Baldinvestor.com

Insights into behavioral investing on the Australian share market

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Australia blinded by the debt

Baldinvestor is reading yet another book on financial crisis - and looking to compare previous crisis conditions elsewhere to that prevailing in Australia now. The book basically states that financial crises are always caused by too much debt - by debt accelerating faster than growth leading into the crisis and usually when we have greater than 150% debt to GDP.

Lets look at Australia. Frankly, we  think the leaders of Australia either do not know what they are doing or are so greedy and corrupt that they do not care. Australian private debt basically doubled from 2005 to 2009. This is phenomenal growth in debt. Most world countries deleveraged heavily after the GFC , and Australia had a small drop. Right now, although not as fast a rise, private debt according to Trading Economics is above its GFC high at 1 trillion.This represents a debt to GDP ratio of 205%. It is clear that this is well in excess of the conditions required for a crisis. It looks like pre GFC debt in the US was maybe $10 trillion in a population of cerca 300 million - compare this with Australia with, I think $2 trillion and a population of cerca 27 million. Australias position looks much more dubious.

Australias population is struggling with their debt load.  Wages are stagnant so we cannot see how it is possible for further increases in debt. This means that house price growth must slow, and if the path to riches is coming to an end, surely the many property investors out there who are not making money will look to off load their property assets. This is Baldinvestors logic, whether right or wrong. Of course the government can step in and come up with some other hair brained scheme to push property prices up, as housing construction is the governments holy grail. Australia government debt is one of the lowest in the developed world, but this is simply because we have managed to avoid a financial crisis thus far.

Australian banks debt is made up largely of mortgages, so if house prices take a large drop - banks are under pressure. Demographia released its latest report listing all Australian capitals as severely unaffordable and Sydney on a price to income multiple of a ridiculous 11. Even if the government continues to flood the country with immigrants - surely these prices must restrict all but the richest few from buying a property. Just to save a deposit would have to take the better part of a decade on a median salary.

Professor Steve Keen who researches crises has gone silent again, but his choice to move overseas reveals his disgust with the governments handling of Australias economy - his view is that a collapse is coming and it is being worsened by actions of the government. He cites a solution as being debt forgivenesss - we agree but are unsure how this can be implemented fairly. Also if this were to eventuate, precious metals would benefit hugely.

Bald investor thinks this is all totally irrational and doesnt make a scrap of sense. But who knows how much longer it can continue? We think Australia is in plenty of trouble in the near future. 2020-01-22
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