Market may fall bellow 5,200 !!!

It is interesting how the experts change their minds. At the start of the year there was all this ‘positive’ vibe going on about how the stock market was going to crash through the 6,000 point barrier by the end of the year as it clawed its way back to 6,800 where it was before the GFC hit back in 2007/2008.

Now the ‘experts’ are saying that the market could fall below 5,200 in October due to the financial woes currently being experienced by Australia at both the federal and state levels. In fact there is one theme from the experts during September claiming that a third of the listed companies are teetering on the end of financial failure.

There is also the Reserve Bank’s well reported concerns that the real estate market is overheated and telling banks to tighten up lending policy. The Reserve is signalling that the next interest rate move has to be upwards and that this is likely early in the new year.

And now there is this concern that the top 200 companies in Australia only pay about 10 percent in tax, when the corporate rate is supposed to be 31 percent from the first dollar of profit. But these companies have all kinds of tricks and moves that allow them to play with the profit reported or deductions applied that then brings their effect tax rate down to 10 percent.

Some corporations are managing to pay just 3 to 5 percent tax.

While companies in Australia are making bigger profits than ever they are paying less adjusted tax than they were paying ten years ago!

I pay 35 percent tax of every dollar I earn. How can this be fair?

BarryMark

A more-depressing-than-usual weekend Financial Review

I will try and make this really quick and won’t waffle on about anything too much. At the start of this year I actually decided I was not going to do any ‘economic’ postings anymore, but after flicking through this weekend’s Australian Financial Review—as I sipped my way through a bottle of Jacobs Creek Chardonnay Pinot Noir Brut Cuvee—I just could not resist.

Regular readers will know that I often refer to the Australian Financial Review (AFR) as ‘the most depressing paper in the world’. In fact, as I actually read very few other papers, I have no relative idea how depressing it is compared to all the other paper in the world. But I am pretty sure it is at least ‘the most depressing paper in Australia’. But I do like it, and I buy it mostly every day and try very hard not to miss the jam-packed seriously-depressing weekend edition; even though it costs me $3.30. Yep! I kid you not. $3.30 for a paper.

Anyway … back to this weekend’s edition … Saturday the 15th March, 2014.

Full of depressing news really.

So very quickly . . .

It seems we now have a rental glut in Perth WA. This is after about three years of being told that Perth was heading for a severe housing and rental shortage. The glut is especially evident in the ‘apartment’ category where, it seems, there are about twice as many apartments available (or about to become available) than there are people who want them. Not a good story for anyone who has, or is about to, invest in apartments.

“Global uncertainty hit local shares” whereby local they mean ‘Australian’ shares. So the share market has taken a 2.8 percent hammering and one of the key reason is the current global uncertainty—which decoded means the trouble between Russia and the rest of the world over Ukraine. Did you know that some of the largest nuclear reactors are in Ukraine, and in fact the largest nuclear reactor in Europe is in Ukraine?

While the real estate market is generally trending upwards over in the eastern states and for Australian in general, property prices continue to trend down in Western Australia with Perth prices falling by 1.1 percent so far this year. This follows a 2.8 percent fall in the average property price in 2013. The next item might explain part of the reason for this.

The price of iron ore, the primary source of income for all of Australia (indirectly or directly), continues to trend down. I think it would be safe to say that within my remaining lifetime—assuming I get to live at least another 10 years—we are never going to see iron ore get back to anything like its previous peak of almost $190 a ton. We will be lucky if it manages to stay above $100 a ton for the year. The only way that the Big 3 iron ore exporters (BHP Billiton, Rio Tinto, and FMG) are managing to make useful money from iron ore is by doubling (and more) their production. Even then, with double the production, they are only making about the same profits they were making three years ago (even though they are shipping twice the product).

They are building and selling apartments in Fitzroy (Melbourne) that are 33 square metres! There is a bed, a built-in wardrobe, a toilet and shower, and a wee kitchen area. All squeezed into 33 square meters. My kitchen and family area is about 41 square metres (I just measured it). I remember seeing about ten years ago how people in Japan were paying rent for tiny ‘apartments’ that just managed to fit a bed in. I never thought I would see something similar in Australia.

On top of the iron ore price trending down the world banks are downgrading China growth. There is no longer any optimistic talk of China returning to double-digit growth in 2014/2015 like we were hearing and seeing at the last quarter of 2013. Now the thinking is that growth in China for 2014 is more likely to to return to pre-2008 levels and be around 7.8 percent for 2014 and possibly under 7.0 percent in 2015 with a possible up-tick in 2016.

The Australian taxation system needs ‘massive’ reforms if the Australian government is going to be able to fund basic services, and provide much needed infrastructure repairs and upgrades, over the next ten years. To me this is code for saying ‘taxation has to go up wether we like it or not’. So how will they increase the taxes? Increasing the GST seems like one of the most popular (with ‘them’) options. But increase it to what? From 10 percent to 12.5 percent, or just go directly to 15 percent? Another option for saving/making money is to increase the pensionable retirement age to 70! Crap! I will have to work at least 10 more years. Another option being considered is to remove or modify the leveraging for investment properties.

The government initiated MySuper plan was supposed to make superannuation simpler and cost less. If the various articles in the AFR are correct (there are two or three of them) then MySuper has achieved neither. Most superannuation now has added complexity and the costs of having superannuation have increased. MySuper would appear to be another complete failure, but I am no expert on superannuation and am simply taking what I have read at face value.

Okay. I hope I kept it tight and brief and I promise to try really hard not to post much, if only once a month, on the state of the economy.

BarryMark

Are you paid too much?

In today’s Australian Financial Review there is an item on page 19 titled “Are you paid too much”. In this item they list the average annual incomes of a number of professions and the underlying inference is that some professions are being paid too much. This results from the recent government decision not to provide financial assistance to the local canned fruit industry and in particular SPC Ardmona.

One interesting number in the article is that the ‘average ordinary-hours wage in manufacturing’ is $67,000 per annum. This is about $32.21 per hour based on the notional 260 day working year and an eight hour working day.

Some of the incomes covered are:

  • Psychiatrists pick up $208,00 per annum which is close to $100.00 each hour worked.
  • Crain, hoist, and lift operators who get $159,000 per annum or $76.44 per hour.
  • Mining engineers who make $140,000 per annum or $67.31 per hour.
  • Barristers who average $121,000 a year or $58.17 an hour.

So. Are you getting paid too much?

Another chart included with this article shows that the ‘average weekly earnings for full time employees’ have increased between 1994 and 2012. These numbers are:

  • The top 20 percent of earners have enjoyed an average weekly wage increase of 45 pecent over that 18 years.
  • The bottom 20 percent have picked up an average weekly wage increase of 26 percent over the same time.

All numbers are before tax and are (obviously) in Australian dollars.

As a complete aside, and this is not covered in the AFR article, the top 20 percent of earners have had a 45 percent increase in income over the last 18 years and yet in that same period house prices have gone up how much!! That would be about 350 percent!! Anyone but me see a problem here?

BarryMark

HSD: Property predicted to fall 50%—Let's hope not

Anyone scanning over News.com.au early last week would probably have seen the article "US demographer predicts hit to Aussie home prices" where US demographer Harry Dent warns that house prices in Australia could fall by as much as 50 percent over the next three years. This story was picked up by numerous new sites. You can check the the source item at AdelaideNow here.

Mr Dent, who apparently accurately forecast the 2008 global financial crisis, points out that property prices in Australia are massively overpriced no matter what pricing principles you apply. Additionally many thousands of people who simply cannot afford it have ignored all the basic ground rules in order to buy property.

His theory is that the economic and real estate 'bubble' in China is getting close to bursting and that Australia will be hit hard when it does. He asserts that speculating on real estate at this point is crazy.

HSDPropertyDown50percent

As a home owner nearing retirement I sure hope he has this all wrong.

BarryMark

Tapering starts, dollar goes down, share market goes up . . .

Within hours of the American Federal Reserve announcing that it was going to begin ‘tapering’ (i.e., cutting back) on its quantitative easing programme (i.e., pumping huge gobs of money into the American banking system) the Australian dollar corrected back to around 88 cents. So the dollar rate correction that our own Reserve Bank has been trying to achieve with almost two years of interest rate reductions happened within seconds of this tapering announcement.

On the morning of the day after the announcement our stock market jumps up by over 200 points, and on the second day it climbs a further 60. And the expectation is that the only way is up for our stock market over the next few trading months, especially for resource companies.

The stock market goes up because a lower American dollars means instant higher profits for all the resource companies. At the stroke of pen, well in these days at the push of some computer buttons, all the resource companies are now going to make something around 7.5 percent more money out of every tonne of ore they ship—assuming our dollar stays at around 88 cents.

This just goes to illustrate the brutal and immediate impact of American economics on Australia (and many other countries as well).

All those cash interest rate drops by the Australian Reserve had basically nil effect on the exchange rate. America decides to taper its quantitative easy programme by about 12 percent, and down plunges the dollar.

Another thing this does is totally take the pressure off the Australian Reserve Bank for any further cash rate reductions. With the dollar down at 88 cents they could even contemplate starting the get the cash rate back up to a healthy number. Something around 5 to 5.5 percent from the very low 2.5 percent where it sits now. Especially as this is just the beginning of quantitative easing, which means that the American Reserve plan to continue reducing easy moving forward—assuming nothing goes wrong with the American economy.

So the dollar should fall further with each slice of easing.

As they always say, 2014 is going to be interesting. There is a view that by the end of 2014 our stock market could make it all they way up to 6,000 points. This will still be 800 points lower than it was in 2007 before the GFC, but it will finally be getting almost back to where it was.

BarryMark

Problems looming for baby boomers downsizing?

Most weekends I get the Australian Financial Review (AFR) Weekend Edition. I am not sure why. Lately it is usually a relatively depressing read.

A theme spread across three pages in this weekend’s AFR is that the baby boomers are going to be in for some disappointment and stress when it comes to selling their “big” homes to downsize.

For those that have not been paying attention, baby boomers are those of us born in the heady years just after World War II—sometime between 1946 and 1964. Apparently us boomers have enjoyed long-term economic boom times like no generation before or any generation after—I say again “apparently”.

Well it seems the looming concern is that as us baby boomers start to want to sell our “big” homes and downsize we are going to impact the housing market; in a bad way. The thinking is that as this flood of houses hits the market that an already loaded market will become overloaded with properties. On top of this we will all be expecting to get more for our “big” houses than they are worth in this nervous post-GFC era.

On top of this the current generations don’t have the funds or job security to purchase these properties; plus they are less interested in “big” houses than us baby boomers were. New buyers are not interested in ‘formal’ dining rooms or front lounge rooms, and in many cases the ‘games room’ is gone (possibly replaced with a somewhat smaller theatre room). The average free standing house being built now is around 30 percent smaller than in the mid-1980s and the average suburban block of land is 45 percent smaller (i.e., very close to half the size).

So—the thinking is—that this all adds up to lots of overpriced houses on the market that nobody is buying, which, in a supply and demand versus price market means that something rather unwanted is likely to happen. Smaller properties that the baby boomers are keen to move into will go up in price; but—and this is the gotcha—they won’t get the money they were expecting to get for the property they are selling; if they can sell it.

A collateral effect of the smaller properties going up due to demand by the boomers is that they will be pushed further out of the price range of the current generations of home buyers.

When is this likely to start happening? Assuming the various writers in the AFR have it right then we are just starting into the leading edge of this scenario now and the problem will gradually heat up over the next five years and peak around 2018 through 2020.

HousePriceBarChartA contributing factor is that for the baby boomers when they bought their “big” house it probably cost about 1.75 to 2.5 times their annual income. For younger folk buying a house today (in Australia) it is going to cost them from 5 to 7 times their annual income (based on the average single full-time annual income of $81,790).

The recommendation put forward is that boomers looking to downsize in the next few years should review what options they have to buy their downsized house now.

While all this seems to make sense I am not so sure of the outcomes. I plan to try and keep on top of this. I am a baby boomer and I am looking at downsizing options in the near future.

Income figures were pulled from the Australian Bureau of Statistics site. The 2012 figures are for November 2012. House price figures are from the REIWA chart “Perth House Prices 1974 – 2012” (here).

Another interesting observation is that while the average income has done only slightly better than double from 1985 to 2012, the average cost of a house has increased by 13 times. This almost seem impossible. It certainly doesn’t seem right.

BarryMark

Titbit: House prices ups and downs; Perth prices fall in Q3

The house price numbers are already in from the September 2013 quarter. If you owned an ‘average’ house in Sydney or Melbourne then it is likely your property increased in value by a useful 1.3 to 1.8 percent or about $10,005.

Sadly for the rest of the country house prices fell with Queensland suffering the biggest falls, and Perth and Hobart suffering the second highest falls.

For those of us with an ‘average’ property in Perth we could expect to get about $8,500 less for our property than we could have got in the June quarter—assuming we could find someone to buy our house.

On the upside for Perth more properties were being sold in Q3—albeit at lower prices.

With the betting about 50:50 on whether the Reserve Bank will drop the cash rate lower than 2.5 percent this could be the end of the interest rate reductions. About half of the experts are tipping that the next rate move could be upwards even though the Australian dollar remains much higher than the Reserve Bank would like to see it.

The big problem for Perth is that new home starts are still at record lows. So while established properties are starting to move because sellers are now prepared to drop their asking prices, the new housing stock becoming available is still not keeping up with current demand. Investors are being very cautious about building new homes due to the huge drop in resource projects and the general shocking state of state finances in Western Australia; and prices—especially for land—are still too high for your average couple to consider committing to building a new home.

To give you some idea, in relative terms to the population new home starts are only about 50 percent of what they were in the 1980s. You can begin to understand why builders are discounting new homes so much—but it is the cost of land that is making it so hard.

BarryMark

I said that: Stock market still has a long way to go to get back

ISaidThat-SmallI came across this in Saturday’s Financial Review today and I just had to post it.

This is what I said just three posts ago—well almost.

This snippet comes from the Market Monitor column by Phillip Baker which can be found at the bottom of page 27 in the Smart Money section of the Weekend Review. The article is titled “Gains lose lustre in the cold light of inflation”.

In my posting I pointed out that all this carry on about the Australian stock market reaching its highest levels since 2008 is a bit misleading. While this may be true, the market is still a good 30 percent away from the peak before the Global Financial Crisis (GFC).

In his column (shown) Phillip Baker makes the point that when you index the pre-GFC market peak with the rate of inflation it works out that the market needs to get to 7,900 in order to be at the relative same peak it was at before the GFC.

Based on this the market is actually a whopping 50 percent behind where it would have been if the GFC had not happened.

So the impacts of the GFC are far from remedied, and on top of this the resources markets are struggling, the Reserve Bank can’t get the dollar down despite all the rate drops (every one of which financially hurts all retirees), there is the possibility of a real estate bubble that has a lot of analysts worried, the WA government is further in debt than any previous WA government has ever been, and the unemployment rate is going up every quarter.

In a nutshell: The economy is far from ‘back on track’ as the ex-treasure would have us believe.

BarryMark

Aus stock market still 30 percent away from pre-GFC peak

The Australian news is full of how the Australian stock market is up to levels not seen since 2008 as the All Ordinaries index peaks above 5,200.

This is all very well. But what they don’t tell you is that it is still 30 percent away from the 6,800 high it got to before the GFC hit.

The curious thing is that most other countries hit by the GFC have seen their stock indexes get back to their pre-GFC peaks. The American Dow index is well above its pre-GFC peak.

So how is it that that Australia’s index still has another 1,600 points to go before it gets back to the pre-GFC peak? Especially when, as the government loved to keep reminding us, Australia weathered the GFC better then almost any other country!!

Hmmmm!!

BarryMark

Titbit: Could the next interest rate change be upwards?

Readers of the Australian Financial Review (AFR) would not have missed a number of recent articles by journalists suggesting that the Reserve Bank have gone too low with the current cash rate of 2.5 percent. There have been a number of articles suggesting that the betting is about even money that the next rate adjustment could be upwards.

One big problem is that one of the key effects the Reserve was trying to avoid has now happened. House prices are trending up. Not so much in Western Australia, but certainly in New South Wales and Queensland.

But, on the other side of the coin, the Australian dollar is still well above the ‘perfect’ 86 cents per US$1 that was the target for the Reserve. Today the dollar is still up in the relative lofty heights of 93 cents.

Also the unemployment rate across Australia continues to climb and is threatening to go above the 6 percent mark. A further reduction in the cash rate might help keep the unemployment rate stable, if not lower it slightly. Maybe. Possibly.

In addition the big retailers continue to announce declining profits. Almost all of the big retailers have now suffered three years of end-on-end profit declines.

On top of this household debt is climbing again.

And every reduction in the cash rate hurts all those people who are retired or are semi-retired.

What a mess. I am glad I don’t sit on the board of the Reserve Bank.

BarryMark