Welcome to America’s Lost Decade

…Or should that be Last Decade?

This morning’s decision by the US Federal Reserve’s Federal Open Market Committee (FOMC) is the final act in American global economic dominance.

If the US economy wasn’t already terminally ill, then this morning’s news from the FOMC has pushed it into terminal illness. But before I get onto that, more revelations on the Aussie housing bubble…

In yesterday’s Money Morning we wrote:

“I mean, hasn’t the Commonwealth Bank just completed a global tour spruiking the Aussie housing market, claiming that the income to house price ratios are nowhere near as bad as many claim?

“Seeing as the whole point of the tour was to get investors to buy the bank’s debt for as low an interest rate as possible, it must surely mean the bank has failed to convince those investors about the security of the Aussie housing market.

“Higher interest rates means higher risk. International investors clearly view Australian banks and the Australian housing market as being a higher risk than the banks and the RBA would have you believe.”

It turns out, as usual, we were spot on. Because Steven Munchenberg, chief of the Australian Bankers’ Association (ABA) admitted it.

The Commonwealth Bank (CBA) has had to increase interest rates higher than the Reserve Bank of Australia cash rate movement because international investors fear an Australian housing collapse.

Here’s what Steven “Baron” Munchenberg had to say as quoted by Chris Zappone at The Age:

“Over the last few weeks, we’ve had a lot of international investors asking very detailed and probing questions about why it is Australia thinks it doesn’t have a housing bubble. Bankers were grilled at length as to why investors should not be worried Australia has a housing bubble.”

We can only dream about what the bankers’ answer was. But I bet I can guess… OK, say it with me slowly, “Because… Australia… is… different!”


In fact we’re certain that’s what was said. You only need to look at the quote in the Wall Street Journal article titled “In Australia, Signs of Overheating in the Housing Market”, from Michael Blythe, chief economist at the CBA. He told the WSJ:

“It’s a legit concern [housing bubble] given what’s happened in other countries, but we just think…” wait for it… here it comes… “…Australia is a little different.”

Ha, ha, ha… what a clown!

And if you didn’t think the housing bust had started yet, think again. And if you’ve hung your hat on the idea that house prices won’t fall because Australians love their houses more than the foreign Hun, then, er, think again on that one too.

Today’s The Age runs the story that “Stressed home owners sell up”.

The article states:

“Matthew Tregent and Sarah Zajac are looking at selling their home in Deer Park. They are not suffering mortgage stress – far from it – but many of their neighbours are, and it is changing the character of their street.

“‘It looks like there is a bit of hardship in the area. There’s a lot of houses that are going up for sale,’ Mr Tregent said of their relatively new estate.”

“We’re pretty much surrounded by renters now. Other streets in the estate are as well.

“Why we’re planning on moving is because we’ve been taken over by investors predominantly. It’s becoming, I guess, less desirable to live here.”

The descent into slums and the rise of the slumlord is what you’re looking at here.

Look, as you know, with prices this high it makes sense to rent. But the fact is, renters will typically take less care of a home than owner-occupiers, for the simple fact that the property isn’t theirs.

A renter couldn’t give a stuff about maintaining the property. As long as it’s liveable they’ll be happy with it.

And as for the landlord, well, any landlord worth their salt knows that the building is a depreciating asset. Why spend money on maintenance when all they’re really interested in is collecting the rent money and hoping the land value increases.

If that happens they can eventually flog the thing to a developer and walk away with a tidy sum. That’s the theory anyway.

And if as we believe, house prices fall, then there will be even less incentive for landlords to maintain the buildings. If they’re getting a zero net income and zero growth how likely is it the landlord will scrub the place up or give it a new lick of paint?

That’s right, it’s not likely at all.

But, at least it’s pleasing to see another nonsensical Aussie housing myth is being bust in the mainstream press. We’ve argued for some time now that Australians have no greater attachment to a home than anyone else.

There’s no “love” for housing in Australia. Maybe there’s a love for a certain lifestyle, and in some cases that means having a certain kind of house in a certain area… but if the cost to maintain that lifestyle becomes excessive then tastes will soon change.

I know it’s not exactly the same, but think about how many people “loved” buying vinyl records thirty years ago… and how many people “loved” buying CDs ten years ago… “Oh, we could never give up our vinyl/CD collection, we love it…”

Now walk into anyone’s house and their record collection is stored in a machine five inches by three inches – an iPod or something similar – and there’s not a CD or vinyl record in sight.

As I say, it’s not the same, but it proves the point that people change their tastes and their habits over time to suit the circumstances.

Housing is no different. If it costs too much and the expected growth isn’t there, then guess what, people won’t buy, they’ll rent. And if enough people in a certain area rent, then you’ll soon see the place turn into a low-value ghetto… the South Bank area of Melbourne is one area to watch for this transformation. But nowhere will be immune to it.

Even the toffy areas will succumb to the same plague.

Just to repeat, we’re not having a crack at renters. We’re not saying they’re slobs or that they’re lazy. It’s just that they behave how they should behave towards property that isn’t theirs – they don’t care for it as much. It’s as simple as that.

The Aussie housing bubble deniers can carry on as much as they like, the fact remains Australian housing is overpriced and heading for a massive fall. The spruikers can scoff and gloat and claim that people such as your editor don’t know what we’re talking about, it doesn’t matter.

Ultimately, nothing the spruikers or bankers say will be enough to stop the housing market from collapsing once the fall gathers pace.

But that’s for all on housing today, back to the Fed and its dopey money printing scheme…

I tell you what, for a bunch of people who are supposedly super-bright, what they’ve done is nothing short of criminally comical.

Over the past few weeks the Fed has been grooming the markets. It has tried to find out what the market was expecting the Fed to do.

It has been like some sort of weird auction where there are no bids. Or like two shadow boxers not punching each brains out. Instead the buyers and sellers are just mingling around giving vague but obvious clues:

“Sooooo, just supposin’ we printed $500 billion what would you say to that? Not that we will mind you, I’m just like, kinda askin’… OK, what about, say, $600 billion, what would you say to that? Not that we will, I mean maybe it’ll be more, maybe it’ll be less…”

And so the sad comedy routine continued.

The upshot of the Fed’s ingenious cloak-and-dagger mind games was that according to Bloomberg News this week, “Fed Will Probably Start $500 Billion of Bond Buys, Survey Shows”.

This was from a survey Bloomberg had sent to a bunch of Wall Street economists. Funnily enough, the New York Federal Reserve had sent a similar survey to bond dealers and investors the week before.

So we can guess that the response the Fed received was pretty similar to the response Bloomberg got.

Armed with the results of this highly scientific and well-thought-out survey – remember that Fed chairman Ben S. Bernanke is a former “Princeton University economist who studied the Great Depression” – what did the Fed decide to do?

We can only imagine that they hunkered down, cracked open the sarsaparilla, turned on the popcorn machine and…

Knowing that the market was expecting the Fed to print $500 billion of lovely new cash, and knowing that anything less than this amount would disappoint the market, guess what they did… go on, have a guess…

That’s right, the Fed announced this this morning:

“The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.”

See, that’s the kind of tactic that only a Princeton edumacation can bring you.

The market expects $500 billion, here, we’ll give ’em $600 billion.

That’s the extent of the brain power that’s gone into this. Trumping the market was the only goal.

If the market surveys had revealed expectations of $200 billion then the Fed would have given them $300 billion. If they’d expected $700 billion they would have given them $800 billion.

If the market had expected free cheeseburgers all-round the Fed would probably have given them two free cheeseburgers all-round.

So, what does this all mean? Are America and the rest of the world on the edge of a hyper-inflationary death-spin? Is it time to stock up on cans of baked beans and hotdogs?

Not so fast. That’s perhaps too obvious. Let’s pause and think about how this could all play out… I’ll get back to you with my thoughts on it tomorrow.


Kris Sayce
For Money Morning Australia

Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

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The radio statio I listen to in the morning had a soundclip from a couple of Yanks who printed a sign saying “Obama=Keynesian” and asked passersby what they thought. The clip was all replies arguing about where Obama was born, including the classic lady who said “you wait till November and you’ll find out we’re not as stupid as you think!”

One guy realised it had nothing to do with Kenya and accurately agreed with it from an economic viewpoint, but for the man in the street, there is no hope!

Peter Fraser

Yawn – you know after listening to the same prediction every day for over two years, I have to ask when is enough enough.

At what point should a loser lick their wounds and say “I was wrong” or do we need another hike to Mt Kosciusko.

How’s this for a reason why CBA doubled up on the RBA hike for borrowers of their mortgage products. Do you reckon it was a strategy to encourage more customers to take out home loans with CBA at much higher interest rates than Westpac, NAB or ANZ? Do you reckon it was to stop their current mortgage holders from packing up and leaving to go join one of their competitors? Ahhh probably not?Perhaps after a little soul searching and the realisation that following their recent worldwide roadshow to calm the horses of credit finance the international market is going to… Read more »

haha BB – a battle to LOSE customers. It’s an interesting business, banking.


cb, re your “thought exercise” from a previous post, it’s an interesting question and a great way to think about things. It sounds like it would have an easy answer, but I can’t think of one at the moment. Did you have any ideas?


BB – I like it, however I won’t believe it until CBA drop their “exit” fees to make it less painless to change banks. 🙂


Oops I meant less painful to change banks.


It’s way beside the point, but some sources suggest that sales of turntables (record players in the old parlance) are growing faster than any other type of hi-fi equipment. Of course ipods/iphone sales would be killing turntables stone dead, but they’re not considered to be hi-fi


oysterboy – c’mon now. After all they are still ‘A Bank’ and a thousand bucks is a thousand bucks after all in bankworld.