Mish's Global Economic Trend Analysis

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Australian Home Sales Sink, Luxury Units Sell for Half Cost; New Home Loans at 10-Year Low; Australia Retailers in Deep Trouble; Party Officially Over Posted: 10 Apr 2011 08:58 PM PDT Things are not looking too hot down under. Not only is the Australia housing collapse picking up steam, but Australian retailers are struggling mightily in spite of rising sales numbers. Bloomberg reports Australia Retail Sales, Loans Rose in February, Sending Dollar to Record Australian retail sales rose in February and lending to businesses climbed for the first time in nine months, according to government reports that sent the nation's currency to a record against the U.S. dollar. Sales advanced 0.5 percent from a month earlier, when they gained 0.4 percent, the Bureau of Statistics said in Sydney today. That was the biggest increase since July and was higher than the median forecast in a Bloomberg News survey of 24 economists for a 0.4 percent increase. A separate report from the Reserve Bank of Australia showed total credit extended by Australian lenders last month jumped by the most since May, led by business loans. The signs of stronger consumer spending and a lending revival boosted the local dollar as confidence grew that natural disasters didn't derail the economy's expansion. That is the extent of the good news. Housing is a veritable disaster. Even retail sales do not look so good from the perspective of retail profits. Frugal is the New Black, Tourism Sinks, Retailers Struggle The Australian reports Mining hides flatlining Australian economy The growth in employment, which yesterday pushed the March jobless rate below 5 per cent, is concentrated in a handful of industries, several of which have little to do with the overall health of the economy. The Australian Chamber of Commerce and Industry's latest survey of business confidence found that 34.5 per cent of businesses say trading conditions are poor, while the number expecting conditions to deteriorate over the next three months has almost doubled since the beginning of the year to 18.7 per cent. "The non-mining sectors, which still make up 90 per cent of the economy, are exposed to pressure from interest rates, the dollar, cautious household spending and rising oil prices," ACCI economics director Greg Evans said. Figures released this week revealed spooked consumers and a sluggish housing market had put even the booming mining state of Western Australia into a technical recession, with two consecutive quarters of economic contraction. The latest figures from RP Data revealed house prices fell in every capital city except Sydney in February, with the strong growth experienced in the market in 2009 flattened in the past year by the run of interest rate rises. Retail king Gerry Harvey, co-founder of the Harvey Norman electrical and furnishings chain, yesterday described a "multi-speed economy" in which only the mining, food and hardware sectors were flourishing. "There's an awful lot of retailers just surviving, who have sacked all their staff and kept on mum, dad and the kids working 14 hours a day just to keep the doors open," Mr Harvey said. "You'll see a lot of retailers going in the next few months - they just can't survive - and the small ones are going under every day." Australian National Retailers Association chief executive Margie Osmond said retail was "the sick man of the economy. "We've been severely bruised by interest rate activities, and we have a community completely conditioned now to discount-only. Frugal is the new black." But Australian Tourism Export Council managing director Felicia Mariana notes that foreign visitors are less likely to stray beyond the big cities, starving regional towns of investment. "Further afield, you'll see hotel occupancy rates of 30, 40, 50 per cent," she said yesterday. "People are using the internet to build itineraries and they are less and less inclined to meander and drive four or five hours to find an interesting place." The trend is most apparent in far north Queensland, where visitor numbers fell 9 per cent last year. Tourism spending fell 12 per cent - and the fall-off came even before Cyclone Yasi and floods ravaged the region. Luxury Units Sell For 50% of Cost The Fraser Coast Chronicle reports Luxury units go at basement prices AFTER more than 18 months on the market, the luxury Riverview On March apartments finally went under the hammer yesterday — and about 140 people came to watch as they sold for a song. Valued at $650,000 to $700,000-plus each, four of the six units sold. They fetched $510,000, $320,000, $339,000 and $300,000. Auctioneer Jason Andrew was made to earn his keep in cajoling every last dollar out of the buyers, but bidding was desultory for the two penthouses, which were eventually passed in because they did not meet the reserve price. Developer Ron Blyth admitted he felt hard done by, with three of the four sold units going for less than half the building cost. Even on the highest-selling apartment, Mr Blyth lost about $200,000 – or a total of about $1.2 million for the combined sales. "It's less than encouraging," he said. "The situation probably is that real estate isn't in vogue at the moment." "I thought we had enough interest to get them sold, but there w bidders there and they didn't all bid." There were not really 30 bidders there were 4 bidders and 26 "Lookie Lous". Expect to see "No Bid" with increasing frequency at auctions. New Housing Loans at 10-Year Low The Australian reports Buyer retreat spells slump in home prices BUYERS are deserting the housing market at a pace that threatens a slump in housing prices and a risk to the economic outlook. The number of new housing loans approved by the banks dropped 5.6 per cent to a 10-year low in February, after a similarly sharp drop in the previous month. The buyer retreat comes as the stock of unsold houses mounts. Figures compiled by property analysts SQM Research show there are now 356,600 properties on the market, which is almost 50 per cent more than a year ago. "It is clear now that the sudden drop in finance approvals in the new year is not to do with the flooding, but is rather due to the Reserve Bank's interest rate rise in November, which was the straw that broke the camel's back," SQM chief executive Louis Christopher said. The slump threatens to undermine budget calculations for the government, which is counting on a rapid return to growth in the next financial year. The number of loans for new homes slumped 12 per cent in February and has dropped almost 36 per cent in the past three months. Home building is a key economic sector influencing both the health of manufacturing and consumption. Mr Christopher said the market was likely to continue weakening until the Reserve Bank cut rates or there was some form of government stimulus. Stimulus the Problem, Not the Solution I cannot help but laugh at some of the comments by SQM chief executive Louis Christopher. For starters, one last interest hike did not break the camel's back, nor will buyers return when the Reserve bank of Australia cuts rates. Christopher seems to be angling for more stimulus. Has anyone, anywhere learned anything from the popping of the US housing bubble? Hells bells it took massive stimulus and silly bank loans to reach peak housing insanity in the US, in Australia, in China, in the UK, in Spain, in Ireland, and for that matter everywhere there was a housing bubble. Perhaps this annotation I made on the Australian graphic will help. Buyer Exhaustion - Pool of Greater Fools Runs Out Australia is suffering from buyer exhaustion after the Australian government foolishly stimulated housing to stave off the last recession. Buyer exhaustion would have set in whether the Reserve Bank made that last rate hike or not. . Now what? Housing inventory is both huge and rising, few can afford homes, and those who can afford homes already have one (if not more). Simply put, the pool of greater fools has run out. Stimulus will not help. After all, how many rounds of stimulus did the US try to restore housing prices? Let me count the ways. US Housing Stimulus Tried and Failed Fannie and Freddie nationalized Home buyer tax credits Home buyer tax credit extensions HAMP - Home Affordable Mortgage Program Numerous foreclosure moratoriums QE round I QE round II Fed bought $2 trillion in mortgages to keep rates low Fed holding short-term rates at zero percent Record low mortgage rates Did any of those work? How many others did I miss? Regardless of how many I missed, none of them worked. So why would they work in Australia? Please don't tell me it's different down under, and don't tell me there is a shortage of housing either. Skyrocketing inventory and falling demand says otherwise. Besides, it's a simple economic fact that home prices cannot sustainably rise above people's ability to pay for them. Nor can home prices sustainably rise several standard deviations above rental prices. Party is Now Officially Over Please pay attention to those struggling retailers. Australian retail sales will collapse once the housing bubble bust pick up more steam. That collapse in retail sales will crucify banks that made poor commercial real estate loans and it will bankrupt store owners who paid too much for their stores. Look for the Reserve Bank of Australia to cut rates. It will not matter when they do. It was one hall of a party Australia, but the party is now officially over. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Obama Want to Take "Scalpel Not a Machete" to Reduce $1.6 Trillion Deficit; Scalpel and Machete Both Wrong; Student Loan Scam Revisited Posted: 10 Apr 2011 11:39 AM PDT You cannot reduce a $1.6 trillion deficit by taking a scalpel to it. Yet that is exactly what the president wants to do. Please consider Obama to Offer Details of Plan to Reduce U.S. Budget Deficit President Obama will lay out a long-term deficit reduction plan later this week that will take "a scalpel, not a machete," to programs like Medicare and education and try once again to extract more taxes from the wealthiest Americans, his senior adviser said Sunday. Appearing on several Sunday morning television talk shows, David Plouffe, Mr. Obama's senior adviser and former campaign manager, laid out few of the contours of the deficit-cutting plan but sought to distinguish it from a Republican congressional plan announced recently by Paul D. Ryan Jr. of Wisconsin, the chairman of the House budget committee. He said the Republican plan "would give the average millionaire $200,000 in tax cuts" but double the health care costs of senior citizens "$6,000 a year down the road" and trim "energy investment at a time of record gas prices." That is disingenuous because Ryan did not propose new tax cuts. The president is referring to tax cuts that came about under the Bush administration. In other words, the president wants tax hikes, not that Ryan is proposing new cuts. As far as energy goes, the best thing to do is let the free market sort it out. On CNN's "State of the Union," he [Plouffe] also claimed that the deal reached with Republicans protected 800,000 children from being dropped from Head Start, the preschool program for children in poor families, and safeguarded the student loan program. "Obviously, we need to look at all corners of government," Mr. Plouffe said. As he said previously, his health care law is $1 trillion in deficit reduction over the next two decades, but we have to do more there. We have to look at more spending here, carefully. As he said, we have to use a scalpel not a machete. And, obviously, this is a distinction with the congressional Republican plan that was announced this week." Obama Safeguards the Plague It is hard to comment on details because Obama did not provide many. Supposedly more are coming. In the meantime, I can comment on student loans because Plouffe specifically mention "safeguarding" them. Bragging about safeguarding student loans is like bragging about safeguarding the plague. Student loans have done four things, all of them bad. Jack up the cost of education Make students debt slaves for the rest of their lives Unjustly hand over huge profits to schools like the University of Phoenix at taxpayer expense Add to the national debt The best thing to do with student loans would be scrap the program entirely. Please consider A Remarkable Comparison: Affordable Student Loans vs. Affordable Housing an email from Eugene Holloway, a Maryland Attorney, on the rising cost of college education. Debt for Diploma Schemes: Debt for Diploma Schemes and the Cookie Monster Principle Off-Balance-Sheet Budget Fraud: Budget Deficit Accounting Fraud and the Off-Balance-Sheet Student Loan Scam; Time to Scrap Entire Student Loan Program Pell Grants Turn Students into Debt Zombies: For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program Subprime College Loans, Who is to Blame?: Subprime Goes to College; Students Buried in Debt; Who is to Blame? Expect More Student Riots: University of California Campus Erupts In Riots; Student Loan Scam Drives Up Cost Of Education; Expect More Riots Reflections on a Wise College Major Scalpel and Machete Both Wrong We do not need to take a Scalpel or a Machete to the student loan program. The student loan program should be scrapped in entirety. Indeed there are entire departments that should be scrapped entirely, including the department of education and department of energy. Perhaps there are a few items of some merit in those departments such as the strategic energy reserves, but such functions could be moved elsewhere if needed. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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