Bubble
(Down Under)
News
AUSTRALIA is headed for an “economic Armageddon”, with record household debt, record foreign debt and a massive housing bubble creating a perfect storm that could “wipe out” millions of families if there is a global shock.
That is the apocalyptic warning of a former government economic advisor, who says the government needs to cut tax incentives such as negative gearing and welfare handouts and the RBA needs to increase interest rates in order to avoid a “devastating depression”.
Worse still, Australia is particularly vulnerable because of significant structural imbalances, including record levels of household debt not seen since the lead up to the last great depression in the 1920s.
Corporate governance specialist John Adams, who was an economics and policy advisor to Senator Arthur Sinodinos and management consultant to a big four accounting firm, believes he has found seven disturbing signs that the global economy is primed for a major fall.
Sign 1: Record Australian Household Debt
According to the Reserve Bank of Australia, Australia’s household debt as a proportion of disposable income now stands at a record high of 187%.
The two closest episodes were the 1880s and the 1920s, which both preceded the only two economic depressions ever experienced in Australian history in 1890 and 1929.
Sign 2: Record Australian Net Foreign Debt
Australia’s net foreign debt now stands at more than $1 trillion and as a proportion of Gross Domestic Product was at a record high of 63.3% in June 2016.
This makes Australians much more vulnerable to international economic developments such as higher global interest rates, international financial crises or major government or corporate bankruptcies.
Sign 3: Record Low Interest rates
Australia has its lowest official interest rates on record with the Reserve Bank of Australia’s cash rate sitting at 1.5%. The current low rate of interest is not sustainable over the medium term and will inevitably rise.
Australians, particularly in Sydney and Melbourne, who have borrowed record amounts of money are very susceptible to higher interest rates.
Sign 4: Australian Housing Bubble
The expansion of credit by the Reserve Bank of Australia has been pumped into the Australian housing market over the past 25 years. Credit, which has been directed to Housing as a proportion of Australia’s GDP, has exploded from 21.07% in June 1991 to 95.06% in June 2016.
Over the same period, credit which has been directed at the business sector or to other personal expenses has remained relatively steady as a proportion of GDP.
Sign 5: Significant Increases in Global Debt
The General Manager of the Bank for International Settlements stated on 6 February 2017:
“Total debt in the global economy, including public debt, has increased significantly since the end of 2007 ... Over the past 16 years, debt of governments, households and non-financial firms has risen by 63% in the United States, the euro area, Japan, the United Kingdom, Canada and Australia, 52% in the G20 and 85% in emerging economies. Heavy debt can only leave less room for manoeuvre in responding to future challenges.”
Sign 6: Major International Asset Bubbles
There are significant asset bubbles in bonds, stocks and real estate in major economies such as the United States and China, which has been fuelled by the significant increases in global debt.
For example, the Shiller PE Index in the United States which measures the price of a company’s stock relative to average earnings over the past 10 years is now at 28.85. This is the third highest recorded behind the Tech Bubble in 1999 and “Black Tuesday” in 1929.
Sign 7: Global Derivatives Bubble
According to the Bank for International Settlements, the value of the over the counter derivatives market (notional amounts outstanding) stood at US$544 trillion.
Much of these derivatives contracts are concentrated on the balance sheets of leading global financial and banking institutions such as Deutsche Bank. The concentration of complex derivative contracts on bank balance sheets poses significant risks to both individual institutions and the global financial system.
DYI: China and a host of western countries
including the U.S. are deeply in debt with Australia being the spendthrift
poster boy. When the bough (bubble)
breaks the cradle (economy) will fall (depression). Have massive amount of savings –
relative to each of our personal situation – in high quality credits and a
modest amount of gold. Your
shopping list ready once markets are down at least 50% from their highs. In other words – be a good Boy Scout – BE PREPARED! You may want to look at the closed end fund
Australia Equity Fund symbol IAF for future purchase.
As
a side note Russia has made giant strides in monetary reform hardening the
Ruble. Their central bank has positive
interest rates wringing out inflation plus systematically purchasing gold for
their national reserves. If they have
the political will to maintain this positive monetary stance their population
will and currently are on a saving spree flooding the banks with low cost non
inflationary capital. Plus with positive
rates the flip side of savings is debt reduction as Russian citizens are paying
down debt at a record rate. Encourage by
their government to save in gold and silver coins creating additional
confidence further expanding their monetary reform.
Why
is this important???
It
is my opinion Russia is setting the stage to price first oil then gas along
with the rest of her natural resource in GOLD!
Will this be the end of the U.S. dollar?
NO…Will it be the end of the U.S. being the world’s reserve currency? YES…The U.S. Dollar will have to share its
place with gold. The Russian economy is
too small to become the new reserve currency.
However they could make big inroads into central Europe. This is my judgement is what all of the
Russian screaming is about.
If this occurs and I believe this be a high probable
event, America’s free monetary ride will end.
Interest rates will rise, prices will be “jacked up” and Congress’ days
of deficit spending will end. America
will have to live within its means, in the short run, to put it bluntly, it
will SUCK! The long run will force
monetary reform here in the U.S. Donald
Trump is aware of this. In the Oval
Office for everyone to see is a painting of Andrew Jackson -- who did away with America’s 2nd central bank.
Here is a YouTube presentation explaining the PetroDollar and its end:
Updated Monthly
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 2/1/17
DYI
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