Last week we talked about the signs on the economic Ferris Wheel and I promised some more analysis. I will repeat the Wheel to save you looking back:
click for more detail
We talked about two paced economies and when you have this there will be different states travelling at different paces. In 2007 we saw home foreclosures in the western suburbs in Sydney whilst we were seeing housing prices rise dramatically in many parts of Victoria, Queensland and Western Australia. We haven’t yet seen mass business foreclose but these levels of interest rates will put a lot of pressure on business and we will see foreclosures rise – which is about 5 o’clock on our wheel.
At some point later this year – unfortunately after the shakeout – we may see interest rates start to fall – ‘5:30 o’clock’.
The big question is will we see the wheel pause long enough at ‘6 o’clock’ to cause property and share devastation? It is incomprehensible to many at this point, we could see property gloom – i.e., falling prices. And might I say it even more gloom for shares.
There is a view that property is over valued in Australia and many other countries and just as 12 months ago few would have dreamt that we could see so much fall out in the mortgage market we do have to think about what is the worst thing that could happen going forward. Just as that ‘paradigm’ of a collapsing credit world seemed far fetched a year ago so too is the thought that the value of our beloved houses could come tumbling down.
I am not suggesting this might be the case but I am saying it is possible. It is possible that we could see another leg down in the sharemarket. Again I am not wishing to be a merchant of doom and gloom but rather suggest it is something we keep in the back of our minds. We need to avoid being ‘Gung Ho’ at these times.
My reading is that we are not yet quite out of the woods with some more pain ahead (8 o’clock) which should not last all that long and then we are back to 7 o’clock.
And the Ferris Wheel becomes fun once again.
Enjoy the ride