Something’s been eating at us.

We couldn’t really explain what it was. But something didn’t seem right.

We felt like Lieutenant Columbo. There was a small clue we knew we’d stumbled across. A clue that was staring us right in the chops… but we couldn’t figure out what it was, where it was and why it was important.

But then it clicked. As we drove our hip-hop red [Ed note: That’s the manufacturer’s colour description not ours!] Hyundai Getz up the Nepean Highway this morning, a light bulb appeared above our head – “I wonder if… No, surely not. It couldn’t be that obvious.”

I tell you what had crossed our mind. That National Australia Bank [ASX: NAB] may have cooked the books for its 2009 half-year report.

That during the 2009 financial year the NAB may have acted fraudulently. That it presented to shareholders and investors a record of the bank’s finances that wasn’t an accurate reflection of the bank’s true condition.

That’s a big claim right?

Believe me, I don’t say it lightly.

If we refer to our pals at Wikipedia (we really should make a donation seeing as how much we rely on it), which in turn refers to the Collins English Dictionary 10th Edition, fraud is defined as:

“Deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.”

That’s pretty clear. And based on what I’m about to show you there’s no other way to describe the NAB’s actions other than fraud.

Our pals at Wikipedia also provide the nine elements of fraud as determined under common law:

• A representation of an existing fact
• Its materiality
• Its falsity
• The speaker’s knowledge of its falsity
• The speaker’s intent that it shall be acted upon by the plaintiff
• Plaintiff’s ignorance of its falsity
• Plaintiff’s reliance on the truth of the representation
• Plaintiff’s right to rely upon it, and
• Consequent damages suffered by plaintiff

Your editor certainly isn’t Geoffrey Robertson QC. But in our view there’s no doubt the NAB’s actions in the secret loans scandal meets the definition of fraud. And could be convincingly argued on each of the nine points above.

Even with everything we already know, it didn’t seem possible that the biggest offence was right under our nose the whole time.

You see, there was one thing nagging at us.

One of the arguments put to us is the NAB was simply being smart. It was taking advantage of cheap money in the US. But what we have to ask is, why then? Why did the NAB only borrow from the US Federal Reserve between November 2008 and July 2009?

Think of it this way. The secret loan programme – Term Auction Facility (TAF) to give it the proper name – started in December 2007. The last TAF loans were in March 2010.

If the NAB is so smart, so keen to take advantage of cheap borrowing rates, why did it only borrow from the Fed for that nine-month period? Surely if it was after cheap funding costs the NAB would have lined up with Westpac on December 20th 2007 to apply for a loan.

And if it was so smart and keen to maximise profits then wouldn’t they have stood next to the likes of Riverview Community Bank on March 11th last year to take out another loan?

That’s what you do if you spot a bargain. You get in early and keep shopping until you’ve gotten every bargain you can.

After all, taking advantage of cheap money is the precise reason given by the bank apologists for why the NAB did what it did.

But no, the NAB was so smart and so keen to borrow cheap, it only did it over a specific period – November 2008 to July 2009.

That’s what caused the light bulb to appear over your editor’s head on our drive to the office this morning.

What we wondered is whether the dates were just as important as the size of the loans. As it turns out we were spot on.

The significance of the dates is the release of these two documents. The first was on 28th April 2009:

Source: National Australia Bank

A presentation that allowed the bank to claim, “Priority 1. Keep the bank safe – Liquidity and funding positions strong”. It’s a shame they didn’t admit how they kept the bank “safe” and why the funding position was “strong” – secretly borrowing from the US Federal Reserve.

The second document was on 28th May 2009:

Source: National Australia Bank

Coincidence? Or fraud?

If it’s a coincidence then it’s a pretty bloomin’ big one. That’s why it isn’t a coincidence.

At the end of March 2009, the NAB closed off its half-year results and capital report. But it’s clear way before that, probably in September or October 2008, NAB saw something it didn’t like.

The bank disliked it so much that something had to be done about it before the next reporting date.

That’s when the decision was made to secretly borrow from the US Federal Reserve.

There’s no doubt NAB borrowed from the Fed, not because it saw the chance to make a quick buck, but because it needed to. NAB needed to bolster the balance sheet before the half-year report, and the Risk and Capital Report.

That would give the bank some breathing space to get the house in order before the full-year reporting date in September 2009.

By that time we can assume NAB managed to fiddle the books enough so that it no longer needed secret loans from the Fed… our guess is that it instead relied on secret loans from the Reserve Bank of Australia (RBA), just like the other banks.

It makes you think doesn’t it? I mean, if this is the kind of stuff that can be fairly easily deduced, what other dealings are there between the banks and APRA that you don’t know about?

According to The Australian in June 2009 – while NAB was still in hock to the Fed:

“A stress test of Australia’s 20 largest banks under a scenario of a severe economic downturn shows the banking system would remain resilient with no banks failing…

“Conditions envisaged under APRA’s stress test… included a 3 per cent contraction in real gross domestic product, an unemployment rate of 11 per cent and a 25 per cent peak to trough fall in house prices.”

Last October the mainstream press trumpeted the great news that “Banks pass house price stress test”.

According to the Sydney Morning Herald:

“The three scenarios Fitch is testing are mild stress, with mortgage defaults of 2.5 per cent and a 20 per cent drop in home prices; medium stress with 6 per cent defaults and 30 per cent decline in prices; and severe stress with 8 per cent defaults and a 40 per cent price slump.”

It was hot on the heels of a Commonwealth Bank of Australia [ASX: CBA] stress test that concluded:

“Under a “high-stress scenario,” with interest rates at 14 per cent, unemployment at 10 per cent and property values down 30 per cent, it would see losses of $740 million, or 0.2 per cent of its total book, not including additional insured losses.”

We know to take these with a pinch of salt because the facts belie what happened in the real world.

In the real world, Australia’s banks came close to collapse with central bank interest rates at 3%… GDP falling slightly for one quarter… the unemployment rate climbing to around 6%… and house prices falling by just a few percentage points.

Yet APRA, Fitch and the CBA expect you to believe in the accuracy of their stress tests. Stress tests based on computer models. Computer models which… that’s right… failed in 2008.

Based on their analysis they truly expect you to believe that in a scenario much worse than the economic climate of 2008, Aussie banks would be fine. Yet as I say, the real world points to the opposite.

The real world showed you how unstable the banks were – government bail-outs and secret central bank loans were needed to prevent disaster.

That proves the stress tests to be complete rubbish.

Make no mistake, there’s absolutely no coincidence about the timing of NAB’s loans from the US Fed.

It reveals that the banks will do anything – even if it means acting fraudulently – to protect their interests. Importantly, it should make you question exactly what APRA knew about the secret loans and how complicit APRA was in keeping it a secret.

Especially as APRA was conducting the bank stress tests while NAB was borrowing from the Fed.

It’s clear that the corrupt banking system has many more skeletons in the closet waiting to be revealed.

Cheers,

Kris Sayce
For Money Morning Australia

Today, I’ll let you in on the latest to and fro between your editor and the hapless Australian Securities Exchange (ASX).

Yesterday we received this reply from the ASX:

“Yes, ASX does issue what are often referred to as ‘speeding tickets’, in the form a Price query.

“Price queries are generated entirely because of unexplained movements in a company’s share price. If a company’s price moves in ways that are out of the ordinary, we seek an explanation from the company.

“In the absence of unexplained movements, there is no justification for a price query.”

Far be it for your editor to explain to the ASX its own rules but your editor shot back a reply yesterday afternoon… explaining to the ASX its own rules:

“Thanks, but I disagree. I was simply using the speeding tickets as an example of the ASX requesting information from a company.

“Rule 3.1 states: “Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.”

“Remember that this rule doesn’t necessarily have to have a material effect on the price, only that a reasonable person would anticipate that it may have a material effect. Furthermore, the price action is irrelevant if the information is significant enough that it could affect an investors’ decision on whether to invest. I would suggest that a reasonable person at the time would think a $4.5 billion loan by NAB from the US Federal Reserve could have a material impact on the NAB share price if it was known about, or that it was a significant issue for an investor to consider. You only have to look at the price moves of the banks during that period to see how volatile they were.

“Considering NAB obviously didn’t disclose this loan from the Fed, and using the reasonable person test, surely it’s up to the ASX to notify NAB of the breach and request an explanation about the lack of disclosure. I can see nothing in 3.1A.1, 3.1A.2 or 3.1A.3 that would allow NAB to keep these loans a secret from the market.

“The ASX’s own website states: Timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and ASX have a legitimate interest.

“And: ASX directs considerable resources to ensuring the compliance of listed entities with the continuous disclosure regime. While the Listings Unit has responsibility for monitoring compliance, it is supported in this effort by the Surveillance unit.

“So, now that we’ve established that an entity can only withhold information if all three of 3.1A.1, 3.1A.2 and 3.1A.3 are met, does the ASX still claim that: 1. NAB was correct to withhold this information from the market, and that 2. ASX has no authority to request an explanation from NAB.

“If that’s the case then surely it gives companies the right to keep information a secret from the market, and as long as it’s kept a secret for two years the ASX will do nothing about it. That’s the only conclusion that can be drawn from your response.

“A reply would be appreciated. But even better would be for the ASX to ask NAB and Westpac about the reasons for not disclosing the secret loans from the US Federal Reserve to Australian retail investors.”

Look, it’s hardly surprising the ASX isn’t keen to ask the hard question to two of its biggest customers. I mean, think about how much money the ASX makes from transactions of NAB shares.

And think how much NAB and Westpac pay each year in fees to the ASX. They wouldn’t want to ruffle any feathers would they?

More worryingly, this sorry affair makes you wonder what else the ASX sweeps under the carpet when it comes to its biggest customers.

Anyway, we received this reply a short while ago from the ASX:

“As I said at the outset, ASX does not comment on any specific supervisory action it may be undertaking.

“Also, please be clear, ASX does not claim the things you attribute to ASX. Your points 1. and 2. below [above] are your words, not ASX’s.

“That said, ASX is aware of the matters you raise and the companies are aware of their continuous disclosure obligations.

“The ASX has nothing more to add on this matter at this time.”

There’s one word to describe the ASX’s response: weak.

As we say, if you’re a company director it’s clear that all you need to do is keep things secret for two years and the ASX will roll over like a little puppy… aaaw, aren’t they cute?

But it was interesting to read this news story from AAP: “Aussie banks need better liquidity: APRA”.

AAP quotes APRA executive general manager Wayne Byres who appeared at the Senate select committee yesterday. Apparently he said:

“It’s not as though our banks were as robust as they could be on the liquidity front.”

No proverbial, Sherlock! NAB’s USD$4.5 billion secret loan is proof of that.

We notice the mainstream press has syndicated the AAP story as space filler on their websites. But the interesting point will be whether the mainstream press actually analyses what APRA has said or – more likely – whether they’ll ignore it.

The fact is no bank is as robust as they could be. But that’s simply the way things are with fractional reserve banking. Fiddling around with it won’t help. Increasing reserve requirements from say, 7% to 7.5% or 8.5% won’t make a blind bit of difference.

When push comes to shove, the banking system here and internationally is rotten.

And it’ll take more than political pressure or regulatory changes to make it safe. In fact, the only way to cure the banking and money system is to allow it to collapse.

We’ve received some feedback from readers suggesting we should have taken up the MP’s offer [see yesterday's Money Morning] to put forward questions to Treasury Ministers.

We can understand that view.

But in our opinion it’s a no brainer. It’s a simple matter of principle.

If your editor engages a member of parliament to ask questions on our behalf it makes us no better than any other person who lobbies an MP for favours.

If we accepted the favour of one MP how could we possibly criticize a property spruiker or even a banker who accepted the favour of another MP to argue against our position?

We couldn’t. Not unless we were a hypocrite.

Our view is that centralised parliamentary democracy and excessive state power is the very reason for the current problems. Since they caused it in order to feather their own nests it’s hardly likely they’ll do anything to change it.

Because if they do it negates the entire reason anyone would want to enter politics – that is to obtain power and influence. Without monopoly power over money, banking and taxation, the power of the politician and bureaucrat almost falls to zero.

The only solution is to wait for the inevitable and to make sure you’re forewarned and prepared.

The money and banking system is like a crappy old decrepit building. It reaches a point where trying to maintain it or repair it becomes pointless. That’s where the banking system is right now.

And like a decrepit old building, the best solution is to knock the whole thing down and start again.

As you can imagine, that’d be pretty painful. And don’t expect your editor to say otherwise.

But the fact is, continuing on in the current fashion is even more painful. Painful for most people anyway. Especially for taxpayers. But it’s not so painful for those with the most power – the bankers.

We’re almost ashamed to say it, but it seems Reserve Bank of Australia (RBA) governor Glenn Stevens agrees. He told the Senate committee yesterday:

“It would appear the taxpayer is being asked to shoulder more risk, one way or another, in order to facilitate the provision of private finance.”

It’s the gradual nationalisation of the banking system. Or one part of it anyway. The part that involves risk is being nationalised. While the part that involves profit and fat pay-cheques remains in the private sector.

But just make sure you don’t hold Mr. Stevens up as a champion for the taxpayer.

After all, it was his central bank that put the taxpayer on the hook for USD$53.5 billion of loans from the US Federal Reserve in 2008 and 2009. Money that was used to bail out Australia’s banks.

If that isn’t asking the taxpayer to “shoulder more risk” then I don’t know what is.

But how do you protect yourself from a banking collapse. Well, unfortunately it’s not as easy as it should be. The central bankers and politicians have seen to that.

One obvious solution is to get a stash of gold coins or gold bars as an insurance policy.

Now, that doesn’t mean pouring your life savings into gold – unless you want to of course. But having a few coins or small bars tucked away makes a lot of sense.

I mean, when the banking system eventually comes a cropper, those fancy coloured notes in your wallet or purse aren’t going to be worth much.

Remember that those fancy coloured notes only have a value because the government decrees they have a value. The notes are backed by nothing more than the supposed good faith of the government.

When the banking system collapses who’s going to have faith in any government? Will shopkeepers and other individuals continue to use the old paper money as a medium of exchange? Even though it no longer has the full faith of the government and central bank standing behind it?

Of course not. That’s where the stash of gold – or silver – coins becomes handy.

Look, I know we bang on about this a lot. I know it may seem outrageous that the system of money you’ve grown up with for twenty, thirty or forty years could collapse at any moment. But just remember that the current system has only run in its current form since the early 1970s.

Before that it was a hybrid paper system.

And before that it was largely a money system backed by precious metals. Or most commonly, a money system that used actual gold and silver coins. Those things had real value.

So as strange as it may seem, what we’re arguing for is simply a return to a sound money system. A system that isn’t faultless. But one which is a darn sight more reliable than what the central bankers and politicians have foisted on the public.

But until the collapse happens, I’m afraid you’re still gonna have to hold those colourful polymer dollars. They are after all, the easiest way for you to pay for things today.

Cheers.

Kris Sayce
For Money Morning Australia

It’s time for an apology. No, not from your editor. We’re always right, so there’s no need to apologise [wink].

Instead the apology needs to come from the Australian mainstream financial press. The same financial press that told you Australia’s banks were strong.

That Australia had the best prudential regulation in the world. That Australian banks were different to all those dirty foreign banks.

But an apology also needs to come from the banks who themselves claimed things were different here. And that Australia’s banks didn’t have the same solvency problems as US and European banks.

Why do they need to apologise? Well, two years after the global financial markets collapsed, a secret bailout of two of Australia’s biggest banks has been revealed.

This is pretty big news. Or rather, you’d think it would be pretty big news. But as you can imagine there’s almost uniform silence from the banks and the mainstream press.

Shortly after we sent you yesterday’s Money Morning we decided to do a bit of fishing around on the US Federal Reserve website. You see, earlier that morning the Fed had released some pretty hot material, and we wanted to see what it contained.

What we found shocked us. Although it really shouldn’t have, because we knew the claims about the Australian banking system being strong and robust were complete lies anyway.

In fact, so shocking is this revelation that we considered sending you a Money Morning special edition yesterday afternoon. But we didn’t. We’re fed up of giving the mainstream scoops which they then claim as their own.

Instead we thought we’d wait to see if the Australian mainstream press picked up the story first.

Surprisingly they have. But not with any enthusiasm. And hardly with what you’d call any effort. Probably because they’re a bit sheepish about the fact the banks and regulators have made fools of them. I’ll provide you with the link to the one story on it in a moment.

So excited were we to see how the mainstream had handled this story we did something we normally never do – enthusiastically open the Australian Financial Review (AFR).

The first thing we did was check the Companies Index on the back page. This was promising, the two banks in question were mentioned. We eagerly flicked through to the relevant pages… and drew a blank.

Not a single mention of it. So we started from the front and worked our way quickly through the paper… page seven… here it is… “Rescues: RBA borrowed billions from Fed” was the headline… but no, this isn’t what we’re looking for.

On we went, past the big centre-fold spread telling readers that the AFR contains, “Up-to-the-minute market information, news, commentary and expert analysis… All from just $44 per month”.

We continued… through to the end. Not peep. Not a single mention.

And the AFR is supposed to be Australia’s premium business newspaper. We wouldn’t have thought so.

About all it’s good for is lining bird cages in our opinion.

But then, we guess if the AFR exposed the banks’ duplicity it wouldn’t be able to get an interview with the likes of Commonwealth Bank of Australia [ASX: CBA] CEO Sir. Ralph Norris.

Said person is the feature item in the Boss glossy mag insert in today’s AFR.

We can’t be bothered reading it. It’s surely pap.

But anyway, what the heck are we going on about? This…

I’m talking about the near collapse of the Australian banking system in 2008. I’m talking about the likelihood of two Australian banks collapsing in 2008 if they hadn’t secured a secret loan from the US Federal Reserve.

The fact that National Australia Bank [ASX: NAB] had to borrow USD$4.5 billion from the US Federal Reserve during 2008 and 2009.

And Westpac Banking Corp [ASX: WBC] needed USD$1.09 billion in January of 2008 and 2009.

What’s that, you don’t know anything about it?

And you don’t remember reading about it?

There’s a simple reason for that. It’s been top secret information until yesterday morning.

That’s right, if it wasn’t for the passing of controversial legislation in the United States you’d never have found out about NAB and Westpac’s Federal Reserve bail outs.

And based on the lack of interest from the mainstream press – including Australia’s so-called premium business newspaper, if it wasn’t for Money Morning you’d still be none the wiser.

The one and only article we’ve found that mentions it is this one from The Age, headlined “NAB, Westpac tapped Fed”.

It appears to be an adaptation of a New York Times article based on the reference at the end, with localised bits added by Eric Johnston. But this one pathetic effort shows just how clueless the Australian mainstream press is.

Johnston makes this comment:

“The Westpac borrowings are unusual, as it barely has a North American presence, operating only a US representative office.”

Seriously, do I really need to explain it to a veteran journalist?

Talk about not being able to see the wood for the trees. Talk about not getting it.

Here’s a clue for Mr. Johnston, it wasn’t Westpac’s US office that needed the dosh, it was Westpac in Australia that needed it. It shows you that without the direct financial support of the US Federal Reserve Westpac and NAB would have been toast.

Westpac and NAB needed the loans because they were on the verge of going belly up. It’s that simple. If they hadn’t gotten secret loans from the US Fed they would undoubtedly have needed secret loans from the RBA.

Fortunately for the RBA, the Fed opened the door and this allowed Aussie central bankers and bankers to claim that the Aussie banks hadn’t received a bailout.

But not only that, what’s most extraordinary is that Westpac was one of the first institutions to borrow money from the Fed when the lending facility became available!

But more about that in a moment. Let me give you some of the background first…

You may have read about something called the Dodd-Frank Act. The full name is the Wall Street Reform and Consumer Protection Act. It’s called Dodd-Frank after the bill’s sponsors, US Senator Chris Dodd, and Representative Barney Frank.

The legislation mandates a number of things, but part of it is the requirement for the US Federal Reserve to reveal which institutions it loaned money to under the various bail out programmes.

One of those programmes was titled the Term Auction Facility (TAF). According to the Fed’s website:

“Under the program, the Federal Reserve auctioned 28-day loans, and, beginning in August 2008, 84-day loans, to depository institutions in generally sound financial condition…

“…Of those institutions, primary credit, and thus also the TAF, is available only to institutions that are financially sound.”

OK, so only “financially sound” institutions were eligible for TAF loans. That would be financially sound institutions such as LloydsTSB plc which got a USD$10.5 billion loan from the Fed and which later had to be partially nationalised by the UK government.

It would also include ABN Amro Bank which grabbed USD$1.5 billion of loans from the Fed, and which would later cause such a financial strain on Royal Bank of Scotland (RBS) after RBS bought it that the UK government had to partially nationalise it too.

Not to mention the USD$53.5 billion of loans RBS needed directly.

Then there was Allied Irish Bank, who could forget it? The Irish certainly won’t.

Between February 2009 and February 2010 Allied Irish Bank needed USD$34.7 billion of loans from the Fed. Allied Irish Bank also had all its obligations guaranteed by the Irish taxpayer and is the primary reason why Ireland now requires an International Monetary Fund and European Union bailout to the tune of $113 billion.

And what about Bayerische Landesbank which needed a USD$13.4 billion bailout from the state of Bavaria? Well, apparently it was financially sound enough to borrow USD$108.19 billion between December 2007 and October 2009.

So, we can take with a grain of salt the Fed’s claim that only “financially sound” institutions had access to the TAF programme. Financially unsound and insolvent banks were given loans too.

And in the middle of all that wheeling and dealing, when a total of nearly USD$4 trillion was loaned to and repaid by “financially sound” institutions, Australia’s very own National Australia Bank and Westpac were in on the action too.

Although it was only a relatively small amount compared to some of the other transactions, it was still USD$4.5 billion and USD$1.09 billion respectively. But it was still a lot more than the USD$1.5 billion needed by financially unsound ABN Amro.

Also don’t forget that the NAB went to the Australian stock market in late 2008 to raise $3 billion. That was a sum it needed to bolster its capital.

If $3 billion was a significant and important number for the market to know about then surely USD$4.5 billion (about AUD$7 billion at the time) was even more crucial for the market to be aware of.

But there wasn’t a peep from them.

Because as I say, you didn’t know anything about the NAB’s and Westpac’s Fed loans. It was all top secret.

And it’s obvious that $3 billion capital raising still wasn’t enough because NAB had to go begging to the Fed twice after that for $1.5 billion a time.

But as I say, you didn’t hear a word about this at the time. It was all top secret. But that didn’t stop the bankers and regulators and politicians from posturing about the stability and strength of Australian banks.

In January 2008 Westpac denied there was a problem with its US exposure. That’s despite the fact just one month before, on December 20th 2007 Westpac had gotten a USD$90 million loan from the Federal Reserve under the TAF programme.

Not only did it get the loan, but it was one of the first in the queue! As you can see from the screenshot below (click to enlarge):

Source: US Federal Reserve

You can check out the full details here by downloading the spreadsheet.

You’ll note that Westpac applied for the loan on the same day as Citibank (bailed out by US government), Lloyds TSB Bank (bailed out by UK government), Bayerische Landesbank (bailed out by Bavarian government), and Societe Generale (which was bailed out by the US government courtesy of the AIG bailout against which SocGen had a massive CDS exposure).

In other words, we’re talking about a rag-tag bag of insolvent banks. And our own insolvent bank – Westpac – was amongst the thick of it, begging for an emergency loan from the US Federal Reserve as soon as the doors were opened.

It’s something you’d think would be of interest to shareholders don’t you? But there wasn’t a word from them.

And it must now make the Reserve Bank of Australia (RBA) feel foolish, considering in September 2008, just before NAB sought the Fed’s help, the RBA wrote:

“The Australian financial system has coped better with the recent turmoil than many other financial systems. The banking system is soundly capitalised, it has only limited exposure to sub-prime related assets, and it continues to record strong profitability and has low levels or problem loans. The large Australian banks all have high credit ratings and they have been able to continue to tap both domestic and offshore capital markets on a regular basis.”

Tapping “offshore capital markets” obviously included the US Fed.

So we wonder, how much did the Reserve Bank of Australia know about this? While it was talking up the strength of the Australian banking system did it know that two of the four Australian banking pillars were desperately seeking loans from the US Fed?

Or, like you, was the RBA in the dark? And what about the Australian Prudential Regulation Authority (APRA)? We’ve been told they’ve done all manner of stress tests and the banks passed with flying colours.

How can that be possible if Westpac and NAB need emergency loans from the US Fed? Was this included in the stress tests?

Anyway, we’d like to know. So we’ve fired off emails to the RBA, APRA and the Australian Securities Exchange (ASX) asking them these simple questions.

• When did the RBA/APRA/ASX become aware of Westpac and NAB’s loans under the TAF programme?
• If RBA/APRA/ASX were not aware of the loans under the TAF programme please explain why.
• If RBA/APRA/ASX were aware of the loans please explain why this wasn’t considered to be important enough to inform the market?

We’ll let you know if or when we get a reply.

But it wasn’t just Westpac that kept quiet about it.

NAB chairman Michael Chaney must surely have realised what he was saying when he made the following comment at the December 2008 annual general meeting:

“Our traditional banking and wealth management operations are all profitable, strongly capitalised and conservatively funded. In addition, our banking businesses have sound asset quality and are well provisioned.”

So sound was the asset quality that just six weeks earlier NAB’s New York branch had to arrange a USD$1.5 billion loan at an interest rate of 0.6% with the US Federal Reserve.

All under a shroud of secrecy.

All under the belief that no-one would ever find out about it because no-one could find out about it. The Fed at that time was under no obligation to reveal which banks were taking short term loans from the Fed…

Until the Dodd-Frank Act was passed.

Look, we’ll say we told you so. We’ve claimed all along that Australia’s banking system is no different to any other. It’s inherently insolvent – as are all modern day banks.

Along the way we’ve been called a “lunatic” and a “nutter” for writing what we believed to be true. And would you believe it, once the secrecy of corrupt governments and bankers is revealed this “lunatic” and “nutter” has been proven correct.

But I understand it may not seem like that at the time. Yesterday we received this email from a Money Morning reader:

“Hello Kris

“I don’t normally send comments to publications nor do I sit there and read others comments, however, yesterday I came across a sticker on a car bumper. When I read it, I immediately thought of you and I think you will like it too.

“‘Do not steal. The government does not like competition.’

“I enjoy reading your daily newsletter. Even though some of your theories sound crazy at the beginning, it’s funny how they do in the end sound believable. We do live in a world where some people do not put other peoples’ interest first.

“Lisa”

It’s true. Government is above the law. It can legally steal private property – it’s called taxation. Nice trick huh!

But Lisa hits the nail on the head. What you read here may sound crazy, but it only sounds crazy because it’s outside the norm. It’s different to what you read anywhere else.

And that’s simply because we don’t have to worry about what our advertisers think – because we only advertise our own services. And we don’t have to worry about turning readers off with our seemingly radical ideas, because most of our readers come here because of those radical ideas.

My guess is you’re fed up with being told the same rubbish day-in and day-out by the mainstream press. A mainstream press that reports from press releases, and trusts whatever it is the guys in government or on Wall Street say.

In contrast we’ve learned to doubt everything they say.

We take the view that anything a mainstream economist or analyst says is wrong. It’s up to them to convince us they’re right. Very few of them succeed because ultimately… I hope this doesn’t sound arrogant, they are wrong.

The state of Australia’s banks is a perfect example. For the past two years you’ve had to put up with a constant drone of commentary from the mainstream telling you that Australia is different.

As I say, this bombshell from the Federal Reserve proves otherwise. And it proves we’ve been right to call the Aussie banks for what they are.

Maybe our claim about NAB’s system shutdown last week being caused by a solvency problem rather than a computer glitch still seems crazy to you. But we wonder, after reading today’s Money Morning, perhaps it now sounds just slightly less crazy than you first thought…

And furthermore, it must surely make you wonder what else it is the government and central bankers are keeping secret. Most of which will probably never be revealed.

All you and I can do is use our scepticism and questioning brain to figure out what’s really happening. Because more often than not, the story the mainstream peddles is as far from the truth as you can get.

Yesterday’s revelation from the US Federal Reserve about NAB’s and Westpac’s secret loans is a perfect example. We look forward to getting a reply from the RBA, ASX and APRA about how much they knew and when…

But we won’t hold our breath.

Cheers.

Kris Sayce
For Money Morning Australia

We’re concentrating on the May issue of Australian Small-Cap Investigator for most of this week, but we should still find time to lob a few grenades at mainstream thinking.

So, before Shae takes up the slack, a couple of quick things that took our fancy…

I said yesterday it might be worth waiting for the Aussie dollar to strengthen a little and the gold price to fall. Good luck with that. It’s piled on another few bucks overnight, trading above AUD$1,400.

And the GOLD exchange traded fund (the one your editor owns a few shares in) is trading above $139 per share.

But as the stock market continues to head south – as we feared it might, but hoped it wouldn’t – we think back to the warnings we offered over a year ago about the stock market rally and economic recovery being an illusion.

A government and central bank created illusion. But more on that another day.

Anyway, up in Sydney yesterday Luci Ellis, Head of Financial Stability at the Reserve Bank of Australia (RBA) spoke at an Australian Financial Review sponsored conference on housing. But for a start we’d like to grade her ‘F’ for the job she’s doing on overseeing financial stability considering how quickly the value of the Australian dollar continues to devalue thanks to inflation.

But best of all we liked this comment in her closing “Final Thoughts”:

“Recent data suggest that we do not have a credit-fuelled speculative boom on our hands. It would not be desirable for the current situation to turn into one.”

We have this image of Ms. Ellis standing in front of a large bubble that she’s tried to cover with an overcoat, insisting to passersby that there’s nothing to see.

But what “recent data” would Ms. Ellis be referring to?

I mean, it couldn’t be the data from the Australian Bureau of Statistics (ABS), the chart of which Ms. Ellis used to open her presentation:

Because pardon us for commenting, that’s got bubble written all over it. Well, our version has anyway:

And obviously she hasn’t noticed the numbers contained on the RBA website which provide an insight into the, erm, non-existence of the “credit-fuelled boom”:

Those numbers are in millions. We pointed out last week that residential borrowing had increased 50% in the last two-and-a-bit years.

Clearly that’s not a “credit-fuelled boom.”

But then Ms. Ellis would naturally deny the existence of a credit boom considering it’s her employers that have caused it. You know the rules, gotta tow the company line.

We do like how she used the following chart, which unwittingly should help to dispel the myth that rising population growth is necessarily linked to house price growth:

Prof. Steve Keen pointed out in an article for Business Spectator last week that if population growth running faster than new dwelling growth leads to rising house prices, why didn’t house prices fall between 1955 and 2004 when dwelling growth exceeded population growth?

The simple answer is that the real driver of house prices is easy credit. Plain and simple.

And when that stops – which it hasn’t yet remember… POP!

Finally, before we hand over to Shae, a quick note on a wonderfully dumb comment from Emperor Ken Henry:

“Projects which are earnings super normal profits will continue to earn super normal profits.”

Ha, ha… We’ve had “normal profits”, then “super profits”, and now “super normal profits.”

What’s next? “Super normal extra spicy profits”? “Vindaloo profits”? “My God, What a Profit”?

Not that a coercive sector servant has any idea what a profit is anyway, but that’s another thing.

As our Slipstream Trader Murray Dawes pointed out, the idea of companies making big profits is that it draws new entrants into the market, so that they too can get a slice of this so-called “super profit” action.

But if governments decide to take a big slice of those big profits, guess what, where’s the incentive for new entrants to enter the market, provide competition, and therefore drive those profits down?

By taxing the super profits, or super normal profits, it actually kills several birds with one stone. It punishes the incumbent for making a profit, it reduces their enthusiasm to produce extra, knowing that it will face a higher tax burden, it makes it less attractive for new entrants to come into the market, and finally it puts a handbrake on supply, potentially causing prices to rise.

Anyway, we’ve blathered on enough this morning, over to Shae to wrap things up…

Cheers,
Kris.

“Super profit tax calls industry’s bluff”

And on the front page the AFR leads with:

“Henry ramps up pressure on miners”

With the subheading, “Claims tax will boost growth.”

To back up the arguments the AFR reproduced a chart and pie chart which I’m pointing at with a red pen while Diggers & Drillers editor Dr. Alex Cowie cleverly took a photo with his fancy iPhone:

In a wonderful piece of casual/causal flummery, the chart on the left shows how oil exports went ballistic after the petroleum resource rent tax was introduced.

Thanks to that piece of, erm, evidence, treasury secretary, emperor Ken Henry believes:

“It is the strong and clearly stated view of Treasury that the resource super profit tax [RSPT] will grow the mining sector and the economy.”

The two pie charts to the right provide more, [hehem], proof that the mining companies are ripping off ordinary Australians.

In case you can’t see it clearly, the pie chart shows how the government swiped an average of 55% of mining profits between 1999-2004, but merely 27% in 2009. Obviously something must be done to redress this heinous crime of profitability.

Fancy making a profit eh? Mining companies should take a leaf out of the government’s book and not make a profit. That’s how it’s done.

But do you see the problem with these claims by the Treasury? I’ll explain in a moment. Before I do, there’s other comments made by the deputy drones at the Reserve Bank of Australia (RBA).

As reported in Tuesday’s AFR, deputy drone Ric Battellino said:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

Then there’s the comment from deputy drone Phillip Lowe, sorry, Dr. Phillip Lowe:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Perhaps we’ve gone over the top on the quotes this morning, but I’ve included them all for a reason. Because they have one thing in common…

The overwhelming belief by the bureaucracy that it can manipulate an economy at will. That it can decide which resources companies will prevail and which won’t. It’s megalomaniacal bureaucratic interfering at its worst.

Anyway, let’s work through these kindergarten-grade arguments put forward by the bureaucrats who seem to be long on qualifications but short on logic.

First up, let’s look at the case that the super profits tax will be great because it will only cream off extra tax from the big profitable companies, but at the same time “smaller and more marginal projects would become more viable.”

This must be true because it’s all according to “modelling” undertaken by KPMG Econtech.

Now, as you’re probably aware, the recent record of “modelling” by the financial industry whizz-kids hasn’t been too good. Remember all those models that said a subprime property crisis wouldn’t spread to other investments?

But don’t take my word for it, just type “KPMG auditing scandal” into your favourite search engine and you’ll get a bunch of records returned. We picked out this one from the Irish Independent: “Were the bank auditors conflicted?”

According to the article, “Irish Nationwide, which last week revealed a loss of €2.5bn for 2009, was also a customer of KPMG… AIB paid KPMG a whopping €11m over nine years for services outside its audit…”

KPMG aren’t the only ones, PricewaterhouseCoopers and Ernst & Young get dishonourable mentions too.

Let’s put it this way, just as the auditors felt compelled to give their banking clients the news they wanted, KPMG has given the Treasury the news it wanted – something to justify the imposition of a new tax.

I mean, how likely is it that KPMG would return a report saying the Super Profits Tax will be bad for the industry?

Not very likely considering KPMG is paid a fee by the government in return for providing the report. You couldn’t imagine KPMG getting asked back again if it proposed something against the government’s intentions.

But look, as with all modelling it can only produce a result based on the parameters it’s given. And just wait until you read what those parameters are. You’ll be flabbergasted…

Take this assumption made by KPMG in its report to the government:

“In the model, this implies a zero economic cost for the new RSPT, since it will simply be a transfer of a portion of the surplus (over and above the required return on capital) from these industries to the government sector.”

Got that? A “transfer of a portion of the surplus from these industries to the government sector.” That’s mindboggling in itself. We do like how they’ve used the word ’surplus’ rather than profit.

What chumps.

Anyway, it goes on:

“In KPMG Econtech’s MM900 model, the RSPT has an excess burden of zero. This outcome rests on the modelling assumption that the RSPT only taxes the economic rents earned from immobile factors, in this case mineral reserves. If only these rents are taxed, then the investment decisions of mining companies will not be distorted. Since the tax base in the RSPT will not shrink in response to the tax, activity in the mining industry will not be distorted, and there will be no economic costs associated with the RSPT in MM900.”

It sums up with:

“The incidence of the RSPT is also a result of the immobile nature of the natural resources on which it is levied. Since there is no change in the supply of mineral resources, their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

Phew! I don’t know about you, but I’m out of breath after that…

OK, now I’ll try to paraphrase that junk into plain English. In other words, what our friends at KPMG Econtech are saying is that – because the government is just creaming off profits then it won’t impact either the cost of the resource in the ground, nor will it put miners off from exploring because the tax will come from the profits.

Correct me if I’m wrong but I’d say that’s the gist of it.

It goes without saying that the “brains” behind KPMG Econtech are clearly professional academics or professional number crunchers or wet-behind-the-ears university graduates with no idea about the concept of risk versus return.

It appears to your editor that the fatal flaw in the KPMG Econtech modelling is that because the model doesn’t see the Super Profits Tax as a cost it assumes that the Super Profits Tax has “zero economic cost.”

What a ridiculous claim.

Think of it this way. Let’s say mining plant equipment company Caterpillar changed its terms for providing big trucks to the mining sector. Let’s say that instead of miners buying or leasing the equipment Caterpillar decided to take 5% of the mining company profits instead, and that this 5% would lead to an increase in the money paid by the miner to Caterpillar.

Now, under that circumstance, would you say that there was now a “zero economic cost” to the mining company for plant and equipment? Would you now say that the mining company was now getting its mining equipment for free because the “cost” was only coming from profits?

Anyone claiming that would be mad.

To claim that something isn’t a cost because it comes from after-profits rather than before-profits is accounting chicanery of the highest order.

It’s no wonder the Irish banking system went to the wall, if this is the kind of auditing those banks were subjected to – “Yeah, don’t worry about those collateralised debt obligations, our modelling says they’re fine!”

As I’ve pointed out before, the bureaucracy and now clearly the auditors, have no concept of profits. And they’ve no concept of the difference a lower anticipated profit has on the willingness of an investor to invest.

I mean, if we tipped a stock in Australian Small-Cap Investigator that was super-high risk but which only offered the prospect of a 9% return would you back it? Probably not. But if it offered a high risk potential of a 286% return then maybe you would.

Then again, maybe you wouldn’t. Maybe you’d want an even bigger potential return.

The point is, the risk to Australian mining companies hasn’t changed one jot. But what has changed is the potential return. In other words, same risk but lower return. Seriously, we’re talking Investing 101 here. It’s not some abstract concept we’re trying to get to the bottom of.

You don’t need a Certificate IV in accounting from Chisholm TAFE to work out that if the potential return is lower, investors will reconsider making the investment.

But it doesn’t end there, KPMG makes another terrible blunder. And it’s this. It assumes that because the minerals are immobile it will have no change on the supply. What?! How does that work. Ah yes, that’s right, “their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

I’ll be straight up with you, this is perhaps the most ludicrous statement we’ve ever seen. It’s claiming that because the Super Profits Tax is being taken out of profits then it will not impact the investment decisions of miners.

Not only that, but according to the pen-pushers and tax-stealers in the Treasury, increasing taxes will not only be a zero cost to the mining industry, but it will actually increase growth… Hahahahahahahaha, stop it guys, seriously.

The evidence? The chart faithfully reproduced by the AFR which shows the CASUAL relationship between the introduction of the petroleum resource rent tax and the increase in oil exports.

For Treasury to claim that the introduction of a tax will actually increase production is absurd. But if it is true then maybe the Treasury should reconsider the tax increase on cigarettes. After all, going by their logic increasing the taxes will increase the supply of cigarettes and most likely increase the number of cigarettes smoked!

Nuff said. Clowns.

Finally there’s the statements from Tweedle-Battellino and Tweedle-Lowe. If you thought the comments from KPMG Econtech and Ken Henry were ridiculous then the comments from the RBA drones really do take the cake.

Their statements that:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

And:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Have you ever come across anything so weird as for a bureaucrat to wish that Australia’s most productive industry suffers the collapse of a big mining project. Is he serious?

We’re talking about something that provides a genuine benefit to the economy. We’re not talking about the Ponzi banks and housing sector that are a drag on the economy. We’re talking about an industry that is the sole reason for the Australian economy not collapsing in 2009.

But then again, these are the same guys who are keen to argue that the property market isn’t in a bubble.

Ah, but now the penny’s dropped. Actually their thinking on the resources sector and the housing market is exactly the same now we think about it.

In both cases they want to see “a gradual and sustained increase in investment over time for the economy to benefit.”

In other words, just as the RBA is keen to keep house prices sky high in order to try to avoid a bursting of the property bubble, it is equally keen to see commodity exploration fall so that prices remain high.

It goes to show you how much the Australian economy relies on the resources sector for economic growth. The obvious fear is that if too many miners extract too much of the natural resources it could push commodity prices lower and therefore have a negative impact on the value Australian exports.

Or, to put it another way, a potential commodity price crash.

You can hardly blame them for being worried. After all, the RBA and the bureaucracy have succeeded in driving all other productive industries offshore or into oblivion.

It figures it can manipulate the resources bubble by increasing taxes and therefore putting a brake on supply.

Talk about playing with fire.

The trouble is that rather than protecting the resources industry, these tax-grabbing measures are more likely to destroy the industry than save it. While it’s true that these resources aren’t movable it’s also true that they are available elsewhere.

Look, I’m not saying that the entire resources sector will collapse, but what I am saying is that in many cases – as we’ve seen already – the Super Profits Tax will be the difference between whether a company explores here or whether it targets projects in countries with a less burdensome taxation regime.

But as usual, what it all really comes down to is the fact that a handful of power-hungry bureaucrats believe that they can manipulate an economy to suit their purpose. That by pushing and pulling levers they can get the economy to move exactly as they planned.

Soon enough they’ll work out it’s not possible. In the short term these things can give the impression of working, but in the long term all it does is increase the distortions in an economy and create a huge mess with massive unexpected (for them) consequences.

It’s proof that bureaucrats and number-crunchers don’t have a clue about how an economy functions.

Cheers,
Kris.

The Reserve Bank of Zimbabwe? Check.

The United States Federal Reserve? Check.

The Bank of England? Check.

The European Central Bank? Check.

The Reserve Bank of Australia? [Silence].

Not yet, reader. Will its time come to openly and brazenly print money?

We know it and the retail banks do it behind closed doors. But it hasn’t yet announced a multi-billion dollar plan to monetise debt obligations. Of course, so far it hasn’t had to because thanks to the “we’re different” mentality, Australians have continued to make sure private sector debt continues to rise.

For instance, according to the Reserve Bank of Australia (RBA), as of March 2010 residential loans by banks stood at $935.2 billion.

That’s compared to a paltry $634 billion when the economy last peaked in October 2007.

In other words, household debt obligations have increased by about 50% over the last two-and-a-half years. An increase which has occurred almost without stopping for breath.

Who needs a central bank bail-out when it’s easier to just convince the population into believing “Australia is different.”

But anyway, back to the European Central Bank and its EUR40 billion bailout… [murmur, murmur] HOW MUCH?!

[Hehem] Right, well, what I should have said is, the European Central Bank and its USD$1 trillion bailout plan. Or to put it another way, $1.1 trillion – more than the annual output of the Australian economy.

Where did the trillion come from? We’re sure this all started off as a EUR40 minor problem. I mean, that was the reason behind the mainstream’s argument about Greece being irrelevant.

OK, we did note over the last couple of weeks that the number had ratcheted up quietly to EUR130 billion. That’s a pretty big number by itself.

But then, whammo! At 3.15am in Frankfurt, the ECB announced to the world – but not to the Europeans because they were all asleep [Shhhh!] – that it was using its “nuclear option” of monetising the debt in order to fight the “wolfpack.”

Yep, that’s right, the free market gets the blame for problems ultimately caused by… that’s right, the politicians, bureaucrats and central bankers. Even though the free market – or ‘wolfpack’ as they call it – had nothing to do with it.

But what are the chances of the ECB’s money printing plans working any better than the money printing strategy of the Fed, the Bank of England and the Reserve Bank of Zimbabwe?

No chance, we’d say.

In fact, it rather reminds us of Mission Gainsborough…

General Melchett: Field Marshall Haig has formulated a brilliant new tactical plan to ensure final victory in the field.

General Melchett: E-e-exactly! And that is what is so brilliant about it. It will catch the watchful Hun totally off-guard, doing precisely what we’ve done eighteen times before is exactly the last thing they’ll expect us to do this time…

And the Watchful Huns in the markets certainly were caught unawares. Hence the French CAC40 climbing 9% and the Spanish market surging 14%.

The market obviously wasn’t entirely convinced that the ECB would be so stupid to just print a bunch of new cash in order to pay off debts. I mean, it’s obviously the kind of crass thing the Americans would do… but not the Europeans.

And the British with their Anglo-Saxon ways are just as bawdy as the Yanks. But surely the sophisticated French, the sensible Germans, and the, erm, er, Belgians would have a more balanced plan of attack.

It appears not.

In fact, based on the numbers bandied around over the last few weeks it seems to have been more like a central bank version of Deal or No Deal rather than the thoughtful deliberation of supposedly intelligent men.

We can only think that they’ve been frantically opening briefcases with numbers inside. As the ‘Bank’ spun the numbers and offered the magic trillion, the finance ministers leapt with joy, “Voila! Nous etre rich!”

And so today the European printing presses whirr into action.

But wasn’t it nice of them to do all this in the early hours of the European morning. What dedicated public servants they are. And obviously it was so urgent, that they had to release the news before Fritz in Cologne, Francois in Lyon and Giuseppe in Milan had woken from their slumber – “Don’t wake them, they need the sleep, they’ll have to work twice as hard to pay this off! Ha, ha, ha…”

Or maybe they were more eager to rubber-stamp it before Stavros and Effi in Athens had woken up. You remember what happened last time they got mad!

It still startles us how our Keynesian friends can’t grasp how illogical it is to just print money. Look at the number again, it’s the equivalent of $1.1 trillion or greater than the entire yearly output of the Australian economy.

Think of it this way. It will take the European Central Bank about, ooh, a tenth of a second to create the billions of Euros needed.

Yet it will take 10.9 million Australians working an average of 35 hours per week for 52 weeks to produce the same output.

Got that? One-tenth of a second versus one year.

One-tenth of a second versus a combined 19.8 billion hours or 71.4 trillion seconds [Ed note: we just wanted to keep going until we notched up a trillion].

The obvious question is why bother going through all that effort if when push comes to shove the central bankers will just print the money anyway?

Naturally, the reason you have to go through all that effort is because you know there’s something illogical and not right about a bank just creating money from thin air.

You don’t need to be a Doktor der Wirtschaftswissenschaften from the Ludwig-Maximilian-Universität München to work out that even as a short-term measure printing money doesn’t actually solve the initial problem.

All it does is shift the problem. It wipes debt from one bunch of people and plops it onto another bunch.

Because guess what, instead of the Greeks having to come up with a way of repaying their debts or just defaulting, the ECB is just handing over the Euros in exchange for Greek government bonds.

In return, the ECB and European taxpayers get a bunch of crappy Greek debt that no-one else wanted. Well, they would take it on, but only at an 18% interest rate. In fact, so little did anyone want it that the ECB actually has to create the money to buy it.

The issue now is what happens to the billions that will be handed out to the Greeks, Portuguese, and anyone else that needs it? The answer is that the national governments will feed the cash out to their favoured industries and pet projects.

Some will gain by the increased money supply – those that get the new money first, but others will lose out. And because the new money is in effect unearned income, like a handout, it will be wasted and squandered in exactly the same way as any other type of handout.

Not forgetting the moral hazard of having bailed them out once, is it really likely the ECB will tell them to get stuffed if they ask for more? And what about other governments? It can only be a matter of time before they play the “where’s our free money” card.

As we’ve pointed out several times, the most honourable action would have been for the Greeks and other European tin-pot governments to just default on the debt obligations.

There would still be losers of course, we’re not claiming that there wouldn’t. But at least the losers would have been investors. Investors who should always enter into an investment with the risk that they’ll lose money.

Instead, at 3.15am Frankfurt time, the European Central Bank decided it was much more important that they and their political paymasters kept their jobs. The result being that the average German, French and Italian – and every other European – will pay via the devaluation of their savings and their wages.

All just to ensure the governments are saved, central bankers are saved, and bond investors receive back 100 cents on the Euro for their crappy Greek bond investment.

What are the odds that in a year’s time we’ll hear that Goldman Sachs or JP Morgan made a motza from buying cheap Greek debt two weeks ago and then selling it to the ECB this week?

We can see the headline now, “Evil Bankers Profited as Greece Burned.”

The free market will be blamed again, and capitalism will be accused of being out of control. Of course, what the bankers and politicians will conveniently forget is that without the money printing those profits – if they exist, and we’re sure they do – wouldn’t have happened.

The odds on that story making it to the front pages are pretty good we’ll guess.

Cheers,
Kris.

“Oh stop grumbling and just hand over the money.” That’s in effect what the German government is being told to do with its taxpayer euros.

According to the Associated Press (AP):

“A 45 billion euros ($A64.45 billion) bailout package from other eurozone countries and the International Monetary Fund (IMF) should see Greece through its borrowing needs for this year. But the bailout is complicated by German grumbling, which continued on Monday, about the burden of the bailout on its own finances.”

Do you know what, if your editor was German we think we’d grumble a bit too. In fact if we were German we’d tell the Greeks to stick a Banane^ up their Kokospalme.*

We’ve long thought the Euro currency was doomed to failure. Whether the debts piled up by Greece and other Eurozone countries is enough to cause its collapse is another matter.

But one day – probably sooner rather than later – it will fail. Just like all fiat currencies are destined to collapse.

For an indication of how bad things have gotten in Greece you need look no further than current Greek interest rates and compare them to German interest rates.

First take a look at this chart from Bloomberg:

Click to enlarge

The worst thing is, that yield is only as of close of business on Friday. In overnight trade the interest rate on the 2-year bond increased to over 13%. A full three percentage point increase on Friday’s rate.

Make no mistake, that’s an absolutely massive move.

And as you can also see from the chart above, the yield has more than doubled during the past month alone.

But what this shows is that if you mess around with debt and interest rates it’ll eventually bit you on the bum.

It shows you that the attempts to manipulate interest rates by central bankers are doomed to fail. Because while the Greek government should hang its head in shame for criminally burdening its citizens with debt, the central bankers are equally culpable for drugging them up on cheap money.

Let me show you an example. Below is a chart for the same 2-year Greek bonds, except it’s showing the rolling yield going back five years:

Click to enlarge

And remember, this chart only goes up to last Friday. Based on the prices from overnight, the current yield would be where I’ve placed the big red blob on the chart.

Now, we won’t claim to be an expert on Greek government debt. But the reaction of the bond market tells you what the problem is.

It’s telling you that the government has over-exposed itself to debt over a long period and that investors are no longer willing to accept a yield of between 2% and 5% that they were prepared to accept for the previous four years and eight months.

Importantly, the problems in Greece aren’t something that developed overnight. The Greek government didn’t change from an Ebenezer Scrooge type miser at the beginning of this year to a Paris Hilton style spendaholic yesterday.

The markets have obviously known about the Greek debt for some time. It’s only now that the realisation has dawned on investors that there are perhaps better places to stick their money…

Hence why the Germans are “grumbling” over sending some of their hard-earned southbound to the Mediterranean.

This is the sort of event the saps in the mainstream insist could never happen in Australia or the US. They’re mistaken.

You see, as our Slipstream Trader editor Murray Dawes wrote in Money Morning yesterday:

“I really believe that you can never succeed in the markets long term if you’re not constantly aware of the effect your psychology has on your results.”

A large part of the reason why investors are fleeing Greek bonds is psychology. Sure there are some mug punters that are prepared to buy Greek debt on a 13% yield, but that yield shows you just how risky the punters believe it is.

The main role of interest rates is to provide a visible price of money, another role is to indicate the supply and demand for money, and finally it provides an indicator on the relative risk of money and other investments.

To use an example. While the Greek 2-year bond is trading at a yield of over 13%, the German 2-year bund has a yield of just 0.88%. That’s a spread of over twelve percentage points!

The interest rate is now telling investors that German debt is low risk and Greek debt is super high risk.

Of course it’s all relative. And you shouldn’t forget that the German rate has been manipulated much lower than it otherwise would be by the European Central Bank. But you get the point.

Keeping interest rates low gives the false impression that no one needs to save. Low interest rates over the previous four years gave the market and investors the false signal that there is already enough saving and therefore there’s no need save.

The low interest rates also made the incentive to save a lot less too, even if they were inclined to.

So, what do governments and individuals do? They heed the signals from the interest rates and spend. Only it turns out that the signals were false. The signals were like faulty traffic lights stuck on green in all directions.

Investors were happy to drive through them and luckily they missed the carnage. But eventually their luck ran out and they’ve run head on into a semi-trailer.

Which is what makes headlines such as this sent in by Money Morning reader Karl all the more worrying: “Lifting rates will not stem rising market.”

The article opens with, “SOMEWHERE amid the fuzzy logic that drives the Reserve Bank’s interest rate policy is the notion we have a housing price bubble and that raising interest rates will deflate it.”

Sadly, in the short term the writer Terry Ryder is probably right. For a time investors and people will ignore higher interest rates because they assume it to be a sign of a positive economy. But taking that attitude is no different to what’s happened to the Greeks.

Whichever way you look at it, it’s a manipulation of interest rates. And despite the fact that interest rates are rising you shouldn’t forget that they are being kept much lower than the free market would otherwise have set them.

Rising interest rates should mean that it’s time to stop spending and it’s time to save. However, because of the entrenched idea that rising interest rates means a positive economy, individuals have been brainwashed by the mainstream commentators into believing that higher interest rates is also a good time to borrow and spend.

But don’t forget, despite Australian interest rates being higher than the official cash rate in other economies, they are still being kept artificially low.

And because the Reserve Bank of Australia (RBA) is keeping rates low, it’s masking asset bubbles and convincing investors and individuals that more can be borrowed – especially as rates are below ‘normal.’

Just as the Greeks were convinced to borrow more when their interest rates were kept artificially low.

The five-year chart above provides a perfect example of how a bubble can only be suppressed for so long before it eventually bursts.

It may not look like a bubble bursting because the chart shows the yield going up. But just remember, the higher the yield the higher the risk. And also remember that bond prices react inversely to bond yields.

So if you were to see the price of bonds as opposed to the yield it would look something like what we’ve magically created using the expensive software package known as – hehem – Microsoft Paint:

Click to enlarge

You can see the bubble being artificially expanded by low interest rates, reaching a crescendo in late 2009.

But then the market reached a tipping point if you like. Investor psychology took over. It begins where one by one investors start to dislike the risk profile of a particular asset class.

Eventually one by one becomes ten by ten, then one hundred by one hundred, until the flood of investors exiting an asset is unstoppable.

You’ve seen that for yourself in the stock market.

And now you’re seeing it with Greek government bonds.

There’s no reason why this can’t and won’t happen in the UK, the US, or more troublingly in China.

And there’s absolutely no reason why it won’t happen to Australia’s asset bubbles either.

Cheers,
Kris.

^ Banana
* Coconut tree

But there is something I wanted to mention today…

It’s been a while since we caught up with any of our old broker pals – probably because we’re a bit of a pariah these days.

But when we do meet up over the $13 all-you-can-eat buffet at the RACV Club in the next couple of weeks we’ll try and eke out of them what kind of message is going around Australia’s broking rooms.

Our guess – and it’s only a guess – is that it will be similar to the message written by Michael Pascoe in The Age yesterday. It was under the headline, “Why a China slowdown will be good news.”

The whole article has a similar ring to the “house prices will plateeeeeeaaaaauuuuu” argument.

You’ve got to give it to the mainstream, apparently nothing ever goes down. Except when it’s already gone down of course. But don’t mention that because everything’s going back up again.

But a pretty good sign of the market getting near the top is when brokers and commentators start cheering 5% and 10% falls in the stockmarket, or when growth in the economy slows, “Oh, it’s OK, the market needed to take a break, it’s a good buying opportunity.”

Or, the economy “needs to pause, it should plateeeeeeeaaaaauuuu from here for a few quarters…”

Sometimes that’s true, but when the mainstream is singing it in unison, it’s time to be on guard.

But all that aside, there’s more to worry about that just whether Pascoe thinks a slowing China will be good news.

It’s the whole attitude towards China that’s even more worrying. The general idea that the Chinese are privy to a miracle formula that enables them to conduct not only the Chinese economy but the global economy in the same way that Andre Previn conducts an orchestra.

Take this quote from Pascoe:

“China knows the switch must be thrown to greater domestic consumption and less reliance on export growth. The comrades are taking steps in that direction. It would be nice if they took more of them and did so faster, but they are wary of rocking their bus – there are an awful lot of people jammed into it.”

Again, the assumption is that China can throw a “switch” and miraculously everyone in China will perform exactly as directed. That everyone will buy and sell in exactly the correct quantity and at exactly the right time.

Not only that but they’ll also pay exactly the pre-set price when they buy something and receive precisely the right pre-set money when they sell something. And when they’ve got that money they’ll hold it for just the right time before spending it on something else as directed by central planners.

Make no mistake, that’s what central planning requires. Heaven forbid if someone should buy two pairs of shoes rather than one pair, or a jar of jam rather than marmalade. Doing so would send the whole plan out of kilter.

And even worse, should a black market develop where goods and services are provided at a different price or quantity than the central planners decree, then there’s another spanner thrown in the works.

Not that the mainstream commentators consider any of that. According to them, central planners such as the Chinese or the Reserve Bank of Australia can just throw a switch and individuals and businesses just eagerly follow the determined path like brainless automatons.

To be honest, we’re not sure why the Chinese government have been placed on this pedestal. We can only think that the mainstream believes because China operates a fully coercive economy, that it can order people about at its whim and therefore economic success is assured.

The reality is far from that.

No economy can be centrally planned continuously without it leading to an eventual total collapse. That the Chinese economy has managed to go on for so long is what’s really amazing.

But get something straight. I’m sure you’ve seen the impressive photos of the Shanghai skyline and the vibrant and bustling downtown areas. But just because yuppies in Shanghai are buying Rolex’s and Louis Vuitton bags doesn’t signify wealth any more than Australians buying a 150 inch plasma television or a seven-bedroom house signifies wealth.

Wealth and spending aren’t the same thing. You can have wealth without spending, spending without wealth and spending with wealth. Oh, and no wealth and no spending of course.

But to simply come to the conclusion that because some Chinese are spending on fancy watches and fancy cars that those individuals or the whole economy is wealthy is misleading to say the least.

The important thing to remember is that the Chinese economy has taken off, largely thanks to being able to provide western businesses with cheap labour and cheap production. But it has done so coercively.

For every fancy watch buying person in Shanghai, there’s thousands of others who haven’t curried favour with the government and are therefore left to suffer the consequences of a repressive society. A government created oppressive society.

And like any other coercive and violent government it has rewarded those it favours and hurt or destroyed those it dislikes.

But that doesn’t mean Western governments are no less discriminatory, just because Western governments have adopted minimum wage legislation. All that’s done is to push employment offshore into the lap of coercive governments. Where they own the means of production and force individuals to accept labour terms or… well, you get the picture.

Those left in the West unable to find work because they’ve been priced out of the market may not be forced to work in oppressive conditions, instead they become part of a permanent underclass relying on favours from their own coercive government.

A government that can turn the welfare tap on and off as it sees fit.

Without minimum wage legislation in Western economies, there would be less demand for cheaper overseas labour and less ability for socialist governments to control those individuals.

Besides, Western governments are no less guilty of giving favours to certain people and industries while simultaneously penalising those it considers to be less desirable.

So while Pascoe and the other mainstream cronies talk about the heroic Chinese government and its ability to flick a switch to point the economy in the right direction, they should remember that the switch flicking is not the result of free markets and free will.

It’s the result of coercion and violence.

I’ll make the point again, there’s much, much more to fear from putting more power into the hands of governments than there is from putting power into the hands of individuals. Yet people in the West have somehow become dependent and reliant and over-trusting of government authority.

The result is less freedom – as Shae will explain in Money Weekend tomorrow.

But to sum up, the idea that Australia can ride on the coattails of a booming Chinese economy forever is mistaken. Sure, take advantage of it while you can from an investment perspective – as we have in Australian Small-Cap Investigator and Alex has in Diggers & Drillers – but if you think it will last forever as the mainstream commentators seem to believe then I’m afraid you’re going to be sorely disappointed.

Cheers,
Kris.

We’re not sure that being down here in Frankston will add any different perspective to when we normally write from St Kilda, but you never know.

Anyway, we were gobsmacked by this quote we read yesterday afternoon…

“Prices would only suffer a small fall, they wouldn’t crash.”

That’s if mortgage interest rates hit 10% apparently – according to Martin North, director of Fujitsu Australia.

We’ll be honest, we don’t get what Fujitsu Australia is supposed to be about.

On the one hand their Mortgage Stress-ometer – or whatever it’s called – gains national headlines each time it’s updated. “Squillions in mortgage stress” is the typical headline.

But when push comes to shove, Fujitsu tells everyone not to worry because, “Prices would only suffer a small fall, they wouldn’t crash.” Well that’s alright then.

Which is a bit bizarre in our opinion. Thousands of first home buyers suckered into the idea that property prices always rise, and that now is the best time they’ll ever have to buy.

And that interest rates aren’t going above “normal” anytime soon. Then suddenly, the same economists tell us that the booming resources industry could see mortgage increase by 50% in the next two years.

Which is startling considering in February Fujitsu had a target of 4.5% for the Reserve Bank of Australia (RBA) cash rate by December 2010.

The last we looked it was already at 4.25% and there are still eight meetings of the RBA board to be held before the end of the year.

And even if the RBA does only give the cash rate a minor touch-up by the end of the year, our wonderful friends in the mainstream economist community have the RBA hitting the interest rate bottle hard leading into 2012.

“Interest rates heading for 10 per cent, experts warn,” says The Sunday Telegraph.

Ah, of course. If you think back over the last year or so, almost every mainstream economist told you that rates had to be low now, and that we can all worry about the negative impact of low interest rates some other time.

The important thing they argued, was to save the economy by spending as much borrowed money as possible.

Well, it seems they’ve now decided it’s time to break the bad news on what the future response will have to be.

As we’ve warned over the last two years – while mainstream economists were telling you to get drunk on debt and spending – payback day will come, and it’ll come sooner than you think.

Granted, some in the mainstream have warned about piling up debts for our children to pay off, but they’ve rather missed the point. That implies the payback won’t be for another 10, 20 or 30 years.

The bad news is, the payback has already started. Remember that $900 the Fairy Ruddfather handed out? Well, thanks to the interest rate rises – after many had been sucked in by mainstream propaganda – your $900 boost will have been wiped out by about now if you have an average mortgage of $300,000.

So, don’t worry about the kiddies being lumped with the debt. If they’re lucky everything will have gone bust long before they’re given the responsibility of paying bills.

See, thanks to the mainstream economic chumps, the boom and bust cycle continues. Not content with having built up the last boom, and then causing the last bust, interventionists are determined to lead you into another boom, predictably followed by another bust.

So, far their ingenious plan is “working.” Only a Grinch would claim the last twelve months hasn’t been a boom for both the stockmarket and the property market.

But don’t you dare pause for breath. Because James Kirby at The Age says, “Bullish brokers getting ready for a stampede.”

Kirby says that big name broker UBS has “lifted its ASX200 target for the end of the year from 5450 to 5550.”

Granted, it’s not much of a lift, but it means the broker reckons the Aussie market has another 10% up its sleeve before the year ends.

Is that reasonable? Who knows, but our advice is to make the most of any sharemarket gains while you can. And incidentally, to also lock in some of your gains from the last twelve months if you can.

That’s the advice I’m giving to Australian Small-Cap Investigator and Australian Wealth Gameplan members.

Let me make one thing clear. These mainstream economists who are spinning the party line about the Australian economy being robust and insulated from the rest of the world are just talking through their hat.

Remember, these are the same guys who not only utterly failed to see the global economic meltdown coming, but when it did they managed to convince most of the country that they had a solution to get out of it – borrow and spend.

And now these “geniuses” figure their wonderful plan has worked. It must have because the stock market is up and the property market is up, ergo, success! Trouble is, that little problem of inflation, higher interest rates and killer debt levels is less than two years from hitting the fan big time.

Right now it’s just simmering away, gnawing away at your wealth without you really noticing. And you wouldn’t notice because based on the stock market and property market your wealth is increasing – don’t believe a word of it.

But here’s their chance to show you how the next phase of the plan works. Surely it must be time to start fixing things after the so-called “emergency” measures.

Here’s the thing though. Isn’t it funny how there isn’t a single mainstream economist who is capable of outlining how everything will pan out. You’d think that with the amount of certainty they’ve had about the borrow and spend plan that it would be simple to give a logical breakdown of two things.

First, how this current period of depression will end.

And secondly, how their ingenious plan will ensure boom and bust economic meltdowns never happen again.

The only reason we bring it up is that on our side of the fence – the side that’s opposed the bailouts, the borrowing, the spending and the devaluation of money – there are plenty of economists who have not only explained how this depression will evolve, but also how it could be ended and prevented from happening again.

We had a discussion about this very thing in Editorial office last week. And tomorrow, in case you’ve missed us outline it before, I’ll go through again just how simple it is.

The problem of course, is that the only real solution involves the out-of-their-depth politicians and central bankers getting out of the way and not spending your taxpayer dollars.

For them, that’s not an option. Because if the general public find out that it’s the pollies and the bureaucrats that have caused the mess then suddenly the pollies and the bureaucrats will find themselves being kicked into touch.

That’s why they’ve had to blame the entire episode on capitalism and free markets.

And even as we write this morning, we see news that the Greeks are taking the cowardly route of accepting bailout money. It’s cowardly because it keeps the Greek taxpayer on the hook for billions.

When the much better and heroic course of action would be to default and start with a clean sheet.

Not only that, but the rest of the European Union is also being told to stump up the cash for someone else’s debt. And as far as we can tell, no one has thought to ask the German, French or Dutch taxpayers if it’s OK with them.

We wrote this analogy some time ago… It’s like finding out that your next door neighbour has got himself into a hole for $1 million, and then finding out that all the other neighbours in the street have arranged for you to pay out his debt.

What would your response be to that? Thought so.

Then why is it any different if the decision is made by a government rather than your neighbours. In both cases it’s expropriation of your property to pay off someone else’s debts.

Yet governments can get away with it.

Make no mistake, Greece is likely to be the beginning of the next debt meltdown rather than the end of the last one.

Cheers,
Kris.

“Property boom spurs spending spree” – The Age

“Big four banks gorge on house mortgages” – The Age

“Mortgage supply will not meet demand” – Banking Day

“‘Fair chunk of salary’ goes toward debt” – News Ltd

“Lending rates on way to boom levels” – News Ltd

Obviously if the Australian housing market was susceptible to the same risks as overseas housing markets then those headlines would set alarm bells ringing. Fortunately, as we’re told endlessly by the property spruikers, “Australia is different.”

So there’s no need to worry.

Instead, you can sit back, relax and follow other home borrowers that according to The Age are “taking out bigger mortgages to help fund the purchase of big-ticket items, from new cars to holidays.”

Thank goodness property is so productive. Because it will be able to pay off the new car and holiday without any effort at all.

Home borrowers just need to wait for the house price to rise further and then they’ve effectively bought the car and holiday for free. In a way, we suppose many home owners are just taking a leaf out of the central bankers’ play book.

They are monetising their debt. Printing dollars on the back of an home valuation by banks that are desperate to keep the bubble pumped.

It makes you wonder why people bother working when each home in Australia has a goose laying a golden egg in it every day.

But anyway, we’ve banged on enough about the housing bubble over the last two years, so we thought it was time we took a different approach.

I mean, not all property bulls and investors are spruikers. They invest in property because they truly believe house prices always go up and will continue to do so into the future.

But not only do many property investors have this rosy view of the property market, but they also have a negative view of the stock market. Why? Because of course they see the share indexes that fell 50% in 2008, and which are still a good 20% or more below the peak.

They also look at the same indexes and note that it’s barely above where it was five years ago:

Contrast that to a chart of the Australian Bureau of Statistics (ABS) price index of established houses in 8 capital cities:

One shows hardly any gain – ignoring dividends – while the other shows a 40% increase in five years.

And if we take the ABS numbers back another couple of years then the picture looks even better:

That’s almost a ‘doubler’ in less than eight years. To be precise, it’s a 90.5% gain with no discernable correction. As for shares over a similar period:

Well, actually that’s pretty good too. In fact, just using that chart we can claim that over a seven-year period from 2000 to 2007, share prices more than doubled. And for the ten-year period of 2000 to early 2010, share prices have gained by 66.67%.

So despite the risky nature of the stock market, and despite the 50% fall through 2008, share prices are still considerably higher than they were prior to 2004.

And naturally we should consider dividend payments paid by shares. Because unlike paper gains in housing – and even paper gains in share growth – dividend payments are actual cash payments being received by investors.

It’s money going straight into your bank account.

But does that mean share investing isn’t risky because the value doubled between 2000 and 2007? Does that mean share investing isn’t risky because the value gained 66.67% during the last ten years? And does it mean that share investing isn’t risky because the S&P/ASX200 has added nearly 60% in the last year?

Of course not. By anyone’s judgement share investing is risky. Anyone who tells you it isn’t risky should be ignored. And you should rightly label them a share spruiker.

Although if we were being devious, it’s possible for us to easily create an image of a risk free Australian stock market by simply cropping the above chart to look like this:

Ta-da. Like the ABS chart of house prices, there are a few ups and downs, but largely, over the five year period it would be easy to make the case that share prices always go up. Not only that, but they double every five years.

Presented with that evidence wouldn’t you be keen to leverage to the hilt as much as you can? Ask Storm Financial customers about their experience.

But knowing what we know about the stock market performance either side of that snapshot, we know that to claim stock prices double every five years would be quite misleading.

And here’s the thing. We also know for a fact that residential housing is just as risky as shares. There’s statistical analysis that tells us so.

But here’s something else we also know for a fact, residential housing comprises a much larger proportion of an individual’s asset base than share market investments. We can estimate that based on the total value of Australian residential property being over $3.5 trillion, while the Australian stock market capitalisation is around $1.3 trillion.

What else do we know? Well, as I pointed out in yesterday’s Money Morning, leverage can be super dangerous. Especially when you’re getting 100-to-1 leverage in the stock market through derivative instruments.

But, it can be super lucrative too. You can make a big return at the risk of making a big loss. I’m sure you’ve heard the saying about leverage being a double-edged sword.

And there’s little doubt that increased leverage helps to extend gains to levels that otherwise wouldn’t have been achieved, and conversely helps to extend losses to levels that otherwise wouldn’t have been achieved.

In other words, big leveraged positions in the stock market arguably helped push share prices lower than if there was no or less leverage.

You can get a good picture of that by looking at the Reserve Bank of Australia numbers on margin lending.

The numbers show that as of December 2009 there was $19.2 billion of margin lending outstanding on the Australian stock market. And that the lending was secured by over $53.9 billion worth of shares.

That’s in comparison to December 2007 when there was $37.7 billion of margin lending against $92.8 billion worth of shares.

But look at our cropped picture again:

And now consider the margin lending numbers for each December between 2002 and 2009: $10.7 billion, $12.5bn, $15.1bn, $19.8bn, $27.9bn, $37.7bn, $21.0bn, and $19.2bn.

In other words, the risk taken on board by investors grew as prices continued to rise. Sound familiar? Then what happened? Prices plunged and borrowers were forced out in a mad panic selling frenzy. Uncropped, the chart looks like this:

Doubtless by December 2010, margin lending numbers will have risen and more investors will be taking more risks.

Anyway, at the time we can estimate that margin lending by individuals accounted for about 2.5% of the total market capitalisation of the Australian stock market at the peak. Now, remember, the sole purpose of share investing is well, to invest money. Unless we’re otherwise mistaken there’s little other use for shares apart from as an investment. You can’t live in a share or eat it or wear it.

Now, before we go on, just remember what we’ve said. Investing in shares is risky. Investing in shares using leverage is risky. That the price of shares can fall as well as rise. And that leveraged share investments can have a bigger impact on the price of shares than unleveraged share investments.

We’ll make one other point before we continue. We’re not factoring in institutional investors here such as managed funds or hedge funds where leverage may also be used. We’re simply looking at individuals. Just to make that clear.

Now let’s take a look at something else. As I’ve mentioned, it’s known that the total value of Australian residential real estate is around $3.5 trillion. And we’re also told that there’s about 30% of home owners with a mortgage, about 30% without a mortgage and the balance is rented accommodation – a lot of which we’ll guess is mortgaged by landlords due to the tax benefits.

Well, according to the RBA, as of February this year there was $766.5 billion of lending against owner-occupied housing. And a further $326.8 billion against investor housing.

So all up you’re looking at nearly $1.1 trillion of borrowing by individuals against the value of homes. Or, in percentage terms, about 31.4% of the residential housing market is leveraged.

And to put it another way, housing borrowing is about 57 times greater than borrowing on shares.

What we can say from this evidence is that it’s crazy for property spruikers to decry the stock market as being risky without considering that Australian households on average have 57 times more leverage, and therefore 57 times more debt exposure to the housing market than to the share market.

Shares are risky. We concede that, and we’ve never denied it. However, we believe that property spruiking has made the Australian property market just as risky – in fact statistical analysis confirms that.

So whenever a property spruiker tells you how risky the stock market is, you should take note, because they are probably right. But what you should also take note of is their silence on the risk of housing.

So as we move full circle in this article, we come back to the beginning, and we look at those same five headlines again:

“Property boom spurs spending spree” – The Age

“Big four banks gorge on house mortgages” – The Age

“Mortgage supply will not meet demand” – Banking Day

“‘Fair chunk of salary’ goes toward debt” – News Ltd

“Lending rates on way to boom levels” – News Ltd

Should we still breathe a sigh of relief that Australia is different to the rest of the world? Or should we hold our breath in anticipation of perhaps the biggest property bust the world has ever seen?

Cheers,
Kris.