Prediction - House of Cards

Well, the trigger was wrong but are, as predicted, facing an economic meltdown in Q3/4 of 2008. We're seeing lots of bold predictions about how Australia should rise above this - and to a degree, I have to agree.

What I don't agree on, however, is that we'll be left "untouched". Whether we like it or not, housing prices in OZ are ridiculous. They do not represent "true value" or are sustainable at their current levels. Shit, on "Two in the Top End" last week, in the middle of nowhere we saw 3 bedroom shitboxes selling for $550,000 and higher. In Townsville, we're seeing 4 bedroom houses in the middle of a bog-standard estate asking over $1m.

No, on this count, I have to agree with Marc Faber that we're in a bubble and it WILL burst. Nay, it MUST burst. The downsteam consequence of this is not good - but it needs to happen.

What also worries me is the leveraged leverage that has been sold as a "sound investment" by some in recent years. We've been to a couple of these in recent years and it goes like this:

1. You have equity in your house - you can leverage that to buy shares
2. When your shares go up in value (and they will), you can leverage that equity and buy more shares
3. Repeat, rinse, spin

Of course, this is a fantastic system in a market going upwards. But in a declining system, it's a house of cards. All this debt is layered on asset values that no longer exist and at some point, it all has to come home to roost. My guess, the trigger point will be job losses. When some people start getting laid off or stood down, we'll have another run on shares and, worse, property - and it will all come tumbling down.

So, the next questions are "when" and "by how much"? When is a hard one. I suspect it'll actually come out of the resources sector first as the folks working in this game have leveraged the most (so have more to loose). We've already heard about delays to contracts for steel going into China - so once that comes back, it'll be on for young and old again. There was a report last nite that Woodside have already announced they will begin a freezing on new hiring - so that's not a great start. And, as expected, some of the newer entrants - who rely on inflated commodity prices to survive - are feeling the pinch. There will also be a swayth of mining ventures that are not viable at a more "sustainable" commodity price.

So, all we need now is for China to slow down a big, commodities to fall further and ... well, we'll all be fucked!