Mish's Global Economic Trend Analysis |
| Housing Question From Down Under Posted: 30 Oct 2010 12:29 PM PDT Ben from Australia has a wife who is wondering about the wisdom of staying in cash on the sidelines waiting for Australia home prices to decline. With and Email header of Advice for an Aussie, Ben writes ... Hey Mish,Response to "Down Under" Hello Ben, that home prices in Australia keep going up is all the more reason to wait. The bigger the bubble the bigger the crash when it happens. Home prices always revert to the mean. Australian home prices are standard deviations above the norm in terms of price-to-rent and price-to-wages. The bubble will pop and the crash will be spectacular, no doubt as soon as every conceivable person on the sidelines is sucked in. "No Bubble?" Don't Believe It The central bank says there is no bubble. Don't believe it. Moreover, I laugh when I read articles like No house price bubble: RBA RBA deputy governor Ric Battellino said today house prices in Australia, relative to income, were reasonable.What Battellino seems to be suggesting is to look across the Outback and average prices and there is no bubble. This is like suggesting there is no bubble in San Diego because there is no bubble in Danville, Illinois. Well, there may not be a bubble in the central Illinois farm belt, but not many people live in widely dispersed small farm towns of a few thousand people each. It makes no sense to measure prices this way. The bubbles in Australia are where the vast majority of the people live. Ben Asked "But I look at China and your comments about Australia (and Canada) getting belted in the fallout. Would you suggest anything other than putting everything in the bank? " His question is in reference to Misguided Love Affair with China; China's Massive Monetary Expansion and Crackup Boom. One thing Australians have going for them is treasury rates of 4.5%. The second thing is they do not have to worry about currency fluctuations, something that carry trade investors do have to worry about. Australia Dollar Weekly Chart  The Australian dollar has been on a tear. Yet, where to from here is of primary concern to carry trade players seeking 4.5% in interest but assuming the risk in the slide of the Australian dollar. Australians have no such concerns, and that does open up another play. Instead of sitting in cash, Australians can consider buying longer term Australian Central Bank notes on the expectation that when the housing bubble bursts, the RBA will respond by lowering rates. For someone living in Australia with expenses and wages in Australian dollars, long-term Australian Central Bank bonds looks like a very good opportunity. Those are my thoughts as to what looks attractive from this side of the ocean where 5-year treasury notes yield a mere 1.17% and 10-year notes a paltry 2.6%. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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| Mad Dash Into Junk Sets October Record Posted: 30 Oct 2010 12:56 AM PDT The mad dash into junk bonds continues. Please consider Junk Sets October Record, Mortgage Bonds Rally Sales of junk bonds in the U.S. set a record for October as returns topped investment-grade debt and more borrowers were raised than cut. Government-backed mortgage bonds may beat Treasuries by the most in at least 10 years.Lehman High Yield Bond ETF  S&P 500 Weekly Chart  Buy the Dip? The last two downturns in January and May of 2010 were buying opportunities. Will buy the dip work next time? Fundamentally I see no reason it should, but that does not mean it won't. I have been saying for 18 months that the stock market is unlikely to break hard as long as corporates are strong, but buyer beware, sentiment can turn on a dime. Extreme Sentiment We have a possible warning signal in that the corporate rally for the last two months has been US only. We have another type of warning signal with the CEO of MGM Resorts International proudly proclaiming "The bond market will get better." Will it? He does not know, no one does. Moreover, I see no reason to think it will. Finally, we have Richard R.S. Smith, head of high-yield capital markets at Royal Bank of Scotland's RBS Securities unit touting "We've pushed many of our clients into what we view as a very attractive market from a refinancing standpoint. We think it's going to continue as long as the U.S. government maintains a 10-year treasury rate below 3 percent." RBS just happened to pimp $500 million of MGM bonds rated CCC. This is exactly the kind of sentiment it takes to make a top. However, please remember that sentiment, no matter how extreme, can always get more extreme. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific. 
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