Posted on 11/06/2008 4:19:45 PM PST by Lorianne
Barack Obama’s emphatic presidential victory failed to inspire the anticipated bounce on global share markets this week, but investors know his incoming administration will begin the herculean task of restoring credibility and discipline to markets shattered by the sub-prime debacle.
Obama promises a re-think too of the tired, discredited and divisive foreign and domestic policies of the Bush era and to lift the morale and confidence of the American people, thus assisting recovery from the recession into which the nation has slipped .
The potentially positive influences of his election, however, will be outweighed in the immediate term by the breathtaking scale of the unwinding of trillions of dollars in debt and the parallel decline in previously inflated asset values that is underway in the corporate sector. This process has another year, perhaps two years or longer, to work through.
Much of the negativity of this deleveraging has been priced into markets and investors are looking for opportunities to buy selectively those stocks likely to weather the slowdown. With the US and most of Europe going backwards, Australia’s Reserve Bank’s panic rate cutting has probably come too late to prevent a continuing slowdown and rise in unemployment in this country.
Any rallies in the sharemarket over coming weeks will provide canny investors - previously unprepared to sell at the four-year lows our markets have been experiencing (20-plus years in Japan) - an opportunity to sell.
This will limit the capacity of any revival to gain any traction.
The de-leveraging process in the corporate sector took a big step in Australia with the calling of administrators into the Allco Finance Group, which has been on a drip feed from its banks since January while it desperately tried to sell assets to repay its $1.1 billion in borrowings. The banks finally ran out of patience this week.
While stricken groups such as Allco, ABC Learning, Octaviar (formerly MFS), Centro and Babcock & Brown have their debt repayment schedules hastened by their lenders directly or by calling in administrators, there is no surprise at these situations. Their collapsed share prices have indicated for months that, at some stage, these groups will be put out of their misery.
The gorilla in the room that nobody wants to talk about is Australia's heavily over-geared household sector. With debt having mounted to 170 percent of income, more than doubling in 10 years, Australia's households are the second most indebted on earth, after Holland.
The debt binge has coincided with sharply rising house values in the late 1990s to early 2000s. The sword of Damocles hanging over Australia's households now is falling house prices, and the real threat that values could drop to a level where there is negative equity — ie, the debt on the house is higher than the value of the property. The surge in borrowing by households against the value of their homes means the value of the house, and the equity held by the mortgagor, is critical to the ability of the borrower to maintain their debt levels.
In the US, 20 percent of mortgage holders now have negative equity in their properties, according to research by First American CoreLogic and reported in Morgan Stanley's Downunder Daily. Most people who bought homes in 2005, 2006 or 2007 in the US are likely to have more debt secured by the property than the value of that property. The US is starting to see the deeply worrying phenomenon of tent cities of people who have been thrown out of their homes.
The property declines in Australia have not been as sharp as in the US, where in many cities values have fallen 20 percent or more. Australians are more indebted than Americans, however, and the property declines that started in Sydney in 2004 are now affecting Melbourne, Perth, Brisbane, and Canberra. Australian Bureau of Statistics figures show that home prices fell on average 7.4 percent in the September quarter compared with 2007.
The RBA will have its fingers crossed its rate cuts over the last three months will slow the decline and prevent a catastrophe of the scale unfolding in the US.
As our share and currency markets have discovered, Australia can never be immune from global volatility in debt and equity markets of the type we have experienced since the beginning of the year.
Inevitably, the losses on Wall Street as a proxy for all global share markets translate to business difficulties and rising unemployment on Main Street a few months later.
The likely share market surge that will greet Barack Obama's presidential election victory will give hope to many that the grim losses of 2008 are coming to an end. More likely, it will be like all the other rallies this year which have proven to be short-lived and ended with the market falling further each time.
The fundamentals still look bad. Shares will bounce around, but the massive unwinding of debt and retreating asset values globally are taking their toll on the world's real economies. Notwithstanding government stimulus packages and interest rate cuts, Australia cannot resist the irresistible impact of these dark forces.
BOUNCE?? are you kidding. Everybody I know is cashin in and hiding the dough.
You have to be dumb as a post to buy this crap...
Sarah Palin doesn’t know Euphoria is a continent
Every stock dude I heard said it would go up BECAUSE there was a “change” in administration. Yeh...right....
Yep. It may be too small to hurt much, but it won’t help, that many of us are totally disengaging from the economy as much as we can. Maybe slow new growth and contribute to the unemployment of all the Hussein worshippers.
Bush’s domestic policies were divisive? How? He did everything he could to accomodate the left, often at the expense of the ideals of the right.
What a bunch of nonsense.
Oh, and while I agree that the economic problems are real, can you imagine a Republican getting a pass with a 700+ loss in the Dow in the 2 days following his election?
I do not care about slowing growth. It is already done. I am just putting out a storm anchor to ride it out.
Buy gold - bury it!!
Uh....would somebody call my cell phone in a couple of hours. I’m looking for a high bridge, but you may be able to talk me down.
Suggestion: Don’t call this fellow, Mark Westfield, for investing advice. The guy is an air head.
I hate to be a heartless SOB, but part of me wants to laugh at the Obama voters who will be laid off or fired because of the economic policies of “The One”. They will get exactly what they voted for.
I think its time the makers stop carrying the takers. We need an Atlas Shrugged moment.
It did go up on election day. I don't think anybody was anticipating a McCain win, either. I think it was, you know, "Yay! Change!". Then the next day, "Oh, wait ..." Maybe it was his speech.
They will starve before i do. Whats next is called Nationalization. Thats where they repossess your belongings for distribution to the “needy”. Watch out. Straight out of Marx’s playbook. Mugabe and Chavez must be beaming.
Now say you had a great job. Say you had great money in your 401k. Played the market, made some real change. Say you had $2 million in the account. Now the Gov steals your $2 mil. You put in your only $500 per month too that. By retirement say you have $2.5 mil. Now, you are 65, get your SS check and whatever you draw from the $2.5 mil. WHO gets to DECIDE how much each month you want to take from the $2.5 to put with your SS check? Maybe you want $5,000 per month added to your SS check. But, the GOV says, Oh, No no no, you can only take $1,500 per month max to add to your SS check. So how long would you have too live to get your $2.5 totally withdrawn? My calculator says 1666.66666666666666666666 years!!!!! So, in other words, you kick off in 20 or 30 years and the GOV has your $2.5 mil to spend as it sees fit, minus the small sum you took out over 20 or 30 years. You fam may get some of it, but under your 401k you family would have got EVERY dime you had left. Oh, don't forget, say the KIND Gov allowed your family to get $1 mil. Don't forget they will take about 50% in death tax.
Enjoy socialism folks.
This is going to be sad.
To start with, because of the decline, next year’s tax revenues are going to be down by double digits. And there is no commercial money left to buy T-bills, so forget about deficit spending. If they want to spend more than taxes, the Treasury will just say “no money left”. The last time the US government about went bankrupt was in 1895.
The real fun will begin when unemployment hits double digits, the credit card companies collapse (it was just announced that they can’t sell the bonds they need to cover their cardholders purchases, for the first time in 15 years). Millions of Americans live month-to-month on this credit, so won’t be able to pay rent.
Millions will probably then overdraft bank checking, so either the banks will halt checking, or retailers will refuse it. The only currency left will be debit cards and cash. This will cause massive cash deflation, as there is only enough paper money to support 5% of the daily retail.
Meanwhile, there won’t be any money to pay for Social Security, Medicare or Medicaid, and Defense will be lucky to get just Barney Frank’s 25% cut. Of course, if a war starts against the US, they will have no choice but to put money into Defense.
Sorry, Granny and Gramps baby boomers who voted for Obama, you are at the head of the line to get shafted in this deal. On the plus side, you can probably get government euthanasia.
And no Frank Roosevelt bail outs this time, because that is what started the problem in the first place. The best that impoverished people can hope for is government housing and free food. Health care will be minimal.
The fools in Washington will raise the income tax to 100%, but not get a spare dime out of the deal, so they will try a “wealth tax”. And that won’t work, either, because even the rich are going to lose their shirts in the downturn. A “rich” person will have a few thousand dollars in cash at home, that the government doesn’t know about.
Wealthy people, if they can, will leave the country and take their money with them.
Yep, this or parts thereof are going to make this a heckuva ride.
We’ve hit the iceberg, so Obama has been made the honorary Captain of the Titanic. He gets to go down with the ship.
If the Obama depression hits you will make it up in deflation.
Thats one of the best damn analysis i have seen written here on FR. I see it pretty much the same as you. The gig is up. We have been living in la la land for too long. Reality is about to set in. I just hope these idiots who voted for Obama starve first so i can laugh. Maybe it will make me forget about my own hunger.
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