMT advocates misunderstand what money is.

    Money is not about coercion; it’s about trust. They don’t understand that there are plenty of non-taxable alternatives people can resort to.

    They misunderstand what inflation is. Inflation is not a linear phenomenon, but a non-linear phenomenon that can spiral out of control before you can do anything about it.

    And I use Venezuela as my case study, not QE. So, the point being they don’t understand money.

    This is what I’ll argue at my upcoming debate.

    All the best,

    Jim Rickards Signature

    Jim Rickards,
    Strategist, The Daily Reckoning Australia

    The post The Real Problem with Modern Monetary Theory appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • Unleash the Buying Frenzy in You

    Today, I’m going to try and convince you to invest in the stock market. I make a very persuasive case, if I don’t say so myself.

    But keep your wits about you. And promise me you’ll read right the way through…

    Here’s what you should do today. Put all your money into stocks.

    And the bank’s money too. Re-mortgage your house. Interest rates are pitiful compared to returns on the stock market. Just take a look at these epic gains in the ASX 200 stock market index…

    Unprecedented boom in Aussie stocks

    Source: Yahoo Finance

    As you can see, the market is booming. Up 16% since 2006 — just over 1% a year on average!

    Over the last five years it’s up 14%…

    Over the last year it’s up less than 4%…

    And from its highs in 2007, it’s still down 10%…

    That’s like rocket fuel for your retirement. Can you afford to miss out on spectacular gains like this?

    The rip roaring profits shouldn’t come as a surprise. How often have you been told that stock markets go up in the long run?

    You can’t miss out on gains like this

    Given Aussie school kids were forced to learn Japanese for so many years, let’s take a look at Japan’s stock market. Stocks there have soared in my lifetime…

    Source: Yahoo Finance

    The Nikkei 225 is up an impressive -44% since 1989. Buy and hold delivered for the Japanese. Why shouldn’t it deliver for you?

    Then there’s Europe, where the uptrend in the stock market is also clearly visible going back to the creation of the euro in 1999…

    Unprecedented boom in Aussie stocks

    Source: Yahoo Finance

    Just look at that bull market over time. Epic gains. Impressive stuff. No wonder the French are out celebrating in the streets every Saturday, instead of working their second jobs.

    How can you not be overinvested in stocks after performances like these around the world?

    What about America? If you’d bought the original stocks in America’s S&P 500 index and held onto them, you’d be rich by now.

    Although I couldn’t find the data on how rich, because none of those companies managed to stay in the S&P index. They fell out…

    Right now, investing in Asian stocks is especially promising. And it’s no surprise why. Just look at the performance of Asian stock market indices and funds. Like the MSCI AC Asia ex Japan Index. Or the iShares All Country Asia ex Japan index.

    What does ‘ex Japan’ mean, I hear you ask. Well, they took the Japanese stock market out of the calculation to show you how well Asian markets perform over time…

    It’s a bit like all the gold medals Australia won in relay races at the Olympics, ex the slow guys…

    Proof stocks go up

    I apologise for the sarcasm. Well, not really. I’m a little worked up about all this. About the blatant lies and absurd analysis of the financial industry. Used car salesmen make more sense.

    I’m based in London these days. At the centre of the lies and fraud industry, also known as finance. You should see the rubbish advertised in windows and on billboards here.

    My favourite example can be found a few minutes from the office. It’s the chart of a pension fund’s performance. The line rises dramatically over time. So you should invest.

    What they don’t mention is that the increase is due to ongoing contributions, not investment gains…

    Anyway, here’s the truth, as I see it.

    Stocks don’t just magically go up in the long run. Stocks haven’t been going up much, or at all, in great big chunks of the investment world.

    And even where they have, the buy and hold strategy is a delusion. Because stock market indices only measure successful stocks. They simply exclude the unsuccessful ones.

    Solutions…that actually work too

    I wonder how many years of poor stock market performance it would take for financial pundits to realise they’re wrong. And stop promoting their services as a retirement plan.

    I just realised that’s a stupid question…it’s never going to happen. Especially now that the governments of the world are tricking people into investing in stocks via government policies like Superannuation.

    But people might stop believing in the lies. Like they did in Japan. Eventually, after stocks crashed and never recovered.

    Speaking of which, how does anyone let finance professionals simply take Japan out of the equation while proving stock markets go up in Asia…?

    If I could simply exclude the losses on my portfolio, I might actually invest in the stock market! And it might actually perform as we’re all promised then too…the 8% a year gains we keep hearing about could be true if you simply take out the stocks that went down. That’s how the indices like the ASX 200 work.

    If you want to believe the investment industry’s lies, be my guest. Buy an index fund. Hold the companies that have already peaked and are waiting to decline. Or the companies that are a bubble and will crash out of the index.

    But at Agora Financial Australia, we have other ideas. Because you need solutions that actually work. If you want to retire.

    For many years at Agora, our favourite pick has been gold. It must be very embarrassing for the finance industry that a lump of metal outperformed the mighty ASX 200 — Australia’s best companies…

    But it did:

    Source: Goldprice.org

    So what are Agora Financial Australia’s editors suggesting you invest in these days?

    Find out here.

    Until next time,

    Nick Hubble Signature

    Nick Hubble,
    For The Daily Reckoning Australia

    The post Unleash the Buying Frenzy in You appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

  • What the Aussie Banks Aren’t Telling You

    Suddenly the Aussie market takes a turn for the worst, and everyone is an expert on the doom and gloom.

    Listen here mainstream press.

    I’ve been doomy and gloomy for almost nine years.

    You can’t come and muscle in on my turf.

    I mean, it’s almost like they’ve cottoned to the fact that things aren’t ok…

    Is this THE crash?

    As property prices tumble most are asking where it will stop.

    Melbourne is down 10% from its peak.

    Sydney houses are worth 14%.

    The rest of the major cities don’t get much of a look in mainstream analysis. Simply because analyst on the east coast have a habit of forgetting there’s other cities in Australia.

    But there was no panic then.

    However suddenly the two biggest cities in this island nation crumble and the headlines have you on high alert, that the Economic Armageddon has arrived.

    Is this the property crash we were all expecting? Or is the property market taking a breather, before an even bigger bull run?

    Or worse…is this THE US-style subprime housing crash we’ve all feared?

    Probably not.

    Don’t get me wrong, things in the property market will get worse before they get better.

    But there’s a much bigger problem with Aussie banks.

    One you probably know nothing about…

    The $120 billion question

    Talk of the crash appeared once again in the mainstream press yesterday.

    Once again, the mainstream were asking if our interest only loans in Australia were the equivalent to the ‘NINJA’ subprime loans in the US.

    There’s $500 billion loans in interest only loans that will reset to principle and interest over the next five years…and $120 billion of that begins this year.

    Meaning mortgagors will find their payments jump significantly higher as they now begin paying back the principle of the mortgage as well.

    Given that banks have reduced the amount they are willingly to lend and that house prices are falling, there is a risk that not everyone will be able to refinance their existing mortgage.

    And it may even increase how many people default.

    In saying that, AMP economist Shane Oliver was quick to point out that subprime and interest only loans aren’t the same time. Many of the NINJA subprime loans were lent to people with ‘no income no job and no assets’ (NINJA).

    Here, our interest only loans probably went to people who could prove they had some sort of income. Although, the Royal Banking Commission showed that not all of the loans were above board.

    However Oliver says that interest only loans and subprime loans are two different beasts. Mainly that subprime loans people could simply hand their keys back and walk away from the debt.  

    That’s because the US have non-recourse lending for home loans.

    Meaning at any point, people can walk away from their house and the debt, rather than pay the mortgage back.

    It was this ability to walk away from the debt that compounded the fall in houses prices and the associated problems in the US banking sector.

    In Australia, it’s different.

    We have recourse lending, that means at any given time people are responsible for the total debt outstanding.

    We can’t hand the keys back.

    We can’t walk away from the debt.

    Even if the house is reposed by the bank…and they sell if at a short fall to the loan outstanding, they will still chase people for the difference owed to them.

    Yet that has created an entirely different problem.

    One investors can’t see…

    What you don’t know

    Just how many people are facing financial hardship?

    Go on, guess.

    And I do mean guess.

    Because the truth is, we don’t actually know.

    You see, Australian banks must report to APRA when a loan is 90 days in arrears with no payment.

    Once a loan goes this long without a payment, it’s unlikely the bank is going to see any money for it.

    For now, the Reserve Bank of Australia has Aussie banks total non-performing assets for housing at around 0.9%. Which puts it on par at the peak of the financial crisis.

    That means less than 1% of all mortgages with Australian banks are more than 90 days in arrears.

    On the surface, this gives officials at the RBA and APRA something to cheer about.

    They — and other analysts — will trot out this figure as a way of saying that Aussies aren’t in financial distress.

    However, what about the data you can’t see?

    See, Aussie banks are only required to make public the loan that went bad after 90 days without a payment.

    But all those loans that haven’t seen a payment for a month, or two? Well that doesn’t have to be reported to the authorities…

    Nor do the numbers of people making partial payments either.

    If a person can’t make their full repayments, they are referred to the financial hardship team. And the financial hardship department is more than likely to work with a customer to get some payment.

    After all, cents on the dollar is better than total default. If people are willing to make some payment rather than none, the bank will work with that customer for as long as possible.

    But here’s where it gets dangerous for investors.

    We have no idea how many people are in financial distress.

    None.

    Because the banks don’t publish that information.

    They will advise in their year financial statements the percentage increase or decrease of loans in arrears.

    But they never disclose the number of people or the total dollar value amount of how many Australians aren’t making regular mortgage repayments.

    Which means investors don’t actually know how many banks loans have gone bad…

    One-in-eight in distress

    The danger in the Aussie market isn’t interest only loans.

    And a US-style housing market crash is highly unlikely for now.

    The real problem for investors — and the Australian economy — is the hidden figures.  

    Martin North over at Digital Analytics puts the number of Aussie mortgages in financial distress at 1,026,106 people.

    North — unlike many other corporations — considers financial distress as when net income doesn’t cover ongoing costs.

    Using North’s data, that means roughly one-in-eight mortgages in Australia are in financial distress.

    That means roughly one in eight million are spending more than 30% of their income on their mortgage

    That is a terrifying number.

    How many of those people are late with their mortgage repayments?

    How many people are ‘working’ with the banks to pay some of their mortgage?

    The answer is, we just don’t know.

    Just because Aussie’s are tied to their mortgage debt doesn’t make the debt anymore repayable.

    With banks about to internalise the data, we can’t fully assess the impact of those in arrears.

    So yes, interest only loans are very different to subprime loans.

    But we also can’t see the risk to banks.

    And not being about to quantify the risk, is the real problem.

    Until next time,

    Shae Russell Signature

    Shae Russell,
    Editor, The Daily Reckoning Australia

    The post What the Aussie Banks Aren’t Telling You appeared first on Daily Reckoning Australia.

    Posted: by Daily Reckoning Australia

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