Farewell good times

Colebatch in the Sydney Morning Herald with a firm take down on the Australian economy's growth aspirations.  Building on Ross Garnaut's recent assessment which was profiled in this blog, it makes for a really shocking read - the China bust, uncompetitive currency and interest rates, falling tax revenue, unfunded commitments and an aging society.  Ouch.  Is this the opening of a door into the bad old days of the recession we had to have?

Our economy is poised to go bust and only tax rises and spending cuts can save us.... One of Australia's most respected economists, Ross Garnaut, of the University of Melbourne, warns that when the mining boom busts, the economy is likely to bust with it. History is on his side. Since 2005, mining investment has reared up like a tidal wave, from 2 per cent of GDP to more than 8 per cent. If it breaks like a tidal wave, it will swamp the economy.... 

The bottom line is that something's got to give. Australia cannot continue this level of spending with this level of revenue.....

The end of the mining boom, however, could throw all this out. Garnaut, a former ambassador to China, says we underestimate the seriousness of China's rulers in planning to shift its economy to a more gradual, less resource-intensive growth path...But every mining boom since the war has ended in a bust, and there is no reason to think this time will be different. It was a very big boom, so it could be a very big bust. (here) 

The Super conundrum

There has been debate raging for some time about Australia's compulsory private retirement pension system (or superannuation).  Following in the footsteps of European deficit countries perhaps, government is discussing ending the favourable tax breaks some have enjoyed when contributing to pensions and in general with high risk and low yields in many asset classes, the sector is looking weaker, just when many more people are looking to their pensions to cover them for difficult futures.

And tied up in this is a government short of funds which has found its windfall mining tax is coming up short on delivering promised funds

Asked about speculation the government is poised to raid superannuation contributions and earnings in the May budget, the PM would only promise an increase in the super guarantee from 9 to 12 per cent....Funding to pay for tax concessions to allow the increase are supposed to come from the minerals resource rent tax (MRRT) - an impost the Coalition would scrap in government. (here)

One of the other key fiscal reforms of recent times, the carbon tax has also struck trouble given the failure of the EU ETS scheme which has caused the price of carbon to drop to far below Australian levels (meaning Australian authorities are charging excess levies inflicting pain on the economy).  As set out in the Economist magazine:

...For the time being, therefore, carbon permits seem set to remain, in the phrase of the secretary-general of EURELECTRIC, an electricity providers’ association, “junk bonds”.   

That will have profound consequences. Over the past few years more than a dozen countries and regions have followed the EU in establishing or proposing cap-and-trade schemes. They include Australia, South Korea, California and several Chinese provinces. The travails of the ETS will not stop this process: China’s new leaders are committed to reining in their country’s vast carbon emissions and think a cap-and-trade scheme is essential.(here).

Looks like the government could be getting squeezed soon.

Switching away from the banks

Many in Australia grew up saving with local credit unions, only to get wowed over by larger banks with greater product offerings, often tied to mortgage finance deals.  Since the start of the year the industry representative body has launched a campaign to raise the sector's profile, and its website ("Balance Banking" campaign) has some good details about the sector in general.

Interestingly, if the experience of the UK (which is currently a few years ahead of Australia in its banking crisis) is a guide then mutuals are likely to do well:

At a time when the payday lenders have been under media scrutiny for their astonishingly high interest rates (the Guardian recently reported the case of one lender charging more than 16,000,000% APR), the credit union way of providing financial services seems almost too good to be true. Loans are currently set at a maximum rate of interest of 2% per month (26.8% APR), for example. But despite more than 20 years of trying, Britain's credit union movement is still struggling to get attention. Compared with Australia, say, where a quarter of the population are credit union members, or the US where credit unions claim 95 million members, the British movement still has a long way to go (here).

And the Financial Times had some coverage of one mutual, the Weslayan Assurance Society:

The Birmingham-based mutual, which has focused on professionals market after merging with the Exeter-based Medical Sickness Society in 1997, has seen total turnover or premium income rise 133 per cent since 2005 from £166m to £387m. 

The growth has been driven by the trust the mutual has built up at a time when banks and other financial services companies have been under fire (here).

As it happens Schroders thinks Australian banks are overvalued:

The major banks have added $100 billion in market capitalization in the past year; we would be interested to see the logic behind an explanation as to how their sustainable earnings have increased at all, let alone by even close to the $10 billion required to justify this increase in market value through this time,” the firm’s deputy head of Australian equities Andrew Fleming said on Thursday....“In our view, the Australian economy is becoming more risky over time as the commodity boom fades, which suggests the banks are looking expensive,” Mr. Brunker told MoneyBeat. “No sector seems to have the potential to drive growth. (here)

Aussies going for gold

This blog is very much in favour of people moving their money into alternative asset classes and while suffering from recent price volatility, the market for over the counter gold bullion in Australia is booming, with high sales reported as in India and China, despite the sharp price falls last week.

... There is an interesting phenomenon happening in the CBD of Sydney: Private Vaulting. Until now the only option for safe deposit boxes was with one of Australia’s four TBTF banks and most of those vaults seem to date from the gold rush era of the 1890′s. But in the space of two months there will be two state of the art private underground safe deposit vaults opening, both with an emphasis on storing physical gold and silver. One has been showcased by Mike Maloney in a national news report and the other vault opens at the end of this month, (here)

... In the face of the worst slump in gold prices in decades, some so called bargain hunters are prepared to buck that trend and dive into the market for gold bullion, believing the precious metal is already bottomed out. 
Dealers in gold bullion and jewellery across Australia are reporting queues outside their shop fronts, as small investors swim against the downward tide driven by the big sellers of gold. 
One stock analyst is warning that anyone who thinks they're getting a bargain today just because gold's more than $200 an ounce cheaper than a week ago, could actually be queuing for fool's gold. (here).

And refiner the Perth Mint has been doing well also:

...Very significant demand is being seen throughout the world for physical bullion – in Japan, India, Australia, the U.S., Europe and elsewhere. The speculative raid by one or two banks which led to the price crash is being seen as a gift by eager buyers internationally.
Gold sales from Australia’s Perth Mint, which refines nearly all of the nation’s bullion, surged after prices plunged, adding to signs that gold’s slump to a two-year low is spurring increased demand.
“The volume of business that we’re putting through is way in excess of double what we did last week,” Treasurer Nigel Moffatt said by phone, without giving precise figures. “There’s been people running through the gate.”
The Perth Mint’s sales of gold coins climbed 49 percent to 97,541 ounces in the three months ended March 31 from a year earlier, according to data from the facility in Western Australia that was founded in 1899. 

Japanese curse? or mining the AUD bust?

Not yet but expect the peaked Aussie dollar to trend downwards with the commodities bust according to the Financial Times:

...Traditionally, Australian assets have been particularly attractive to Japanese investors, with the yield on the Australian dollar still the highest of any developed country at 3 per cent. Higher yielding emerging market currencies such as the Russian rouble at 8.25 per cent, the South African rand at 5 per cent and the Chilean peso at 5 per cent are also popular with income seekers.
Still, the BoJ effect could prove to be temporary.
“We would expect the commodity currencies to gain some near-term support from a Japanese investor reallocation, with their attractive yields, liquid bond markets and high ratings,” says Ian Stannard, foreign exchange strategist at Morgan Stanley. (here)

And Japanese mega-easing is cutting into the Aussie banks' profit margins too.  Not entirely convinced by the argument but anyway:

FLOODING the financial system with liquidity has worked a treat in refloating the global economy, but don't ask ANZ boss Mike Smith about the impact on his wholesale banking margins, particularly in Asia.
The Bank of Japan is the latest convert to quantitative easing (QE) -- central banks buying assets such as government bonds to pump money into the economy directly.
If the impact of similar QE programs by the US Federal Reserve and the European Central Bank in 2008 and 2011-12 is any guide, liquidity will expand and pressure will intensify on Asian wholesale banking margins.
The problem for the banks is that they make money by charging higher interest rates on their loans than they pay on their deposits. Once official rates start heading to zero, and deposit rates follow, any further reduction in lending rates squeezes the margin. (here)

Australian property in a dismal state

According to the Australian newspaper - note the level of distressed sales and big problems in the Sunshine state of Queensland.

...Nationally, most receiver sales were in regional areas, with the highest number of distressed listings during the quarter in the agricultural sector. Residential property was next highest.
LandMark White found that almost 23 per cent of properties advertised in Australia during the quarter were listed by a mortgagee, receiver or liquidator....(here).

The only bright spot is sales to enriched Chinese officials (alledgedly) noticeable at the top end of the market (here).

Aussie dollar poison III - the mining and resources industry

It's just too expensive, apparently.  Oh and add to that increased competition and changing markets.  That's the message about the expected cutbacks in Australian mining projects according to a new report by ANZ which was profiled by Macro Business.

....We have again revised lower the potential pipeline of major projects in Australia to AUD440bn as at March 2013 from AUD474bn in October 2012 and AUD498bn in July 2012..... A considerable degree of uncertainty remains for currently uncommitted projects with only 60% (i.e. AUD270bn of the AUD440bn total) of the potential pipeline either committed or already under construction....
... the possible next wave of LNG investment in Australia faces a variety of challenges related to escalating labour costs, the high Australian dollar and the potential competitive threat of LNG exports from the United States. As a result, there is now only a very small likelihood of further onshore greenfield LNG developments being commissioned. ...
...Note that in effect that is $30 billion dollar’s worth projects disappearing per year for the next three years. That’s 2% of GDP per annum for three years gone. My goodness, that is a lot. And that’s before we add any multipliers which the RBA so loves to do.... (here).

And this at a time when new chief of BHP Andrew McKenzie is starting a slash and burn exercise in flattening the senior management and cutting projects.

Aussie dollar poison II - the car industry

As noted previously Aussie manufacturing is in crisis thanks to resurgent China trade, capital flows and the currency war causing a high exchange rate.  In addition to the Economist, many in the media and politics have been despairing about the future of the country's at risk car industry.  It was all kicked off by news of Holden's cuts and comments from ex-Ford chairman Jack Nasser at an industry function.  As noted elsewhere the industry in Australia has seen a mix of union skullduggery, inconsistent policy, poor consumer interaction and small scale.  Nasser said:

....''As soon as you have a reduction in the scale of domestic manufacturing - let's assume one of the three decide to exit Australia in terms of manufacturing - then you end up potentially with a sub-scale supplier infrastructure. And once that happens, I think it's a domino effect.''He then neatly spelled out the challenges facing the car industry: ''You've got an exchange rate that's at . . . a 30-year high, you've got higher costs in Australia, you've got excess capacity in the automotive industry worldwide, you've got a very weak currency in Japan, and you've got a weak Euro. And when you put that mix together it's very difficult then to expect a relatively small but talented Australian automotive industry work its way.'' (here).

Doesn't bode well for the future.

Aussie dollar poison

Poor South Australia.  Last year it lost the Olympic Dam megaproject and now the Economist points out that Holden (the local GM subsidiary) is looking to cut jobs in the state.  Not only that, the magazine lists whole industries which are being struck off as uncompetitive thanks to the record high Aussie dollar:

....Holden, a subsidiary of General Motors and one of Australia’s biggest carmakers, cut 500 jobs, most of them in Adelaide, the state capital. The job cuts and Australia’s trade boom with China have a common thread: Australia’s mighty dollar. Chinese trade not only helped Australia survive the global downturn. It has also boosted the currency’s strength, and made it harder for manufacturers to find markets for their exports. The problem is unevenly distributed around the country. South Australia has suffered the greatest pain: in no other state does manufacturing account for such a big share of the economy....
.....Australia’s dollar recently soared to its highest level in nearly 28 years, on a trade-weighted basis.... The currency’s rise [has] meant that making things in Australia is almost three-fifths dearer than it was ten years ago. It has overwhelmed successive governments’ efforts to steady the carmakers with subsidies. Five years ago, Mitsubishi closed its plant in Adelaide. Australia’s remaining carmakers, Holden, Ford and Toyota, have shed jobs steadily since then. Australians are buying imported cars more cheaply than ever, especially from Japan; their dollar has risen by 26% against the yen since October (here).

As the article notes Julia Gillard is pressing onwards and upwards in engaging with China.  Her own constituents may wish for more efforts directed at home.

Squeezing monetary policy

Nothing unusual in politicians seeking to pull the levers of supposedly independent monetary policy with some public comments and a coming election in mind.  Question is, in the midst of a currency war with central bankers from Japan, Cyprus, Europe, UK and US all feeling the politcal heat to abandon orthodoxy and print, will Julia begin a trend of greater pressure on the RBA?

...Prime Minister Julia Gillard says that the federal government’s ‘‘tight’’ fiscal stance leaves room for the central bank to cut interest rates as manufacturers try to cope with sustained currency strength....
...‘‘Our success as a resources economy, as an economy that’s emerged from the global financial crisis strong, has meant that our Australian dollar has been very high,’’ Ms Gillard said hours after meeting with business leaders advising the government on its 2014 presidency of the Group of 20 nations..... (here)

As has been posted, Garnaut and others have discounted the comfort such statements and assumptions propagate - the Asian mining boom is ending and income and growth will drop but FTAlphaville noted another reason why this is dangerous:

Hot Money

It turns out Australia is being funded by non-conventional sources, with the implication being it is "hot" and can be withdrawn very quickly in a crisis (and quick hot money withdrawal means currency crisis and/or collapse):

...At face value, given the share of foreign companies involved, the analysis implies that around half of the investment during the boom has been funded from offshore. However, the actual use of foreign sources of funds is much higher than that. This is because wherever companies are partly foreign owned, funding from internal sources is equivalent to partial funding from foreign sources. Consequently, since the Australian listed resources sector is around three-quarters foreign owned, the same large proportion of internal funding is attributable to foreign sources.... Taking all this together suggests that around four-fifths of the investment funding has been sourced from offshore (here).

Gerry takes a breather...

Perennial wise man and talisman of Australian retailing has been reported to be enjoying some calm in improved trading conditions after many quarters of tough sales and competition with online sales channels.

....Despite TVs and computers still being the Achilles heel of his retail chain, suffering from continued sharp price deflation and shrinking sales revenue, Harvey Norman was recording better growth from its other departments, such as home appliances, furniture and bedding....Its Australian store network, the bulk of the Harvey Norman retail empire, recorded its first positive sales lift since the fourth quarter of 2011 and the first positive like-for-like quarterly sales growth since the first quarter of 2011....

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But the executive chairman of Harvey Norman, who began working in the retail sector 50 years ago, warned retail conditions remained fragile, creating a tough environment the likes of which he had never seen....''Our sales have been going down, down, year after year,'' Mr Harvey told BusinessDay. ''That has never happened to us before - I've been in business for over 50 years and I have never gone through something like this....(here)

Too right Gerry and more to come unfortunately... 

Follow the Yellow Brick Road...

Serial innovator Mark Bouris is back launching a new venture, a Macquarie-backed mortgage lender to rival the banks called Yellow Brick Road:

...Although the two companies' share of the $1.1 trillion mortgage market is tiny, Mr Bouris argued YBR, which he chairs, could grab a meaningful share of the flow of new home loans within a year....Mr Bouris said that to force banks to change their mortgage pricing strategies, YBR needed to settle about $350 million worth of new loans a month - roughly 5 per cent of the value of loans sold through bank branches....

...Helped by lower funding costs and an aggressive rollout of its branches, YBR would be able to hit this level within a year, he said....(here).

This blog condones more competition in the Ozzie banking sector so welcomes Mark's foray.  Let's hope the market doesn't tank before then!

Penny dropping?

Thanks to FMG magnate Andrew Forrest, the Australian media has been abuzz with an enhanced sense of importance, reporting from the sidelines on the political-investment shindig the miner organised for China and Australia's business and political elite in Hainan, the "Boao Forum".

More interestingly was reports from another regional conference and comments from RBA Governor Glenn Stevens:

...RBA Governor Glenn Stevens has some concerns about China’s “shadow banking” system. He poses questions about the role of non-bank entities in the Middle Kingdom. (here)

The linked Crikey article gives a good run down of the shadow banking problem in China and quotes from Fitch analyst Charlene Chu, who has led the pack in rating the Chinese bank sector in recent years:

“The [Chinese] banking sector is significantly exposed to shadow banking. We could see an asset quality problem in the financial sector in fairly sizable magnitude within the next few years.”

Actually I disagree with Charlene on one point.  The asset quality problem is happening now. A senior auditor warned China's local government debt (to which the banking system is tied) is "out of control" (here).

And yes Australia is exposed front and centre.  The economy is at risk.

Lunacy

Distinguished Australian Professor Ross Garnaut has reportedly called for a cap on the Aussie Dollar to slow inflows and cushion the impact from falls when the commodities cycle turns:

...Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push it down to minimise the recession he sees coming as the mining boom goes bust....Professor Garnaut, of the University of Melbourne, says he would rather see the RBA cushion the economy’s looming fall and bring down the overvalued dollar by cutting interest rates sharply to bring them closer to those of other Western countries.......But if conventional means fail to cut the dollar’s value and relieve the pressure on other tradeable industries, he told a seminar at the Australian National University, the Reserve should consider following its Swiss counterpart’s example and put a cap on the dollar’s value (here).

There is some academic sense to this, but to be clear, whilst the Swiss Central Bank has maintained a floor against the Euro in the last couple of years (i) it started with a huge haul of reserves to defend the floor (buying up enormous quantities of Euro securities to keep the Euro relative to the Swiss Franc high and the Franc low), (ii) it was tested by the market, (iii) domestic inflation resulted and (iv) quite probably it had a role in precipitating the scandal in which the chief of the bank, Hildebrand left (though ostensibly because of his wife's trading activities).

Australia is not a financialised economy like Switzerland and will not have the reserves to do so, nor will it be able to survive under even more inflationary conditions that would result.  Professor Garnaut's reasoning is fair but its unlikely to be implemented.

Interestingly, the Reserve Bank of New Zealand has looked at the same question and concluded it's a non-starter:

...If New Zealand decided to cap the NZ dollar, depending on where the cap is enforced, similar levels of intervention might be required as global foreign exchange turnover in NZ dollars relative to GDP is similar to that in Swiss francs. The OCR would need to drop to zero first in order to eliminate the interest arbitrage motivation for NZ dollar inflows. Any attempt to retain non-zero interest rates by “sterilising” such massive intervention would be very difficult. In effect therefore, a Swiss type operation to cap the value of the NZ dollar through large scale FX intervention would also amount to quantitative easing. As I mentioned, this would be highly inflationary in the NZ context.(here)

It could be argued that the horse has bolted already anyway - yes Australia will suffer the falls in GDP from China slowdown (and Professor Garnaut should know as his son is a top China focussed journalist), but to use the expression of Julia Gillard, these losses are "baked in" - there is little Australia can do now to change course, especially since the real economy has been hollowed out.

Australia is entering the currency war, but there are questions as to what can be achieved.

We're only halfway through...

Any guesses where this is written and what it is about? (hint - read it through, link at end)

... Data released by RP Data, APM, Residex and ABS in January and February 2013 showed that Australian house prices continued to rise throughout 2013.  This means the great Australian housing bubble has been expanding for almost two decades, since the mid-nineties, making it the largest and longest lasting bubble (of any type) that has ever existed in known history... (here).

The law of unintended consequences...

Wikipedia defines the law, popularised by American sociologist Merton as follows:

that an intervention in a complex system tends to create unanticipated and often undesirable outcomes..(here)

This is being seen in Australia.  Deutsche Bank's efforts to assist Sri Lankans affected by the 2004 Tsunami have resulted in firm-branded boats entering Australian waters carrying the 'Lankans seeking refugee status (only for the boat and occupants to be detained upon reaching Australia) (here).  Similarly and more expectedly, the boom in commodities and in particular the labour costs for Ozzie workers and new infrastructure costs are crippling big Ozzie projects, including the offshore Browse LNG field:

....Yet mothballing four years of work implies Australia has become too expensive a destination for big greenfield development. The industry will be watching what happens next with interest because many of the biggest projects are almost as costly. ...Analysts previously estimated that floating LNG could take $9bn off the $40bn-plus cost of Browse. Nice.. (here)

Unprofitable projects means asset sales:

...THE list of assets Rio Tinto is seeking to sell keeps getting longer. So does the list of banks getting a slice of Rio Tinto's business....Investment banks ranging from the best-known names on Wall Street to small Australian boutiques are on the roster as Rio Tinto, under new leadership, embarks on a program to sell off assets. (here).

and declining industries:

...Contraction of the industry has been blamed on the strength of the Australian dollar and fierce competition from overseas rivals who enjoy lower costs on wages, power and raw materials. Some manufacturers have called for industry to get access to cheap gas by government decree, but large resources companies such as Santos and BHP have fought such a market intervention....Mr Nasser said as recently as two years ago he was confident the car industry could survive in Australia, but had become more pessimistic since then. (here)

Ozzie gold bugs

Hat tip to the Keiser Report which spotted a new (non-bank) gold vaulting service opening in Sydney.  Suggestive of a new interest in gold (and likely exodus from the banks)?

...There is an interesting phenomenon happening in the CBD of Sydney: Private Vaulting. Until now the only option for safe deposit boxes was with one of Australia’s four TBTF banks and most of those vaults seem to date from the gold rush era of the 1890′s. But in the space of two months there will be two state of the art private underground safe deposit vaults opening, both with an emphasis on storing physical gold and silver. One has been showcased by Mike Maloney in a national news report and the other vault opens at the end of this month (here).

You've been warned...

Many years have passed since the Economist identified a large, US-subprime style property boom in Australia.  A recent analysis by Leith van Onselen has drawn parallels with the disaster-prone Irish economy:

...Ireland’s house values have collapsed by 50%, on average, since 2007 and the island nation’s home owners have collectively lost the equivalent of A$315bn....Van Onselen notes that in 2004, Ireland was the ‘toast of Europe’, a country with a GDP per capita roughly 20% above the European average....“How things change… As is the case with most housing bubbles, Ireland’s was fuelled by a number of inter-related drivers: easy credit, speculation, and unresponsive supply.” ...

...“The risk for Australia is it basically hinges on the mining boom. If we had a big, big drop-off in mining, we could have a pretty big drastic adjustment. But it’s hard to say what the price adjustment would be if that happened. I couldn’t see Australia being anywhere near 50% [reduction in home values] but 20% could be possible.” (here)

A striking prediction

Two academics having a bet on Australian property?  Nothing new, but an interesting quote from 2010 anyway (and not the only prediction of this type):

...The U.K. and Australian housing bubbles may be unimportant to U.S. investors, but to bubble historians they look extraordinary. The U.K. event in particular has broken out of any previous mold. Despite the usual cry of “special case”, they will decline around 40%, back to trend, as was the case for the previous 32 bubbles. If not, it will be the first time in history that a bubble has not behaved in this way. Reversion to trend will involve considerable pain, which I will discuss further next quarter if things are quiet....(here)

This is what a post boom world looks like...

The market oracles have been showing a glimpse of the future, with an Aussie miner suffering a share price slump following a buyout to a Chinese investor falling through:

...SUNDANCE Resources plunged in early trading after the iron-ore explorer terminated a planned takeover by China's Sichuan Hanlong Group....Sundance shares tumbled by more than half after the mining company said late yesterday that the $1.38 billion takeover wouldn't proceed because the Chinese investment group had missed key deadlines to finance the deal. (here).

...“They have to start from scratch now when economic conditions are a lot more difficult,” said Mine Life’s Wendt. “It’s not going to be easy for them to go out there to find investors because of the more concerning outlook for iron ore demand and iron ore prices and it’s significantly harder to attract funding for high capex projects.”(here).

Meanwhile in other sectors:

...Fitch Ratings has delivered a fresh blow to the upstream liquefied natural gas industry in Australia, tipping more cost blowouts and delays and calling into question the viability of some projects in the pipeline. ...Australia's competitive advantage in the sector is eroding on the back of increased costs and risks, and likely lower gas prices over the medium term, the agency said....

...Fitch also said predicted producers would be forced to sell-down assets...."Rising execution and development risks will force project sponsors of these LNG projects to dilute equity stakes or undertake sales of infrastructure and reserves," Fitch said in a statement. (here).

And with a slowdown comes more fraud:

...A Melbourne professor has warned that hardware and software used for tax fraud is likely in secret use by Australian businesses....The technologies, known as zappers or phantomware, can help a business remove sales from their tax records....Zappers are physical devices used to prevent sales transactions from appearing on a business' records... Phantomware is a class of software that creates virtual sales terminals. It can be used for legitimate staff training, but is also used to keep sales transactions off the books... (here).

Step back from CMBS support

...Australia will stop buying mortgage bonds as a revival in the market means the government’s support is no longer needed, according to Treasurer Wayne Swan.

The cost of issuing residential mortgage-backed securities has recovered since the credit freeze in 2008 that prompted the creation of the government’s RMBS program, Swan said in the text of a speech to be delivered today at the Bloomberg Australia Economic Summit in Sydney. Although it doesn’t plan new purchases, the government won’t sell the securities it owns in the near future, he said....

...The Australian Office of Financial Management, which administers the RMBS program, has spent A$15.5 billion of its A$20 billion budget, according to information on its website. The program aimed to spur competition in the nation’s home loan market by helping smaller lenders fund themselves.... (here)

Will Australia rebalance? Has any economy rebalanced?

No and no.  Not in the short term anyway.  Whenever you read about politicians and/or bureaucrats having to engineer a rebalancing or engineer a soft landing, you know they will not succeed.  An excellent FT article paints the picture: 


...many forecasters are still worried. They do not believe business investment will be a major driver of growth and argue the Australian economy will have to rely even more heavily on housing construction to meet the RBA’s 2013 GDP growth forecast of 2.5 per cent....As such, they reckon the central bank, which has lowered its benchmark cash rate by 175 basis points since November 2011, will be forced to cut again to stimulate demand....

....“I think we are more of a quarry than what we were 50 years ago and that worries me. The strong mining cycle can’t last forever, that’s inevitable,” Bob Every, the chairman of retail and resources conglomerate Wesfarmers, told a gathering of business leaders in Sydney earlier this month. (here)

A petition to Glenn Stevens

Rumoured at one point to be the highest paid central banker in the world, Glenn Stevens, has been reappointed as governor of the RBA.  As his second three year term commences, we would like to petition Governor Stevens in respect of the following items which we believe must be addressed urgently:

1. The mining boom is over.  Stop twisting monetary policy to suit this bloated sector and start to focus on the ailing real economy.

2.  Admit the obvious and stop ignoring the currency war.  It is foolish to maintain one's head above the parapet.  All central banks are engaged in debasing their currencies.  The textbook has been ripped up and it is now beggar-thy-neighbour policies.  Ignore this at your peril - the high AUD is hollowing out the economy.

3. Accept that Australia is flooded in hot money which will withdraw in a hurry when yields return to normal.  Reread point 2 in respect of the high AUD.

4. Prepare for vaporisation of the banking system.  The safety in conservatism of the banking system is a myth (and that means the liquidity facility will be used for solvency).

5. Taking account of conditions in Australia and observing overseas, true inflation is much higher than official figures and should be dealt with accordingly.  Australian's purchasing power is soon to erode and quickly.

That's five big points to tackle Glenn.  If you have others, please comment or send an email to feedbackformhere@googlemail.com

Home sales slide...

While the mining boom flickers out, Australia's other, real economy has tanked and no the Ozzie dream of the quarter acre block will not save all...

MacroBusiness economist Leith van Onselen said that sales in the detached new homes market were now tracking at their lowest annual level in the 16-year history of the series...."It's the worst February on record," he said....

...Victoria posted the weakest performance by far, with detached home sales dropping 13.7 per cent...."Victoria's detached new homes market is extremely sick," Mr van Onselen said, noting that the problem has been exasperated by the cancellation of the $13,000 first home bonus in July last year....

...The slide has come despite many developers offering steep incentives – including cars, cash rebates and home decorating packages – in bid to entice buyers back into the market.... (here)

An alternative to big banks?

In addition to tracking any bank crisis which occurs in Australia, this blog will also try to look at any alternatives to the big banks, where savers can move their money.

So a good place to start is a post on the topic by savingsguide.com.au.  A fair point that it makes in favour of building societies and credit unions is their narrower focus and conservative practices - in short they are not tainted by vast portfolios of toxic loans and vaults of alphabet soup securities:

 ...Though many credit unions and building societies have been around for many years, earning the reputation as sound platforms for financial management. Even St.George bank started out in the early days as a building society. So the answer is they are safe. They are highly regulated just like the banks, just without the numerous layers of fluff....(here)

Liquidity v Solvency again

One man's assistance is another man's bailout...

In the world of bank recapitalisations little is clear and labels are important as substance.  Of the many banks which imploded or suffered from the ongoing implosion in Europe, a vast number had been given a clean bill of health by the European Banking Agency during post-2007 stress tests.  In fairness the tests were focussed on liquidity management (liquidity strain being identified as the immediate cause of failures of banks like Bear Stearns and Lehman which kicked off the crisis), while as many now know (except it seems the heads of the EU and the ECB, the crisis has morphed into one of solvency - banks just don't have enough capital in general (as opposed to immediate funds to hand and agreed credit lines to see off a sharp rise in demand for return of funds).

And so it is that the same debate is playing out in Australia in respect of its new bank liquidity facility.  As noted several times in this blog, this has been characterised as a backstop, a safety measure which should not have to be used, or if used, only to cover temporary liquidity demands.  Taking this at face value there are fair questions to answer, but interestingly Michael West had an article out where he disputes the purpose - that the facility is in fact, simply a bailout fund from the RBA - with the suggestion being that Australia's banks are much weaker than they represent.

Over to Michael:

...Glenn Stevens doesn't think it's a bailout fund. It's a Committed Liquidity Facility - the $380 billion in Reserve Bank rescue money, sorry ''liquidity'' that is, which the banks can access should they find themselves in strife....Under this thingamajig, one must select one's words with care, if you are a bank and you are about to bite the dust then you can forget about a bailout. If you are even tempted to whisper the word bailout, snap out of it!...

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...If, however, you encounter ''an acute stress scenario'', why not shimmy on down to Martin Place - but only if you need a little something to facilitate your liquidity in a committed kind of way - flop out the old paw for a spot of lazy taxpayer liquidity, say $20 billion, and Bob's your uncle. Or rather Glenn's your lender. This is no freebie. You will pay dearly - a heinous 40 basis points over the official cash rate....

...Yes, you can only access this exciting opportunity if you are a bank and you are ''illiquid'', but not ''insolvent''. It is beyond this mere chronicler to explore the fathomless schism between a bank that finds itself illiquid and one that finds itself insolvent....(here)

This is not too different from some schemes tried elsewhere and the main message from the crisis in other jurisdictions is that early recognition and writedown of bad banks is necessary (this is the difference between the US and EU response).  Given that thanks to the EU, we are now in a world of depositor bail-ins (with New Zealand and Canada indicating they are considering such contributions so that bondholders, depositors and all sorts of creditors likely to be hit if a bank fails), the strong suspicion is that, notwithstanding the arrangements discussed beforehand, any stress at a major Australian bank will be messy.