95% LTV hurray for Australia!

As I'm working on part 2 on my aussie housing bubble problem I stumbled upon this brief headline from the online/magazine publication The Advisor: industry news for mortgage and finance brokers. Which by the way is gold mine of all things bubbly in Australia. Do not think this will be the last time I will post something originating from this publication! The link below is an article talking about one of the majors joining the ranks of 95% LVR or what we in the states call Loan To Value (LTV).

"The Commonwealth Bank has become the latest in a long line of lenders to increase its maximum LVR. Over the weekend, the major announced it would allow all new mortgage customers to borrow up to 95 per cent of the value of a property."

"CBA’s general manager retail products Michael Cant said the decision to increase its maximum LVR was a response to growing competition for a smaller number of borrowers.

“We are certainly looking to grow our lending to the home loan market,” he said."

http://www.theadviser.com.au/breaking-news/5019-major-increases-max-lvr

The money part of the quote: "...was a response to growing competition for a smaller number of borrowers." Umm that sure sounds like a ponzi scheme to me! They seem to be running out of greater fools and they need to ratchet up the risk another notch to keep this thing afloat.

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Radiation Dose Chart

Follow the link from the Big Picture blog to get an idea of radiation dosage. I have been meaning to post this for some time...

It puts these posts into prospective and is a good guideline for what's going on in Fukushima
-Footage of the Highway to Fukushima
-Best/Scariest Chernobyl Documentary: Battle for Chernobyl

Link Source:
http://www.ritholtz.com/blog/2011/03/radiation-dose-chart-2/

Best/Scariest Chernobyl Documentary The Battle of Chernobyl (HQ)

i

The Housing Bubble isn't gone it just moved; Part 1

I find it unbelievable that after what the US & Europe have been through over the last 4+ years with the housing bust that folks around the world would be more vigilant to preventing it from occurring. Well at least temporarily from occurring. History teaches us that humans are bound to repeat similar mistakes. Mark Twain's quote says it best, "history doesn't often repeat itself but it sure does rhyme". Anytime I can quote Twain I take that opportunity! Well the shocker in all of this is Australia hasn't learned 1 bit from the suffering of Europe and the US. Their major banks have all the greatest hits from the housing bubble. I am going to pick on one of their banks but most of them are doing similar irresponsible lending practices. Hell they are trying to out compete each other in the quest of market share without regard to the consequences.

I am going to feature Westpac Bank Corp one of the larger Aussie & New Zealand banks out there. All of this information I will be commenting on is in plain sight and can be gathered on Westpac's website. First I will rattle off some of the terminology like the Rocket & Flexi First Option Loans. Interest Only up to 10 years with Low Doc loan Applications: "If you're self-employed and don't have documentation proof, we can still help." Combination loans that combine a fixed and variable component to the loan. 100% offset loan accounts that act like a margin account. Then a laundry list of different options of: Top-up, Redraw, Portability, Repayment Holiday, Parental Leave, Reduced Repayment, Progress draws for Construction, Smart Pay, and Funds Access. Wow! That my friend is a lot of financial innovation. Now granted some of the options can be useful and are nice. You can put lipstick on the pig, but a pig is a pig. Guess what? Debt is still debt no matter how you dress it up too.

I am in debate with a leading Australian bank analyst and he has passed on some of his reports countering my belief that Housing Bubble in Australia is a major danger. After I look through it I will pass on some of the findings.

*Disclosure: No position in Westpac Bank corp as of the date of this post


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Quantitative Easing Explained

Thoughts on the End of QE 2

Merrill Lynch's Jeffery Rosenburg came out with a fantastic research report on February 16th titled "Double Rainbow". It was an excellent report plus it made me laugh. Unfortunately I can not post it here, but it inspired me to jot some thoughts down of how my best guest of the end of QE2 will play out. Here are those thoughts:

It’s going to get real interesting this summer as QE 2 is schedule to stop. The markets more than ever are being driven by government policy. As a market purist I am not too comfortable with that, but it is what it is. The $100+ billion/mo of “jet fuel” being added to the system through QE 2/POMO is a potent medicine and it has worked thus far. Asset prices are up and company balance sheets are better than they have been in awhile. The wealth effect is beginning to work as “retail” has started the inflows into Equity Mutual Funds. This could carry the market beyond June, but any speed bump (like the Greece crisis after QE 1 or the current middle east turmoil) could scare retail out again. Some research speculate that with the state of the current US deficits it is impossible for the Fed not to start up QE 3. All of these factors can be viewed as positive.

The flip-side is that there is more and more political/international pressure against continuing that policy. The Fed is not getting the desired “good inflation” in housing. Plus the side effects of the medicine are starting to show up in spots that the Fed can’t be too happy with (food, energy, precious metals, etc.). This should have a detrimental effect on an already over levered consumer. Will companies be able to push that commodity inflation on to the consumer without any ill effects? Pricing power has been weak thus far and that has to be concerning to margins. Leverage is still prevalent in the system and deleveraging hasn’t or (better yet) allowed to take its course. I see more cons than pros.

Right now I am bubblish and will hunker down May/June to see how things play out. For fun… my “crystal ball” says that June/July we see the S&P 500 meet a lot of the economist 2011 year end predictions. However by late summer we should see a correction of about 15% and the bearded one institutes QE 3 with an initial market reversal to the positive side. (I don’t think Bernanke will institute QE 3 without a little pain to back him up.) My grand fear is this time it doesn’t work because of the previously outlined bad inflation, margin collapse, higher rates, asset price exhaustion, etc. Plus most of stimulus 2.0 will wear off in 2012 and then we are back to the feared potential tax hikes in 2013. I don’t see what bullets the Fed has to use at that point and we see another bear market with downside of around 30%. 2012 will be a tough year indeed.

My New Blog: The Wedge Effect

Believe it or not I am back blogging! This time I have been motivated with the unintended consequences of all of this government intervention. The Wedge Effect is the increase of interest rates and risk premium of all other capital assets. I will be reporting on the effects and also current events that relate to a more intrusive government in our markets. Take a look:

The Wedge Effect Blog

Time permitting I will continue to blog for you mercenaries out there.

The Media Misses the Forest from the Trees with Sub-Prime Scare

Is it me or is the Main Stream Media (MSM) taking the easy way out on the deflating housing bubble. We have finally passed the stage of denial of the falling values and are now approaching acceptance of them. Most likely by the fall of 2007, we'll be moving on to panic stage after a dismal spring-summer peak buying season passes. Currently the easy way out to explain why home prices are falling and our economy is slowing is to blame it on some shady loans in sub-prime. If you came from another planet and began reading today's business news you would think the entire housing bubble could be blamed on the segment of sub-prime and shady loans. However the MSM is completely missing the forest from the trees because it was a convergence of numerous factors that helped spur massive home speculation.

Yes problems with sub-prime are showing up now, but it was only a symptom of the great housing bubble not the disease. Plus the real shady loans, 110% financing, 40-50yr mortgages, neg-ams, and ninja loans (no income-no job-no assets) haven't even reared their ugly head yet! They showed up around 2005. Why did this happen, well I will tell you why. From 2002-04 a massive amount of people were hired to meet the demand for new homes, refinances, and other real estate activities. This just led to a feeding frenzy of increased real estate activity as more and more people fueled the rise of prices and the rise of the Real Estate Industrial Complex. No Dick Cheney and the black helicopters were not behind this, it is just an easy way to describe everyone (REIC: agents, lenders, builders, title, escrow, appraisers, etc) that has vested interest in real estate activity. Continuing: Greed took greater hold with speculators buying 2nd, 3rd, and 4th homes which artificially inflated prices and created jobs for the REIC. While the REIC reciprocated and encouraged more and more speculators and buyers to join in. In economics this is your typical multiplier effect. As values skyrocketed home affordability was falling like a rock. But REIC and the general buying public didn't want the gravy train to stop and that is where the true sub-prime stepped in to extend the bubble for another year and half.

Here is a simple way that the media should be describing the entire situation out there: The housing market got way ahead of itself and now its coming back to earth! The simple economic term says it all: revision to the mean. Or here is yet another way of putting it: the housing bubble was one big bender of a party and now the inevitable hangover is here. Those at the party tried in vain to keep it going with redbull/vodkas, cocaine and on the housing side you had low rates, creative financing, and general propaganda. Now they enter the long and drawn out hangover which for housing means long periods of price declines to high inventory from inactivity, etc. Ahhh, but I digress.

So when somebody tries to blame this housing decline or anything else for that matter on just one factor, take it with a grain of salt. There are a lot factors to this housing hangover and there is a lot of blame to go around: Greenspan & his artificially low rates, Bush's idealistic ownership society, sub-prime, REIC, yen-carry trade, a greedy uneducated public, black helicopters, etc. America and the media need to wake up and take responsibility for this mess that we all had some stake in creating! One tree of this mess is sub-prime, while the forest are all these factors together that created one of the largest bubbles of history, the late and great housing bubble.

Inflation & Ski Resorts

Has anyone noticed the recent proliferation of higher and higher ski pass prices. Within in the last five years I have seen prices in Tahoe go from the high $40's to around $70 a ticket. The worst in my opinion has been the escalation at Mammoth Mountain. In little over 4 years their tickets have gone from $61/day to $80/day. That is an inflation rate of 7% and who knows what the increase in price will be with the new renovations they're doing. I have one of their discount season passes that has gone from $499 to $550 this year alone!

Yes this anecdotal evidence, but this inflation problem is starting to rear it's ugly head in more places. Even more worrisome with inflation is it's a lagging indicator meaning we are getting the hangover from the easy money over the last 5 years. Too much money following too few goods. Now that our economy has slowed down we are left to play in the mess Greenspan made (http://themessthatgreenspanmade.blogspot.com) at the turn of the century. Welcome to Stagflation! Stagnate growth + inflation of the 1970's.

Before you go play hopscotch on the freeway, remember domestic company balance sheets are in great position and are economy is more efficient then ever. The effects of the past monetary binge and now the housing crash are going to test our economy. So far the economy is with standing the onslaught....