Big rise in number of Aussie millionaires

THE number of Australian millionaires has risen 34 per cent rise as the world’s wealthy recover most of their losses from the global financial crisis, a study shows.

Australian millionaires totalled 173,600 at the end of 2009, up from 129,200 at the end of 2008, the latest World Wealth Report by investment bank Merrill Lynch and consultancy Capgemini said.

That sees Australia rise to tenth in the world for number of millionaires, after slipping to eleventh in 2008.

The total wealth of what the report terms “high net worth individuals” (HNWI) - people with net assets of at least $US1 million ($1.15 million) excluding their home - in Australia was $US519.4 billion ($596.6 billion) in 2009, up 37 per cent on $US379.8 billion in 2008.

Managing director of Merril Lynch’s global wealth management division in Australia and New Zealand, Chris Selby, said Australians’ wealth benefitted from resilient gross domestic product (GDP) growth and national savings.

The main driver of wealth, however, was the rebounding share market, he said.

“After a horrible 2008 where (the market) was down almost 50 per cent, 2009’s growth was 33 per cent,” Mr Selby said.

“The millionaire population was a huge beneficiary.

“Australia has a very strong equity culture, so clearly the driving market capitalisations helped the wealthy.”

The US, Japan and Germany remain the world’s wealth powerhouses, home to 54 per cent of the world’s HNWIs.

Developing Asian countries posted the strongest growth in numbers of millionaires in 2009, led by Hong Kong and India.

That saw the value of the Asia-Pacific region’s HNWIs surpass Europe’s for the first time in 2009, at $US9.7 trillion ($11.14 trillion) compared to Europe’s $US9.5 trillion ($10.91 trillion).

The global financial crisis.Overall, the number of the world’s HNWIs and their value have returned to 2007 levels, indicating a recovery from

“Clearly it is as almost as though the year of 2008 never happened,” Mr Selby said.

A symptom of the crisis was a rise in spending on luxury items, such as cars, boats and jets, Merril Lynch senior vice president of investments in Australia, Peter Opie said.

Millionaires spent 30 per cent of their so called “passion investments” on those items in 2009, up from 27 per cent in the previous yea

Foreign funds no problem for savvy local banks: RBA
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THE Reserve Bank has declared that Australian banks are not too heavily exposed to volatile offshore funding markets and are among the best managers of risk in the world, which helped them survive the global financial crisis.

In a speech yesterday, the central bank’s deputy governor Ric Battellino said the major banks had become increasingly reliant on international funding markets because the establishment of the superannuation industry in Australia over the past two decades had reduced the size of the retail deposit market.

The banks are among the most active users of offshore markets, and account for nearly 40 per cent of Australia’s total foreign debt liabilities,

“There’s a natural tendency to believe that it is riskier for banks to borrow offshore than to lend offshore,” Dr Battellino said.

“Events over the past few years have shown that one activity is not intrinsically more risky than the other. It’s a matter of how the risks are managed.

“In the lead-up to the financial crisis, European banks were running very significant risks through their offshore lending, not only in terms of the credit quality of the US assets they were buying, but also in terms of short-term nature of some of the funding transactions that supported those assets.

“The US dollar shortages that keep recurring in global money markets are a manifestation of those funding risks. These risks were largely unrecognised and it seems not very well managed.”

Dr Battellino said the conservative practices of the Australian banks, compared with their troubled European peers before the downturn, helped the sector sail through the downturn.

“The Australian banks have long recognised the risks that come from their business model and in my experience are very focused on understanding those risks and managing them,” he said.

“This contributed to their relatively good performance through the global financial crisis.”

The current euro-zone debt crisis has caused costs to blow out on funding markets, and this is expected to have an effect on some of the Australian banks.

NAB and the Commonwealth Bank are fully funded for the next few months.

However, the ANZ Bank and Westpac still need to raise between $8bn and $13bn by the end of September.

The cost of raising five-year term debt has increased by at least 60 basis points in the past two months.

A SERIAL blogger who last year predicted the financial crisis has become a cult figure online for his forecast.

Edward Karan proposed on September 19 real estate prices in Australia would fall 40 per cent over two years from the first quarter of 2008.

“It’s too late, the course is set, the market will crash, its like a runnaway train (sic),” he wrote on news.com.au

“Expect a 40 per cent drop in prices once the bubble is fully deflated, this taking approx 2 years in duration. Tipping point is Q1 2008. This will cause the Australian Economy to go into recession. Sorry for the bad news, but unfortunately there is no escaping it now.”

Yesterday the Australian sharemarket experienced its longest losing streak, falling for an eighth straight day after fears of a US recession continued to brew.

Mr Karan’s forecast sparked heated discussion on news forums around the country, while the controversial blogger _ occupation unknown _ gathered a following of supporters and critics.

He signed off on December 18, on what he believed was the cusp of the financial storm.

“Folks the tipping point has arrived. As such this will be my very final post…My warning has been heard, and today the decline in Australia’s largest asset bubble will slowly but surely start,” he wrote.

“To my supporters, a big thank you. To my opponents, you were warned. Goodluck and goodbye to all.”

“Ed Karan, sorry to hear you’re leaving these forums forever,” bemoaned Sam Brown of Golden Beach.

“I look forward to the next two years - will be interesting to see how your prediction pans out. I suspect you’re right. In fact I’ve just sold my house and moved into a nice little rented flat. I’ll buy again sometime after 2010.

“Meanwhile I’ll be saving $20k per year in addition the staggering profits from selling the house. If you’re right, I’ll owe you a beer!”

But, like all good bloggers, Ed has returned to the forums.

“Your jealous because I have a fan club on News.com,” he told one critic called “shadow” this week at globalhousepricecrash.com .

“Hey for the record, that was an accident, I was just trying to warn people about the Real Estate correction.”

Australian housing market ‘a time bomb’

Australia, UK only two housing bubbles left
Would need to fall 42pc to return to trend
“As soon as rates go up, the game is over”

THE Australian and British housing markets are the last two bubbles left in the wake of the financial crisis, and it is only a matter of time before they crash, warns legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham.

Mr Grantham famously reported a year before the global financial crisis: “In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist”.

The Australian reported he said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.

“You cannot possibly miss it,” he said.

“The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times).

“Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be.”

GMO is one of the biggest investment management firms in the world, with about $106 billion in funds under management, and is considered to be an authority on asset bubbles.

Mr Grantham, who is in Australia to meet with GMO clients in Sydney and Melbourne this week, said any bubble could be an exception to the rule.

“Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different,” he said.

As an example, he cited the British housing market bubble of 1989. At the time, he said people dismissed the bubble because there was no more rezoning, creating a land shortage and as such, they believed prices would rise forever.

“Seven years later, in 1997, they hit the lowest multiple of family income since the record books started in 1945. It’s always the same old argument, they are not making any more land.”

In Australia’s case, Mr Grantham described the housing market as a “time bomb” just waiting for interest rates to increase and become impossible to support.

Since last October, the Reserve Bank has raised the official cash rate six times. The rate is now 4.5 per cent.

If the Australian housing market did not return to the normal multiple of family income, he said “it will be the first time in history.”

“Sooner or later, the rates will go up and the game is over.”

Read more property news in The Australian.

The Resource Super Profits tax

Like many contemporary political issues, everyone has a very strong opinion regarding the proposed Resource Profits Super Tax (RPST). But as it was with the proposed emissions trading scheme (ETS), very few of us have a comprehensive understanding of how exactly it works. Fewer still are able to appraise the situation from a perspective that does not relate specifically to their own self interest. But such is the nature of these things.

Rather than get lost in the detail of the proposed tax, let us instead evaluate the situation from a broader perspective. The first thing to appreciate is that the current tax regime for mining companies is in dire need of reform, something both sides of the debate acknowledge. A tax based on the principle of economic rent is one that most experts agree is not only fairer, but also encourages investment (in essence, economic rent is the level of profit in excess of the bare minimum required to make a given economic venture worthwhile). Here too both sides are for the most part on the same page.

Where opinions start to differ is with the detail. Essentially, the miners argue that the rate of tax that is levied is too high, and the level it kicks in is too low. The Government maintains that this is very reasonable and that the miners have just gotten used to paying very low taxes for too long. They also argue that the proposed system will provide significant benefit to those projects that turn out to be unprofitable, or not highly profitable.

As is often the case, both sides have some valid points, but both are guilty of exaggeration and spin. I tend to think that a rent based tax is a great idea, and that although the details may need some adjustment, it will be of great benefit to the mining sector over the long term. Especially so when the resource boom eventually and inevitably starts to wind down.

The point I want to discuss though is the broader issue with Sovereign debt. Australia is lucky enough to have escaped the worst of the GFC, and indeed we are the envy of the western world. But the fact remains that, like so many countries, we need to ensure that our debt levels remain reasonable and under control. If we don’t we will eventually end up like Greece, and of course no one wants that.

However, there are essentially only two ways to reduce budget deficits and Government debt: cut spending or raise taxes (or both). Neither is politically palatable, as we have seen with the reaction to the European austerity measures. But be that as it may, it is unavoidable.

The Government of course knows this, and knows it needs to act sooner rather than later. The Henry review seemingly provided an answer on a silver platter: tax the super profitable miners and avoid the angst of the general population. Well, obviously it hasn’t played out like that, but only because the Government has been very bad at explaining the issue, and the facts have been tainted by very powerful and well resourced interest groups.

People opposed to a higher tax regime for the miners must understand that if it doesn’t go ahead, the Government will need to raise money elsewhere, and that could well be in the form of higher personal tax. No one will be happy with that and it will be political suicide. Otherwise the cuts to Government spending will need to be far more aggressive. Again though, voters probably won’t appreciate significant cuts to hospitals, education, welfare, infrastructure and the like.

So let’s all take a step back and understand that although the RPST is far from perfect in its current form, it has the potential to reform the mining tax regime and raise significant funds in one stroke. The miners will always and should always do what they can to maximize returns for shareholders, so we can expect them to fight tooth and nail against this, but the fact is that they can afford to pay more tax and still remain very profitable. Even in its current form the RSPT will not decimate the Australian mining industry, despite claims to the contrary.

Let’s not forget too that what they are profiting from are the natural resources that are collectively owned by every Australian, and we need to extract a decent return for ourselves. One day this boom will be all over and we will ask ourselves who reaped the lion’s share of the benefit. Most likely it will be corporate interests, and indeed they are entitled to make a decent return from their hard work. But citizens should understand that the current regime means that the country itself is not getting anywhere near its fair share.

Somewhere between the two ends of the spectrum of this debate the truth lies. Rather than get hysterical over the extremes, let’s debate the issue in a calm and objective way. This issue is a big one and requires strenuous debate, but let us first establish the facts before we all go off half cocked.

The recent articles in this series on Santos (STO:ASX) have been inspired by a lesson from the WD Gann Stock Market Course where he teaches his Mechanical Stock Trading Method and tests it over a 15-year period in US Steel. In the last section of the lesson he covers a situation very similar to ours in Santos last week. Here are Gann’s instructions on US Steel:

Cover all shorts and buy for long account at 135, because this is the 1/2 point between 8-3/8 and 261¾, being half of the life fluctuation and the strongest point since 150.

8-3/8 was the lowest price at which US Steel ever traded, in May 1904. 261¾ was the all-time high in September 1929 (these prices are still the all-time low and high for US Steel by the way). 135 was the 50% level or mid-point between these.

Chart 1 – Half-Point of Lifetime Range

click to enlarge

Chart 1 shows that the recent low on 21st May, Santos fell straight to this 50% level and then rebounded.

The quote from Gann also mentions that the price at 135 was ‘the strongest point since 150.’ This was another major 50% level, from a major low in 1915 to the all-time high in 1929. You can see from Chart 2 that the equivalent in Santos is the range from the 2003 low to the all-time high in 2008 that started our run of trades in February.

Chart 2 – Major Monthly Range

click to enlarge

In addition, the low of 21st May completed a repeat of the range from 27th March to 9th July 2009 – a significant range on the weekly chart. As you’ll remember from last week, it also hit the 1 x 2 trading day angle from the October 2008 low.

Chart 3 – Set-Up on 21 May

click to enlarge

Now that I have spent some time showing you the set-up, back to Gann’s instructions at the top of the article. He said ‘cover shorts and buy at 135’. Translating that to our situation, on 21st May, when Santos gapped down, opened just below the 1 x 2 angle and the major 50% level, and then moved up, we should take profits on all our short trades and go long. The exact price of the 50% level is 11.37. Last week I suggested covering shorts at 11.40, just to be certain.

With an account balance now of over $120,000, we would be able to take 50,000 CFDs and place stops 5 cents below the low of the day (just in case the market re-tests the low).

Chart 4 – Going Long

click to enlarge

On 25th May there was a higher swing bottom, confirmed on the 27th. Our rules would state to take an additional position here, as this is a First Higher Swing Bottom trade from the Number One Trading Plan.

On 1st June there was what appeared to be an Outside Continuation Day, which would also have given a signal to take an additional position. The next day, however, was actually a down day, so it became an Outside Reversal Day. We will take this up in the next issue, but note what Volume has been doing since the 21 May low.

Knowledge is Power!

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ADB asks Sri Lanka to reduce size of budget

The Asian Development Bank on Friday asked Sri Lanka to prune the size of its budget to sustain economic stability as the island emerges from decades of ethnic conflict.

The Manila-based bank’s President Haruhiko Kuroda said Sri Lanka’s top priority now is to rebuild infrastructure in the island’s war-ravaged north and east; and ensure economic stability reaches everyone in the country.

“For that, macro-economic stability, particularly a sustainable budget deficit, is crucial for sustained economic growth,” Kuroda told reporters in Colombo at the end of his three-day visit to the island.

Sri Lanka’s fiscal deficit shot up to 9.7 percent of gross domestic product in 2009, above a seven percent target set by the International Monetary Fund when they released a 2.6 billion dollar bailout package last July.

“Fiscal deficit close to 10 percent of GDP is too large and must be reduced over the medium term,” Kuroda said urging the government to widen its tax net and increase government revenue.

ADB forecasts Sri Lanka’s economy to expand strongly by 6.0 percent this year from 3.5 percent last year, but Kuroda warned the Indian Ocean Island needed to trim its expenses.

“You may be able to increase growth in the short run by increasing spending and reducing taxes. But in the medium to long run if there is no prudent and sound fiscal policy, you cannot have sustained growth,” he said.

ADB Sri Lanka country director Richard Vokes said about 450 million to 500 million dollars has been earmarked to disburse in the tropical island between end 2009 and 2010.

Kuroda said about 50 percent of the project loans will be disbursed in the island’s war-ravaged north and east for reconstruction work and livelihood support.

Sri Lanka is emerging from a 37-year ethnic conflict after government forces last May, crushed the Tamil Tiger rebels who were fighting for an independent homeland for minority Tamils from the majority Sinhalese community.

The United Nations estimates some 100,000 people died in the conflict, while tens of thousands are unable to return to their villages and still live in makeshift homes.

Australia’s tax battle over resources ‘golden goose’

Australia’s proposed new tax on mining profits has prompted a fierce struggle between the industry and the government for the extraordinary riches of the Asia-led commodities boom, analysts said.

Prime Minister Kevin Rudd’s plans to impose a 40 percent levy on the so-called “super profits” of resources firms was met with anger from the nation’s most valuable export sector, which warns it will kill investment.

With mining companies’ share prices diving, resources firms hit back, accusing Canberra of essentially nationalising the industry while the opposition said it could “kill the goose which laid Australia’s golden egg”.

“The companies are crying blue, bloody murder but you would expect them to — they’ve had their eggs stolen,” BIS Shrapnel economist Frank Gelber said.

The government hopes to raise billions of dollars with the tax and use the money to “spread the benefits” of the mining boom around the country.

“Provided commodity prices hold up high, we’re taking a lot of money out of the mining sector and we’re giving it to the rest of the economy. Now there is some logic to that,” Gelber told AFP.

“But the other thing is that these guys entered into these mining projects in good faith, with certain rules, and we just shifted the goal posts. Now we’re here, both sides have to take the consequences.”

Major miners have attacked the proposal, with Anglo-Australian giant BHP Billiton saying it placed a shadow over some projects, including expansion at its Olympic Dam uranium and copper mine, and would drive investment offshore.

Rio Tinto said it was reviewing all new Australian capital projects in response to the plans, which it described as “shocking”.

And United States firm Peabody Energy cited the tax as a reason to cut its takeover bid for coal miner Macarthur, while it was also blamed by Anglo-Swiss firm Xstrata for its suspension of a 27 million US dollar copper exploration project.

Rudd has even taken a tumble in polls after announcing the levy, which could also reduce the value of Australians’ retirement savings as they are heavily invested in blue-chip stocks such as BHP.

Rudd, who is expected to call an election this year, defended the Resources Super Profits Tax, saying he had been warned that “you’re going to hear lots of people crying wolf” on the issue.

He said government modelling showed the mining industry would actually grow despite the levy because it taxed profits, not volume.

Soaring commodity prices have seen Australian exports jump significantly since 2000. Coal exports surged 123.9 percent to be worth 54.4 billion dollars (48.65 billion US) in 2008-2009 while iron ore rose 66.9 percent to 34.2 billion dollars.

Bob Gregory, an economist at the Australian National University, said the government appeared confident the mining boom — which the central bank has said could stretch for decades as China and India industrialise — was assured.

And while the tax would hit the share prices of mining firms, he was less certain it would damage the industry, which in 2008-2009 was the nation’s best export sector, earning 127.5 billion Australian dollars.

“I think the Australian government, and us the people, we don’t want to scare off large amounts of investment,” professor Gregory said.

“Even though mining investment poses all sorts of problems — by making us more reliant on China and that sort of stuff — you don’t want to take the risk of scaring off too much investment.”

Gelber said the tax was unlikely to impact those mines already producing but it was understandable the sector was “squirming on the hook” given that mining was a high-risk activity.

“Now prices are so high, all the current round of projects that are about to start or have just started, they are going to proceed,” he said.

“But what it could affect are projects when the prices are lower because the profits are lower. It’s an awfully profitable activity at these prices. But the real question is, will these prices last forever?”

James Wilson, a Perth-based research analyst for DJ Carmichael, said many companies may now be examining projects in different countries including Canada, which is reducing its corporate taxes.

“A lot of people will be looking at whether projects are better value off-shore,” he said.

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RIO Tinto has raised the stakes in the mining industry’s fight with Kevin Rudd over his new super tax by shelving its $11 billion expansion plans in Western Australia.

In a fresh blow to the Prime Minister’s tax reform plans, the mining giant said it would withdraw its plans for expanding its massive iron ore operations in WA because of the uncertainty sparked by the proposed tax on super profits,

But the mining giant denied it was withdrawing its plans this afternoon, saying instead it was “reviewing” the potential impact of the tax but has not yet made any decisions.

“Rio Tinto today confirmed that no decision has been made to shelve any projects in Australia following the announcement by the federal government of the proposed resource super profits tax (RSPT),” Rio Tinto said.

“Rio Tinto is reviewing the potential impact of the proposed RSPT on all of its operations and new projects in Australia.

“The feasibility study into the proposed the 330mtpa (million tonnes per annum) expansion of Rio Tinto’s iron ore operations in Western Australia is continuing as previously advised.

“Rio Tinto is however unable to determine the impact of any RSPT on the 330mtpa expansion study until the details of the Government’s proposal become clearer,” the company said.

Rudd faces down industry

As Mr Rudd faced down industry executives in Perth for a second day yesterday, it also emerged that fellow miner BHP Billiton was reassessing the viability of its iron ore and coal projects in New South Wales, Queensland and Western Australia.

And Origin Energy said  the proposed 40 per cent “resource super-profit tax” would push up “retail energy prices” by making gas and coal to drive power plants more expensive.

Origin said “wholesale energy prices are also likely to increase with any increase in resources tax”.

We’ll take your projects - Canada

Canada said it is keen to accommodate any mining projects that move out of Australia because of the planned tax.

Conservative Canadian MP Brad Trost says he is keen to cash-in on the Australian government’s “blunder”.

“We see an opportunity to have some money come north,” he told ABC Radio today.

Canada was a low-taxed, mining-friendly nation, he said, noting that the sector is taxed at the same rate as other companies and corporations.

“By 2014 we are aiming to have a combined average of 25 per cent tax rate,” he said, adding that the rate would vary slightly between provinces.

“I am sending out the message (that) Canada wants Australian business.”

Tax is about right - Prime Minister

After attending a meeting with resources industry leaders on Tuesday night and holding a breakfast briefing with smaller miners yesterday, the Prime Minister refused to describe the 40 per cent rate as non-negotiable but said it was “about right”.

At the “robust” dinner, mining executives told Mr Rudd his plans had done “irretrievable damage” to the Australian resources sector, were driving investment overseas and wiping out the retirement funds of thousands of Australian shareholders who could not now “afford to retire”.

Shares in Australian mining companies shed more than $16 billion this week, with heavy falls by BHP and Rio in London contributing to a plunge on global markets overnight.

Shares in BHP, Rio and Andrew Forrest’s Fortescue Metals Group stabilised yesterday as analysts said the selling had been overdone.

Mining executives at the meeting also accused Mr Rudd of deceiving the public by calling the tax a “super-profits” tax.

Mr Rudd is standing by his plan but has agreed to meet the mining companies again next week. It is understood Treasury is already revising its modelling on the implementation of the tax.

AUSTRALIAN house prices are 50 per cent above fair value, warns the man who predicted the GFC.

Edward Chancellor, of US investment management firm GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.

Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value - a once in 40-year event. ”

If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably,” he told The Australian.

He said prices would have to fall by more than a third to reach fair value - although some of this fall would be cushioned by income growth.

He described Australia’s banking system as a “cartel” and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

He attributed Australia’s “luck” to a comparative lack of competition among local banks, enabling them to avoid much of the reckless lending that occurred in the US, as well as the commodities recovery led by China.

“My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom,” he said.

“Those are the facts and you can’t paper over them.

“In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.

“The problem is the bubble and that hasn’t gone away.”

A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.

“It’s the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse,” he said.

Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.

“We would see the Chinese demand for Australian commodities as being potentially vulnerable,” Mr Chancellor said.

He said he expected the negative news in Australia to come from “the housing market falling under . . . the sheer weight of its overvaluation and lack of affordablity” and a “terms of trade shock”.

Everyone referred to Australia as the lucky country, he said. “I think that’s pretty apt.”

However, “given the great growth in private sector credit and the vulnerability of the housing market, . . . Australia is not out of the woods. It hasn’t even entered the woods.”

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Forced sales hit property market

HOMEOWNERS coaxed into reinvesting the equity in their homes are facing bankruptcy as falling property values and rising interest rates stretch them beyond breaking point.

These duped mortgage-holders, many of them baby boomers preparing for retirement, are among an increasing number of people facing eviction across the country.

The number of eviction notices served in New South Wales surged more than 50 per cent in the year to June, with the fallout most pronounced in Sydney, where some agents have as many as 18 mortgagee sales listed on their books.

According to the NSW Attorney-General, there were 5316 eviction orders lodged last financial year, up a massive 52per cent on the 3495 the year before. Although many of those struggling owners bought at the peak of Sydney’s property boom in 2003, agents are reporting distressed owners who have used surging property values to borrow against their homes.

Patricia Maynard, 65, and husband Richard, 75, face losing their $1.2 million Coogee home in Sydney’s east after they were talked into withdrawing $960,000 from the property they originally paid off in 1986.

Ms Maynard said the couple were approached by a group in late 2002 who offered to help them unlock the equity in their home to reinvest and fund their retirement.

“In February 2003, we went and got the bank cheques and we thought, ‘Great, we don’t need Centrelink payments any more, we can be self-funded retirees’,” she said.

“We were so naive, we’d paid off our house in 1986 and we were just retirees on a pension.”

The company has been placed into liquidation, the couple now owe $1.1 million on their house and Ms Maynard has been forced to return to work.

“I thought there was no way something like this could happen in 2006 in Australia, that these people could get away with something like this,” she said.

Ethical real estate campaigner Neil Jenman said the number of people who had lost the equity in their homes and were seeking help had “at least doubled” in the past six months and the problem was expected to worsen.

He said most of the people losing money were driven by a fear of being poor in retirement rather than greed.

“It’s not greed, it’s fear driving people into these things,” Mr Jenman said. “They are in their 50s and they say to themselves, ‘I haven’t got my finances in order so I’d better fast-track it’.

“It should be against the law for unsophisticated investors — that is, anyone with a net worth of under $5 million — to mortgage their home and go into any scheme without first receiving independent legal advice.” Although there are reports of increasing mortgagee sales across Sydney, outer-western suburbs such as Liverpool, Kellyville and Ingleburn have been hardest hit by the downturn.

Many owners in these suburbs who have borrowed against their homes now have mortgages bigger then the value of their properties — and the banks are moving in.

Real estate agent Essam Eskaros, of PRDnationwide in Liverpool, said that of the 19 properties the group had listed for sale this month, 18 were mortgagee sales.

Ian Carroll, of agents Century 21 Carroll Combined in Blacktown, said about one in five properties were forced sales instigated by banks.

“We’ve had one unit that we sold in 2003 for $319,000 that just resold for $240,000,” Mr Carroll said.

“We’ve also had a development site that was bought for $670,000 and which just resold for $365,000.”

Auction clearance rates remain low in the eastern capitals, with less than half those properties auctioned in Sydney being sold.

Over the weekend, the auction clearance rate was 49.8 per cent for Sydney and 56 per cent for Melbourne, according to Australian Property Monitors.

Despite the weakness in the market, high house prices continue to lock families out of home ownership — a problem the Howard Government blames on the states.

“The stubborn refusal of state and territory governments to release enough land for new homes is forcing the price of house and land packages beyond the means of many hardworking Australians,” John Howard said yesterday.

Dr Phillip Low, a senior member of the Reserve Bank of Australia (RBA) recently announced that Australia’s relationship with China has decades to run.

“For the next twenty years, on average, it is going to be a good 20 years for China and for us”. Dr Lowe said.

However, on the other side of the world Jim Chanos, famous for predicting Enron’s fall, said “short sell China”.

So who’s right? A multi billionaire that has made his fortune from foreseeing a corporation’s demise? Or the RBA desperately trying to stave off Australia’s impending recession?

It’s no secret that stimulus is responsible for China’s current success. In fact, in an attempt to cool the overheating economy, the People’s Bank of China (PBoC) demanded that banks increase lending reserves half a point up to 16.5% for the large banks.

This is clearly a desperate move to slow down credit expansion.

Dr Lowe from the RBA believes it’s a good sign. The slowing down of stimulus and the tightening of monetary policy led him to say “…that is a favourable development in that it increases the likelihood that the Chinese economy is on a sustainable path. Time will tell though.”

It’s strange that Dr Lowe was happy to say ‘time will tell’ when he openly admitted Australia’s reliance on China’s astronomical growth. “We are benefitting from high commodity prices and from our links with Asia.” He said.

He goes on to say “I’m quite optimistic that story [China] has decades to run and that underlies much of the positives for the Australian economy.” That’s doesn’t sound like a twenty year plan, it sounds more like prayers.

Especially when 70% of our exports are to the Asian market.

But what about Jim Chanos? He’s long been heckled for his bearish views on the market. Based on his blunt remark to ’short sell China’, should you stop hoping China is Australia’s white knight?

Even if you push aside Jim’s recent comments on CNBC that China is “cooking the books” and “faking, among other things, its eye-popping growth rates of more than 8%”, what are the facts?

Like many Western economy’s today, China is running on stimulus. The fact that the banks tried twice last month to rein in lending is a sure sign of an economy about to burn out. Amazingly lending for January was ¥1.4 trillion (AUD $228 billion).

This figure for January is nearly one fifth of the lending planned for 2010. In fact for all of 2009, the Chinese banks lent out over ¥9.5 trillion (AUD $1.552 trillion) to keep the economy humming - or burning in order to survive the ‘GFC’. That’s an enormous amount of credit to flood an economy.

China’s excessive stimulus and aggressive lending by the banks have created artificial demand, which has pushed our resource prices higher.

When China announced their ¥4 trillion ‘rescue’ package in 2008, exact details of how it was going to be spent was unclear. Very little information was provided on where the money would be going. Any press release from China stated the stimulus was directed to ‘infrastructure and social welfare’.

To top it off, the Chinese government instructed the banks to ‘loosen credit’ and even encouraged the smaller banks to be part of a ‘more proactive fiscal policy’.

What these packages really told you, was China was going to spend, and it was going to do so in a big way.

And that’s exactly what they’ve done.

But the side effects of all this spending is only just starting to become clear. The loose credit policies and stimulus have driven up property prices. In the major Chinese cities, house prices were up 9.5%, and land jumped a shocking 106% last year.

Is slowing down stimulus too little too late for China?

“Bubbles are best identified by credit excesses, not valuation excesses,” Jim Chanos said in his TV interview. I like that definition. “And there’s no bigger credit excess than China.”

So, will China be able to cool their economy and let the bubble slowly leak? Or are we waiting for a really big bang?

Today I want to take a brief - very brief - look at China. You know China, that’s the economy to our north that saved Australia from economic death last year.

As you may have read in these pages before, don’t believe the hype about Australia’s resilient economy and sound banking system being the reasons why Australia scraped through without much damage.

It was all down to one reason - the Chinese.

But while the Chinese may have helped out last year, the news in recent days points to the perils of relying on the irrational whims of an overseas government to prop up your domestic economy.

News reports such as “China pushes to wean banks off lending” should be enough to send a shiver down the spine of any Australian corporate bigwig.

Because make no mistake, the Australian economy is tied at the waist, the hips and the legs to the Chinese economy. Should the Chinese authorities decide enough is enough it will be curtains not just for companies in the resources industry, but every sector of the Australian economy.

Even sectors that would appear to have little connection to mining will be affected. And so will individuals.

How come? Well, simply because the Australian economy has so much riding on the resources industry in terms of exports.

If the Chinese stop buying up all of Australia’s natural resources the consequences will be dire.

Simply put, while the Australian dollar has become stronger partly due to higher interest rates than other economies, it is still the commodity currency status of the Australian Dollar that has driven it higher.

That’s because all - or most - of the money used to buy up those resources is eventually converted from US dollars or Japanese Yen or Chinese Yuan into Australian dollars.

Naturally, when we import goods there’s also a bunch of Australian dollars that are converted into other currencies as well which helps to even things out.

But imagine if suddenly the export of resources hit the skids. We saw how this could look when the Australian dollar sank from USD$0.98 to around USD$0.60 last year.

That was just a short term hit, and was really influenced more by a ‘flight to safety’ rather than mindless dumping of the Aussie dollar.

A seizing up of the Chinese economy would be entirely different. That wouldn’t be a short term blip at all. And for Australia it would mean a similarly big fall in the value of the Aussie dollar.

And unlike during the mid-2000s when the dollar was priced around USD$0.50, just as the resources boom was taking off and the China story was starting to make front page headlines, there would be no ‘get out of jail free’ card for the Australian economy this time.

Look, we’ve seen plenty of headlines in the past about the Chinese authorities threatening to put the brakes on economic growth. In the most part the economy has continued to surge on and the Australian economy has benefited from it.

But like all bubbles and all winning streaks, this one will end too. The worrying aspect to all this is that there doesn’t appear to be a Plan B.

What will the Australian economy export if no-one wants our resources? Quite frankly, the options don’t look very promising.

Has Generation ‘Y’ Given up on Property?

The definition of a Gen Y is someone born between 1980 and 1995. But for most people Gen Y is just a euphemism for layabout, bludger or timewaster. And it helps to explain the alternative reference of ‘Gen ID’ - which means ‘Generation I Deserve’.

Let’s be honest, the name calling is appropriate. I’m sure you’ve talked incessantly about lazy youths or young adults - they won’t buy house, they want to go overseas, they won’t put money in the bank, and on it goes.

And then they quit a perfectly good, well paying job, just because it didn’t ‘engage’ them - whatever that means.

But fear not, the Gen Y offspring aren’t completely useless and ignorant of investing. In fact, you may be quite surprised at how good some of them are at saving…

You see, a survey from bullion company Gold de Royale came through to my inbox recently. The survey looked at their client’s investments habits.

The most interesting detail was the age of the customer buying bullion. A whopping 32% of gold bullion purchases were made by those classed as Gen Y!

But hang on, that can’t be right! This is the generation that thrives on credit, still lives at home on the Bank of Mum & Dad, and believes that a loan for $20k for that ‘must have’ 12 month trip overseas is an asset rather than a debt?

But what about the Gen Xers and Baby Boomers? Only 5% of Gen X’s looked to precious metals for an alternative investment, whereas the Baby Boomers lead the way with 60% of the near retirees wanting bullion as an investment.

Even so, the mainstream media image is still Gen Y is useless with their money.

But the fact is, they’re not. And I’ll explain more in a moment.

Firstly, you need to remember that no other generation has had credit thrown at them, like the Gen Yer’s have.

I bet you spent years saving for you first car, with every single cent - or penny - safely tucked away in a jar or under the bed. You knew that if you wanted wheels, you had to work hard and save for it.

But, when a Gen Yer was finally ready for a car, his or her bank manager had already sent a letter to them congratulating them on their eighteenth birthday and advising them they could get a loan for a car - even if they only had a part time job.

And don’t forget that at any University open days, there are bank leaflets for prospective students on special ‘University Credit Cards’. Sure these cards have a low limit, but before the students are enrolled credit has been thrust into their hands.

So while they have been dubbed ‘Generation Debt’, amazingly ‘only’ 56% of Gen Y’s over 18 have a credit card.

I mentioned before that the Gen Yer’s might be better at investing than you first realised. While you’ve looked at property prices, and possibly wondered how your kids will ever afford their own home, this generation, have looked for alternatives instead.

A hefty chunk of Gen Y have share portfolios. Many older investors have been frightened off the stock market, but Gen Y has used this crisis as a chance to become financially ’savvy’.

A large majority of ‘Generation Me’ have taken this market carnage as a sign they need to learn more about investing. In fact, 65% of Gen Y rate ‘Saving & Investing’ as their main concern. In true Gen Y style, they even have Facebook groups dedicated to sharing tips on how to save more money.

And even though retirement is nearly 40 years away for this lot, many are contributing more of their salary to superannuation.

So if you have the strong desire to kick your Gen Y off the Xbox, Playstation or Wii and move them out of their bedroom while they’re at work, do it. You might just find a large stash of bullion under their bed!

But the good news to come from the market down turn, has shown Gen Y that boom times don’t last forever and that they’ll look for other investment opportunities, instead of bricks & mortar.

Stock markets around the world slumped Friday after President Barack Obama unveiled plans to limit the size and scope of US banks and financial firms in a fresh offensive against Wall Street excesses.

Markets from New York to Tokyo reacted with barely-restrained panic to Obama’s drive to limit the size of the largest banks and introduce measures to curb “excessive” risk taking.

“Never again will the American taxpayer be held hostage by a bank that is too big to fail,” vowed Obama, flanked by former Federal Reserve chief Paul Volcker who advised the president on the rules.

He promised to “protect” taxpayers by preventing banks or financial institutions from owning, investing in or sponsoring hedge fund or private equity funds.

Wall Street gave an immediate thumbs down to the plans as US stocks plunged, with the blue-chip Dow Jones Industrial Average down more than 200 points or two percent in Thursday trading.

The news then sent shockwaves though Asian stock markets with the region’s financial centers suffering heavy losses in Friday trading. European exchanges later opened under pressure.

Obama’s measures would effectively force financial firms to choose between lucrative proprietary activities — trading in stocks and sometimes risky financial instruments for their own benefit — and traditional activities, like making loans and collecting deposits.

The initiative, which must be approved by Congress, includes a new proposal to limit the consolidation of the finance sector, placing broader limits on “excessive growth of the market share of liabilities” at the largest financial firms.

Obama blamed banks for sparking the worst economic crisis since the Great Depression with “huge reckless risks in pursuit of quick profits and massive bonuses” in a “binge of irresponsibility.”

“My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout,” the president said.

He vowed to enact the reforms in Congress, even if Wall Street deployed an army of lobbyists to kill them.

“If these folks want a fight, it’s a fight I’m ready to have,” he vowed defiantly.

The announcement was the latest attempt by the White House to harness public rage at Wall Street bonuses and the financial crisis.

David Easthope, analyst with Celent, a research and consulting firm, said the effort could hit the banks in one of their most profitable areas.

Proprietary trading “has been the sweet spot for leading investment banks over the last few years, and executives will be concerned that Washington will be taking away the frosting,” he said.

The Financial Services Roundtable, which represents 100 of the largest integrated financial firms, said the proposal would do little to improve risk management or protect consumers from irresponsible loans and trades.

“The proposal will restrict lending, increase risk, decrease stability in the system, and limit our ability to help create jobs,” said Steve Bartlett, president and chief executive for the Roundtable.

The group represents 100 top financial services firms providing banking, insurance, and investment products and services.

Obama’s first year in office was dominated by efforts to rescue a handful of banks that threatened to topple the US economy after being exposed to massive losses on the subprime mortgage market.

According to Treasury officials, about 205 billion dollars was pumped into 707 banks under the government rescue plans.

Obama has sounded a tougher tone towards banks in recent weeks as he faced widespread voter anger at the massive government bailout, which came as Americans faced surging unemployment, home foreclosures and national debt.

Top Obama economic aide Austan Goolsbee sought to counter criticism that the plan is returning to the Depression-era law creating a wall between investment and commercial banks.

“It’s not returning to Glass-Steagall,” Goolsbee said.

While the act repealed in 1999 forbid underwriting securities or investing in securities by any commercial bank, Goolsbee said, “This is not that. This says a bank cannot own a hedge fund, cannot own a private equity fund or do trading for its own account that is not related to its client business.”

He added that the goal is “to get back to the fundamental nature of the bank, which is serving its clients, rather than investing for its own profit.”

Banks make fools of the press

Poor old Michael Pascoe must also be spitting coffee across the breakfast bench this morning when he reads that headline. Because just two weeks ago he wrote in The Age:

“Big Four no longer banking on guarantee.”

He went on to write:

“There’s been a phoney war in recent months about the Federal Government’s bank guarantee with the occasional Big Four CEO suggesting it needs to be scrapped. As far as the Big Four are concerned, it’s already gone… But the real story is that ANZ hasn’t used the guarantee since July. It hasn’t needed to - and neither do the rest of the Big Four, the benefit of being among the very few AA rated banks left in the world and being based in a strong developed economy with a central bank and regulator that didn’t fall asleep at the wheel. No wonder the Big Four CEOs would happily wave goodbye to the guarantee.”

Ha, ha, ha… Could anyone be more wrong than that? But he’s right about one thing, the central bank and regulator “didn’t fall asleep at the wheel.” Although we wish they had fallen asleep. At least that way they couldn’t stuff things up any more than they already have.

Because far from falling asleep, to follow the motoring analogy, they’ve done worse. They’ve had their foot to the floor travelling at 120km/h driving through the economic equivalent of a school crossing.

But we’ll tell you what’s really phony, the misinformation coming from the banks about the strength of the banks. And even more worrying is the way the mainstream press just laps everything up and takes the crooked bankers’ words as gospel.

This continuing bilge about Australian banks being the best in the world with their AA credit rating is doing nothing more than suckering people into believing everything is fine.

Sucking them into believing it’s a great time to take out a glabzillion dollar mortgage just as interest rates are about to head north and property prices south.