Friday, 17 August 2012

Australia is a Big Bubble

Astonishing article on the website of The Atlantic.

"Would you believe it if I told you that Australia's financial sector is worth more than the eurozone's financial sector? Well, it doesn't matter if you believe it or not. It's true. The technical term for this is "jaw-dropping." The chart below, from Cullen Roche of Pragmatic Capitalism, puts it all in rather stunning picture perspective."

Albert Edwards warned before about the biggest bubble in recent history in this article.
  • Because Australia has gone so long without a recession, everyone has been convinced that it's managed by geniuses, and that the economy there is solved. This is classic bubble thinking.
  • But Australia has telltale signs of a bubble.
  • 5 of the world's most expensive cities are now in Australia (Sydney, Melbourne, Adelaide, Brisbane, and Perth).
  • Not one Australian city falls into traditional measures of "affordability."
  • The entire Australian economy is premised on the wheels not coming off China.
Says Edwards:

Our own more Minskyan interpretation of events is that the lack of volatility in the Australian economic cycle and the absence of any recession since 1991 has led Australians to have an excessive appetite for debt in the belief the future will reflect the past. But for us, suppressed volatility is merely storing up an even bigger crash further down the road.

And thus is should not come as a surprise to see this kind of article:

"Australia’s sub prime mortgage scandal grows"

In April, we learned via the Australian newspaper how Australia’s largest banks are being forced to forgive mortgage debts of borrowers granted loans based on falsified or fraudulent information supplied by mortgage brokers.

Then in June, the Australian followed-up with further reports (here and here) of Australian sub-prime lending, and the battle playing-out between unscrupulous lenders and borrowers.

Now the Senate Inquiry into the post-GFC banking sector has revealed several instances of banks providing home loans to people who can’t afford them, and doctoring the paperwork so the loans looked okay. As well as allegations of widespread boosting in loan approvals.

Perhaps the most shocking of the revelations are instances where the banks have been enticing elderly Australians into Ponzi-like mortgages that they had no way of repaying.

Has the World learned anything from the 2008/2009 Global Financial Crisis? It doesn't look like it.

Real estate and banks in Australia appear to be in bubble territory, European shares might be a contrarian play. European banks appear cheap (although risky), Marc Faber recommends to buy selected European telecom players, who have fallen tremendously in value since 2000. The richest man in the world, Mexican Carlos Slim also has his eye on this group of companies.

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