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Australia Is The Biggest Bubble In Recent History, It's Heading For The Mother Of All Hard Landings
Topic Started: 4 May 2012, 11:30 AM (5,321 Views)
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ALBERT EDWARDS: This Is The Biggest Bubble In Recent History, And It's Heading For The Mother Of All Hard Landings

Joe Weisenthal | May 3, 2012, 6:48 AM | 11,426 | 23

You have to love this: The title of Albert Edwards' latest note is: The biggest bubble in recent history is heading for the mother of all hard landings.

So what's that bubble?

Australia!

Edwards' post is building off the work of his colleague Dylan Grice, who wrote about an Australian bubble built on the back of a China bubble in his recent note.

So what's Edwards' big complaint with Australia?

Because Australia has gone so long without a recession, everyone has been convinced that it's managed by geniuses, and that the economy there is solved. This is classic bubble thinking.
But Australia has telltale signs of a bubble.
5 of the world's most expensive cities are now in Australia (Sydney, Melbourne, Adelaide, Brisbane, and Perth).
Not one Australian city falls into traditional measures of "affordability."
The entire Australian economy is premised on the wheels not coming off China.

Says Edwards:

Our own more Minskyan interpretation of events is that the lack of volatility in the Australian economic cycle and the absence of any recession since 1991 has led Australians to have an excessive appetite for debt in the belief the future will reflect the past. But for us, suppressed volatility is merely storing up an even bigger crash further down the road.

Read more: http://www.businessinsider.com/albert-edwards-australia-is-the-biggest-bubble-in-recent-history-2012-5#ixzz1tr9VjKGK
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DYLAN GRICE WARNS: Australia's Credit Bubble Is Built On An Even Bigger Chinese Credit Bubble

Mamta Badkar | Apr. 25, 2012, 1:06 PM

Concerns of a slowdown in China have caused investors to grow even more cautious about Australia.

On a recent trip to Australia, Societe Generale's Dylan Grice was taken aback when he came across a book titled "The Australian Moment" by George Megalogenis which talked about the 'Australian miracle.'

"I had a great time in Oz: fantastic people, wonderful atmosphere, and a truly beautiful country. But I felt more relaxed when Australians called themselves the lucky country with their typical honesty, realism and humility. Now that it's been upgraded to the status of miracle I'm worried."

In a new report titled Popular Delusions, Grice argues why Australians should be worried that someone is calling their country a miracle. He points out that Australia is currently benefiting from a commodity bull market that is inflating a credit bubble, which itself is being inflated by a Chinese credit bubble.

Read more: http://www.businessinsider.com/dylan-grice-australian-economy-2012-4#ixzz1trA6B8xu
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davel
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Our own more Minskyan interpretation of events is that the lack of volatility in the Australian economic cycle and the absence of any recession since 1991 has led Australians to have an excessive appetite for debt in the belief the future will reflect the past. But for us, suppressed volatility is merely storing up an even bigger crash further down the road


This sentiment is 100% on IMO. Whether or not the big crash event comes to pass, its undeniable that what has happened across Aus society is a huge dose of complacency has set in. There hasn't yet been the mindset readjustment seen in most countries since 2008. Could argue its started, question is how far will it go?
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miw
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davel
4 May 2012, 11:33 AM


This sentiment is 100% on IMO. Whether or not the big crash event comes to pass, its undeniable that what has happened across Aus society is a huge dose of complacency has set in. There hasn't yet been the mindset readjustment seen in most countries since 2008. Could argue its started, question is how far will it go?
Tend to agree, although I am seeing signs that Australians are making the necessary adjustments without the need for a collapse.

a) Since 2008, we have been seeing a slow deleveraging of private balance sheets.
b) Asset prices are off by about 10%.

When bubbles burst you tend to see drops more like 30-80% and they happen very fast down from the peak. If there were going to be a bust, then it should have happened by now. What we have seen doesn't even qualify as a correction.

Before bubbles burst, you tend to see a long period where almost everyone feel the investment can't lose, and even the ones who are scared are more scared of missing out so they still invest. I'm not seeing that in any part of the Australian economy. Most people are well aware that house prices can/have/are likely to go down and that you can lose money, at least in the short term. Retail is doing it *really* tough and has been for a while. There just isn't the lack of caution you usually see before a bubble bursts.

Anyway, as an economist I forget the name of once wrote: "You can't actually detect a bubble until after it bursts."
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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audas
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miw
4 May 2012, 02:20 PM
Tend to agree, although I am seeing signs that Australians are making the necessary adjustments without the need for a collapse.

a) Since 2008, we have been seeing a slow deleveraging of private balance sheets.
b) Asset prices are off by about 10%.

When bubbles burst you tend to see drops more like 30-80% and they happen very fast down from the peak. If there were going to be a bust, then it should have happened by now. What we have seen doesn't even qualify as a correction.

Before bubbles burst, you tend to see a long period where almost everyone feel the investment can't lose, and even the ones who are scared are more scared of missing out so they still invest. I'm not seeing that in any part of the Australian economy. Most people are well aware that house prices can/have/are likely to go down and that you can lose money, at least in the short term. Retail is doing it *really* tough and has been for a while. There just isn't the lack of caution you usually see before a bubble bursts.

Anyway, as an economist I forget the name of once wrote: "You can't actually detect a bubble until after it bursts."
Bullshit - we are tracking directly inline with japan and the United states.
There is every chance we will exceed the negative trajectory by years end.

EVery single indicator is that we are heading for a crash of at least 40% over the next two years - the US took TWO years to hit that level of fall.

I really dont think people understand how long crashes take - its not an overnight thin like the stock market.
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audas
4 May 2012, 02:28 PM
Bullshit - we are tracking directly inline with japan and the United states.
There is every chance we will exceed the negative trajectory by years end.

EVery single indicator is that we are heading for a crash of at least 40% over the next two years - the US took TWO years to hit that level of fall.

I really dont think people understand how long crashes take - its not an overnight thin like the stock market.
Even the stock market which seemed like an overnight thing was actually over 12 months.

Property bubble bursts are longer. US has been falling for almost 6 years now and than seemed like a quick bubble burst.
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davel
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@miw - I personally lived through the US crash 2006-2009 and it was anything but quick, in my area at least. Most people didnt internalise it until well into 2008. Then it became crazy and went down fast.

I dont see Aus going through that, absent a China implosion, but the feeling compared with US 06-08 is pretty similar (again, my area). it doesnt happen fast, its a long bleeding process.

If there's one factor that I could pick which I think has turned here which is key, it would be valuations. Thats actually what caused the issue in the US to infect from subprime to everything else. Again, it wont be the same here. But when you have valuers writing down values that acts as a tremendous drag on prices. Everyone has to adjust their behaviour, including lenders, and then we're in the deflationary spiral.

IMO this behaviour was not widespread even 12 months ago. Now its the norm.
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miw
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Mr Griffin
4 May 2012, 02:48 PM
Even the stock market which seemed like an overnight thing was actually over 12 months.

Property bubble bursts are longer. US has been falling for almost 6 years now and than seemed like a quick bubble burst.
This is just asinine. I personally have watched the S&P500 lose 30% of its value in a matter of about 2 weeks in the last 5 years. Also happened in 1987 and 1974. Bear markets last for years. In fact, the current bear market has lasted nearly 12 years. Crashes are very fast and very brutal.

Property crashes take longer, but are also most brutal in the first 2 years. Let's look at the US property market bust:
Case-Shiller 20-city composite:

Jul 2006 206.82 (peak) Loan delinquency rate: 1.62% Unemployment: 4.7%
Nov 2006 204.65 (past the peak, first time it dropped by an amount that indicated real trouble) delinquency: 1.95% unemployment: 4.5%
Nov 2007 188.94 Down 8% Delinquency: 3.07% Unemployment: 4.7%
Nov 2008 154.50 Down another 18% Delinquency 6.64% Unemployment: 6.8%

Nov 2009 146.17 Down 5.5% Delinquency: 10.45% Unemployment: 9.8%
Nov 2010 143.77 Down 1.7% Delinquency: 10.11% Unemployment: 9.8%
Nov 2011 138.19 Down 3.9% Delinquency: 9.86% Unemployment: 8.7%
Feb 2012 134.20 Total drop since peak: 35.1% Prices still going south in most cities. Delinquency reducing. Unemployment 8.3%

What can you see from this?

1. The crash was essentially done and dusted in 2 years. Since then it has been a painful bear market.
2. The reason it really crashed (2007-8) was the incredible rise in loan delinquency to over 6% and an increase in unemployment to what in Australia would be equivalent to 7.8% unemployment in 2008.
3. The US case had the confluence of the 2007 credit crunch, the 2008 subprime crisis and a recession. Australia had very little credit crunch, no subprime and (so far) no recession.
4. It looks to me like Australia got lucky in that there was a wake-up call that came early enough to avert disaster.

I will get very concerned about a potential crash in Australia if we get loan delinquency (30-days past due payment or in outright defaut) above 4x the background rate (about 4*0.8% or 3.2% Right now: it is at 1.57%, down from a record 1.79% 12 months ago) and unemployment rises above 7%. This could happen of course, but, since I can't buy tomorrow's paper like you so obviously can, I'd have to say it is far from certain and in fact unlikely. At any rate, to turn a downturn into a crash you need to get into the forced-sale negative feedback loop. (On the stock market, margin calls, on the property market - foreclosures or mass unemployment.)

If I were looking for a US example that looks like Australia, I'd be looking at the 1990 property recession which also lasted over 6 years, but had much shallower drawdown:
Oct 89: 82.44 Peak
Apr 93: 75.83 Trough - down 8% - after 3.5 years
Jan 88: 82.70 Back to pre-selloff level - after just over 9 years.

If you were to do stupid, invalid curve-fitting like Steve Keen that would predict a lowpoint around the end of 2013 at a level about 2% below now. A crash cannot be ruled out, but neither is it indicated if you care to look at the whole picture and compensate for confirmation bias.

The Japan situation is so irrelevant to Australia it is not even worth addressing.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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davel
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miw - as you point out the first 18 months was "only" 8%. Not dissimilar to Aus now.

Sure there it then speeded up, and this was largely due to inability of people to roll over their mortgages due to tremendous change in valuations. Many people, me included, took advantage of low mortgage rate deals in the period 2005+ when mortgage rates were relatively high (30 yr fix for example was 7+%). Idea was always to roll over to a new deal. But when the valuers suddenly knocked 100k off the value of your house, whilst lowering their LVR tolerances, many people needing to refi were tipped onto the street.

This is the real story of what happened. There really werent many subprime borrowers in most places.

Wont happen in Aus, but doesnt need to follow exactly the same track in order to be damaging.
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miw
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davel
4 May 2012, 04:56 PM
@miw - I personally lived through the US crash 2006-2009 and it was anything but quick, in my area at least. Most people didnt internalise it until well into 2008. Then it became crazy and went down fast.

I dont see Aus going through that, absent a China implosion, but the feeling compared with US 06-08 is pretty similar (again, my area). it doesnt happen fast, its a long bleeding process.

If there's one factor that I could pick which I think has turned here which is key, it would be valuations. Thats actually what caused the issue in the US to infect from subprime to everything else. Again, it wont be the same here. But when you have valuers writing down values that acts as a tremendous drag on prices. Everyone has to adjust their behaviour, including lenders, and then we're in the deflationary spiral.

IMO this behaviour was not widespread even 12 months ago. Now its the norm.
@davel,

Fair enough. "quick" is a relative term, and when you are in it it seems to go on forever. But given that oz peaked in 2010, you would agree that by 2 years into the downturn in the US, the mood was one of sheer panic?

I just do not see the panic when I look at the market, except perhaps for places that were literally underwater in January 2011. :-) What I see is a very low number of listings, but (except for flood-affected areas) at prices pretty-much what they were 12 months ago, and they aren't moving very fast at all. Tough if you want to sell, but not panic. I only know Brisbane, but it seems to be off much the same amount as anywhere else.

Your point about property valuations is a good one, and one I had not thought about up to now but will factor into my calculations from now on. I wonder what level of annual price drop you need to cause property valuers to start a vicious spiral?
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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