Australian Treasury Calls Housing Bubble, Economist Relates

I … Australian housing prices peak out as the Australian Dollar turn down.

Leith van Onselen is the Unconventional Economist and writes that the Australian Treasury Calls Housing Bubble. He also writes Australia: Following Canada into a Financial Black Hole

And in article Australian Banks: Delusion Meets Desperation he writes: “When times are rosy, perceived risks are low, and credit is freely available – such as prior to the onset of the global recession – the banks are able to refinance their foreign borrowings easily and cheaply. But in times of heightened risk-aversion – such as when Lehman Brothers collapsed in the dark days of the global recession – foreign investors are less inclined to continue extending credit, leaving Australia’s banks, house prices, and broader economy exposed to a sudden liquidity shock.

This is the pro-cyclical nature of modern, risky finance. During good times, asset prices become inflated by easy credit. But when circumstances sour, credit is pulled-back, causing debt-deflation.

Regarding the banks’ heavy offshore borrowing, consider first the below chart, which I have produced from Australian Bureau of Statistics (ABS) data, showing the breakdown of offshore borrowings by Australian depository corporations, split-out between short-term debt (maturing in less than 12 months) and long-term debt (maturing in more than 12 months). Depository corporations comprise banks (accounting for the overwhelming majority of foreign funding), building societies, credit unions and registered financial corporations.

As you can see, offshore borrowings by depository corporations has exploded over the past 20 years, from around $50 billion in 1988 to nearly $700 billion currently.

Currently, depository corporations have around $300 billion of short-term foreign borrowings maturing within 12 months, in addition to another $380 billion of longer-term foreign borrowings outstanding. Other things equal, this $300 billion of short-term foreign borrowings must be refinanced within 12 months just to maintain the current level of credit within the Australian economy (let alone increase it).

[I comment that the foreign lenders risk appetite will change to risk aversion, by falling Australian home prices (as documented by the article’s author) and as debt deflation takes commodity prices, DBC, Australian Shares, EWA, and Industrial Miner, BHP Billiton, BHP, lower, on a falling Australian Dollar, FXA.]

The banks know they have Australian taxpayers over a barrel. They might as well be saying: “provide us with your backing or we will restrict credit, crashing both the housing market and economy and, in the process, destroying middle Australia’s main source of wealth”.

II … Global competitive devaluation commended on November 5, 2010 at the hand of the currency traders.   
Cumulative currency value losses between November 5, 2010 and November 19, 2010, are as follows
FXS -3.6%
FXF -3.0%
ICN -2.9%
SZR -2.7%
FXA -2.7%
FXY -2.6%
FXE -2.5%
BNZ -2.1%
XRU -2.0%
BZF -1.9%
FXC -1.8%
CEW -1.7%
FXB -1.2%
CYB -0.5%
FXM -0.5%

The Australian Dollar, FXA, has been one of the strongest currencies, as international investors took out yen carry trade loans and dollar carry trade loans to purchase Australian assets such as homes, mining stocks such as BHP Billiton, BHP, as well as the bank heavy Australian ETF, EWA.

Over the last 18 months the liquidity trade, as well as dollar carry trade and yen carry trade investment, provided returns ranging from 29% to 270%; the greatest returns came from rises in the Australian Dollar, FXA, the South African Rand, SZR, the Brazilian Real BZF, the Indian Rupe, ICN, and the Emerging Market Currencies, CEW, as is seen in the MSN Finance chart of FXA, SZR, BZF, ICN, CEW.  

United States, IWM, rose from 40 to 72.5 …. 80%
Australia, EWA, from 10 to 24 … 140%
Asia, Excluding Japan, EPP, from 20 to 46 … 130%
Europe, VGK, from 27 to 51 … 115%
Brazil, EWZ, from 30 to 77 … 150%
Russia, RSX, from 10 to 35 … 250%
India, INP, from 25 to 75 … 200%
China, FXI, from 22 to 44 … 100%
South Africa, EZA, from 30 to 70 … 130%
Sweden, EWD, from 12 to 29 … 150%
South Korea, EWY, from 20 to 56 … 180%
Canada, EWC, from 15 to 29 … 100%
Mexico, EWW, from 22 to 60 … 180%
Turkey, TUR, from 20 to 74 … 270%
Thailand, THD, from 20 to 64 … 220%
Emerging Markets, EEM, from 20 to 46 … 130%
Metal Manufacturing, XME, from 20 to 60 … 200%
Energy Services, OIH, from 70 to 130 … 85%
Solar Energy, TAN, from 5 to 7.5 … 50%
Centerpoint Energy, CNP, from 9 to 16 … 80%
Commodities, DBC, from 19 to 26  … 37%
World Government Bonds, BWX, from 48 to 62 … 29%
Gold, GLD, from 72 to 132 …. 83%

November 5, 2010 was an inflection point, that is a tipping point, in world economic and political history.

On November 5, 2010, the world passed from an age of investment liquidity provided by the world central banks lowering of interest rates and by quantitative easing and by Bank of Japan ZIRP yen carry trade lending and pivoted into the age of deleveraging and the age of debt deflation.

Beginning on November 5, 2010, the bond traders seized control of both long-term interest rates, such as the Interest Rate on The US 30 Year Government Bond, $TYX, and short term rates that were formerly under the control of the world central bankers. Municipal bonds experienced severe deflation as Mike Mish Shedlock reported Full Year Of Muni Gains Wiped Out In 2 Weeks. Bond vigilantes will continually be taking interest rates higher as the US Federal Reserve’s Quantative Easing constitutes monetization of debt and European Sovereign debt and other sovereign debt issues remain substantially unaddressed.  World Corporate Bonds, PICB, fell 1.4% and World Government Bonds, BWX, fell 1.5, the week ending November 19, 2010. Peak bond wealth, BND, was achieved on November 4, 2010 at 82.96. Bond deflation is definitely underway.

There is a trigger for all things economic. It was the Leaders’ Announcement of a Debt Default Mechanism – a crisis mechanism which would be used in the event of a sovereign default, as Econogirl reported on October 28, 2010, that lead to a blast higher in periphery European sovereign debt interest rates in November 2010, as well as a run on Ireland’s banks, that brought about the negotiation of seigniorage aid for Ireland.  

The currency traders have established themselves as the world’s sovereign governing power; their rule over the world’s governments began on November 5, 2010 when the Interest rate on the US Government Bond, $TYX, sustained above 4%, and as they sold the major currencies, DBV, and emerging market currencies, CEW, which has been called the US Dollar, $USD higher, rising from its low of 75.88 to close at 78.50.
Competitive currency deflation, that is competitive currency devaluation coming at the hand of the currency traders, has terminated liquidity trade, dollar carry trade and yen carry trade investing.

Peak currency wealth was achieved on November 5, 2010, as the Optimized Currency ETN, ICI, has fallen lower since has fallen lower since that time, as have all of the currencies listed below.

Cumulative currency value losses between November 5, 2010 and November 19, 2010 are as follows:
FXS -3.6%
FXF -3.0%
ICN -2.9%
SZR -2.7%
FXA -2.7%
FXY -2.6%
FXE -2.5%
BNZ -2.1%
XRU -2.0%
BZF -1.9%
FXC -1.8%
CEW -1.7%
FXB -1.2%
CYB -0.5%
FXM -0.5%
Chart of the Euro, FXE, shows a close at 136.36 on November 19, 2010.

The chart of the small cap value shares relative to the small cap growth shares, RZV:RZG Daily, shows a November 19, 2010 close at 0.788, down from November 4, 2010 high of  0.8047, provides evidence that debt deflationary is underway. Other evidence that debt deflation is underway is the rise in the S&P Mid Term Futures Volatility, VXZ, and the fall in Junk Bonds, JNK.

Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

Peak fiat wealth was achieved November 4, 2010 as the 30 10 US Government Debt Yield Curve, $TYX:$TNX, flattened from 1.628.

A steepening yield curve came from the anticipation of Quantative Easing 2, as well as Yen based carry trade investing and US Dollar carry trade investing; and that rallied the world stocks since June 7, 2010, as is seen in the monthly chart of world stocks, VT Monthly, with a close at 47.02 on November 19, 2010.
The weekly chart of  world stocks, ACWI Weekly, shows world stocks have now declined with a close at 45.54 on November 19, 2010; stock deflation is well underway as peak stock wealth occurred November 4, 2010 at 46.60.

In the week ending November 19, 2010 commodities, DBC, -2.3%, and Oil, USO, -3.4%, on falling commodity currencies, such as the Australian Dollar, FXA, the Brazilian Real, BZF, and the Euro FXE, since November 5, 2010. World stock ACWI, relative to Commodities, DBC, ACWI:DBC, is at an all time high of 1.84. Stocks cannot maintain their price given that commodities have now turned parabolically lower. Peak commodity wealth, DBC, was achieved on November 10, 2010, as commodities fell from an island reversal high of 26.58.

Intervention by global leaders has effected bloodless economic and political coups. Bondholders in failing banking institutions (Anglo Irish Bank and Allied Irish Bank) and financial institutions (Ambac) are being required to accept a haircut. As banking institutions fail, sovereign debt shocks (Herman Van Rompuy in Press Conference) flow through the entire financial system creating sovereign crisis, (Strauss-Kahn in a speech at the European Banking Congress in Frankfurt, Germany) which results in a nation loosing its sovereign debt seigniorage and having to accept seigniorage aid, which results in the loss of national sovereignty whereby regional economic governance is implemented, this in response to the call of the club of Rome in 1974 for ten regions of global governance, whereby former citizens now become residents living in a region of global government.   

III … I believe that liquidity shocks will come as debt deflation really gets underway, resulting in liquidity evaporation and Götterdämmerung  

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