It was almost eight years ago. I was sitting in a cafe at Manly drinking what back then would have almost certainly been a skim double shot flat white. I had just finished my last day of night shift which meant there was no point going to bed and wasting the day under the covers.
In fact it was too hot to sleep anyway and my mind would have been racing with all the opportunities that the four day break and the end of roster would present.Something did catch my eye though. The headline perched neatly between the half filled coffee cup and ash try (back then I smoked and it was even legal to do so in a cafe) Read "Zero Percent Interest Rates".
NSW property markets were moving off the back of pent up demand for housing and cheap money. I read the article, filed it under interesting in the big grey filing cabinet and went about planning a 4 day break.
Today, no ash tray and the coffee is filter brewed to a reasonable and drinkable strength. It's not Manly this time but the view is better.
David Koch has written an interesting piece in the Sun-Herald. He proposes that the latest round of interest rate cuts have gone too far, that mortgage stress is "real" and that alot of aussie families and businesses are in for an uncertain future – despite record employment levels.
The last two rate rises have had the desired effect. The westpac consumer sentiment index has just recorded its biggest fall since it started measuring the confidence of average consumers.
We are not the US (thank heavens) but David does go on to present some interesting facts about the US economy and the housing market.
* The fed could cut official interest rates to zero – off the back of a recent .75 percent cut
* In January the US fell into recession, which they predict will last until the end of 2010 or 2011
* By the end of this year 25 Million Americans will have negative equity in their home 0r in other words 20% of all homes and up to 7 trillion in Cap losses
* The Average house price will fall 25 Per cent but will halve in places like Miami and LA.
Now David is a local financial Journalist and certainly does not profess to be an expert on US matters. However he has drawn from the work of Paul Krugman, professor of economics at Princeton University. Professor Krugman is also a columnist for the New York times.
The US Fed has taken action. Recently becoming actively involved in the bail out of financial instutitions and making it known that it will print money if it has to in order to bail out others in the future.
Will US rates hit zero to help bolster this failing economy and avoid another great depression? It's possible but unlikely in my opinion.
Will the the Australian Reserve continue to raise the cost of finance in this very uncertain global market?
One hopes not – but given the strong economic data coming out of certain states and the serious pent up demand for housing – it's a 50/50 bet.
Have a great Day!
Don
Good Post Don
There is certainly some major stuff going on right now and we would be mad to think that we live in a vacum most people are quite indifferent to what is happening in the world economy a major bank in the UK had a run, HBOS had a scare last week and Bear Steins was an inside job for the boys.
The one bit of advise that should be heeded is work out your defensive position and make sure you take it in the short term as the domino effect has already started and no one knows where it will end.
The Us is not technically in recession yet which will be classified by the US statisticians only after it happens.
Yes the FED we keep hearing about them the Fed this the FEd that and unfortuantely they do control our destiny. I think they will keep printing money and we will see stagflation I dont think they have any intetion of saving the US $. Many many strong arguments either way some say that as lending is freezing up then defaltion like Japan. Some contrarians saying that the recent commodity correction is a sign of the return of the strong dollar I personnaly dont think so. Gold would need to be $2400 an ounce in todays money to equal its historic high.
There is also the question of socialing debt many in the Uk unhappy that the governemt bailed out a failed bank with taxpayers money effectively penalsing tax payers that did not speculate.. Moral hazard is all the buzz the FED and BOE very keen to further ensalve the tax paying populations in repaying the endless debt, the big boys are already out and have the takings.
expect to see more shocks, shorts etc this is manipulation watch out if we have an oil shock.
The Uk is about to cop what the US is going through and Europe is next.
I think for us in oz we will have a -ve impact but not as severe with our commodity and energy rich nation and new found alignment to the BRIC economies. Here is some stuff on it light reading for the Easter weekend.
Earth 2050: Population unknowable?
How many people will inhabit the planet before population growth finally levels off? The figure most commonly used is 9 billion by 2050, up from 6.7 billion today — an extraordinary number, considering that there were only 1 billion humans in 1830. (Right now there are a billion people just between the ages of 10 and 19.)
China's economy forecast to be world's largest in 2015 – regaining position it lost in 1890
Instead of using the exchange rate to measure the level of Chinese performance, which greatly understates China’s role in the world economy, Maddison uses purchasing power parity (PPP) to convert yuan into US dollars and finds that China accounted for 5 per cent of world GDP in 1978, 15 per cent in 2003 and that this is likely to rise to 23 per cent in 2030. -see detail on PPP in World Bank and OECD articles at bottom of page.
Prior to 1890, China was the world’s largest economy. Chinese Economic Performance in the Long Run: 960-2030 AD uses a comparative approach to explain why China’s role in the world economy has changed so dramatically in the last thousand years. It concludes that China is likely to resume its role as the world’s largest economy by the year 2015, thus regaining the position it had held until 1890.
China to double its coal consumption
China is opening the equivalent of two coal-fired plants a week, and within ten years it will double its coal consumption to three billion tons annually. To put that into perspective, the U.S. uses slightly more than a billion tons of coal a year.
Rio sees China, not U.S., paved with profits
SYDNEY (Reuters) – Global miner Rio Tinto Ltd. downplayed the impact of mounting U.S. economic turmoil on its businesses, forecasting strong demand for its main revenue earners led by a commodities boom in China..Rio, the world’s biggest aluminum maker and a top supplier of iron ore, copper and other industrial staples, said it was premature to say the price cycle for its products had peaked, though it was mindful of short term risks of an expected slowdown in the U.S. economy. “However, the U.S. is now somewhat less important in world commodity demand than it was five years ago,” Rio’s chairman, Paul Skinner, said in the report. But a sharp slowdown in the U.S. would have only a modest impact on growth in China and India, which are key growth markets, Skinner predicted. “Projections for Rio Tinto’s main product groups, iron ore, aluminum and copper, suggest that demand could potentially triple over the next 25 years,” Skinner said. “In the short term, with low commodity stocks and a likely continuation of supply side challenges, we expect solid global economic growth, led by China, to support strong increases in demand for most metals and minerals during 2008 and 2009,” Skinner said.
Steel demand to remain firm, despite Us banking problems
Global steel consumption is likely to continue to grow, in spite of the current difficulties facing the US financial sector. The strength of the steel markets in Asia and the Middle East, especially for new infrastructure and construction seem set to more than offset any weakness in the USA, and possibly Europe. China and the rest of Asian now account for some 60% of global steel consumption. It also said that Qatar may break the link between its currency and the weakening US dollar, as Kuwait recently did.
Middle East demand to suge on boom in construction
Steel consumption in the Persian Gulf region is rising sharply as strong oil prices fuel a construction boom, and demand could almost quadruple by 2012. The Gulf Investement Corp expects that the Gulf Co-Operation Council countries will be consuming 72m tonnes/year of steel by 2012. They used 19m t in 2006, according to International Iron & Steel Institute figures.
Oil Imports to Quadruple to India and China
Energy developments in China and India are transforming the global energy system as a result of their sheer size and their growing importance in international energy markets. “Rapid economic development will undoubtedly continue to drive up energy demand in China and India, and will contribute to a real improvement in the quality of life for more than two billion people. This is a legitimate aspiration that needs to be accommodated and supported by the rest of the world”, said Mr. Tanaka. “China and India together account for 45% of the increase in global primary energy demand in this scenario. Both countries’ energy use is set to more than double between 2005 and 2030. Worldwide, fossil fuels – oil, gas and coal – continue to dominate the fuel mix. Among them, coal is set to grow most rapidly, driven largely by power-sector demand in China and India.
Consuming countries will increasingly rely on imports of oil and gas – much of them from the Middle East and Russia. In the Reference Scenario, net oil imports in China and India combined jump from 5.4 mb/d in 2006 to 19.1 mb/d in 2030 – this is more than the combined imports of the United States and Japan today. World oil output is expected to become more concentrated in a few Middle Eastern countries – if necessary investment is forthcoming. Although production capacity at new fields is expected to increase over the next five years, it is very uncertain whether it will be sufficient to compensate for the decline in output at existing fields and meet the projected increase in demand. A supply-side crunch in the period to 2015, involving an abrupt escalation in oil prices, cannot be ruled out.
Iran, Switzerland ink key gas deal
TEHRAN — A Swiss company has signed a natural gas purchase contract with Iran, Swiss Foreign Minister Micheline Calmy-Rey announced here on Monday in a news conference with her Iranian counterpart Manuchehr Mottaki. Switzerland’s Elektrizitaetsgesellschaft Laufenburg (EGL) sighed a 25-year deal with the National Iranian Gas Export Company for the delivery of 5.5 billion cubic meters of gas per year.
“We have a strategic interest to secure our gas supplies and diversify our gas suppliers,” Reuters quoted the Swiss minister as saying. “We have to import all our gas and oil,” she added. She said the deal was “important in a long-term perspective” for both sides. She said in Geneva on Sunday, before traveling to Tehran that the agreement could help ease Europe’s dependence on Russian gas. The gas will be pumped to one of EGL's power stations in Italy
China: "To Get Rich is Glorious"
When Chinese Premiere Deng Xiaoping spoke these words back in 1993, that's when China unleashed an economic force unprecedented in modern history. That single, but pivotal, change in philosophy marked the beginning of China's relentless march to prosperity. And along the way, we are seeing a series of largely untold economic miracles:
Chinese consumer spending has jumped from virtually zero to nearly $1 trillion. There are now over 100 cities in China with a population over 1 million. The U.S. has only nine. China currently boasts 1.3 billion consumers. Plus, to stimulate foreign investments, Beijing is pulling out all the stops.
China plans to boost natural gas consumption by as much as 500 percent … invest nearly $4 billion in information technology and infrastructure … expand fiber optic networks … beef up mobile communications capacity … establish digital capable HDTV transmission … and use GPS technology for traffic control.China is building massive skyscrapers, highways, city expressways, subway lines, and an intra-city light rail. It's expanding the Beijing airport, improving water, electric, gas, and heating facilities. All across China, the equivalent of a city the size of San Francisco is being built every two weeks. This year alone, Shanghai (with 17 million people) will complete towers with more square footage than all the available space in Manhattan combined.Even more significant is that China just launched a rural initiative for over 800 million citizens. It plans to spend over $11 billion a year on rural education, irrigation, and medical services. And it's investing tens of billions to build 112,000 miles of rural roads — enough to circle the globe four times over. magine, just imagine, the raw materials and natural resources like cement, asphalt, tar and steel required to feed that kind of growth. That's why consumption of just about every imaginable resource is flying off the charts!
The Relentless Rise of India:
"It's Like China 15 or 20 Years Ago."Those are the words of a renowned emerging-markets investor that appeared in a recent issue of Time magazine. But that's just a tiny glimpse of India's almost unlimited potential:
India is currently home to more than 1 billion people and projected to surpass China as the most populous country on Earth by 2015. India's economy is growing 8 percent a year — the second fastest rate in the world. The Indian stock market has tripled in three years — creating a record number of billionaires. One reason: Foreign investors have poured $30 billion into India's stock market in 36 months. Just like China, India needs massive amounts of natural resources and commodities to feed its booming economy. And this is not just a passing trend. It's an economic appetite that could last for a long time.
But where will China and India find the commodities, natural resources, and consumer products to feed their unbridled expansion?
A "Back Door" to Asia: Brazil!
Elisabeth's mother, who lives in Brazil, recently turned 90. At the reservoir on our farm, her grandchildren and even their dog joined us in celebrating.Ever since Luiz Inácio Lula da Silva ("Lula") was elected Brazil's president five years ago, she's been saying he'd wreck the economy. Lula has done precisely the opposite. He's implemented the most disciplined fiscal and monetary policy the country has seen in half a century. He has boosted Brazil's currency by 69% since he took office in January 2003. He has increased the trade surplus by 225% from $14.1 billion to $45.8 billion. And he has paid off 100% of Brazil's debts to the International Monetary Fund.
To achieve all that, however, Lula had to pay a stiff price: Spartan government spending, sky-high interest rates … and, consequently, a relatively slow economy last year. So it's only now, in his second term, that he feels he's got a firm enough financial foundation in place to go for the real prize: Big growth. With that goal in mind, the Bank of Brazil has already slashed its benchmark interest rate 14 times, to the lowest level in recent history. And sure enough, the economy is responding:
Retail sales have jumped 8.5%. Capital goods production jumped 18%. And Brazil's key stock index, the Bovespa, which rose 32.9% last year, has gone on to new highs in 2007. In just four years, Brazil's president, Luiz Inácio Lula da Silva, has transformed the Brazilian economy and forged monumental deals with China. Brazil's trade balance has gone from an $8 billion deficit to a $46 billion surplus. Just recently, Brazil's state-owned oil company inked a deal to sell China 12 million barrels of crude oil.
How do you get all that oil out of Brazil when its infrastructure is not up to par? No problem for China. They've offered many billions to improve Brazil's port and railway infrastructure — so they can extract natural resources more efficiently. China is also building the world's second largest dam in the Brazilian Amazon. And energy from that dam will power mines that send raw material to … China. Brazil's natural resources are equivalent to those of the U.S. and Canada combined. But even those resources alone can't feed the needs of China, India, and all of Asia.
So these resource-gobbling giants are looking elsewhere too.
China wants 40 pct of oil/gas imports from Africa
China wants up to 40 percent of its oil and gas imports to come from Africa in the next 5-10 years, a Chinese industry official said on Monday. ""We wish to increase the imports, the oil and gas from Africa from 35 to 40 percent in the next five to 10 years,"" Zhiming Zhao, executive president of China Petroleum and Petro-Chemical Industry Association told reporters at an energy conference in Cape Town. China has embarked on a relentless investment drive in Africa to feed its economy, particularly in mining, oil, and gas. Despite objections to China's human rights record and talk of a colonialist agenda from critics, there have been a steady flow of big deals since President Hu Jintao announced a drive to boost relations with Africa in 2004.
China imported more than 30 million tons of oil from Africa in 2005, about 30 percent of its total oil imports. ""We have a very good relationship with Africa and in future we wish to find more places to put our investments,"" Zhao said of increased Chinese-African cooperation. Zhao said China had invested some 30 billion dollars in Africa's oil and gas industries. Among the Chinese investments in Africa's oil and gas sectors, Zhao mentioned Egypt, where China Honghua set up a joint venture with the Egyptian Ministry of Oil to produce drilling rigs. China National Petroleum Corp. (CNPC) has also invested in its first overseas deep-water exploration project off the coast of Equitorial Guinea, and was continuing its decade-long relationship with Sudan.
Three major Chinese oil companies CNPC, Sinopec, and CNOOC Ltd. are operating in Nigeria, Africa's biggest oil producer.
Vietnam's second oil refinery to have more Japanese business involvement
HANOI — Japan's Mitsui Chemical is expected to become the fourth partner of a joint venture to develop Vietnam's second oil refinery in central Thanh Hoa province. The Nghi Son oil refinery has been the subject of long negotiations between state-owned Vietnam National Oil and Gas Group (PetroVietnam) and its two existing partners, Japan's Idemitsui and Kuwait's Petroleum International, local newspaper Vietnam Investment Review reported Monday.PetroVietnam said last week that it expected a joint venture contract to be signed in early April. The Vietnamese group will hold a 25-percent stake with the three foreign partners dividing up the rest. The joint venture is expected to officially receive an investment license by June, and construction will start in 2010. The refinery with annual processing capacity of some 10 million tons is slated for completion within 60 months.
The project will include the oil refinery, refined and material factories, energy facilities, pipeline and storage systems, and an informatics system. In addition to LPG, unleaded gasoline, kerosene, jet fuel, diesel, and FO, the refinery is projected to produce bitumen, propylene and BTX as a raw material for the domestic petrochemical industry. Crude oil may come from the Su Tu Den (Black Lion) oilfield off Vietnam's southern coast, and imports from the Middle East. The Nghi Son refinery and the Dung Quat oil refinery, Vietnam's first refinery under construction in central Quang Ngai province, will contribute 70 percent of the country's demand for petroleum products by the time they are fully operational in 2015.
PetroVietnam is working on another plan to develop the country's third oil refinery in Long Son Island off the coast of southern Ba Ria Vung Tau province.
According to PetroVietnam, by 2010 the country's demand would be about 18 million tons of refined products, while Dung Quat refinery being able to refine six million tons of crude oil.Therefore, the three refineries must be completed by 2015 to meet the demand of about 20 million tons of products.
Great Post,
So Bardon should we be investing in coal, oil energies, gas oil etc from Aussie and not real estate speculation other than our PPOR ??
And Don I remember Japan we trying to give money to people at 1% and they still didn't want it, hhmmm I wonder?
D
Don, how do you effectively use those sorts of rates? Do you buy IP's with a variable rate? Correct me if I'm wrong but the variable rates are usually set a few points higher when the rates really hit rock bottom..?
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