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Another GFC looming in the next few years ?

Discussion in 'Property Market Economics' started by Tekoz, 4th Jul, 2016.

?

What would you do to prepare when this happened?

  1. Invest in Gold

    6 vote(s)
    15.4%
  2. Invest in Property (still)

    22 vote(s)
    56.4%
  3. Government Bonds

    1 vote(s)
    2.6%
  4. Deposit more money into the bank

    5 vote(s)
    12.8%
  5. Don't know what to do ?

    5 vote(s)
    12.8%
  1. Tekoz

    Tekoz Well-Known Member

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    Back in the year 2008 the US big banks or investors loaned money to subprime housing borrowers under the false assumptions that "Housing market is rock solid - Borrowers will always be able to pay their mortgages. Although many borrowers don’t have adequate income to pay back their mortgages, the banks still approve housing loans". This assumption is proven false due to very poor lending practice which then creates a GFC. [Info: http://news.bbc.co.uk/2/hi/business/7073131.stm]

    Nowadays investors buy the government bonds of subprime governments (including the US) based on the assumption that "governments always pay their debts."

    In the US, the total amount of government debt(USD $ 19.4 trillion, Source: U.S. National Debt Clock : Real Time) is now approximately almost half size of the subprime housing debt and growing (USD $33 to $47 trillion as of November 200, Source: Subprime mortgage crisis - Wikipedia, the free encyclopedia).

    What make it worst is 30% of these Gov bonds are now on negative yield. Meaning investors are actually paying interest to the Government for buying negative yield bonds.

    So the big question is:


    This will end badly and Alan Greenspan has said recently that High Inflation will come.
    Source: Greenspan Warns A Crisis Is Imminent, Urges A Return To The Gold Standard | Zero Hedge

    Yes, government default may create a massive depression (government and central banks worst nightmare).

    So the only way to avoid government default is to continue creating government bonds/debt and printing money (Quantitative Easing) until the market & investors lose confidence/trust hoping that they will stop buying government bonds.

    What would you do to prepare when this happened?

    Any comments would be greatly appreciated.
     
  2. barnes

    barnes Well-Known Member

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    Where is the 'DO NOTHING" space? Just sit and wait preserving what you have already made until it weathers through. It's the best strategy in every crisis and I have lived through several. :)
     
  3. hammer

    hammer Well-Known Member

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    There's always another gfc looming. We live in a boom and bust world.
     
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  4. Perthguy

    Perthguy Well-Known Member

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    Correct. The question is, how are you preparing for it? I was cashed up and ready to buy during GFC. Unfortunately, with money very tight, I could not get a loan. It was not long after that I picked up my next IP.
     
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  5. Tekoz

    Tekoz Well-Known Member

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    Thanks for some of the input people.

    It seems the majority as at today is still investing in property :cool:, I guess it is because I'm asking in the property forum after all.
     
  6. Perthguy

    Perthguy Well-Known Member

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    Only because I am in property accumulation phase. I was onto listed securities, I would be cashed up and ready to buy. GFC is a good time for investors who are prepared.
     
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  7. BarneyRubble

    BarneyRubble Well-Known Member

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  8. Bayview

    Bayview Well-Known Member

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    The best hedge against any sort of downturn is to continually work on decreasing debt - all debt.

    Start with private consumer debt, the move on to investment debt.

    That doesn't mean stop investing; it means invest so that you also still have the capacity to repay loans as you go...a GFC won't affect any of your IP's (or business) if you have comfortable DSR's and LVR's.

    There is lots of talk about capitalising interest, and IO loans and so forth; that's all great when times are good and the job is secure (?) and the income is good...hope for the best; but plan for the worst.
     
  9. Casteller

    Casteller Well-Known Member

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    In a GFC event get the hell out of banking shares, sell the lot. Banks can and do evaporate faster than a fart in a fan factory.
     
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  10. House

    House Well-Known Member Premium Member

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    It's probably because it's the safest asset to be in for a GFC as it's the only one not dominanted by investors where fear and greed are probably the main emotional drivers.

    I've read all the Rickards, Schiff's etc but because of it I put the fear of GFC2 in myself... But realized that as long as I have a big enough buffer to see me through, things should be back to normal soon enough. Unless it's an actual recession that hits...

    Just look at all those people who have been shouting about the real estate bubble for the last 16 odd years, they've missed out big time.

    GFC1 didn't have too much impact in comparison to other countries but history shows we've fared well in general.
    image.png

    And if it was because mining was propping us up...
    image.jpeg
     
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  11. Bullion Baron

    Bullion Baron Well-Known Member

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    Easy to trivialize the current situation like this, we see short term boom and bust cycles regularly, but how do you see this bust playing out? What did it look like last time?

    [​IMG]

    The U.S. has an ugly debt problem and so do most western economies. We will eventually delever (even if still riding the debt to GDP higher in the meantime as Australia is), I don't know whether that will come about by inflation and GDP growth or deflation and default, but I do expect it to be a rocky few years, perhaps even a decade or longer.

    In the GFC the central banks were there to prop up the financial institutions, who will bail out sovereign nations defaulting?

    In my view a healthy allocation to gold is a must. Keep your leverage at sensible levels, your cash buffers ready.
     
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  12. Barny

    Barny Well-Known Member

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    @Bullion Baron what would you say a healthy allocation in gold might be?
    And for those that owe money on mortgages, is it still something to allocate borrowed money towards or only saved money with no debts attached?
     
  13. Barny

    Barny Well-Known Member

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    Leverage/serviceability.
    Recently had this discussion with a few people @kierank @Jess Peletier, thanks guys.

    You may have a good buffer in place, and you should to help you through the tuff times, but serviceability/cash flow is extremely important.

    I understand that our personal position in leverage wasn't a concern, it was actually serviceability I had to check over. We have big buffers in place if ever needed and our leverage is on the lower side, and have been reducing this over the last couple years.
    Had to work out if we could continue to service our debts and lifestyle if a recession takes place, and we loose our jobs/income.

    Can we cover the morgages...check, as they are cashflow positive.
    Can we cover our rent and lifestyle....check, we can move back to our ppor morgage free, but our lifestyle will take a hit. We would need to cut all luxuries. That holiday every year would stop, buying cars would stop. Buying $25 wagyu burgers would stop.
    Can we still create an income......check, may not be the same income but I'm happy to take what we can in tuff times and stress about the rest at a later stage.
     
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  14. paulF

    paulF Well-Known Member

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    Great comments above. I think it's very subjective depending on one's financial standings.

    I chose the put more money in the bank option and the reason why i did is because i have a mortgage like many others and currently my offset account is saving me big money on interest while the IP is taking care of itself and hence i'm closing off the PPOR debt much faster. I used @Terry_w tax tip below to calculate the savings(earnings depending on how you look at it...) and the return beats pretty much most returns from any other investment category (that i know how to invest in...). Also, historic low inflation played a part in choosing that option.

    Tax Tip 122: PreTax Equivalent Earnings on the PPOR offset
     
    Last edited: 5th Jul, 2016
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  15. Tekoz

    Tekoz Well-Known Member

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    yes, then that's my question, what to prepare before the GFC hits ?
    I guess now it is the right time to ask that question.
     
  16. radson

    radson Well-Known Member

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    Why would anyone advocate a gold standard? Its an absurdly simplistic reductionist zero thought through solution to the complexities of the modern politcal/social/economic times.

    Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts
     
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  17. barnes

    barnes Well-Known Member

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    Sell as much as possible and sit on the sidelines.
     
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  18. radson

    radson Well-Known Member

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    btw, Im DCA into australia shares, international shares, Infrastructure funds, bonds and gold.
     
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  19. JDP1

    JDP1 Well-Known Member

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    if the gfc mark 2 hits, id buy as much of an index as possible....wait for 7 yrs or so and sell my stake- likely doubling or more of my money. I can wait 7 yrs.
     
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  20. Bullion Baron

    Bullion Baron Well-Known Member

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    Depends on the investor and their situation, but IMO anything up to 25% of a portfolio could be reasonable for a conservative investor (see the Permanent Portfolio and how gold acts as a stabilizer against volatility of equities over the long term).

    The Power Of Gold And Rebalancing In A Portfolio | Research

    10% may be a more reasonable allocation for some investors.

    I wouldn't borrow to buy gold as the debt would not typically be tax deductible (i.e. you can't negatively gear physical/freehold gold).
     
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