Hi,
Honestly I thought a factor in all the collapse from GFC 1 ... to where we are now would be the bond side.
It has been ... and it hasn't been.
Strange comment but we have seen the prices demanded to invest in second tier bonds explode in some cases and in the case of Greece fall totally apart. On the other hand the liquidity measures taken by the band leaders the USA and Germany on behalf of the EU have seen the bonds issued by both remain intact. In fact the reality that rates will remin low for some time has seen them rally when others have actually totally fallen out of bed.
Does the next leg down if it happens ... get driven by a bond yield rising driving up the cost of borrowing ? Given they have held it together till now ... I don't know. Personally and its a personal observation ... when goverments are demanding more and more of the total free capital ... the value of paper money is falling due to the fact that the central banks are just priniting it to keep the market awash ... I thought it would have happened prior to now. During GFC 1 ... things went very close to total shutdown with everyone refusing to lend to each other and only the drastic action of central banks doing what their primary function is at times like this is ... be the lender of last resort stopped a total meldown in 2007/8/9. I suppose they will be able to avert this yet again ... but this said the reality for borrowers outside the central bank cabal is they are facing increased costs. If one actually notes recent moves via rating agencies even goverments are being downgraded and the USA itself put on negative credit watch.
When we have these goverments demanding 80% of the free capital then 90% then 100% then 110% ... eventually it will become a competition for funds ... or so I thought ... until they all just went lets print money out of thin air.
This does nothing other than relieve maybe the liquidity but still the debts created remain and at some stage need to be repaid.
In many ways the whole thing is a dirty little game. The US is and has been without a doubt playing with statistics and understating its unemployment by a serious factor. When you have population growth of 2 million a year they need to employ 150k plus new people each and every month just to keep unemployment stable. The numbers fall well short of this and still we see the reported headline unemployment fall. yes last number the participation rate fell .... but not by much. I doubt having looked hard the real unemplyment situation in the USA has changed one iota in the past 2 years.
Next we see the same with inflation over there and whilst house prices remain mushy the cost of living via every measure has been rising as the low value of the USD has hit import prices and energy prices eventually have caught up with the rises seen 2004-2009 and on top of this some local charges have risen to try and balance budgets on a local govt side and state side. Yet despite this the same is going on as was the case pre GFC and the real inflation was understated by around 2.5% a year. If they can keep doing this the real debt will be debased over a period of time. Doesn't help the 80 million Americans ... baby boomers about to retire and go onto inflation linked payments via social security or pensions.
Understating the inflation side ... overstates the GDP by a similar amount and the real GDP growth is negative I suspect not postive.
Add to the mix the debt side is frankly out fo control and growing over there ... overspending 10% of their GDP in a federal budget deficit ...
To me there are so many factors longer term that just do not add up.
Dont add up at all.
Sure we may very well have some sort of a rally .... but with not one ... not two but 5 different factors pointing one way and only one saving grace the other side ... or two ... goverment overspending and ultra low rates ... both of which eventually have to halt ... any rally for me is eventually going to peter out.
The scope of the fiscal side measures needed ... and yes this is fundamental mumbo jumbo that may or may not take hold ... eventually it will ... it has to. A house with an income of 20k which owes officially 140k on credit cards and is really owing 400k on credit cards ... which instead of spending less than its official income of 20k is adding to its overall debt at the rate of another 18k each year doesn't sound like much but where does it end ?
In simple terms the tax raised by the US federal system needs to rise from 2 trillion to near 3 trillion or by nearly 50% from the low levels charged right now. Spending needs to fall from the 3.8 trillion or 1.8 trillion deficit to something like 2.5 trillion or less to meet the deficit ... so right now ... taxes need to be raised by about 40% .... 40% and spending needs to be slashed by 40% ...
Both sides ...
Draconian measures are needed to be taken. None of which is about to happen ... the measures which have been dillied and dallied and fought over tooth and nail in the US congress and senate account for 5% of a very much needed 80% change and they cant even do that let alone something that is needed on ascale at least 10 times if not 15 times larger.
The goverments by playing with inflation numbers understating them and overstating GDP ... may hope they can via deflating the real value of the debt by understaing inflation by 2-3% a year make the debt pile dissapear. Saldy it would take 10 or 20 years to make this meaningful and it will not hold together that long. This also is if they take stern fiscal measures to balance budgets looking forward. The EU has been forced to take some of these measures and will have very slow and low GDP for some years. The US has taken none of these measures.
Cracks already appearing in the picture as I said with ratings agencies downgrading everyone and everyone ... from countries to banks. This will force up the price of money longer term as it should. Banks which are solvent over here are being squeezed on their margins as they have to pay a higher price to borrow and as such pass it on to the borrowers. Ratings agencies were made to look worthless and idiots GFC1 with some having banks with investment grade ratings which went insolvent and broke days latter. The ratings agencies are paid not by govements but by banks and investment houses so its always a catch 22 as to having the fox looking after the henhouse. Whilst a goverment of a nation always should have a higher investment rating than individual companies within that nation .... so a bank in the USA cannot have a higher rating than the goverment ... I am wondering if this is even correct given the fiscal debacle overseas. The goverment of Greece just handed out a 50% haircut to bondholders but I am very sure a lot of Greek based companies were and did not do the same with their debt. Perverse thing is each of these companies which will presumably repay their debt vs the 50% written off by the goverment ... actually every one fo them had a lower credit rating than the goverment of Greece.
Does this fallacy continue ? I dont know but not sure that the credit rating of Australian banks should have been cut of late vs the overseas ones. We are a pimple in the overall equation and if ... if the resource side falls apart ... it will be a very interesting ride.
Having commented last year when the RBA raised the rates Melbourne cup day I thought the last rise was a big mistake ... from 4.5% to 4.75% ... we sat there for 12 months ... now the RBA is in retreat mode and two cuts in two months ... and market pricing in a few more in 2012 .... we have so much room to move in that area vs the US or EU its a joke. We could cut 13 more times !! And on the fiscal side the goverment is still talking balancing the budget in 2012/13 .... vs the US spending about 10% of their total GDP over and above reciepts. If our govt only did half of this if it was needed ... and went to a 60 billion deficit ... it would be about $2,800 for every man woman and child spent. Our overall debt situaion with no nasty hidden debt it really is insane the ratings agencies and their actions downgrading us of late.
QUOTE
The Gross Australian federal debt as at 30 September 2011 was AUD$208.992 billion, with a net debt position of $80 billion, or 6% of GDP
http://en.wikipedia.org/wiki/Australian_national_debt
This compares with the USA offical one at 110% of GDP and with unreported contingent liabilities ... real ones via social security and medicaide and medicare making it 300% of GDP or 50 times our size.
I scratch my head at times like this and wonder. Anything and I mean anything can and will happen.
Cant rule anything out on the fundamental sice as it is frankly totally insane.
Something somewhere has to give one might think.
Is this going to lead to some magic rally ? These sorts of overseas inspired pressures ? I am not sure it does. Eventually lenders to these out of control debts have to demand higher yields to lend as the size increases as does the risk of non repayment.
Only time will tell .
Marry christmas and good luck for 2012