Monday 27 May 2013

Ross Garnaut on Australia's China Bust

Hat tip to MacroBusiness.com.au.  Excellent video (with summary, here).

For a bit of perspective there is also an encompassing piece by Roger Montgomery on what has gone wrong in Australia (here).


Dump the banks!

It is early at this stage to tell how the skid to the rally in Australian banking stocks is likely to play out, but a quick skim of the headlines is enough to suggest a real evaporation in sentiment:

Dollar puts an end to banking's party 
Our much-loved bank shares are coming under pressure, although at this stage it looks not so much a violent pricking of the bubble, but a gentle deflating like the forgotten balloon behind the couch after the raucous party (here).
and 

Australian bank stocks fell the most in a year as investors sold out of a rally that had driven financial shares to a record high last month....The rally pushed bank shares to record highs with UBS AG (UBSN) analysts led by Jonathan Mott calling Commonwealth Bank the most expensive lender in the world on May 15. 
 “The market run has been so skewed towards high-yielding stocks and financials in Australia, and now with worries about China, foreign investors are withdrawing,(here)
and also:
Foreign investors dump big four banks 
The Australian dollar faces further sharp losses in the next 12 months as it rediscovers its historic link to commodity prices, analysts say.
The dollar sank to a fresh 11-month-low of 95.94 yesterday. It was trading at 96.8 US cents this afternoon following a rollercoaster overnight session....The revised forecasts from analysts come as HSBC flagged Australia’s entry into the global “currency war”, which has seen central banks print billions in cash to push their currencies lower (here)




Car crash...

In light of Ford's gutting decision to cease manufacturing vehicles in Australia from 2016 below is a wrap up of some of the discussion and implications.  Firstly some historical perspective.  Back in April, outspoken former Ford CEO Jac Nasser was blunt and on point with his predictions for the Australian car industry:

FORMER Ford president Jac Nasser says the demise of the struggling Australian carmaking industry appears inevitable in the face of a high dollar, high costs and excess overseas capacity.... 
...The BHP Billiton chairman's dire assessment of the nation's deteriorating car industry comes after Holden this week said it would axe 500 jobs in Adelaide and Melbourne as it cut production from 400 cars a day to 350 because of the strong dollar, which was last night trading at a seven-month high above $US1.05... 
...It was difficult to predict how long it would be before there was no car manufacturing in Australia, he said, stressing it depended on the strength of suppliers. 
"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 sub-scale supplier infrastructure," Mr Nasser said. "Once that happens, I think it's a domino effect. It would be a very sad day for Australia but unfortunately it looks like it could be inevitable."...(here)
Nasser has been a contraversial and outspoken figure caused a stir with his comments which a month later proved correct.

Ford’s exit spells the end of the road for manufacturing 
Gone are the days when Ford could build legendary sports sedans, like the Falcon GTHO Phase III. In 1971, it was the fastest four-door saloon in the world.... But Ford Territory sales couldn’t offset the disastrous plummet in Falcon sales, which has been the mainstay of Ford’s range since the 1960s. Corporate fleet and government sales, which account for two thirds of large, local car sales in Australia, are insufficient to meet the volumes required to keep products like Falcon profitable and viable....
...The loss of 1,200 jobs in Broadmeadows and Geelong is only the tip of the iceberg. Victoria, the manufacturing hub of the country, is in recession. The high Australian dollar is killing the manufacturing sector. Sectors of the farm industry are in huge trouble. Much of the world economy is in an extended state of recession and austerity....If the mining super-profits boom has plateaued or, worse, disappeared, as some pundits have predicted, then Australia is in for a long winter of discontent. 
Neither side of politics has any solution to these problems. Future Australian governments face a hollowed-out manufacturing sector, declining revenues from resources and an ageing farm population facing import competition as never before....Australia rode out the GFC on the back of virtually unprecedented mining boom and a fiscal revenue position that was Made in China. But that was a thin, glossy veneer on what was – and is – in reality a deficit-ridden, Dutch-diseased, debt-financed bubble.Shell is selling the Geelong refinery. BAE Systems is getting out of Australia. Ford will be gone in 2016....Who will be next? (here)
And on the specific point as to the vulnerability of parts manufacturers (with ominous US precedents such as Delphi in the US which was bought out by its customers, including General Motors), signs do not look good:

Component maker Autodom has shed up to 15 per cent of its workforce in Victoria and South Australia since carmakers Holden and Ford took control of the company in November.
Autodom and its subsidiaries are in liquidation but the group's assets are being operated by receivers McGrathNicol to ensure ongoing supply of components for the carmakers (here).
Back to the drawing board Ozzie governments...!

Wednesday 22 May 2013

Now back to the real economy...oh...

Things are not looking bright for corporate bellweather Telstra (the monopoly domestic telecommunications provider):

Telstra is poised to make deep cuts to its 30,000 strong Australian workforce, amid a slump in consumer confidence and falling mining investment.
The telecommunications giant unveiled a sweeping overhaul of the divisions that contain half its staff on Wednesday, in a move that could lead to substantial job losses.
 
The announcement came as federal Treasury and the new Parliamentary Budget Office blamed both sides of politics for Australia's slide into a structural budget deficit - a deficit Treasury warns is now likely to remain for another six years. 
The news was a blow to government hopes that jobs growth would pick up outside the mining sector. Record low interest rates have so far failed to reignite the economy and the latest data will add to pressure for further rate cuts.(here)

Clarke and Dawe on the budget and mining

Clarke and Dawe have really come into their own during this crisis...



and in case you missed it, the mining boom is well and truly over...


Australia's top commodities agency has detailed a year of woe for the local resources industry and joined the Reserve Bank in declaring the peak of investment in the sector.
The Bureau of Resources and Energy Economics revealed sharp rises in the number of projects suffering cost blowouts or deferrals, and a steep fall in exploration spending.
The findings will fuel perceptions that the resources boom is over and were released on the same day investment bank Citi said 2013 would mark the end of the ''commodities supercycle'' (here)
and here's a graphic from the SMH article:





Monday 20 May 2013

More ratings woe


China's State Grid Corporation's purchase of Singapore Power’s SP AusNet and a majority stake of its unlisted assets for more than $5 billion has moved ratings agencies to downgrade the Australian provider's credit rating, according to The Financial Review.
The newspaper reported that Standard & Poor’s and Moody’s Investor Services questioned whether the State-owned corporation could offer the same level of support if the assets were in distress. (here)

A dubious title

It has been noted before that Australia's major banks have been experiencing high valuations, profits and share prices recently.  A glowing endorsement in the Wall Street Journal had the Commonwealth Bank as the most expensive bank in the world, with the other three majors (Westpac, NAB and ANZ) along with Macquarie as in a stellar performing group:


CBA’s tangible book value of 3.6 times is also the highest in the world, according to UBS analyst Jonathan Mott.
Australia’s banks remain some of the sturdiest in the world owing to their conservative loan books and the strength of the local economy, which hasn’t been in recession since the early 1990s (here). 
But there are warning signs too:

Behind the strong headline results, however, Australia’s banks are struggling to maintain profit growth as the country’s resources boom starts to fade. Investment in resources, such as natural gas or iron ore for export to Asia, has been an engine for the economy over the past decade.Much of the boost to bank profits has come from cost-cutting and falling bad debt charges, which analysts say will lose momentum in the coming year. Revenue growth and demand for credit have remained weak. 
And the Sydney Morning Herald has been reporting on the banks squealing about the potential loss of an offshore tax break, which has been helping them boost profits:

 The chief executive of the Australian Bankers’ Association, Steven Munchenberg, said the changes appeared to go beyond what was necessary to protect the integrity of the tax system.
‘‘Our initial assessment seems to suggest they have gone a bit far,’’ Mr Munchenberg said. ‘‘The measures announced last night appear to go beyond what seems to be necessary for integrity purposes.’’(here)

and some details:

The budget released Tuesday said the offshore banking unit regime will be tightened as it looks to confine the deduction to genuine mobile financial sector activities. This measure is estimated to save an extra $320 million in revenue over the next four years.
A big user of offshore banking units in recent years has been Macquarie Group, which has seen its deductions runs into the hundreds of millions, including $303 million in financial 2008. But the bank has been winding down this activity since the financial crisis.(here)
As seen elsewhere - bankers are hard to please (and quick to disappoint)!


Thursday 16 May 2013

Disappointment front-loaded

The Australian government is apparently moving into a September election with a budget which is unglamorous and electoral prospects fading into oblivion.  This excellent article by Ross Gittins points to a poor assessment of the Swan-Gillard era:


This is the weirdest budget you or I are ever likely to see. That doesn't make it bad - just very strange.
With just four months until the election, it's the most unlikely pre-election budget you could imagine, with loads of nasties and next to no sweeteners. It is  more like a post-election budget, particularly the kind you get after a change of government.
Usually when governments know they are going to lose, they  go for broke, offering electoral bribes they know they will never have to find a way to pay for, aiming to minimise their loss of seats.
Not this time. This budget is more likely to cost Labor votes than win it any.
No, the purpose of this budget is not vote-buying – it is reputation-rescuing, a last-ditch attempt to influence what history will say about the Rudd-Gillard government  as an economic manager (here).
While it has been a tough time globally, the article gives a sense of the extent of the budget failure:
This time last year, Swan boasted of budgeting for four surpluses in a row, as though they were in the bag. His surplus of $1.5 billion for the financial year just ending is now expected to be a deficit of $19.4 billion (but even that isn't yet certain). This year his boast of being able to get the budget back to a surplus of $6.6 billion in 2016-17 (again on the basis of Treasury's long-range projections) will draw understandable cynicism.
To this it should be added that the worst of the coming crises (property crash, domestic slowdown, slowing of foreign capital inflows and end of the China and mining booms) have not hit yet - when they do, how bad will it be?

Much, much worse.


Dollar bust?


The Australian dollar has been hit by a fresh wave of selling, plunging to another 11-month low as investors continue to pile into its US counterpart. 
The currency fell as low as 97.98 US cents in offshore trade, a level not seen since early June 2012, and down from 99.12 US cents about midday on Thursday. In early trade on Friday, it had recovered to 98.22 US cents.... 
The Aussie dollar has dropped 5 per cent this month. It started tumbling amid more signs of a slowdown in China and after last week's interest rate cut by the Reserve Bank. (here)

CBA makes hay while the sun shines

A good set of results out for the Commonwealth Bank of Australia, now thanks to favourable encouragement from the regulator and the lopsided economy, one of the largest banks in the world:

In an unaudited trading update Wednesday, Commonwealth Bank reported net profit of 1.90 billion Australian dollars (US$1.88 billion) in the three months to Mar. 31, up from A$1.70 billion a year earlier. The lender is Australia's largest by market value. 
Cash profit, which smoothes out one-off items, was also A$1.90 billion, compared with A$1.75 billion a year earlier and A$1.85 billion in the immediately preceding quarter....
...Their shares have been among the best-performing on the Australian stock exchange as investors have flocked to their high-yielding stocks. Commonwealth Bank and Westpac topped the A$100 billion value mark this month, at one point making each worth more than the Australian listing of the world's largest mining company, BHP Billiton (BHP).(here)
But note some words of gloom looking forward for the sector:

But behind the headline results, Australia's banks are struggling to keep growing profit amid slowing economic growth. Together, the revenue of the big four banks was largely flat from a year ago, while much of the profit improvement came from cost cutting and a reduction in combined bad debt, which fell 17% from the previous half.
Credit Suisse analyst James Ellis said the lender's result was "supported by a cyclically-low bad debt charge" and pointed to worse times ahead for Australia's banks.
"For the sector the result suggests that the optimisation of bank earnings is reaching its limit, with bad debt charges as feasibly low as they can get, margin expansion and the pace of productivity improvements fading," he said in a note to clients.

The article also mentions declining business confidence, capital levels and the end of the mining boom as factors at play.


Meanwhile a new Occupy-style movement is reported to be stirring in the UK (http://breakupthebanks.org.uk/).  When things start to go wrong will there be significant protests in Oz against the banks? 


Monday 13 May 2013

The Swan mysteries...

Poor Wayne Swan is just not getting any appreciation according to Reuters.  Despite seeming to hold the Australian economy from global crisis, Australian voters look set to punish the incumbent Labour party at the September federal election:

Around 400,000 first-time voters go into Australia's September elections with no idea of economic hardship, adding to Treasurer Wayne Swan's mounting problems as he delivers what is shaping up as his last, and most difficult, budget on Tuesday. 
Swan is confronted by a slowing economy, a mining boom which is nearing its peak, falling tax revenue and a political promise to rein in spending, leaving him with no money to spend on pre-election handouts.(here)
As notedelsewhere the obsession with surplus is a bit fanciful given the global macroeconomics and ultimately in a possibly soon crisis or contagion, will not help much (see the previous post about Australia's currency peashooter).  But while having sympathy for Wayne's position we feel it slightly ambitious to seek to blame the high AUD as the cause.  Immediate cause yes, but in global terms the high AUD is the symptom of a larger imbalance, which Wayne and his team have not addressed and will ultimately lead to their undoing.

Aus/NZ solidarity

Australians are a competitive lot.  They punch above their weight on the international stage, in particular in the sporting arena and Aussies like to win, and, to play in the big leagues.  In the world of currency management, or in particular, the global currency wars, the FT has reminded that Australia and New Zealand are unfortunately minnows when it comes to suppressing the exchange rates of their currencies from hot money appreciation - they hold a "peashooter" rather than a bazooka.

...New Zealand’s direct action was the most aggressive, but it seems designed to soften the kiwi’s strength rather than halt the trend in its tracks. Which is just as well given that a housing bubble is limiting officials’ room for manoeuvre. With two-year bond yields near 2.5 per cent (compared with the US at 0.23 per cent and Japan at 0.11 per cent), it is hard to see the New Zealand dollar extending last week’s 2 per cent drop against its US counterpart.
Meanwhile, Australia’s unexpected rate cut had a similar effect on an Aussie dollar hovering just above parity with the greenback. Bond yields there are in line with Kiwi ones. So are Korea’s. Of the three Seoul is historically the most aggressive in acting to stem currency strength. But it faces the biggest problem, namely that it is in effect fighting not the dollar but the yen, against which the won has hit four-year highs (here).
And this game has gone global.  As Zerohedge notes, even Israel has joined, though with a not very convincing alternative excuse other than the currency wars. 


Sunday 12 May 2013

Aussie banks need a cash call


Australia's four largest banks have been warned by Fitch Ratings that they need to improve their funding mix if they are to meet Basel III liquidity requirements and retain their coveted AA- credit ratings.
The banks have been told to scale back their dependency on offshore funding, bolster deposit levels and lengthen the duration of their wholesale funding.
Fitch warned the steps are especially necessary after the Australian Prudential Regulation Authority (APRA)earlier this week declined to push back the planned 2015 start date for new liquidity rules.
APRA's decision prompted Fitch to warn Australia's banks that they will have to meet liquidity coverage ratio targets by 2015 and net stable funding ratio targets by 2018, despite the revised Basel rules allowing phased implementation.
“Their reliance on wholesale funding, particularly from offshore markets, is high compared with international peers,” Fitch senior director Tim Roche said in a statement. (here).

About that interest rate cut...


Easing interest rates is THE central bank game in town according to FT Alphaville:
...other big Asian currency war battlers, Australia and New Zealand.
The RBA cut its rates on Tuesday, citing the room afforded by new inflationary data, plus some stronger words on the exchange rate. The next day, New Zealand’s central bank declared it was intervening in its own too-strong currency. Both have their own problems with high asset prices: Australia’s central bank might sound less worried about this just now as growth has slowed, but it’s not ignoring the risk. In New Zealand, house prices are such a worry that the central bank is tightening rules on risk-weighting of mortgages and loan-to-valuation ratios.(here).
Bloomberg picked up on the inherent paradox of apparently increasing jobs undermining the RBA's (and RBNZ's) rate cuts:

Australian industry has been squeezed by the currency’s longest stretch above parity with theU.S. dollar since it was freely floated in 1983 that has made tourism more expensive and exposed local manufacturers to cheaper imports. Rosella, a 117-year-old saucemaker, announced its closure at the start of March, leaving 70 workers without a job. General Motors Co.’s Holden division said last month it will cut about 500 jobs in Australia, citing currency devaluations in competing markets.(here)
and the job figures could apparently be prone to errors:
Australia’s jobs data has swung from gains to losses in the past three months. April’s 50,100 rise was preceded by the loss of 31,100 jobs in March and the addition of 71,700 in February.
“The last couple of months has seen a higher than usual amount of sampling volatility,” said Andrew Salter, a Sydney-based foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. “The market has certainly priced out some RBA easing but I don’t think there’s going to be a view change on the basis of one month’s data. Certainly the trend in the unemployment rate, still being higher, is consistent with the RBA’s outlook.” 

Monday 6 May 2013

Somebody thinks Australia's banks need stronger regulation...


Couldn't agree more... 
Australia came through the GFC pretty well compared to many nations but finance law specialist Professor Ross Buckley is looking overseas for ideas to improve the health of our banking system....Australia's relative success at navigating the GFC is no reason to be complacent, Professor Buckley, from the University of New South Wales' Centre for International Finance and Regulation says.
"We shouldn't expect Australia's financial system to be as stable today as it was in 2008," he said...."Various changes we made to Australia's financial system in response to the GFC should, over time, make it less stable, even though I think they were appropriate and clever things to do in 2008."
Professor Buckley has just taken up the new King & Wood Mallesons Chair of International Finance Law, established by law firm King & Wood Mallesons with a $1 million contribution. (here)

Soros shorting Aussie Dollar...?


Not the first? 
The Australian dollar fell in evening trade on the back of rumours that billionaire US investor George Soros is betting the local currency will fall...The Aussie dollar slipped from $US1.0284 in late local trade to $US1.0253 in offshore trade as traders reacted to unconfirmed rumours that Mr Soros - who famously shorted the British pound back in 1992 - was planning a raid on the dollar ahead of Tuesday's interest rate announcement....
A large number trades shorting the dollar totalling $US1 billion were placed via Hong Kong and Singapore late Monday, believed to be by Soros Fund Management (here)

The trade imperative

Similar to the decision to open swap lines between the Australian and Chinese central banks in CNY, the recent announcement that the Reserve Bank of Australia will diversify 5% of its holdings into Chinese government bonds makes good political and (in terms of encouraging trade) business sense.  

But are they a valuable instrument? In terms of currency value, the Chinese currency RMB would appear to most likely to appreciate (taking stated information about fundamentals as given).  But the likelihood that there will be a decent return from the Chinese government?

Don't bank on it.  It is a reflection of the broader alignment of the Australian economy too - and looking at the recent headlines doesn't make good reading:
The economic weakness in China clearly appears to be taking a toll on the Aussie economy.... (here)

Thursday 2 May 2013

Learning to live with a deficit...

Optimistic Australians are taking some getting used to the idea that the good times are over.  At least those in government.  While it has been pointed out that being in a small deficit is no huge deal for a country like Australia, the huge disappointment due to misaligned expectations is indicative of a ruling class which is out of touch with the economic mood - needing to tighten instead of dreaming up grand spending plans:


Collapsing revenue from lower company profits has blown a $12 billion hole in the federal budget this financial year, Prime Minister Julia Gillard will reveal on Monday...What she will categorise as a ''significant fiscal gap'' has forced a Hobson's choice on the government as it crafts the budget to be delivered on May 14: either trim or delay expensive recurrent programs, including the $14 billion disability insurance scheme and the $6 billion school education reforms or, hand down an even larger deficit in place of what only months ago was confidently forecast to be a small surplus (here)

And it is only down from here:

Australia's economy is the envy of the developed world but there is a question lurking at the back of economists' heads: when will the good times end?One prominent economist warns we could be in recession within two years once investment in the resources sector - the great driver of the economy for much of the past decade - drops off.....Meanwhile Dr Robert Gay, a former senior economist with the US Federal Reserve now working in the private sector with Fenwick Advisors, says Australia faces the prospect of a "perfect storm" of economic dangers in the not-too-distant future.....He warns a fall in commodity prices could be the catalyst for a particularly unpleasant economic downturn. (here)

Aussie bank bubble...

...is getting plenty of attention.  Here's some of the commentary:

It seems analysts are finally catching on to what we here at the Motley Fool have been saying for some time now. Share prices of the major banks have been inflated well past any measure of relative value.(here)
...and via the FT, via UBS:

 The Aussie banks are very good companies. They are profitable, resilient, well capitalised, well managed, shareholder focused and have a very strong industry and regulatory structure. However, following the significant leveraging of the Australian & NZ households over the last thirty years they are now low growth and remain heavily exposed to housing, funding markets & unemployment risk (here).
John Collet at the Sydney Morning Herald cared to disagree however:

Investors believe that lower interest rates are here to stay and the big bank profits add to their confidence....For Shane Oliver, chief economist at AMP Capital Investors, there is a risk of its becoming a bubble but "we are not there yet".
The banks are well managed and increasing their profits. One risk would be if interest rates were to rise. But markets are expecting the next move in interest rates to be down. (here)
The key phrase there being "well managed" - that will remain to be seen!