Round 2 of the Crisis is about to begin

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Chinese banks in NZ and AU are cutting rates below 2% in some cases, I’m told. Money is really cheap. But…

Property Investors must be delighted with significant easing of lockdowns across Australia and New Zealand, things are starting to get back into the swing of things. The first round of the crisis seems to be coming to an end and the general narrative across mainstream media has begun moving away from public health & safety to the impending fallout from the series of lockdowns that have rattled both nations for the last 8 weeks or so.

For those that paid attention to our articles throughout March and April, would know that this crisis, as much as it looked like a health crisis (at face value), was never actually about the health of the people. It was more about the health of the “system”, the health of the economic engines that drive both countries. Weaknesses in the engine are now beginning to show and that’s what we are going to cover in today’s article.

Grant Robertson, NZ Finance Minister

In New Zealand, Finance Minister, Grant Robertson announced an ambitious budget that spoke about a lot of numbers, but lacked clarity in exactly how the nations income stream is going to be rebuilt again. $50bn budget for a $125bn economy is a dangerous number, no matter which way you look at it.

It is likely to take 12-14 years for the debt balance to be achieved (which I don’t think will happen), and even then, it will be the next generation that is going to pay the price for this calamitous budget.

Josh Frydenberg, Treasury Sec. Australia

Meanwhile, in Australia, Mr. Frydenberg came out saying that the jobkeeper wage subsidy program will now cost the budget $70bn rather than $130bn because of a reporting error in estimates of the number of employees likely to access the scheme. You read that right. A reporting error of $60bn.

I wonder who’s running the numbers in the office and how much can the rest of the numbers be trusted. Secondly, notice, that the program, even though sounded remarkable because of the big number, is still only an estimate based on the number of people that are “likely” to access the scheme. Shocking.

The housing market, however, hasn’t yet started showing the sort of decline that is expected. Wait another 6 weeks and you might start seeing the narrative about the housing market crash, get louder.

“Good times are ahead”, is the message being preached by all these economies, including the front-running, US economy.

Everyone is drowning in the madness of the Keynsian approach of printing money to speed up spending.

While the wage subsidies and the small business loan schemes must be great for many businesses, the fact remains that dishing out free cash is not a long term solution.

Especially not at the level that the government is doing currently. So far, I haven’t seen anyone in MSM asking “what happens after the wage subsidies have been paid out in full”?

On a side note: In the press briefing 2 days ago, a journalist asked FM Robertson the following question: “With helicopter cash, will you be borrowing money to do that or will you be printing more money…” – I don’t know who this journalist was or which school she went to, but someone clearly needs to tell her that there’s NO difference between the two in this case.

QUESTION: When the government “borrows” money, who does it borrow from and on what terms? Also… does it pay any interest? To who?


Last week, I spoke with around 50 random small business owners across Australia & New Zealand. I just rang them up and asked the founders two simple questions – How many workers have they laid off or are planning to layoff in the short term (3 months) and how long before they will need additional funding to remain viable.

The average across that small sample size is: 61% have laid off more than 40% of their workforce and almost all of them said they needed additional funding within 3-4 months before they will be in serious trouble. These numbers aren’t hard to fathom, considering the countries were put into enforced lockdown for several weeks, literally decimating multiple industries and business sectors.

There are 3 primary response categories that governments have to rely on, in times such as these. These are:

  • Fiscal Response
  • Financial Response and
  • Monetary Response

You will be right in thinking, well, why 3 names for the same outcome… well, like everything in the world of banking and finance, the same is true when it comes to structuring relief and responding to a crisis.

Fiscal response involves using government revenue collection and expenditure to influence a country’s economy. Items such as tax breaks, extension of depreciation schedules, reduction of GST (if any) etc. are all part of a fiscal response strategy. Basically, this type of response is purely policy driven, doesn’t impact the government’s cashflow today, but it does impact the income for the treasury tomorrow.

Then comes Financial Response. This is made up of financial assistance packages, easing off bank lending rules to facilitate additional lending, cash subsidies, government guaranteed cash loans etc. This response puts real cash in the hands of the people, as you have seen through the wage subsidy programs on both sides of the Tasman.

Then lastly, we have the Monetary Response. This is largely delivered by the central banks through the use of instruments such as interest rates, inflation management, liquidity injections (buy back programs) and easing of lending restrictions. It is important to understand that momentary policy DOES NOT immediately show its impact as far as Jane and Joe on the street are concerned. Monetary policy takes time to show its results and is mostly there to assist commercial aspects of the economy.

It is more about keeping lending flowing, businesses viable, borrowing cheap and economic activity stimulated – the end hope is that if these things remain in place, the economic wheels will keep turning, and the jobs will remain saved. Utopian. Hardly ever works like that. But its an important aspect of economic response so worth a mention.

Whether it be the helicopter cash program of the US Fed, the Job-keeper/seeker wage subsidy of Australia or the Wage Subsidy + Small Business loan package in New Zealand – all these are just means to “short-term” ends. Long term economic ramifications are yet to be felt at a level whereby both governments are likely to have to extend further major relief packages for another 6-12 months.

While monetary policy cannot anticipate the point at which the economy will reopen, it can make sure that the necessary monetary and financial conditions for the restoration of economic activity are in place, in line with the easing of the containment measures.


This is from a statement from the European Central Bank. Sounds complicated… doesn’t it?

I LOVE ECB - HELLLLLLL NOSo what does it all mean for you, the property investor

 

Well, Real Estate Investment Trusts. Watch the market. Housing market data is terribly out of shape, unreliable and still, heavily sentiment driven. The fundamentals of the housing market are still shaky. How shaky?

Well, its yet to become clear…but in the mean time, if you’re getting cold feet, sitting on your hands, you need to considering becoming more prudent with what else is going on in the market.

Malls have opened. Retail REITs are a good stock to watch. Had you paid attention to some of the lessons in the REIT Masters Course, which is part of our Crisis Investing Program, you would have done well, by now with Retail REITs bouncing back slowly.

However, there are going to be several major shocks coming up in the next 12-24 weeks, with shock waves slowing down into cycles 12 week long at a time. I don’t have a crystal ball, but I’m simply saying the based on how I read the market. I could be wrong. This is not financial advice.

Whether or not the market is going to go up, come down or tread sideways for a while, is not the first question to ask. The first, and most important question to ask, ALWAYS, is “how do I know which direction things are going in” – and that comes from knowing how to read the market.

And then there’s the question for first home buyers. Money is cheap.

Chinese banks in NZ and AU are cutting rates below 2% in some cases, I’m told. Money is really cheap. But… I want to caution anyone considering buying their first home during this time to take a moment, not get caught up in FOMO and really understand what they are getting into. Take a moment to learn how to think like an investor, because even if you’re buying your first home, you ought to do it with the objective of using this first home as the first step in building your own property ladder.

For that, you need to know some of the basics of Real Estate Investing. Like I keep telling all our students, you should not be making decisions based on price.

Price is a LIAR. Making decisions based on price is like taking a gamble based on what you can afford today, without an understanding of what your purchase might be worth tomorrow. Decide on fundamentals. Fundamentals. Fundamentals.

Drop in a question, let me know what your biggest challenge is and I will do my best to provide you some insights.

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