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Credit deflation and the reflation cycle to come (part 2)


spunko

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18 hours ago, DurhamBorn said:

I prefer SSE to National Grid,or if you are prepared for a bit more risk Drax ,they have just bought some fantastic hydro assets in Scotland.Its tricky to know if electric will follow oil higher next cycle,but very likely it will do well.Not advice etc,just a couple to think about.

I own NG and SSE in my income portfolio.  Fully allocated.  Thinking of adding DRAX for a bit of fun but it's technicals are a bit wild ATM!  I have NG as more of an infrastructure play and SSE as energy.  NG div is still good at 5.63% (and I'm nicely up total return wise).  Technically, a very hard price chart to read.  Seems to have been in a rising price channel on the weekly and daily charts but maybe currently weakening (daily stochastic recently hit the oversold zone, where is could stay a while, dragging down the weekly).  That may be just the ebb and flow or a change to the better or worse.  However, very big picture, still c.75% off its 2009 low even it has fallen some 25% from its 2016 peak.  However the monthly chart looks a lot better with MACD, etc currently rising from a very low base.  Not sure what I would do right now TBH. 

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17 minutes ago, Barnsey said:

Some great charts there, thanks @Harley & @Errol :)....

..Seems there's a building consensus that the U.S has probably just entered recession or will imminently...

..so I've looked back at the price action of Silver during the last one....

...Silver catches it's breath, and heads up to $14.28 by Feb 2009 as the S&P resumes it's downward momentum...

You're welcome.

I find this talk of recession odd given the stories I hear of a tight labour market.

The last time I looked at PMs in the scenarios (and smaller) you mentioned, my take away is they sell off with everything else at first (margin calls?) but then bounce back to become inversely correlated with equities.  So similar to you, although your analysis seems to be a story of a wild ride back to around where it started (well £11.80 to $14.28).  However I bet the story is very different in GBP (USD being the safe haven) and that's what really matters to us.  I remember my USD equity losses for that period being far less in GBP.  I also looked at GDX in my analysis and found that interesting (I posted on this a while back).  Essentially, if I recall correctly, it outperforms the physical at the start but fades in the longer term, presumably as people move from moving between equity sectors to moving between asset classes.   

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44 minutes ago, Harley said:

I find this talk of recession odd given the stories I hear of a tight labour market.

Pretty normal looking back...

Key point to consider is that the unemployment numbers will be subject to revision so we could already be in a period of positive unemployment growth. And if the jobs market is so tight, why is overtime falling off a cliff?

 

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Is there a catch with holding preference shares in an income portfolio?  I'm just doing my weekly screen of dividend payers and lots of preference shares coming up:  Banks, Chemicals, Assurance, Insurance, Utilities, etc.  Found a few in decent companies which don't pay a big enough ordinary dividend but do pay a good preference "coupon".  May also help de-risk an all ordinary equity portfolio(?) - hard to tell as my charting package does not cover them all.

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56 minutes ago, Harley said:

I own NG and SSE in my income portfolio.  Fully allocated.  Thinking of adding DRAX for a bit of fun but it's technicals are a bit wild ATM!  I have NG as more of an infrastructure play and SSE as energy.  NG div is still good at 5.63% (and I'm nicely up total return wise).  Technically, a very hard price chart to read.  Seems to have been in a rising price channel on the weekly and daily charts but maybe currently weakening (daily stochastic recently hit the oversold zone, where is could stay a while, dragging down the weekly).  That may be just the ebb and flow or a change to the better or worse.  However, very big picture, still c.75% off its 2009 low even it has fallen some 25% from its 2016 peak.  However the monthly chart looks a lot better with MACD, etc currently rising from a very low base.  Not sure what I would do right now TBH. 

Caisse de dépôt et placement du Québe have taken a near 5% stake in SSE.Id consider their energy guys the best in the business as investing in future energy.

Drax are more risky,but i really like the deal to buy the hydro assets,pump storage being the main one.The next cycle should see energy spreads much greater than they are now during the night to peak time etc,and an asset like pump storage should be able to cash in.Energy from waste could also be very interesting and they have bought the biggest plant in Scotland Daldowie.

As you say a bit wild,and they need to make sure they pay down debts this year,but i like mix of assets and happy to buy again at this point with ladders set.

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forgot about drax, did well out of it last year, might have a good old poke around it again. Thanks for the reminder.

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33 minutes ago, DurhamBorn said:

.....

Drax are more risky,but i really like the deal to buy the hydro assets,pump storage being the main one.The next cycle should see energy spreads much greater than they are now during the night to peak time etc,and an asset like pump storage should be able to cash in.Energy from waste could also be very interesting and they have bought the biggest plant in Scotland Daldowie.

As you say a bit wild,and they need to make sure they pay down debts this year,but i like mix of assets and happy to buy again at this point with ladders set.

Ta.

Not sure why I said they're a bit wild technically.  Too many charts today!  Just had another look and the daily chart shows a divergence between price and the technicals which usually resolves one way or the other plus a lower low, but they could be close a bottom on the long term support line/price channel on the monthlies and the weeklies look fine.  Just I haven't had a buy signal yet.  But then they currently yield 5.55%.  Thinking of an initial 1% starter stake next week to get them on my radar.

Capture7.thumb.PNG.0a70b477798acfaf0427477062c8fac4.PNG

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51 minutes ago, Harley said:

Is there a catch with holding preference shares in an income portfolio?  I'm just doing my weekly screen of dividend payers and lots of preference shares coming up:  Banks, Chemicals, Assurance, Insurance, Utilities, etc.  Found a few in decent companies which don't pay a big enough ordinary dividend but do pay a good preference "coupon".  May also help de-risk an all ordinary equity portfolio(?) - hard to tell as my charting package does not cover them all.

Preference shares are sort-of halfway between bonds and shares.  Their (sort-of) fixed dividend is great as interest rates go down, but in the DB scenario of increased profits in the 'reinflation' stocks you wouldn't see the full advantage of the profit share going to shareholders -- the ordinary shareholders would see the full gains, particularly if the company isn't currently paying a big enough ordinary dividend (for reinflation stocks).  I'd also imagine that they're priced far above par in our current low-interest-rates environment.

[I'll ignore the voting rights aspect because it is more-or-less irrelevant for small shareholders]

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I previously mentioned my two FTSE350 income portfolios are running out of steam and that I should start looking further afield.  I was seeking 25 different shares in each portfolio (4% allocation per holding) but am struggling to identify the last 5 shares in each.  Worse, a number of the ones I do have at less than 4% are rising in price so outside my yield/risk target.

I've decided to still try and get to 25 holdings in each by waiting for new opportunities or complementing the portfolios with small cap yielders or even preference shares (depending on the responses to my post on these!).  I looked at overseas stocks but (due to withholding taxes) these do not seem to be suitable for an ISA/SIPP tax wrapper type account where I cannot claim a tax deduction for overseas tax paid.  The US, post WBEN, is 15%(?), and some European countries (France, Total SA) are even worse, although there may be some onerous paperwork possible to claim some of these taxes back (no thanks!).  Does this sound right?  However, would ETFs or Trusts be better in that they can avoid such taxes (being registered in Ireland, etc)? 

If correct, then I'll invest in overseas stocks using a normal (taxable) trading account and claim any withholding taxes against any UK tax.  The first £2,000(?) of such dividends are tax free so I'll have to calculate the marginal tax rate on the (hopeful) remainder to see if this all makes sense.  I could also optionally bed and breakfast any suitable shares into the ISAs each year.

BUT, this all got me thinking that maybe I've tapped out the dividend side and should be looking at value stocks and using my annual CGT allowance.  That's quite an annual CGT allowance per person, plus lowish tax rate, plus the ability to set capital losses against gains. Maybe time to create a value stock portfolio instead!

Thoughts?

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24 minutes ago, dgul said:

.....I'd also imagine that they're priced far above par in our current low-interest-rates environment.......

Many thanks. 

This is what surprised me (or maybe I'm wrong!).  I couldn't find any yield to maturity type data (do they have a redemption date or at least risk?) but the current yields seem quite good:

National Westminster Bank PLC 9% Non-Cum.Pref Shs A  - 5.99%

Croda International PLC 5.90% PRF PERPETUAL GBP 1 - 5.96%

Aviva PLC 8.75% PRF PERPETUAL GBP 1  - 5.94%

General Accident PLC 7.875% PRF PERPETUAL GBP 1  - 5.94%

RSA Insurance Group PLC 7.38% PRF PERPETUAL - 5.90%

BP PLC 8% PRF PERPETUAL GBP 1 - 1st  - 5.44%

The Royal Bank of Scotland Group PLC 5.50% PRF PERPETUAL GBP 1 5.50%

Standard Chartered PLC 8.25% PRF IRR GBP 1  - 5.36%

Keystone Investment Trust PLC 5% PRF PERPETUAL GBP - 5.08%

Marston's PLC PRF PERPETUAL GBP 1 - Participating 0% - 5.0%

BBA Aviation PLC PRF PERPETUAL GBP 1 - 5%  - 4.9%

Naturally, company risk, and presumably after the Aviva issue, redemption at par risk.

And as you say, a halfway between shares and bonds, which has some intrinsic appeal.

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Napoleon Dynamite
5 hours ago, sleepwello'nights said:

If only I could understand some of the theories he summarises. My issue with him is that he is at core a socialist and therefore each individuals self interest is the reason for the global economy not working for everyone's good.

He also ends up paraphrasing John Milton Keynes; "in the long run we're all dead"

Yep he's a lefty so not really one for dosbods.

I find him very watchable though.  I find it difficult to find things of an opposing point of view that's well articulated, but he does that.

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1 hour ago, Harley said:

Many thanks. 

This is what surprised me (or maybe I'm wrong!).  I couldn't find any yield to maturity type data (do they have a redemption date or at least risk?) but the current yields seem quite good:

National Westminster Bank PLC 9% Non-Cum.Pref Shs A  - 5.99%

Croda International PLC 5.90% PRF PERPETUAL GBP 1 - 5.96%

Aviva PLC 8.75% PRF PERPETUAL GBP 1  - 5.94%

General Accident PLC 7.875% PRF PERPETUAL GBP 1  - 5.94%

RSA Insurance Group PLC 7.38% PRF PERPETUAL - 5.90%

BP PLC 8% PRF PERPETUAL GBP 1 - 1st  - 5.44%

The Royal Bank of Scotland Group PLC 5.50% PRF PERPETUAL GBP 1 5.50%

Standard Chartered PLC 8.25% PRF IRR GBP 1  - 5.36%

Keystone Investment Trust PLC 5% PRF PERPETUAL GBP - 5.08%

Marston's PLC PRF PERPETUAL GBP 1 - Participating 0% - 5.0%

BBA Aviation PLC PRF PERPETUAL GBP 1 - 5%  - 4.9%

Naturally, company risk, and presumably after the Aviva issue, redemption at par risk.

And as you say, a halfway between shares and bonds, which has some intrinsic appeal.

Be careful with any prefs that are trading way above par. If they’re redeemable and the issuer does decide to redeem you’ll only get the par value back. Having said that Aviva tried to redeem their irredeemable prefs a couple of years ago. They were of the view that legally it could be done. They only backed down due to a public outcry.

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1 hour ago, Harley said:

Many thanks. 

This is what surprised me (or maybe I'm wrong!).  I couldn't find any yield to maturity type data (do they have a redemption date or at least risk?) but the current yields seem quite good:

National Westminster Bank PLC 9% Non-Cum.Pref Shs A  - 5.99%

Croda International PLC 5.90% PRF PERPETUAL GBP 1 - 5.96%

Aviva PLC 8.75% PRF PERPETUAL GBP 1  - 5.94%

General Accident PLC 7.875% PRF PERPETUAL GBP 1  - 5.94%

RSA Insurance Group PLC 7.38% PRF PERPETUAL - 5.90%

BP PLC 8% PRF PERPETUAL GBP 1 - 1st  - 5.44%

The Royal Bank of Scotland Group PLC 5.50% PRF PERPETUAL GBP 1 5.50%

Standard Chartered PLC 8.25% PRF IRR GBP 1  - 5.36%

Keystone Investment Trust PLC 5% PRF PERPETUAL GBP - 5.08%

Marston's PLC PRF PERPETUAL GBP 1 - Participating 0% - 5.0%

BBA Aviation PLC PRF PERPETUAL GBP 1 - 5%  - 4.9%

Naturally, company risk, and presumably after the Aviva issue, redemption at par risk.

And as you say, a halfway between shares and bonds, which has some intrinsic appeal.

Most preference shares are perpetual.  As always, though, the smallprint is everything.

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On 05/09/2019 at 13:10, sancho panza said:

I'm hoping for(being realsitic here) some pull backs that would enable me to add some to SAND/OGC/IAM/FRES/HOCM/GUY/RIO2

I know we’ve spoken about Rio2 before and guess you have access now via ii. Probably a decent entry point here as for some reason the market didn’t like this weeks pre-feasibility study even though it shows a profitable mine at gold $1300. Definitely a buy and hold for 2/3/4/5 years rather than for a melt up and sure it might go lower in a crash but I’m totally happy to have bought at 0.46. 

Nobody take my word for it though obviously.

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China exports to US decline 16%.

https://www.bloomberg.com/news/articles/2019-09-08/china-aug-exports-1-0-y-y-in-dollar-terms-est-2-2?srnd=premium

https://www.bbc.co.uk/news/business-49625843

Now, this is meant to be about tariffs and the trade war, but I'm not sure it is that simple...

Regardless, 16% is an absolutely massive number.

[worldwide exports down 1%, which is equally massive]

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On 07/09/2019 at 15:02, Barnsey said:

Some great charts there, thanks @Harley & @Errol :)

Another tweet regarding timing of U.S. recession (already underway?)

Seems there's a building consensus that the U.S has probably just entered recession or will imminently, so I've looked back at the price action of Silver during the last one, because I think there are smarter folks and other forces behind the scenes of all this, and I'm a little obsessed with loose patterns, bearing in mind of course that this could be/is the end of a 40 year deflationary cycle, and things will no doubt be even crazier as things play out.

Sequence of events 2007 - 2008:

August 2007 - BNP Paribas blocks withdrawals from it's 3 hedge funds (Woodford anyone?), Fed cuts discounted rate (temporary loans for banks) by 50bps = Silver begins it's ascent from $11.80

September 2007 - Fed cuts funds rate (credit for everyday folks) by 50bps = Silver $13.17

October 2007 - Dow Jones/S&P peaks = Silver reaches $14.82

November - December 2007 - Silver pulls back to $13.98 (are we here now?) as Fed institute Term Auction Facility on 12th December (things are going to be fine). Very important to note, the recession began right here, but won't be confirmed by the NBER to the masses until 1 year later! However, it's also at this very point that Silver heads from $13.98 just before Christmas 2007, to $20.25 mid March 2008, pretty much straight up. As does Gold and Platinum.

March 2008 - Stocks catch a breath and halt their decline (coinciding with Bernanke's famous "sub prime is contained" speech), silver pulls back to around $17 and hovers there until mid July when it bounces back up to $18.67 but then...

BOOM! July - October 2008 - Silver hand in hand with the stock market, jump off a cliff together into the abyss, Silver falling from $18.67 to $9.09 in just 3 months!

December 2008 - March 2009 - Just before the recession is officially confirmed by the NBER, Silver catches it's breath, and heads up to $14.28 by Feb 2009 as the S&P resumes it's downward momentum (bottoms out March 2009 at 756, down from a peak of 1535).

Thanks for taking the time to timeline the timeline Barnsey.Jsut my view here but given a lot of readjsutments occur some 6-9 months after the fact,there's a good chance the recession will only be revealed autumn 2020.

I agree,I think if the US isn't in recession now,then by Q1 2020 it will be,but we may only be told late 2020 by which time the selling season will have begun in earnest.Itd be interesting to see a timeline for 2007-09 with when recession was actually confirmed.

For me- and it's a bitt of a chicken/egg argument I guess-but I'm trying to discern what came first,the PM move or the $ move.AS you allude,what makes that call difficult is that $strenght begets PM weakness and vice versa once recession is in play.For me,I go down the dollar weakness route,but maybe thats because its what Im on the lookout for now.

As I've discussed with hartley,the monthly charts from 08 reveal a nice inverse correlation with the PM's ref $.To the extent that over the course of 16 months you could have made multiple baggers selling n moving to cas and back.

10 hours ago, Lavalas said:

I know we’ve spoken about Rio2 before and guess you have access now via ii. Probably a decent entry point here as for some reason the market didn’t like this weeks pre-feasibility study even though it shows a profitable mine at gold $1300. Definitely a buy and hold for 2/3/4/5 years rather than for a melt up and sure it might go lower in a crash but I’m totally happy to have bought at 0.46. 

Nobody take my word for it though obviously.

I agree Lavalas.Biginsitutional  money is yet to flow into the PM miners (even the big ones) especcially given the current price of both the underlying and miners,But when it does things like Rio2 will run late and hard.I'm looking ot try and time dollar weakness but there are some shares I may hang onto and this is one of them

8 hours ago, dgul said:

China exports to US decline 16%.

https://www.bloomberg.com/news/articles/2019-09-08/china-aug-exports-1-0-y-y-in-dollar-terms-est-2-2?srnd=premium

https://www.bbc.co.uk/news/business-49625843

Now, this is meant to be about tariffs and the trade war, but I'm not sure it is that simple...

Regardless, 16% is an absolutely massive number.

[worldwide exports down 1%, which is equally massive]

We're going all 1920's with the protectionism...............debt deflation next

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more structural risk.This time the EU thinks more stress tests will magic the problem away.

When this market blows,it's going to be peic.

https://wolfstreet.com/2019/09/07/eu-securities-regulator-warns-on-liquidity-risks-material-second-round-effects-of-forced-selling-at-junk-bond-funds-em-bond-funds/

Contagion from Liquidity Crunch at Junk-Bond Funds to Trigger “Material Second Round Effects”: EU Securities Regulator

by Nick Corbishley • Sep 7, 2019 • 21 Comments • Email to a friend

The costs of dodging negative interest rates.

By Nick Corbishley, for WOLF STREET:

In the event of a market shock, 40% of European funds focused on junk-rated bonds — ironically named “high-yield” funds — would not have enough liquid assets on hand to meet investor withdrawals, even if the withdrawals in one week amount to only 10% of the fund’s net asset value, the European Securities and Markets Authority (ESMA) warned this week, raising yet more concerns about the risks associated with the liquidity mismatch at funds that offer daily redemptions while holding illiquid assets that can take much longer to sell at survivable prices.

In the wake of liquidity problems at H2O Asset Management and the recently gated £3.7 billion Woodford Equity Income Fund, two UK-based firms that remain under ESMA authority until (or unless) the UK leaves the European Union, central banks and financial regulators have issued a string of warnings about the liquidity risks posed by open-ended funds.

Bank of England governor Mark Carney caused consternation in the fund industry by saying that open-ended funds like Woodford’s are “built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid.” They could even pose a systemic risk, the Bank of England warned in July. Similar concerns have been raised in recent weeks by the European Systemic Risk Board, the Bank for International Settlements, the International Monetary Fund and the G20’s Financial Stability Board.

Now, it’s the turn of Europe’s top securities regulator to sound the alarm. As part of what it calls a “pure redemption shock simulation,” the regulator examined roughly 6,600 bond funds that were set up under UCITS (Undertakings for the Collective Investment in Transferable Securities), the EU regulatory framework for mutual funds. These UCITS funds had an aggregate net asset value (NAV) of €2.5 trillion. ESMA wanted to determine how these funds would cope if investors demanded redemptions worth the equivalent of 10% of a fund’s value in a week.

What ESMA found was that while the majority of funds would have sufficient liquid assets on hand to meet investors’ redemption requests, there were “pockets of vulnerabilities,” especially among “high-yield” (HY) bond funds and emerging-market (EM) bond funds.

“In particular, UCITS offering daily redemptions to investors while investing in less liquid assets such as HY or EM bonds might be subject to a liquidity mismatch,” the authors note. “HY and EM fund flows tend to be more volatile than other fund styles,” having experienced large outflows during the global financial crisis, as well as during the taper tantrum in mid-2013.

In ESMA’s redemption shock simulation, up to 40% of HY bond funds could experience “a liquidity shortfall”, meaning that their holdings of liquid assets alone would not suffice to cover the redemptions. Even after burning through their cash holdings, portfolio managers would still need to offload around €12 billion of assets to meet the redemption orders. And those assets, consisting largely of bonds of junk-rated companies, are not so easy to sell at survivable prices, especially in the midst of a broad market sell-off.

In a market whose average daily trading volume is around €7 billion, the inevitable outcome would be downward pressure on the prices of high-yield bonds. That, in turn, could lead to a downward spiral as prices are pulled even lower, sparking a second round of selling. In such a scenario, high-yield bond funds could lose around 11% of their value, ESMA warned. Given the growing size and importance of Europe’s fund sector, that could be enough to generate all kinds of mayhem and contagion, or as ESMA puts it, “material second round effects”.

“The resilience of the fund sector is of growing importance as it accounts for an increasing part of the EU’s financial system,” said Steven Maijoor, chairman of Esma. “Therefore, it is crucial to ensure that the fund industry is resilient and is able to absorb economic shocks”.

Between 2007 and 2018 the total net assets managed by EU-domiciled UCITS funds have increased sharply, from €6.2 trillion to €9.3 trillion. Europe’s fixed income fund industry has more than tripled in size, from around €775 billion to €2.6 trillion. HY and EM bond funds account for a relatively small part of that universe but they are growing fast as the desperate hunt for yield intensifies against a growing backdrop of negative interest rates. Between 2007 and late 2018, the proportion of HY and EM bonds funds grew from 5% to 8% and from 4% to 9% respectively.

ESMA’s proposed solution to the liquidity challenges facing many high-yield bond funds is to require that all asset managers across Europe carry out quarterly liquidity stress tests on their funds from the end of September 2020. This has provoked a chorus of complaints from fund managers about the extra costs they will have to bear, as the stress tests will require new computer systems to be developed. There are also concerns about the scarcity of reliable market data.

There is no mention in ESMA’s report of the role of the ECB’s negative interest rate policy, which is making it more and more difficult for investors in Europe to find positive-yielding, investment-grade assets to invest in. The inevitable result is that more and more of these yield-starved investors end-up chasing the positive, albeit shrinking yields, offered by much riskier fixed-income assets such as emerging market bonds or junk-rated corporate bonds.

That would be OK too. But many of them, rather than doing the chasing themselves, are handing their money to high-yield bond funds or emerging market bond funds to do the chasing for them. But if recent events in the UK are any indication and as financial regulators and central banks are increasingly warning, many of these open-ended funds are much riskier than their prospectuses seem to suggest — with the ultimate risk being a run-on-the-fund.

During times of market stress, a run-on-the-fund, and the forced selling at fire-sale prices that would ensue, could wipe out a large part of the principal investment even if the underlying bonds don’t default. And if fund managers block redemptions to keep the fund from collapsing, as has been the case in the UK, investors in these funds suddenly find themselves unable to access whatever remains of their money. By Nick Corbishley, for WOLF STREET.

Hedge funds have field day front-running the liquidation while 300,000 investors are left twisting in the wind. Read… Woodford’s Shuttered Fund Crushed Further by Plunging Stocks in its Holdings, such as Muddy-Waters Target Burford Capital

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Sorry to spam WOlf St but here's another ponzi I've seen dominate economic places like Leicester and Coventry.Student accomodation funded by the generosity of British taxpayers,whose profits leak like help to buy,into the pockets of private secotr shareholders

https://wolfstreet.com/2019/09/08/delinquency-rates-of-student-housing-cmbs-spike/

The once hot asset class of high-end student housing runs into reality.

 

In August, the percentage of student-housing CMBS that were delinquent and have been turned over to a special servicer spiked to 7.3% of total outstanding balances, according to Trepp, which analyzes CMBS. The rate of CMBS that aren’t delinquent yet but have already been turned over to a special servicer rose to 2.8% of the total outstanding. And so, the combined rate of student housing CMBS in special servicing has jumped to 10.1% (purple bar on the right, chart via Trepp):

US-CMBS-student-housing-deliquency-Trepp

In addition, another 14.6% of Student-housing CMBS that are not yet delinquent and have not been turned over to special servicing are now on the watchlist (purple bar on the left in the above chart).

In dollar terms: Of the $4.5 billion in private-label student housing CMBS, $331 million are delinquent as of August, and $123 million, while still current, are already in special servicing. In total, $454 million, out of $4.5 billion, are in special servicing.

But for the recent vintages of CMBS, the delinquency rate is a lot higher: $1.5 billion of the $4.5 billion in student housing CMBS are backed by mortgages on properties that were constructed in 2010 or later. According to Trepp, many of these mortgages were securitized into CMBS within two years after construction, “meaning little or no operating history was provided.” The delinquency rate of these CMBS has spiked to 15.3%!

This comes on a backdrop of loose money, low interest rates, and historically low default rates by other multifamily CMBS: With student housing excluded, only 1.8% of the remaining multifamily CMBS are in special servicing (red bar on the right in the chart above).

In broader terms, the Trepp delinquency rate for all CMBS in August fell to another post-Financial Crisis low of 2.5%. Even the battered brick-and-mortar retail CMBS sported a delinquency rate, at 4.1%, that was far lower than the student housing delinquency rate.

But the student housing sector was once red-hot with investors. According to the Green Street Commercial Property Price Index, prices of student housing properties soared 56% from the peak before the Financial Crisis. In fact, the property price index for student housing barely dipped during the Financial Crisis, before it took off gain.

But the sector faces some challenges, including:

Oversupply of luxury student housing units. Not only oversupply, but also the whole notion of “luxury student housing” in the era of crushing student debt. Sure, some students are floating in moolah, but most students are struggling to get by. An insider who has been working in student-housing construction for many years told me:

“I was always shocked by the luxury and presumption of entitlement embedded in the marketing, such as top of the line fitness facilities when there is already a fieldhouse on campus, appliance packages for people who never cook but eat at the cafeteria, etc. All this has added to the cost and to student debt.”

Falling student enrollment. According to the National Center for Education Statistics, total undergraduate student enrollment surged by 37% between 2000 and 2010, from 13.2 million to 18.1 million students — thus whetting the appetite for the student housing industry. But then came the Financial Crisis and other factors such as soaring tuition, and to the greatest surprise of the industry, total enrollment has since declined by 7% through 2017, to 16.8 million students.

Thus, even as supply of high-end student housing is increasing, the supply of students, so to speak, is declining.

The issue with student housing isn’t the low end. There is always demand for affordable student housing. It’s at the high end where things are cracking – and more precisely at a specific corner of high-end. Trepp:

Generally speaking, the student housing market is relatively barbelled in terms of inventory quality.

One end consists of older, lower-end developments with more dated amenity offerings. Since “low end” housing construction is constrained and most campuses have a steady supply of frugal students as well as money-conscious parents, this part of the market usual soldiers on.

On the other end, there is a constant new supply of amenity-rich multifamily units coming onboard – which has triggered – as we like to say – the “student housing amenity race.” The housing options that find it hardest to compete are those complexes that were amenity-rich 10 years ago and remain pricey, but now seem dated.

At these older high-end properties, so the 2010-plus vintages, landlords can’t keep up their occupancy levels, given the already limited number of students who can afford them and the onslaught of new high-end student housing, and given the requirement to charge uncompetitive premium rents to service the debt. Hence, the CMBS delinquency rate on these older vintages that has soared to 15%.

Clearly, many graduates who are now struggling with piles of student loans lived in low-end student housing or outright dumps, trying to get by, in line with the bifurcation among American consumers.

But in the era of relentlessly soaring student debt [The State of the American Debt Slaves, Q2 2019]…

US-consumer-credit-student-loans-2019-Q2

…and in the era of campaign promises (whatever they’re worth) of forgiving part of this student debt at the expense of taxpayers, the whole notion of “luxury student housing” and how it was funded and securitized and sold to investors, and how those involved profited along the way, clarifies the role of the University-Corporate-Financial Complex, and how it has hooked into the government-guaranteed money flow. And students are just the conduit.

Services are Hopping. The #1 Biggie is Hopping the Fastest. It all adds to GDP! Read...  The Financialization of the US Economy

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@Barnsey

http://theeconomiccollapseblog.com/archives/uh-oh-u-s-layoffs-rise-38-percent-highest-level-for-august-since-2009

Employers also announced the most layoffs of any August since 2009, the outplacement firm Challenger, Gray & Christmas said.

Job cuts rose 38 percent over July, with 53,480 positions to be slashed from employer payrolls, led by workforce reductions in health care, which had b

Other nations are really starting to feel the effects of the trade war as well.  This week, Germany reported a startling drop in new manufacturing orders

Contracts for ‘Made in Germany’ goods fell 2.7% from the previous month in July, data showed on Thursday, driven by a big drop in bookings from non-euro zone countries, the economy ministry said. That undershot a Reuters consensus forecast for a 1.5% drop.

“The misery in manufacturing continues. The decline in new orders significantly increases the risk of a recession for the German economy,” VP Bank analyst Thomas Gitzel said.

During the second quarter, German GDP growth fell into negative territory, and it looks like that will happen again here in the third quarter.

That would mean that Germany is already in a recession right now, and that is very troubling news for all of Europe.

Here in the U.S., just about everything that we would expect to see happen just prior to the beginning of a recession is happening in textbook fashion right in front of our eyes.

In particular, the transportation industry is already mired in a very deep downturn, and we just learned that orders for heavy trucks in August were down by 80 percent compared to a year earlier…

Orders for heavy trucks that haul part of the economy’s goods across the US plunged by 80.1% in August 2019 compared to August last year, to about 10,400 orders, according to preliminary estimates by FTR Transportation Intelligence. It was the 10th month in a row of year-over-year declines, and the second month in a row of 80%-plus declines, with orders in July having plunged 81.2% to about 9,800, not seen since 2010.

I don’t know about you, but an 80 percent decline sure seems like an awfully big red flag to me.

Overall, it is still being projected that the U.S. economy will stay out of contraction territory in the third quarter, but GDP forecasts have continued to slip.  The following comes from Reuters

een a mainstay of recent job creation, the tech sector and manufacturing.

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Remember as well the Fed is too tight for this stage of the cycle by around 2.5 basis points.Given the scale and speed of the contraction in liquidity that will cause, the debt deflation cant be stopped now.Europe and China likely points for most pain,and those companies who have gone up on Chinese credit growth.Most of that growth went into mal-investment and will go up in smoke.

Here in the UK we should see defensives and cyclicals move higher as the market sniffs a money injection into the domestic economy.

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1 hour ago, DurhamBorn said:

Remember as well the Fed is too tight for this stage of the cycle by around 2.5 basis points.Given the scale and speed of the contraction in liquidity that will cause, the debt deflation cant be stopped now.Europe and China likely points for most pain,and those companies who have gone up on Chinese credit growth.Most of that growth went into mal-investment and will go up in smoke.

Here in the UK we should see defensives and cyclicals move higher as the market sniffs a money injection into the domestic economy.

 

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7 hours ago, sancho panza said:

Sorry to spam WOlf St but here's another ponzi I've seen dominate economic places like Leicester and Coventry.Student accomodation funded by the generosity of British taxpayers,whose profits leak like help to buy,into the pockets of private secotr shareholders

https://wolfstreet.com/2019/09/08/delinquency-rates-of-student-housing-cmbs-spike/

The once hot asset class of high-end student housing runs into reality.

 

In August, the percentage of student-housing CMBS that were delinquent and have been turned over to a special servicer spiked to 7.3% of total outstanding balances, according to Trepp, which analyzes CMBS. The rate of CMBS that aren’t delinquent yet but have already been turned over to a special servicer rose to 2.8% of the total outstanding. And so, the combined rate of student housing CMBS in special servicing has jumped to 10.1% (purple bar on the right, chart via Trepp):

US-CMBS-student-housing-deliquency-Trepp

<img alt="US-CMBS-student-housing-deliquency-Trepp" data-ratio="89.38" height="429" srcset="https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/09/US-CMBS-student-housing-deliquency-Trepp-2019-08.png&key=e35b597a2e28b9918598d8e371ad12f81973b5283a01016dffefa607c152517e 480w, https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/09/US-CMBS-student-housing-deliquency-Trepp-2019-08-260x232.png&key=a1d12a982d1c3de2a19eee830bb3bca4c1ebf35d90bf27b3a4cd08fa8822607f 260w, https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/09/US-CMBS-student-housing-deliquency-Trepp-2019-08-160x143.png&key=2660926ec90647eb20132c8ca9411254c1bf03e2a15036aba9d924548e57dc86 160w" width="480" data-imageproxy-source="https://wolfstreet.com/wp-content/uploads/2019/09/US-CMBS-student-housing-deliquency-Trepp-2019-08.png" data-src="https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/09/US-CMBS-student-housing-deliquency-Trepp-2019-08.png&key=e35b597a2e28b9918598d8e371ad12f81973b5283a01016dffefa607c152517e" src="https://www.dosbods.co.uk/applications/core/interface/js/spacer.png" />

In addition, another 14.6% of Student-housing CMBS that are not yet delinquent and have not been turned over to special servicing are now on the watchlist (purple bar on the left in the above chart).

In dollar terms: Of the $4.5 billion in private-label student housing CMBS, $331 million are delinquent as of August, and $123 million, while still current, are already in special servicing. In total, $454 million, out of $4.5 billion, are in special servicing.

But for the recent vintages of CMBS, the delinquency rate is a lot higher: $1.5 billion of the $4.5 billion in student housing CMBS are backed by mortgages on properties that were constructed in 2010 or later. According to Trepp, many of these mortgages were securitized into CMBS within two years after construction, “meaning little or no operating history was provided.” The delinquency rate of these CMBS has spiked to 15.3%!

This comes on a backdrop of loose money, low interest rates, and historically low default rates by other multifamily CMBS: With student housing excluded, only 1.8% of the remaining multifamily CMBS are in special servicing (red bar on the right in the chart above).

In broader terms, the Trepp delinquency rate for all CMBS in August fell to another post-Financial Crisis low of 2.5%. Even the battered brick-and-mortar retail CMBS sported a delinquency rate, at 4.1%, that was far lower than the student housing delinquency rate.

But the student housing sector was once red-hot with investors. According to the Green Street Commercial Property Price Index, prices of student housing properties soared 56% from the peak before the Financial Crisis. In fact, the property price index for student housing barely dipped during the Financial Crisis, before it took off gain.

But the sector faces some challenges, including:

Oversupply of luxury student housing units. Not only oversupply, but also the whole notion of “luxury student housing” in the era of crushing student debt. Sure, some students are floating in moolah, but most students are struggling to get by. An insider who has been working in student-housing construction for many years told me:

“I was always shocked by the luxury and presumption of entitlement embedded in the marketing, such as top of the line fitness facilities when there is already a fieldhouse on campus, appliance packages for people who never cook but eat at the cafeteria, etc. All this has added to the cost and to student debt.”

Falling student enrollment. According to the National Center for Education Statistics, total undergraduate student enrollment surged by 37% between 2000 and 2010, from 13.2 million to 18.1 million students — thus whetting the appetite for the student housing industry. But then came the Financial Crisis and other factors such as soaring tuition, and to the greatest surprise of the industry, total enrollment has since declined by 7% through 2017, to 16.8 million students.

Thus, even as supply of high-end student housing is increasing, the supply of students, so to speak, is declining.

The issue with student housing isn’t the low end. There is always demand for affordable student housing. It’s at the high end where things are cracking – and more precisely at a specific corner of high-end. Trepp:

Generally speaking, the student housing market is relatively barbelled in terms of inventory quality.

One end consists of older, lower-end developments with more dated amenity offerings. Since “low end” housing construction is constrained and most campuses have a steady supply of frugal students as well as money-conscious parents, this part of the market usual soldiers on.

On the other end, there is a constant new supply of amenity-rich multifamily units coming onboard – which has triggered – as we like to say – the “student housing amenity race.” The housing options that find it hardest to compete are those complexes that were amenity-rich 10 years ago and remain pricey, but now seem dated.

At these older high-end properties, so the 2010-plus vintages, landlords can’t keep up their occupancy levels, given the already limited number of students who can afford them and the onslaught of new high-end student housing, and given the requirement to charge uncompetitive premium rents to service the debt. Hence, the CMBS delinquency rate on these older vintages that has soared to 15%.

Clearly, many graduates who are now struggling with piles of student loans lived in low-end student housing or outright dumps, trying to get by, in line with the bifurcation among American consumers.

But in the era of relentlessly soaring student debt [The State of the American Debt Slaves, Q2 2019]…

US-consumer-credit-student-loans-2019-Q2

<img alt="US-consumer-credit-student-loans-2019-Q2" data-ratio="87.04" height="423" srcset="https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/08/US-consumer-credit-student-loans-2019-Q2.png&key=0d9ab5d9f9f186a84061ab17518f18474ba6d0ecf63709f370b4f053e4ec775b 486w, https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/08/US-consumer-credit-student-loans-2019-Q2-260x226.png&key=01815ab1d0726c3319d2f71b61e3a47e812182cb782e9ff476d8e1181692da85 260w, https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/08/US-consumer-credit-student-loans-2019-Q2-160x139.png&key=bb2532b710e8ba154a654313b5ee18c78f66829ec044befd7aa8c7bddf2d9c2e 160w" width="486" data-imageproxy-source="https://wolfstreet.com/wp-content/uploads/2019/08/US-consumer-credit-student-loans-2019-Q2.png" data-src="https://www.dosbods.co.uk/applications/core/interface/imageproxy/imageproxy.php?img=https://wolfstreet.com/wp-content/uploads/2019/08/US-consumer-credit-student-loans-2019-Q2.png&key=0d9ab5d9f9f186a84061ab17518f18474ba6d0ecf63709f370b4f053e4ec775b" src="https://www.dosbods.co.uk/applications/core/interface/js/spacer.png" />

…and in the era of campaign promises (whatever they’re worth) of forgiving part of this student debt at the expense of taxpayers, the whole notion of “luxury student housing” and how it was funded and securitized and sold to investors, and how those involved profited along the way, clarifies the role of the University-Corporate-Financial Complex, and how it has hooked into the government-guaranteed money flow. And students are just the conduit.

Services are Hopping. The #1 Biggie is Hopping the Fastest. It all adds to GDP! Read...  The Financialization of the US Economy

Ok, UK perspective...

1. Those with the money to afford the luxury student accommodation are SE Asian/Chinese.

2. UK student numbers as a % are dropping and being replaced by 1 above.

3. Call for restrictions on immigration/Brexit.

Factors that will have an impact on the above:

a) SE Aian/Chineae economic downturn will affect 1 above.

b) SE Asia/China are now developing a strong `Home grown` university sector; recruitment of Western academics is high to give the prestige/kudos, once again impacting on 1.

c) Following recent Auger review of FE/HE in UK, student loans/fees are likely to drop by about £2k, so having an impact on 2 above.

d) UK student perception of degree value vs Modern apprenticeships in the workplace (and employability) likely to impact 2.

e) Impact of additional visa requirements and/or permissions to stay for a period post-degree will impact overseas student numbers in 1 and 3 above.

The UK HE business that has been allowed to massively expand in the last 20 years is now going to contract, with several universities amalgamating (read going bankrupt). As the student accommodation was tied to this expansion I would expect a similar contraction...not a good bet in such an illiquid asset. I expect to see some of these developers/developments being bailed out by their conversion to a pressing need, social housing.

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Yellow_Reduced_Sticker

Recession CANCELLED!

WHY?

Because the UK economy grew by 0.3% between June and July, according to the Office of National Statistics (ONS). Economists had forecast month-on-month growth of 0.1%, up from 0% in June.

A meagre 0.3% growth ...ha -ha bunch of muppets!xD

https://uk.finance.yahoo.com/news/uk-gdp-july-monthly-industrial-production-manufacturing-recession-brexit-083436309.html

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5 hours ago, DurhamBorn said:

Remember as well the Fed is too tight for this stage of the cycle by around 2.5 basis points.Given the scale and speed of the contraction in liquidity that will cause, the debt deflation cant be stopped now.Europe and China likely points for most pain,and those companies who have gone up on Chinese credit growth.Most of that growth went into mal-investment and will go up in smoke.

Here in the UK we should see defensives and cyclicals move higher as the market sniffs a money injection into the domestic economy.

The canaries are warming theri vocal chords.

Point to note-46% of new Aussie mortgages are IO.

Ponit to note 30% of exports are coal/iron ore.

https://dfat.gov.au/trade/resources/trade-at-a-glance/Pages/top-goods-services.aspx

 

 

Worth noting that the article refers to the miscalculation of inflation,something this thread has been referencing-hattip to Shaun Richards from me- since it's inception.It also refers to the fact that different socio economic deciles experience varying levels of inflation-again something this thread has been referring to since inception.

https://www.abc.net.au/news/2019-09-08/economy-grinds-down-as-consumers-keep-their-wallets-shut/11487524

On a warm weeknight, Carol Salloum greets a couple of regulars at her restaurant, Almond Bar, in Sydney's inner eastern suburbs.

A year or so back, the popular Syrian eatery would have been full. Tonight, empty tables are a sign of the times.

And it's not just that custom is down; spending is slimmer, even among loyal guests.

"I mean, we've been here now for 12 years and the last 12 months have probably been the most difficult by way of customers not spending," Ms Salloum says.

"You know, rather than two people getting a bottle of wine, they are getting a glass of wine each, that kind of thing. They are thinking twice about where their money is going."

It's no isolated case.

Consumers aren't quite on strike, but there's definitely a consumer go-slow

"At one point I thought we were going into a recession, to be honest but I'd say [it's] somewhere before that," Ms Salloum says.

"Very weak; it doesn't look great from a business point of view."

Her assessment is on the money.

According to the official estimate from the ABS, Australia's economy expanded at an annual pace of just 1.4 per cent in the last quarter — the slowest rate of economic growth since the global financial crisis.

You have to back nearly 20 years to find a weaker result — in the year 2000 when the GST was introduced. Leave that one-off event aside, and the economy is the weakest it's been since the early 1990s.

Wage growth remains a massive issue

Parlous consumption was one of the big drags on the economy, which is not surprising, considering what's been happening with wages growth.

It's been woeful.

 

"The last six years has been the worst period for wages growth since the Second World War," says Jim Stanford, chief economist and director of The Australia Institute's Centre for Future Work.

"Wages have grown so slowly it's undermined consumption, it's undermined job creation and it's contributed to Australia being the most indebted consumers of almost any country in the world."

The wage price index has managed to pull ahead of consumer price rises. But only because — reflecting the weakness in the economy — the inflation rate is extraordinarily low.

If it doesn't feel like your cost of living is falling, though — and you're scratching your head at the talk of wages beating price rises — there may be a good reason.

The price of many necessities of life — food, healthcare, electricity and other utilities — has risen strongly over many years, far outpacing average wage gains.

But the "basket of goods and services" that make up the consumer price index also includes stuff most of us only buy now and again, and people on tight budgets might just forgo: the latest smartphone, for example, or a new whiz-bang laptop, the latest fashion clothing, or international travel.

It means, in effect, that there's a bias towards the well-off and people with a lot of disposable income in the cost of living.

"It all depends on what you buy," says Dr Stanford.

"The reality is that the price of many household essentials has been rising much faster than wages."

"So, if you can afford to spend a lot of your income on luxuries, your inflation rate may well be lower than average, but if you spend most of your income goes on the basic necessities, your cost of living will be likely to have risen far more than your wages and your standard of living will be going backwards."

Home ownership a distant dream for many

House prices aren't included in the Consumer Price Index. If they were, it would tell a very different story.

Despite recent falls, the cost of buying a home has soared in recent decades relative to incomes, pushing the Australian dream of home ownership out of reach for many.

 

Soaring property prices have also created a huge debt burden.

On some measures, Australia's household debt is the highest in the world; on others, merely second to Switzerland — and that makes us vulnerable.

Martin North of Digital Finance Analytics, who has long warned about the dangers of Australia's high household debt levels, notes that mortgage "delinquencies" — the share of borrowers who aren't keeping up with required loan repayments — have risen significantly, even though the RBA's cash rate and bank lending rates are at historic lows.

"If unemployment starts to rise, that will accelerate," he says.

Australia's unprecedented levels of household debt have never been tested in a recession — but it's worth noting that in the last recession, in the early 1990s, house prices fell by in the order of 20 per cent.

If Australia were to experience mass unemployment at the levels seen back then with today's levels of household debt, Mr North is among those who fear the consequences will be dire.

 

During the election campaign and the lead up to it, Treasurer Josh Frydenberg and his colleagues boasted of "the strong economy" — a claim that was not accurate even back then.

The mantra then became that the "economy is sound". Then, as a weakening economy mugged the rhetoric, it changed to "the fundamentals are strong" — a phrase echoed by the Reserve Bank governor.

The claims don't wash with Ms Salloum.

"I can't see it," she says. "Nothing seems 'sound' or 'strong' from our point of view."

There's plenty of folks who would share her feelings.

Low productivity growth by historical standards doesn't sit well with the claims about a "sound" economy with strong fundamentals, either.

Mr North and Dr Stanford are among the many economists and financial analysts worried about the structure of the Australian economy, which relies heavily on two industries to sustain its momentum — mining and construction.

"Both of those sectors have gone from boom to bust and right now we have very little of the hi-tech export-oriented sectors we need to drive growth," says Dr Stanford.

Many of the new jobs being created are not in "hi-tech, export-oriented" sectors but in a suite of industries that Mr North refers to as "the bedpan economy" — labour intensive human services such as aged care, community care and health care.

"Those jobs are not necessarily productive jobs, they are important jobs but they won't tend to deliver high productivity growth," says Mr North.

"My question is where is the next generation of value in the economy going to come from?"

How long can Australia's 'resilient' economy hold on?

In the face of the undeniable weakness, Mr Frydenberg has not dropped the reference to a "strong" economy, instead describing it as "resilient".

That's a fair call; a world-record 28 years without a recession is evidence enough.

 

Australia's weathered the Asian financial crisis of the 1990s, the tech wreck of the 2000s, and the Global Financial Crisis a decade ago without succumbing. But that record has involved some sound management and a lot of luck.

At some stage, the luck will run out.

Alongside spluttering economic growth and households hunkering down at home, a series of risks lurk offshore — a bad Brexit, the US-China trade war, underlying problems in the Chinese economy blowing up among them.

"Any one of those could play us into a GFC 2.0," says Mr North.

"And if that happens then essentially all bets are off."

"We are going to see very high levels of unemployment, we're going to see a lot of households defaulting on their mortgages and that would have a spillover effect on the economy. That would hit the banks and take us into a very dark corner, in my view."

In recent times, it's only been population growth that's kept Australia out of recession. More people have created more demand but high immigration has also helped to suppress wages.

While the pie's been growing larger, the slices have been getting smaller (leaving aside the distribution of the pie, which is skewed towards those at the top).

Per head, living standards have fallen — a phenomenon that's been dubbed a "per capita recession".

The government and the RBA will be banking on the tax cuts which commenced in July and interest rate cuts to lift the economy out of the doldrums. If we're lucky, things may start to turn around.

But if the luck runs out, there could be far worse to come.'

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