$50 per share in 2017, page-50

Your being a touch optimsitic about the likelihood of Obama's success. the reality is the tabloid version of the great depression, sometimes known as Bernanke's liquidity theory is a somewhat blinkered perspective, did the liquidationists cause the severity and the fiscal stimulus folk save it , or did the lquidationists clean all the toxic debt out and it would have recovered anyway, or did the War save it through massive fiscal stimulus? The truth is there are lots of theories , I know all of them in some detail and the truth is noone really knows.

All we can do is look at probabilities, see what echoes we get form the past and try and understand the beast that appears to have been unleashed.

For a start the Obama stimulus package is about 10 times smaller than it would need to be, all he is really doing is move private debt to public hands, moving money around isnt going to help anyone. The major part that needs to be acknowledged is the scale of the downturn, a trucks driven through our lounge room wall and parked itself in front of the tele and folks are trying to pretend there has been a knock at the door.

Our biggest export partners are announcing surreal downturns of gargantuan proportions and we are singing koombai while pretending the trains not coming as our head rests gently on the rail.

Folks who readily understand that if they borrow to much relative to their income they might get into a bit of trouble should they lose their job, find it hard to get their head around our entire nation do the same thing.

Folks take a step back, use a bit of commonsense, lets forget all the fancy theories. What happens if you get borrow yourself to the eyeballs and the boss rings to tell you hes dropping your salary by 15%? or the wife rings and shes lost her job?. What happens to the house payments?

At some point you have to sell assets cause you cant afford the debt?What happens if this starts to happen across your suburb if this happens to other households , do asset prices fall cause you are all trying to flog them at the same time?

Monetary policy has been run by a cult of short term thinking economists known as the neo classicals, they basically thumbed their nose at all the economists in history and told them they didnt need them anymore they knew better.

According to them all you had to do was raise and lower interest rates, the economy took a downturn you lowered interest rates, folks would borrow more due to this cheaper credit and big the prices of houses up, folks would then feel rich and start spending their new found equity through credit . All you have to do according to the neo classicals is make sure credit flowed. Folks would tell themselves they were rich and go on a spending spree, governments were happy because they got the tax benefit of the asset inflation.

Where in reality it was a complete hoax, your house wasnt groing in value, it was your dollars that we depreciating, this hoax has perpetrated some many times in history its ridiculous. Then the myths enter the process, its demand driven, its immigration, they aren't making any more land anymore, there are only so many houses near the coast, the rest of the world is in a bubble but our fundamentals are different , the immigrants are coming , housing affordability is getting better etc etc etc

Listen folks I can point to the pages in the text books, newspapers, journals where its all been said before in history. In fact here is some from Joseph Schumpeter in 1939 chronicling the demise in the 20s-30s. As yoiur reading it relace the word "bankers" with "ANZ bankers" and see how well his words from 1939 fit todays circumstances

In a Schumpeterian business cycle, a primary wave of prosperity begins when the newly created money is spent by entrepreneurs to purchase materials and labor needed to launch their new ventures. The injection of new spending
triggers speculative expectations of prosperity, which results in increased consumption spending by households and “induced investment” spending by firms to create additional capacity to meet the expected increases in demand.

The speed at which a secondary wave of speculative spending develops is indicated in Schumpeter’s statement that: “Speculation in the narrow sense of the word will take the hint and start on its familiar course or rather, anticipating all of this, stage a boom even before prosperity in business has had time to develop”
(1939, p. 145). The launching of highly speculative new business ventures gains steam when the bona fide entrepreneurs begin to realize monopoly profits from
their successful new ventures. But the speculation becomes most intense in the financial markets and flows back into the general economy. In this matter, a secondary wave of speculative prosperity not only superimposes on the primary
wave but becomes quantitatively more important and much more visible
(Schumpeter 1939, p. 146).
The speculative excesses of the secondary wave are due to “reckless” behavior of bankers , which Schumpeter defined as “granting loans without regard to the borrowers’ ability to repay” (1939, p. 260, fn) and financing
“reckless, fraudulent, or otherwise unsuccessful enterprise” (1939, p. 148). He distinguished between credit (debt) which adds to productivity and that which
does not. The financial system that functions properly in extending credit to entrepreneurs and any business that uses the new money to invest in productive assets must also “punish any other use” (1939, p. 147). Schumpeter noted that
“the average businessman” is perpetually optimistic, seeking extensions of credit while trying to ignore the “hard objective facts” of economic reality (1939, p. 141).
It is the responsibility of bankers to recognize the “hard objective facts” and extend credit only to productive use. Instead, they act “recklessly” in financing the speculative activities that swell the secondary wave: “New borrowing will then no longer be confined to entrepreneurs, and ‘deposits’ will be created tofinance general expansion, each loan tending to induce another loan, each rise in
prices another rise” (Schumpeter 1939, p. 145).
When the primary wave of prosperity ends and recession comes as a normal phase in the business cycle, the speculative excesses financed by “reckless finance” result in “Abnormal Liquidation” (1939, p. 149). While
recession involves the process of “creative destruction” of firms and industries rendered obsolete by the impacts of innovations implemented by the entrepreneurs is a function of the recession, it only takes the economy down to
the new higher equilibrium, or in Schumpeterian terms, to a permanently higher level of economic development. But with the collapse of the speculative excesses that rest on the huge amount of unproductive debt, bankers’ behavior
changes again, becoming extra-cautious and defensive in their lending. The resulting credit crisis intensifies the “abnormal liquidation” that plunges the economy down past the new higher equilibrium as otherwise sound firms and
banks are forced to liquidate due to the denial of access to liquidity (1934, p. 234,
p. 238; 1939, p. 149).


its all happened before many times, what is happening is not new, what is scary is the scale. Folks love telling the urban myths, houses double every 10 years!

We it depends when you were born, if you bought a house in Sydney in 1920 you would have taken till 1953 to get your money back. I have 100 years of data on my shelves the long term average return is about 3.3% (2.1% units )above that is just fluff that will be blown away in a downturn.

Lets simplify it with one chart




Apply commonsense, if your household debt to income (gdp) ratio keeps rising isn't it sensible that at some point you reach a maximum amount of debt you can support, sure you can lower the cost of the debt (lower interest rates) but if income falls as well it counters the benefit you get from the cheaper credit.

At some point the party needs to end, you just max out the countries private credit carry capacity, this is why the RBA's policy is ludicrous, they kept us partying without worrying about our long term health, Glen Stevens is a credit junky and now we have hit the withdrawal phase. Why do these lunatics think they can infinitely raise the debt to income level?

Now our leaders want to hit us up again on even more credit while allowing our assets to be sold at bargain basement prices to the Chinese?

Its a joke and the ANZ business model tracks to the chart above. Simply go the ANZ annual report and check their RE assets (450B from memory) then check back to 2000 (220B from memory). (Somebody might check them for accuracy as I havent time at the moment but they are roughly proportionally correct)

Now ask yourself how did ANZ grow its asset base by over 200B in Real Estate assets?

The answer is they tracked the rising debt to income ratio, house asset were not rising , debt was rising, folks were simply borrowing more money and stretching their household balance sheet. So when the party ends so does ANZs party, there business model completely depends on asset inflation.

In stag deflation their business model blows up in their faces. It goes boom !