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!

Prediction - Global Collapse Q3/4 2008

Yesterday we had a prediction that, of all things, property prices would INCREASE (yes, go up) over the next three years. This despite the credit crunch, etc, etc, etc.

The only logical conclusion for this is that "the world demand will continue to grow" (okay, that's my thinking anyhow) - which I think is bollocks. My prediction is that China is about to turn off the tap. It won't be completely shut off, but compared to now, it will be a trickle.

It seems obvious to me that the resurgence of China is largely off the back of the Olympics and the desire of the regime to "look good" before a worldwide audience. But what happens after August of this year? Once the spotlight has moved, why would they keep this up? We already know that they're facing a problem with inflation and they've mooted trying to curtail their rampant growth (back to 7-8% down from it's current level of 13-15%). That's a halving of current growth.

On the flipside, there's only so much of an increase in resource costs that China can stomach. It has no choice at present because they've got a deadline to meet - but once August 2008 has been and done, there will be nothing stopping them.

So, my (rather bold) prediction, is that China WILL start ramping back in the 3rd and 4th quarters of 2008 and that pull back will put the fear of god into the resources sector (which will already had started suffering thanks to global restraint thanks to the oil price) and prices will start to tumble. My guess is that we'll even see Oil come back to "sane" levels - but by then the rot will have set in. Confidence will spiral out of control, the resource sector will start shutting down "inviable" operations and places like Mackay, Perth, nay even Townsville will feel the effect.

Thousands will loose their homes and the damage to the economy will be unrelenting. So by the time resource prices are "affordable", the rest of the economy will be so scarred that it'll lie dormant for many years.

I still don't understand why EVERYONE seems so convinced that China will continue to act like a capitalist economy. How ANYONE can predict what they will do is beyond me - let alone speak with confidence that "they'll grow forever". I'm sorry, but it just doesn't happen like that. China MUST take a breather or they'll hurt their own economy and at 7% it's still "booming" - but when everyone expects growth to keep going up and up, well, we all know how well markets take that sort of news.

So, lets bring it on. Time has come to burst this bubble so we can all get back to normality (well, once we've all experienced the pain that is)...