The REAL casualties of this credit destruction are beginning to be weeded out.
Those companies with high leverage to credit debt will be the first to go as they will no longer be able to service that debt requirement.
Companies that were on the brink such as ABC have already gone.
The signs are not good for many specs either,even producing specs,being in the company building phase,they may also have accrued larger debt to expand rather than expand via cash raised.These higher risk companies will be the next to have the rug pulled from under them with expected loans not being available.
The market seems to be factoring in such credit/debt issueswith many spec that one would have thought a shoe-in now having large chunks wiped from their market caps.
Now the BIG question.
Just how far/deep will this all cut.If deeper for longer and we see more companies go under or struggle for funds to expand,growth will be even weaker.We are not the US but the US markets are showing just how much bad debt /unsustainable credit is being wiped off the books AND ITS A LOT to use a general phrase!
How much do WE have to wipe off.
NSW Govnts poor infrastructure spending is coming home to roost here with the bill having to be picked up for unsustainable toll roads and riduculous rush jobs like the desalination plant.Not only this but big cost overruns in the first(last?)part of the Nth west rail link have hit home badly too.This all arose because Iemma's mob thought theyd bludgeon through the sale of the power infrastrucure which woul pay for recent badly run infrastruture projects.No longer the case.And now the tax payer/public service will pay for it.
This is straight out surplus destruction due to poor spending.As mentioned higher taxes(roads already hapening with Sydney new congestion tax) and public system unemployment will be the next stage which is already happening with Government dept amalgamation on the books.
Bare in mind unemployment is already 5% in NSW.Its only WA/QLD with the mining booms that have very low rates due to the recently gone mining boom.One can guarantee these unemployment rates will be similar if not worse come the mine cut backs on lower commodity prices.This bad news hasnt hit yet but it will by mid 09 if not sooner.
If so rates will continue to drop whilst this is all factored in.
Given all this we may well see a cash rate of 3-4% or another 2% off current which would put mortgage rates at around 5-6%.Im betting on the lower rate target by mid 09.If these credit issues and very poor profit statements keep coming out from the US late in 09 then WE may see rates another 1% lower than this.
Looking further forward IF the talk of supply destruction is correct then the current market will be way oversold and yes we will see a big recovery but with the likes of even GM/Ford in the states looking to be baled out this may be end of 09 if not 2010 before this happens.
