Wednesday 28 August 2013

RBNZ acts, RBA where are you?!

Sharp criticism from Stephen Koukoulas at Business Spectator:

There have not been many instances in the past decade or so where economic policy changes in New Zealand have presented a template or lead for Australia. After all, New Zealand is only just recovering from a recession that Australia never experienced, it’s per capita GDP is more than 40 per cent lower than in Australia and it has net government debt at 36 per cent of GDP compared with Australia’s 12 per cent.Confronted by an uncomfortable house price surge at a time when the economy is only just gaining a foothold after the recession and when the New Zealand dollar is significantly overvalued, the Reserve Bank of New Zealand has a dilemma. It clearly is reluctant to hike interest rates as this would obviously risk choking off growth and reflating the Kiwi dollar, but it needs to stifle housing demand as the house price surge is threatening to become a troublesome bubble.(here)

The real winner from the elections?

While election season accelerates into full swing ahead of polling day on 7 September, the Guardian has a nice piece about the entrenched players in the Australian economy which wield a disproportionate amount of pricing power:

Whatever happens on 7 September, we already know who rules in Australia. We like to think of ourselves as an open and equal country with appropriate checks and balances but in truth, power is highly concentrated within our nation.
Let’s start with banking and finance. According to an IMF report last year, "Australia’s four major banks hold 80% of banking assets and 88% of residential mortgages," making Australia one of the most concentrated banking market in the world – more so than, for example, China or the US. (here)

Monday 19 August 2013

The cricket analogy

Fresh from another unsuccessful Ashes series against England the Australian team may be licking their wounds and economy watchers may feel salt is being rubbed into those aforementioned wounds by Larry Elliot of Britain's Guardian newspaper who sees a clear and comparable trend in failure on a big scale ahead for Australia:

It may prove to be a similar story with the economy. Australia was one of the few developed economies to emerge from the global recessionlargely unscathed. Growth has been good for a quarter of a century, public debt is low, the banking system proved resilient during thefinancial crisis and it is one of only a handful of countries that still retains a AAA credit rating.
Australia now bears all the hallmarks of a country where its industrial base has hollowed out. The decision by Ford Australia to close its manufacturing plants at Broadmeadows and Geelong is evidence of what economists call Dutch disease: a natural resource boom drives up the exchange rate and makes all other exports deeply uncompetitive....
...As the economist John Llewellyn has pointed out, household debt in Australia rose sharply in the 1990s and 2000s and now stands at 150% of GDP. Noting that the housing market may already be in bubble territory, he adds: "Depending on a strong pickup in housing as a means to sustain growth and rebalance the economy would therefore appear to be fraught with danger.....The Reserve Bank of Australia is now cutting interest rates and talking down the currency in an attempt to rebalance the economy. That is easier said than done when your economy amounts to a large hole in the ground ringed by some expensive property.(here)

Thursday 15 August 2013

Factoring in the China slump

Election season in Australia kicked off with announcements that the mining boom was over - perhaps a good opportunity to align voter's expectations prior to starting on the campaign trail.  But there does seem genuine concern of the risks to Australia from a China meltdown, not only from the RBA but also from ratings agency Standard and Poor's:

Australian banks' credit ratings would be cut by up to two notches and house prices would fall by as much as a quarter if China's economy were to slow sharply, Standard & Poor's says.
In a report assessing how Australia's financial system would respond to a ''hard landing'' in China, the credit rating agency says a dramatic slowing in Asia's growth engine would have severe ripple effects on the domestic economy.
S&P sees a hard landing in China - where growth slows from about 7.5 per cent now to 5 per cent - as unlikely, attaching only slight probability to this scenario.
But if growth did slow this sharply, it says Australian banks would face credit rating cutsbecause of their heavy exposure to the domestic economy and the $1.2 trillion mortgage market. (here)

Monday 12 August 2013

A great paradox

If Australia's banks are doing so well with so much cash on hand why is the Federal government introducing a backstop liquidity regime? 

On the one hand there is giant CBA of the big four announcing big profits and dividends:


COMMONWEALTH Bank is expected to post a record $7.6 billion full-year cash profit and potentially reward shareholders with a special dividend as the reporting season kicks into gear this week. 
With the chase for yield pushing the banks' share prices to record highs, CBA's capital management will be closely watched ahead of quarterly trading updates from rivals ANZ on Friday and National Australia Bank next week. ANZ, like NAB and Westpac, has a September 30 year-end date.(here)
But the international media smells a sector which is overvalued, overexposed and lacking growth potential:
Higher payouts signal confidence, but they also imply managers have no better use for the cash. That leaves the big four trading at a whopping two times book value. CBA, by far the largest and now seventh-biggest in the world by market capitalisation at $107bn, is trading on 2.7 times book, which can only be considered extreme for a bank with four-fifths of its loan book in its home market, where economic growth is slowing and government finances are worsening.
Australia’s banks have for five years been a great bet, with price gains of two-fifths compared with a tenth for US banks and a one-third loss in Europe. But the best is past. Returns on equity over that time have slipped by a sixth while those lumpy loan books – which have not been tempered by a housing market downturn, cannot deliver the profits growth implied by their rating. The return of capital implies the banks themselves cannot see value in seeking growth, either.(here)
While Australian regulators seem to be preparing for a liquidity crunch while analysts point to a possible trigger for recession from China.  Anyone with some alternatives?

Money running out in WA?

Or are politicians just playing politics with the budget ahead of elections? Either way the state at the centre of Australia's now bust former mining boom looks in trouble already:
The West Australian opposition has accused the state government of unleashing a "$28 billion debt monster", with the latest state budget showing ballooning liabilities. 
Opposition Leader Mark McGowan immediately took to social media to respond to the once-boom state's balance sheet. 
He labelled the second-term Liberal government "economic vandals" for adding a projected $10 billion to the state's net debt over the five years to 2016/17.(here)

Tuesday 6 August 2013

RBA takes the initiative sqeezes banks into gear?

This column has dwelt before on the RBA and the fundamental dilergence between the inflated Treasury information it is given and conditions in reality.  For some time now we have argued that the RBA was in denial about impending weakness in the economy, the banking system and the mining boom.

In case you missed it the contrarian view was that despite appearances, the economy is weak, the banking system is undercapitalised and the mining boom evaporating more quickly than most realised.

After previous speeches essentailly committing Australia to an ostrich policy of head in the sand isolationism, RBA Governor Glen Stevens, as this macrobusiness.com.au article explains performed an about turn and signalled accomodative monetary and fiscal policy.  Or to put it another way after denying the currency war and gathering global slump would affect Australia, Stevens now took aim:

This is a remarkable statement. Although its content is ambiguous about how effective the RBA sees its power to lower the exchange rate, the import of the analysis is that only a lower currency can deliver a ‘sustainable rebalancing’. Truly this is an epic volte-face by the central bank which was, until recently, still encouraging Australians to think of a high exchange rate as a historic boon that was here to stay. It’s not done for the central bank to say it was wrong but it sure is implicit.
...The point is it’s an economy operating at stall speed, with rising unemployment and falling business investment. Into this mix we must throw one more probable outcome....
There is a significant risk that the terms of trade will fall further and faster than Treasury forecasts (here)
And across town the banks are being squeezed hard.  Not only with a deposit levy (a form of negative interest rates to an extent, to encourage spending?) which will likely impact on capital, but also in a seeming prodding of banks to come good on interest rate cuts.  Unusually (and perhaps for the first time ever seen by this reviewer) one of the major banks has passed on and then exceeded a rate cut - could this even be too risky by the banks?  Who knows?  Certainly the dressing of the step us as "showing confidence" is absolute baloney! (here)

An optimist reassessed

It has been very interesting to read the changes in tone from respected Ross Gittins in his publications in the Sydney Morning Herald.  Gittins is a respected economist and long term contributor to the Herald and often takes an alternative viewpoint on issues.

So it was not surprising that as recently as June Gittins was still in the boom times camp (or boom times are coming again camp):
In other words, it's wrong to imagine the boom's about to leave us high and dry. Mining production and exports have a lot further to grow in coming years. Even the fall in imports (which constitutes a reduction in their negative contribution to growth) is linked to the boom: reduced investment in new mines means reduced imports of capital equipment (here)
An observer looking globally would conclude that in fact the boom is about to leave and right now is leaving all emerging economies high and dry as has been seen by the plunging currencies and poor statistics of high growth favourites like South Africa, India, Mongolia and Brazil being reported recently.

What a change then a couple of months makes:
Stevens warned that, in our efforts to get economic growth back to its trend rate of about 3 per cent a year - which is necessary to stop unemployment continuing to worsen - ''the challenges ahead are substantial''. What's more, those challenges will continue for ''the next few years''.
His speech explained those challenges. You know the basic problem: ensuring the rest of the economy takes up the slack as the stimulus from the mining investment boom tails off...
It turns out that, in our present circumstances, low interest rates don't pack the punch they used to, so we're not going to get as much increase in activity as usual.
Why not? Because, Stevens reminds us, we're not just coping with the aftermath of one boom, but two. The other is the end of the ''credit boom''.
… we should not expect a return to the sorts of growth seen in the 1995 to 2007 period' (here).
Now that's a turnaround!  If the Australian economy could rebound to such a degree (in the opposite direction), it would...oh no it won't!

Thursday 1 August 2013

Debt junkies

An excellent analysis by Leith van Onselen on the reported comments by NAB head Cameron Clyne as to the need for more debt.  While it is true Australia's public debt markets are small (and this is a product of the history of Australian government funding), it is spot on of Leith to point out the hypocrisy of a state guaranteed bank sitting on a private debt book which Moody's and other rating agencies have expressed concern to shout for more.  As Leith notes private debt in countries like US and UK can be a big risk:

That said, there remains a vulnerability that virtually nobody on either side of politics, the mainstream media, or the mainstream economics profession will acknowledge – one that is far more pervasive than concerns about public debt: Australia’s heavy private debt load. As shown by the below chart from McKinsey Global, while Australia’s public debt levels are low, our household debt is amongst the highest in the developed world, with most of that invested in pre-existing housing (here)
If Australian banks are anything like their international peers then they gorge on cheap government funding and speculate while holding out little to their depositors (and to become less when they price in the cost of the levy).  But still they ask for more...

The new reality...

Word on twitter is there is due to be an announcement of a budget shortfall by the Federal Government and while not all the revenue raising measures are intrinsically bad (eg raising money for a bank deposit insuance scheme), it does suggest the government is struggling to contain the downturn.  And it makes a mockery of the previous obsession with surpluses...and sticking with a theme here note it is bad for banks in the short term (though they may appreciate a bailout at some point...!)


Treasurer Chris Bowen is expected to reveal a $30 billion black hole in revenue when he releases Labor's economic statement today in Canberra at 1300 AEST. 
The economic statement will include a new levy on the banking industry, an increase in tobacco excise and reportedly more help for the car industry. 
Confirmation that the statement will be released today has heightened speculation that Prime Minister Kevin Rudd could call the election this weekend. 
The nation's banks are set to cut interest rates paid to savings accounts to soften the hit from the planned new government levy on deposits. 
The levy would build a fund to protect deposits with the level set at $100,000. Presently, banks pay the government a fee to guarantee deposits over $250,000.(here)