Several manufacturing enterprises have since called it a day, the Bridgestone Tyre Company being the biggest. Thousands of exporters, however, must be feeling the pinch because the AUD is becoming so expensive. One positive aspect of the larger pool of unemployed is that some will be available for the massive resources projects getting underway throughout Australia.

The article in the Australian by David Uren titled “Golden lining to the currency cloud as world dumps greenback,” highlights the impact of the sagging USD on its domestic economy. The USD’s fall (apparently down 35% from its peak in 2002) is proving a major bonus to US exporters whose businesses have taken off. On the capital side, the US government and all the US companies holding international assets are making squillions. For example, the US private equity group TPG that has just lured the Australian public and institutions into buying MYER out, may have originally bought the AUD when it cost around USD 60c. That same AUD is now worth over USD 90c at a time when a lot of American companies like TPG will be tempted to repatriate assets, including their property holdings, from Australia.

The downside for America lies in the potential for serious inflation from all this money swirling around. Firstly there is income from the sale of overseas assets. Then there are various stimulus packages and last but not least there is the inflationary impact of the increasing costs of imported goods. Interest rates in the US may have to rise sooner rather than later. The longer they delay the higher they will have to go. The US Federal Reserve probably should have raised rates before we did.

So the world has dumped the greenback and justifiably so. Central banks like India are buying gold instead (200 tonnes in the past week or just short of Australia’s annual production). Companies like the private equity group TPG that just made over AUD 1.5 billion flogging Myer shares to an unsuspecting Australian public will not be leaving the proceeds in USD for long. They will probably put the money straight into the Chinese Yuan which surely can not be pegged to the USD for much longer, but about that in another blog…

We are a trillion US dollar economy compared with the US 14 trillion USD economy and the USD 60 trillion world economy. Our country is only a speck internationally, traditionally only 2% of turnover for global giants like Nestle, Unilever & Shell. However, our interest rates are internationally high by comparison. So where is a lot of hot money going to flow, if not into the AUD? If the RBA continues along this path whilst the huge US economy keeps deflating and the USD keeps falling, our currency will reach parity with the USD in very short order.

This could be fatal for our exports, especially in the manufacturing sector which will become uncompetitive with imports if they haven’t already become so.

Since I recently predicted, wrongly as it turns out, that US rates would rise before Australia’s, the US economy has continued to weaken. Unemployment has risen to 9.8%. President Obama’s health care reform is stalled, Afghanistan is a quagmire, Chicago lost the 2016 Olympics to Rio, gold continues to break records (because those in the know have lost faith in the USD).

So, whilst US interest may not have risen for domestic reasons, investors will vote with their feet and search for a currency that is rising.

What better place to put their money than in Australia, which is politically stable, supplies the world with resources and now has one of the highest interest rates in the world (but lower than India and Brazil), and a rising dollar.

The upward pressure on the AUD will rise each time the RBA ratchets up the cash rate. Inevitably more money will flow into the AUD pushing it rapidly towards 1AUD = 1USD. As the Aussie dollar buys more US dollars, imports get cheaper, outbound tourism will boom and inflation may abate, but….on the other hand, exports, import/ competing manufacturing, inbound tourism, property and jobs will all suffer.

Is inflation that much of a problem that this should be allowed to occur?

Hopefully, at least the Federal Government will maintain its fiscal stimulus. In any event, Mr Turnbull, which schools precisely, would you deny their once in a generation opportunity for a new (“freebie”) multi purpose hall?

Whilst I may have been wrong in predicting that Australian interest rates would not rise until they do in the US, the consequences of the rise, yesterday, will seriously hurt sectors that do not need further shocks.

Another consequence of the tightening of monetary policy will be that the Federal Government will have to bring in a tough Federal Budget next year if it is to avoid unnecessary rate rises now that Mr Stevens has put his hand on the interest rate trigger. Will the Federal Government want to have a tough Budget before the next election? I don’t think so. No wonder it’s looking for an excuse for a double dissolution. What better time then when the Liberals and Nationals are imploding.

Henk Emans, B. Comm, MBA, LREA

I understand that a lot of China’s gold is stored in London but that it is pulling at least some of it back to start storing it in Hong Kong. The other worrying development for the US is that China is to allow its citizens to hold gold.

These developments are good for Australia because we dig up lots of the yellow metal (about 10% of the world’s supply) and production has started to rise again (up 2 tonnes in last quarter) with new mines still coming on stream (Boddington the largest with expected annual production of approx.7 tonnes rising to 30tonnes) but not so good for America because interest rates in the US will have to rise to make their Treasury Notes (TN’s) more attractive. If they do rise in the US (they already are rising at the long end) then there will be less pressure on our dollar and on our interest rates.

The Australian Reserve Bank knows that if it increases Australian interest rates (already high by international comparison) our currency will become more attractive to foreign investors who will want to buy more AUD which will rise and make our exports less competitive and lead to job losses.

If rates in the US do rise to make TN’s more attractive, the US$, which has already lost 12% of its value in the last year compared to the Chinese yuan, may slow its slide.

US GDP in 2008 was approx US14 trillion (vs Australia’s USD 1 trillion) but its national debt is now fast approaching US$ 12 trillion (vs Australia’s nominal Federal government debt), rising by over US$ 100 billion every month at a time when President Obama wants to introduce free healthcare to those who can’t afford to pay while still fighting wars in Iraq & Afghanistan. On the other hand the capacity of industry and the well-off to pay higher taxes has reduced, if anything. How is the deficit going to reduce? I can’t see it happening unless the US$ falls dramatically to make their exports much more competitive so that incomes  rise again, tax receipts rise and deficits start to fall.

In short, I think US interest rates will rise before ours do. Let’s see if I’m right. If I am, the Cronulla property market will be perfectly placed, new quality developments such as Sammut developers Drift apartments on Gerrale St, Cronulla (Central) will come on the market as a luxury finished product at the end of 2009, while interest rates are low and the Australian economy strengthens…

Henk Emans, B. Comm, MBA, LREA

For those people like myself who have to make these payments, this can be a very frustrating time:

1) Because under “CHOICE” I have to send the money into about 10 different funds using about 5 different methods

2) With the financial crisis the money goes into funds that are just going to lose a lot of it.

3) How much better would it be if the money had been invested in residential real estate?

If you want the details, read on.

1) It’s great that we all have “Choice” as to who to let lose our hard earned 9%, but “Choice” has become an administrative nightmare for small businesses.

I got bombarded with paper from about 10 different funds, most of them trying to get me to send them money monthly instead of quarterly, which is the government requirement for the superannuation guaranteed (9%). Do you seriously think I want to send amounts as small as $100 to 10 different funds monthly rather than $300 once a quarter, just so the government can take their 15% contribution far earlier, so that the funds can get their excessive fees earlier, and lately, just so they lose the remaining amount more quickly. Because I refuse to do this, one fund wrote me quite threatening letters which start by stating that their fund (who better remain nameless)”….requires superannuation contributions you make on behalf of your employees to be remitted at the end of every month.” Because I refuse, even though the law allows me to refuse and the funds know this, the fund & several others make me write individual cheques to cover the superannuation guarantee (SG).

At the other end of the scale there is BT (now part of Westpac) who are super efficient. They allow me to pay by Bpay. Each member has a unique reference number, which my financial institution stores and the process of sending that staff members SG takes about 1 minute, with absolutely no paperwork involved. Brilliant! But I have all the range of funds and their individual quirks in between. Some funds are still in the dark ages with their accounting systems. They want a cheque and a letter, or Bpay plus follow up advice.

How is a small business supposed to have time to make money and survive when this chaos reigns supreme? There are simple solutions to this problem, but does anyone in authority care?

2) What is going to happen over the next few years is anyone’s guess, but we have to face facts. We have just had 15 fantastic years of economic growth so we can’t really complain that about 8 different bubbles (see my blog 18.10.08) have burst at the same time. It is unlikely that we are going to recover quickly from this crisis, if, in fact, we have reached the bottom yet. We might even have a way to go down yet. So what does this mean for your 9% SG. Firstly, the government will take 15% off the top, then there are the administration fees, the insurance cover costs and before the funds have invested a cent your money is below 80c in the dollar. After only a few years of negative income, it is going to take a lot of positive returns to even get your money back. Anyone approaching retirement would not voluntarily put money into super.

When I was young and worked for a bank, my bank’s superfund was so rich it was compared with Fort Knox. If you stayed till you were 65 you walked away with guaranteed super benefits. One year they actually worked out the bank could give all its staff some money back because we had overcontributed. Other years the expected liability was such that the Bank had to fork out huge money so shareholders got sick of that & closed the fund to new members and gradually changed over to a scheme where the benefits depended on the economy and financial managers who are like lemmings and follow each other over the cliff. By that I mean that because of ratings no funds performance can be too different from that of another so they all have to be in the latest fancy investment or derivative or lose funds to those that are. Of course when the bubble burst they all fell over the cliff at the same time without exception, like sheep to the slaughter.

Quite apart from the performance aspect I remember writing to the committee of the bank when it was looking for submissions on superannuation. I said I didn’t want to contribute to superannuation for my retirement when I was already battling to feed, house & educate my four children. Also, I was working just before the 1987 crash and after the 1974/5 crash. Crashes are not new, but this one is a beauty.

3) One of the investments, super fund managers don’t get into is residential estate. Yet over my working life, land in my area has gone from $10,000 to $500,000 without any finesse or intervention from fund managers.

Admittedly, 2 years ago, it might have been worth $550,000 – $600,000. Why not package residential real estate into trusts and let super funds buy into them?

Another solution might be, and this is not a new suggestion, to allow self funded retirees to get the pension, but tax it along with their retirement income. After all, they have probably worked and paid taxes for 40 years before getting the pension.

Alternatively, do away with the 9% SG and add another income tax such as is charged in many European countries and invest the specific proceeds in some sort of infrastructure future fund.

With the benefit of hindsight it is easy to criticize the SG. Two years ago when funds were returning +15% everyone was happy. Hopefully the good times will return. In the meantime government can do a lot to improve the system we have.

Or think about investing in quality real estate?

Everybody is clutching at straws. Meanwhile, Rome burns.

Nouriel Roubini, a Professor of economics at the Stern School of Business was reported in the Australian Financial Review on 15.10.08 in the article “G7 economies likely to tip world into recession“, as saying we are witnessing 8 bubble bursting simultaneously:

• Housing bubble

• Mortgage bubble

• Equity bubble

• Bond bubble

• Credit bubble

• Commodity bubble

• Private equity bubble

• Hedge funds bubble

Prof. Roubini says we are beyond a V-shaped recession (6 months) and U-shaped recession (2 years) and into the decade long L-shaped recession. Fasten your seatbelts.

CitiMortgage said it would agree to a sale at that price, but at the last minute told the borrowers they needed to pay USD 166 a month for the next 20 years (or just under USD 40,000) to make up the shortfall! How demoralising would that be?

The same article quotes Moody’s economy.com estimating that 10 million home owners in the USA have negative equity, a condition known colloquially as being upside down or underwater. By next June the forecasting company expects the total to rise to 12.7 million – a quarter of all home owners who have mortgages.

The Kelly’s, both 64, did not want to surrender their home to foreclosure, thereby ruining their credit rating, hurting their neighbours and “betraying their image of themselves”.

Mr Kelly offered to pay USD 20,000, but before the lender could answer Mr Kelly was laid off. Now the lender will be lucky to get anything.

What does all this mean to the Shire? The number of mortgagee sales has gone through the roof (forgive the pun) here too. There are still groups of people selling:

1. Baby boomers and empty nesters going from a big house to a villa or weekender

2. Those in financial stress

3. Those in family stress

4. Those upgrading

Group 1 will be spending less because their super has fallen out of the sky. Groups 2 are “underwater” and they will probably just add to the pressure on the rental market. The current perilous financial situation can’t be helping family stress but, as few as possible will be selling into a poor market and then end up with half the net proceeds and on the rental market. Those few upgrading will, with few exceptions, not buy before they sell. Because it is taking longer to sell, there are less and less buying.

Our NSW state government is in crisis, largely because stamp duty from real estate purchases has halved in the months of July and August of this year. This despite the fact they charged land tax twice this year on any property they could show went up at all!

I believe Daniel Potts got it right in a lead article in the Investor section of The Sun-Herald on 28th September when he said

“…potential vendors hold off in weak markets, giving the false if reassuring impression that prices are stable when the real situation is that the market has shut down…Heaven help us if property had regular trading hours like the sharemarket…”

Mr Potts did highlight one positive for Australian real estate over the US and that is our

“…critical shortage of housing exacerbated by record immigration”.

It is becoming clearer, at least in the US, UK and Australia that it is the real estate crisis that has caused the subprime and financial crisis. Neither are going to go away quickly or without further corrective action. The Reserve Bank announced today (30/09/08) that it stands ready to buy another USD 20 billion to improve international liquidity.

But, how about a 50 basis points rate cut to improve clearance rates beyond the current 30% in the Shire last weekend. (Sydney wide the clearance rate was 59.3%).

After taking the call the mortgage broker is under pressure to perform and secure a loan. Gradually over a number of years millions of people borrowed money whilst real estate values were rising. Once those values started falling or if borrowers became unemployed they could not repay the loans.

In the meantime, the brokers who made the loans, grouped their mortgage papers into packages, which they sold at a discount to banks, superfunds and investors generally. Whilst real estate values were firm these assets returned good income. Credit agencies, to their shame, even gave many “A” Grade credit ratings. When millions of borrowers were foreclosed and others just walked away the security on the loans, now held by banks and investors, became worthless. The American banks started to unload these worthless assets at ever increasing discounts. It became pass the parcel and when they no longer realized any funds from selling them they had to write down their asset values and mend their balance sheets by borrowing. Quite soon banks were not even lending to other banks and certainly not to “Fannie Mae” which holds trillions worth of marginal home loans. Hence the subprime crisis.

Even Australian banks have bought many of these now bad loans. NAB just wrote off AUD1billion of them. The Australian banks have also lost billions lending to companies such as CENTRO, ABC Learning, MFS and a host of others who once borrowed cheaply in America, but where they now cannot borrow at any price.

There are many serious consequences for Australia from the subprime crisis. Foremost it has destroyed what little competition there was between the four big Australian banks, one of which will probably gobble up St George. Many of the mortgage brokers have been eliminated because they cannot borrow cheaply overseas anymore. RAMS was worth about $800m when it listed on the stock exchange just before the credit crunch hit and within weeks was snapped up by Westpac for about $150m.

The big four banks can now, with impunity, keep their rates up and even higher than the Reserve Bank. As well, having lost billions on bad loans and with less competition the banks will have to keep their rates up to maintain dividends for their shareholders. So do not expect rates to come down anytime soon.

Just this month Morgan Stanley has frozen thousands of equity loans called HELOCs (home equity lines of credit), another financial tool used in America and here, to unlock unused equity in homes. This difference between the sale value of the home and the debt on it has been falling sharply. In America, this is because there are some 18mil homes for sale or just standing empty in rust bucket cities like Detroit. GM and Ford are headquartered there and they are closing factories worldwide by the dozen, literally.

Parts of Detroit are like ghost towns where every second house is for sale and investors pay huge municipal taxes that rents cannot possibly cover, if, indeed, they can secure paying tenants, at all.

It is even more depressing that, at the same time as people are losing their jobs, then their houses, prices are going up on basic food items because of drought here or floods there or climate change everywhere. Then there is the demand for commodities from Asia helping many of us in Australia as the tripling in the price for coking coal (of which Australia is by far the world’s largest exporter) and a near doubling of the price of iron ore filter down to us all but also make the price of almost everything go up. Separately, but for similar reasons oil prices have risen steadily to exorbitant heights. All these factors lead to higher prices when we can least afford it.

A number of factors have led to rising unemployment in America. These factors have been at work for many years, exacerbated by recently skyrocketing fuel prices. Another major reason for America’s woes is the fact that China’s currency has been undervalued for many years now. The Chinese yuan is pegged to the USD at an artificially low rate. China has an almost inexhaustible supply of cheap labour making quality product so cheaply that consumers in America and Australia have not been able to resist. Our factories have closed and our famous brands are all made in Asia. In short, we can say we have exported our jobs to Asia, particularly China. As a country it becomes more powerful by the day, holding trillions of dollar reserves.

Meanwhile back home, Americans are experiencing little or no growth overall in many parts of their economy yet they have to cope with rising petrol prices the cost of which flows quickly through to the rest of the economy. Thus they suffer stagflation (rising prices in a stagnant economy). Just when we have least to spend we have to spend more for our basic essentials.

Sadly, not a good outlook for America. Australians, for the time being are somewhat insulated from but certainly not immune to most of these adverse trends. Even though we are suffering our own financial crisis we are supplying a large part of Chinas raw material import requirement. We have vast unused land to the north. We have untapped green energy, an educated workforce, political stability and a great climate. And … we are coming fifth in the gold medal tally at the Beijing Olympics!

On 23rd May 2008 Shoalhaven City Council wrote to me about the risk (hopefully very small) to my land & many others on the coast, of falling into the sea.

On the 27th May the Office of State Revenue wrote to me saying the Valuer General has reassessed the value of my land so I have to pay more land tax for 2008. I am left to think the OSR has panicked & thought, we had better pluck this goose whilst it is still perched overlooking the beach, because, if it falls off the edge they are not likely to get anything more.

I have rung OSR & they are blaming the Valuer General. I am not arguing about the amount (at least not for the moment), just the concept of a retrospective tax.

In January the OSR wrote in their letter “Land Tax in this notice has been assessed for the 2008 Tax Year”, and in May the heading of the letter is exactly the same. On page 4, I read that the second letter replaces the previous notification, because of a valuation change!

There is no guarantee that I will not be hit with another increase by the 31st of December 2008. I bet I won’t hear from the OSR if my house does fall off the cliff onto the beach!

Where is the fairness in all this? Surely the OSR can’t have two bites of the cherry in the same year?

In the OSR’s brochure they state at the outset that “land values are determined as at 1st July each year & reflect property market conditions at that time”.

Any valuation by the Valuer General after that time should purely be applied to the next 1st July, and not be backdated to the previous July. Alternatively, if at 31st December, when the OSR wants to issue land tax notices for the coming year and they have not yet got updated valuations then they should mark the notice as provisional. My first notice was not so marked and it should be allowed to be considered final.

The sneakiest part of the whole exercise is the fact that because of the averaging process this increase will have a double effect on the 2009 assessment.

For any of our readers who have been issued with a similar notice. You have our commiserations.

Comments anybody?