Thursday 28 February 2013

RBA in numbers

Interesting data out via a Bloomberg FOI request (via FT Alphaville).  Some detail of foreign holdings of AUD (in particular central banks) and the way RBA goes about determining the extent of overvaluation.


....The staff's preferred model is based on the long-run relationship between the real exchange rate and the terms of trade and the real policy rate differential with the G3 (US, euro area and Japan) over the post-float period. It suggests the exchange rate is around 5 per cent overvalued.......While the bank has signalled that the dollar has been a factor in deciding recent rate cuts, and there's been a bit of 'passive intervention' with a chunk of foreign currency, so far it does not seem to have done much....

...We have to wonder how much of the central bank's low-key response to the AUD's overvaluation is because officials genuinely think the Australian economy can cope, and how much of it is because doing anything about it is too damn difficult. The RBA is already in a cutting cycle but slashing rates very low would risk inflation. Going Swiss is not an attractive option for small economies that have inflationary pressures; as the New Zealand central bank governor outlined last week....(here)


Fair enough but what is likely disturbing is that there are well a couple of assumptions in play, particularly that i) the high AUD hasn't had an impact yet (arguably it has) and ii) the RBA still has control of its currency


...In that scenario, how long might it take before even a 'moderately' overvalued currency takes its toll? We also can't help noting that the central bank of New Zealand, a much smaller economy in a very similar predicament, has decided that despite the risks it is time to go a little harder by explicitly threatening intervention .... RBA governor Glenn Stevens says that if things get really bad, a strong Australian dollar probably would cease being a problem....


What if the AUD doesn't fall or falls very abruptly?  There is a currency war after all. And in case you are wondering whether imports (including outward tourism) are on expanding too rapidly, symptomatic of an overvalued currency, then read this.


Wednesday 27 February 2013

AUD is not a reserve currency...

An interesting side issue from the currency war debate.  In talking up the likely devaluation of the Aussie dollar, Debelle mentioned its widespread holdings among central banks.  It is true that hot money, including from central banks has been attracted to Australian bonds, with Australia seen as a relative safe haven, having high interest rates and good metrics.  

First thing to note is that metrics are degrading.  Swan's budget is sinking into deficit like a dead dodo (estimates are sinking to $15 billion here).  This means less incentive to hold Aussie dollar bonds.

But more significantly, Australia is a very small economy.  The argument made previously for not intervening is that Australia's debt markets and central bank are too small to counteract global flows.  Overall, thanks to mining plays, Australia's dollar has the character of an emerging market currency, once hot and decoupled from atlantic turmoil, now facing outflows.

Unlike China, which cannot sell parts of its massive holding of treasuries for fear of wiping out its remaining holdings, there is no reason why all those central banks Debelle is talking about will feel inclined to keep their Aussie bonds.  Debelle said:


....There's no limit on our ability to supply Australian dollars...we have more Australian dollars than anyone else in the world because we print them," he added, pointing out that Switzerland had successfully capped the value of the Swiss franc against the euro since 2011....(here)
Firstly there is no comparison between Switerland and Australia in terms of the size of their fx markets or Switzerland's proximity to the Eurozone.  Secondly and more importantly, who will even want Aussie dollars in months and year's time? 

RBA fighting a phoney war

Well certainly not a currency war.  As twitter posts have been appearing with news that Malaysia has joined the currency war, RBA board members are now talking about the possibility of joining - following other nations to lower their interest rates....Roger Corbett got a mention (here) as did Guy Debelle...

...‘To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates,’’ he said in a speech to the University of Adelaide Business School. ‘‘We still, obviously, retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate.’’....But Mr Debelle warned that cutting interest rates too far could also create problems for the economy - forcing up the price of assets and causing people to borrow more than they could afford....(here).

This is for an economy where there is already a bursting property bubble and asset price trend.

Meanwhile even the RBA is admitting the Aussie dollar is overvalued, but not by much they say!


....THE Australian dollar was overvalued by as much as 15 per cent late last year according to modelling released by the country's central bank....The local currency was between 4 per cent and 15 per cent over valued in September and about 7 per cent above fair value in December, papers released by the Reserve Bank of Australia under the Freedom of Information Act showed....Even so, the central bank papers said the currency wasn't having a "highly contractionary" affect on the economy...(here)


(the Economist calculated the overvaluation at 60% recently).

Cash in the attic...

...will be better than cash in the bank after 3 years...


....HOUSEHOLDS face losing up to $109 million from their family savings as the Federal government moves to seize cash from inactive bank accounts....After legislation was rushed through parliament, the government will from May 31 be able to transfer all money from accounts that have not been used for three years into their own revenues....

"It is very hard to see why this needed to be rushed through but there have been suggestions it was done more for the government's own financial circumstances rather than customers needs," he said.....Mr Munchenberg warned that unaware customers face having accounts frozen and could face months of delays trying to reclaim their won money from ASIC.....This cash grab comes as economists warn the government is on track to hand down a $15 billion budget deficit in May as company tax receipts collapse....(here)

Tuesday 26 February 2013

Cost of funding - cheap and risky?

More on Oz banks' low cost of funding - it's due to nice instruments called covered bonds, invented in the former European state of Prussia in the 18th Centure and rolled out globally in the 2007-8 financial crisis:


....Now the evidence is in. Covered bonds have brought down bank costs even further. In a confidential note to its institutional clients, Westpac describes the fall in wholesale funding costs over the past year as ''extraordinary''.....No longer can the banks rely on that hoary old chestnut of ''high funding costs'' to pass off their failure to match the successive cuts in the official cash rate....Margins are fatter than ever, veritably bulging, and there is scant proof that borrowers are getting their grimy fingers on a single cent of it. It's a good thing for shareholders though, some cautious at the listless growth in credit....(here).
But like all good things in banking, risks are appearing...
....BlackRock Inc. said using loans to small- and medium-sized companies, or SMEs, to back the securities rather than safer real estate or public-sector debt may devalue the asset class. Pacific Investment Management Co. said the first European deal, being marketed now by Commerzbank AG, may call into question SME issues as true covered bonds if it fails to qualify for indexes benchmarking performance....(here)

The elusive banking culture

Watchers of the UK financial system will have noted the new head of global giant Barclays Bank in London recently attempting to draw a line under all of the recent scandals by launching the bank's renovated set of values (here).  Its peer HSBC, was more pragmatic in the US when confronted with money laundering charges and was able to argue it was too systemically important, or too big to fail (here).

Throughout the various scandals of the last few years has been the understanding that not only were banks and their stakeholders let down by individuals, but there was a systematic culture which favoured profit and criminality over ethical behaviour.

In comparison the last few years have been favourable to the Australian sector, with few scandals on an industry wide scale.  A recent case involving the Commonwealth Bank (here) has shed some light, but also attracting attention is perennial outperformer Macquarie (the millionaires' factory).  

Reviewing the recent press about the activities of the holey dollar's private wealth division show all the similar signs.  Not only were there compliance failures leading to the resignation of the head of division, but a flawed culture:


....this is a big deal. Macquarie Private Wealth is the largest full-service stockbroker in Australia. The findings of the internal audit by the adviser services unit were that some 365 advisers of the 420-strong team coast to coast were in breach of compliance....Though the number itself is big, the bigger deal is what the regulator's investigations say about that elusive yet critical aspect of the corporation, culture....In contrast to previous ASIC ''enforceable undertakings'' penalties - which mostly pertained to individual rogue activities - the Macquarie action is squarely aimed at management....
...Macquarie Private Wealth is a marginal proposition economically. If deal-flow rises and capital markets return to full swing, this regulatory nightmare may drift away.....(here)
The bankers will be hoping for rising deal flow, but so far no encouraging signs on the deeper issues.

Rules of engagement

An RBA/Glenn Stevens defence piece by Michael Pascoe in the SMH.  A fair point but for how long will either Australia's policy makers blame the markets for inaction. New Zealand showed a much more assertive stance last week (here).  And while it is true that Australia is a small market that can get flattened by the FX monster, Australia will be in the unenviable position of being the only country not to engage in the currency war.  Brave?

....“You could argue we would be better off with some different configuration: a lower exchange rate and higher interest rates - or more normal level of interest rates - but, given the configuration of the global economy, I just do not think that is possible at the moment. The weakness in the North Atlantic and their money creation is leading to their currencies wanting to depreciate, and someone has to be high.”...(here).

Sounds like "the exchange rate we had to have"... (heard something similar before? here).


 Australia really is the lucky country...!

Monday 25 February 2013

More evidence of bank gouging...

...The country's big four lenders now generate about 88 basis points of net profit on each new mortgage they sell--the highest rate since UBS began keeping records in 2004, analyst Jonathan Mott said Monday. As recently as a year ago, the nation's lenders were losing money on new mortgages....

...."Writing a new wholesale funded home loan has never been more profitable," he said in a note to clients. "If the conditions in debt and deposit markets continue to improve the banks will be in a position to pass through out-of-cycle rate cuts. If the banks do not follow suit, then the risk of 'political interference' in the sector is large."... (here)

Profitable certainly, but not without risks.  If Britain's banking sector's recent history is anything to go buy, gouging and profiteering will not protect from the coming downturn...

Sunday 24 February 2013

CBA too big to fail and to jail?

A Hat tip to the Australian Property Forum for its coverage of the ongoing Bankwest/CBA scandal.  In case you missed it Bankwest was a victim of the GFC and after the insolvency of its English parent, HBOS was taken over by CBA.  While previous coverage had focussed on malpractice at Bankwest (such as this Four Corners special here).  The other issue is CBA's handling of the takeover and how it may have committed fraud to extract further value from the takeover, at the cost of Bankwest customers.

The following video provides a nice diagram and explanation - here.  The coverage on the Australian Property Forum is here.

As has been pointed out in the above sources this raises several disturbing questions:

- if such behaviour has not been prosecuted, when crisis hits the Oz banking sector again (GFC2) surely it will happen again and entrap more customers at different banks?

- given CBA is now the 7th biggest bank in the world and has released glowing results (here) surely this will mean it is even less likely to be prosecuted and more likely to continue its conduct?

As the video notes - Australian bank customers need to beware - they will not necessarily be safe from Australian banks!

Like a Sydney cappuccino

One of the delights to be enjoyed in Sydney thanks to the heritage of the city's Italian community, is a decent espresso and Sydneysiders all over come to depend on their regular "cuppas".  Of these the cappuccino is a particularly popular variety, which stands out for the amount of its froth - the hot aerated milk at the top of the cup (usually with a signature sprinkling of chocolate powder).

The other Sydney love affair is with property and glowing reports of a return of buyer interest in the Sydney property market and statewide (in New South Wales) was reported in a number of publications.  "Back to boom time" screamed the Sydney Morning Herald:


...LOW interest rates, rising confidence, an improving sharemarket and Chinese buyers all helped Sydney achieve a ''boom time'' auction day as the property market faced its first big test of the year on Saturday.........''Sydney's 76.3 per cent rate is the highest recorded for years and reflects boom-time activity similar to what the market experienced in 2010,'' the senior economist for Australian Property Monitors, Andrew Wilson, said.....(here).
This is froth.  Pure and simple.  A market divorced from fundamentals.  And the optimism on display was elsewhere, in other markets - reporters wrote of an expected bull year in the sharemarket (here), while bank regulators voiced concern about perceived increase in business lending (here). A glowing advertorial for some financial advisers told the story of Tim with all his amassed savings and how he was getting ready for the "good life" (with more saving and spending to come)(here).
So what is really going on? Businesses are looking to cut costs drastically - Insurer QBE noted to be ruling out job cuts (here) and one mining town is dying (here).  Anyone paying attention to global developments is right to think that Australia will not be immune for much longer.  Time to move from frothy cappuccino to regular black coffee...

Wednesday 20 February 2013

Australia avoids the currency war at its peril

Terry McCrann has put it best in a refreshing piece in the Sun-Herald:


....AUSTRALIA is caught smack in the middle of a real live shooting war. Even if it's not bullets and bombs that are being fired.The overwhelming majority of Australians don't know it's going on. And if they did, they'd probably think it was good news for them....And up to a point, they'd be right. Trouble is, "that point" was reached some time last year. Until then, we were beneficiaries. Now we're at risk of becoming - serious - collateral damage....It's the global currency war. Everybody has been trying to weaken their currency to boost their own economy. In echoes of the trade wars of the 1930s - stuff everybody else...
...So how it plays out from here, is critical to everything that impacts on your financial and economic wellbeing. Property prices. Interest rates. Inflation. The stock market. Superannuation. Whether you have a job. Which businesses thrive, which ones shrivel....In recent weeks, the Aussie dollar has drifted in something of a backwater around $US1.03....  The RBA might not seem too fussed. But it is very, very fussed. (here).
Alan Kohler had a good piece looking at the role of Japan and the inability of the Australian government to do anything meaningful.  Are you paying attention Wayne?
...In this context, the Labor Government's "industry and innovation" plan this week is a drop in the ocean, not that anyone expects a big dollop of deficit spending to support manufacturing, or expects the Reserve Bank of Australia to join the currency wars and target higher inflation....
The RBA and the ALP have done what they can. The cash rate is now as low as it's been for 40 years and despite some problems with unionised construction, wage costs overall are not really a problem.....But despite record low interest rates, monetary conditions for Australian businesses are at a record high.....That's because the transmission mechanism between interest rates and the exchange rate has broken down, in turn because of three waves of quantitative easing by first the US, then Europe and now Japan....Japan, straw, camel's back (here).

NZ performs the Haka

In the currency war being unleashed around the world, central bankers have some weapons at their disposal but not many.  Trading strategies - money printing, security creation and bond buying have taken off in the last few years but the role of policy, briefing and government led signals are important too.  The most notable stunts have included a parade of camera work at the Bank of England gold vaults (including a visit by Queen Elizabeth II), sound bites by Russian central bankers and outright lies issued by the G20.

New Zealand has chosen to go for the talking down option (sensible given New Zealand is a small country with little reserves) but has really performed a Haka dance - that made famous by the All Blacks rugby team, defined by Wikipedia as:

... a traditional ancestral war crydance or challenge from the Māori people of New Zealand. It is a posture dance performed by a group, with vigorous movements and stamping of the feet with rhythmically shouted accompaniment...

As detailed by FT Alphaville, NZ is entering the fray:

....We believe the exchange rate is significantly over-valued relative to what would be sustainable long term in the absence of sizeable increases in the terms of trade and productivity....The Bank will intervene when circumstances are right. We will use the OCR as circumstances require and we’re exploring the scope to use macro-prudential instruments that address increasing challenges to financial stability associated with ongoing increases in house prices, and that can also support monetary policy.... (here).

http://1heckofaguy.com/
Now, it is about to be Australia's turn, yet the RBA is silent...what gives?!

The Roadkill in the Tunnel

In very sad news - it was reported that the perennial loser of Australian infrastructure, the Brisbane Airport tunnel, Brisconnections, has entered voluntary administration.  

...BrisConnections had long been expected to follow a similar path to the failed operators of toll-roads in Sydney such as the Lane Cove and Cross City tunnels, and Brisbane's Clem7 tunnel.....Traffic on the 6.7-kilometre toll road which connects Brisbane Airport to the central city has been half what Brisconnections was projecting it to be.... (here).

As the article sets out, in addition to being ultimately unprofitable like other tunnel projects, the modelling was flawed and it never made money.  Except for one maverick investor - Nicholas Bolton who would come close to winding it up in 2009 after acquiring a massive stake for pennies - and made $4.5 million in a last minute sellout which Australian media, shocked labelled greenmailing.  

Bolton has gone on to found bigger investments, face winding up himself and be defrauded by the Russian mafia.  He was interviewed about Brisconnections last year and was unapologetic and argued the project was 

....doomed from the start because tunnels are uneconomic for private companies (here).

So if there is a lesson from this saga it must surely be worth looking around at corporate Australia - how many other businesses have models which are uneconomic from the start and will be exposed in coming market turmoil.




Monday 18 February 2013

Money is melting away...

In Canada at least.  In what is proving a headache for the country's central bankers, including Mark Carney, who recently joined the Bank of England, newly issued plastic notes have attracted criticism due to their stickiness, faults with the design, and, the fact they seem to melt under high temperatures.

Australians have a long experience of using plastic notes - the ones you can wash, but they had better hope that the Aussie doesn't follow the Loonie and fall prone to melting away! (here).

Melted Loonies (c) Mona Billard 

Tall tales

There is a level of confusion as to the state of the Australian economy and likely risks and even those at the top can't agree.

...Three of Australia's big four banks have given market updates this month. You'd be forgiven for wondering if they were discussing the same market....The discrepancy in viewpoints is partly explained by the different business models of the three banks. Commonwealth Bank is the country's biggest retail lender, which means it benefits most from rising consumer confidence....
.
..NAB and ANZ are both more exposed to business lending, where sentiment is weaker. A survey from East & Partners, for instance, last week found that demand for all types of business banking services fell between November and January by an average of 1.9%....Despite their differing outlooks, investors overall still seem to like Australia's banks, deemed to be among the most credit worthy in the world. (here).

Yet meanwhile the central narrative underpinning the actual (or purported) growth was in fact being unwound by the central bank, the RBA:

...The Reserve Bank of Australia (RBA) says the mining investment boom will peak sooner and at a lower level than previously expected.
The central bank also says that while commodity prices are likely to drift lower over the next few years, Australia will continue to benefit from China's economic expansion...."And as mining investment tails away, we'll increasingly move into the operational phase of the mining boom," he said.(here)
Just to spell it out - the mining boom has been and gone....and there is not so much to prop up the Oz economy...

Aussie mutuals strike back!

...With a new website and forum to take on the Banks - Balance Banking - expect to hear more from them soon...

Their fancy website - http://balancebanking.com.au/

Swans in denial

...are not graceful...when is Treasurer Swan and the team running the Oz economy going to tune out of their cognitive dissonance?

...In a forceful intervention near the end of the conference Mr Swan said much of the talk about "so-called currency wars" was "completely misguided". It "unhelpfully reduced the focus on the G20's critical agenda to boost growth and create jobs".
What other finance ministers thought of as intervention to devalue currencies was more often the byproduct of completely appropriate moves to try and kick-start economies, he said...
...Earlier he had told Bloomberg television the yen's devaluation was ''a matter for the market''. The Japanese approach was "to stimulate their domestic economy. That is also good for the global economy.''... (here)


Japan selling AUD...an early shot in the currency war?

Or just simply smart money leaving?  Either way it signals a reversal of fundamentals for Australia.

......If we isolate the November and December MoF numbers for 2012, the pace of selling was even more aggressive. Almost A$8bn of Australian assets was sold in those two months alone by Japanese investors. That is an all time record and gives a clear sense of how aggressive this selling was... 

...Since Abenomics began in November 2012, total foreign bond purchases have not accelerated (chart 2) but the regional rotation has accelerated. Monthly MoF data show strong buying of core Europe (¥817bn per month), tiny selling of peripheral Europe and New Zealand (-¥7bn and -¥9bn), negligible buying of the US (¥2bn per month), significant selling of Australia (-¥235bn), and a meaningful increase into EM Asia and Latin America (¥73bn and ¥159bn, respectively)....(here).

Dumbest guys in the room?

As has been recounted in plenty of famous financial tales, a big crisis requires dumb money.  People who come to the party late and end up holding the can, or missing the musical chair.  In the 2007-8 crisis it was the German landesbanks who ended up holding worthless subprime paper.  Now in an interesting exercise in market timing - the Azerbaijanis are coming!

..."We plan to travel to Australia in order to meet with the leading market participants including regulators, developers, asset owners, and overseas investors to gain deeper understanding of the market," said the State Oil Fund of the Republic of Azerbaijan, or Sofaz, in an emailed response to questions from The Wall Street Journal. "This trip is planned to take place during the course of this year."...

...Sofaz, the wealth fund was set up in 1999 to capture revenues flowing from the Caspian nation's vast oil and gas fields, said that it's ramping up its investments in Australia after buying shares in "major" Aussie companies that appear in the MSCI World Index for the first time last year and government debt..

.....But investment in Australia isn't without risk for the Azeri fund. ...(here).

And to be sure, the smart money is leaving the market...the Japanese are quits

Fighting the currency war with a "preashooter"


Aussie Dollar the most overvalued currency says Fairfax
...The Australian dollar is the most overvalued currency in the world, but there is little will to intervene, according to a global valuation.
Using data from the OECD's measure of purchasing power parityThe Economist's Big Mac Index and the Current Real Effective Exchange Rate (REER) as compared to its five-year average, HSBC found that Australia had the world's most overvalued currency, while having policymakers who were among the least active in the so-called ''currency war''.
''We just don't want to take that kind of risks. We are a small country,'' Mr English added. ''We'll be out in the war zone with a peashooter.''
Reserve Bank of Australia governor Glenn Stevens briefly mentioned the Australian dollar in his statement following the central bank's decision to hold interest rates at 3 per cent for this month, writing that ''the exchange rate remains higher than might have been expected''.(here)

Wednesday 13 February 2013

Very low numbers...

A bit more on the low Australian property numbers, an SMH article making the point they coincided with the ending of a government subsidy scheme.  Like the Warren Bufffet favourite of a naked swimmer exposed by the receding tide (in this case receding government subsidies) what is key is that the ending of the first home buyer's grant is not part of the whole story.  

The accompanying recording of Dr Andrew Wilson of Australian Property Monitors is interesting, you get a sense of fear and uncertainty.  Likewise from Sydney estate agent Shannan Whitney:

...Yesterday the BresicWhitney principal Shannan Whitney was surprised at the extent of the first-home buyer collapse. "Those numbers are quite dramatic," he said (here).

AUD to head into the loonie bin?

Many in the markets have grouped all things Australian with Canada.  Two big resource rich countries exporting to the two biggest energy using countries, with developed financial systems attracting high inflows matched by high exchange rates.

Unfortunately many suspect Australia is subject to a similar housing boom (with matching weakness in the banks) and now with reported pressure on the Canadian currency, the loonie, investors will expect falls in the Australian dollar as well?


...It looks like sentiment toward the Canadian dollar may be shifting....The loonie, as it is known, by mid-session on Monday was on course to close at its weakest level versus the US dollar since August....The loonie’s traditionally tight correlation to investors’ perception of global growth prospects has looked very shaky of late. That soft domestic data has counteracted better economic news from the US and, in particular, China....Traders are now adjusting strategies (here).

Oz banks - on the edge of the precipe

Or as the Financial Times' Lex Column put it - Australian lenders could, with a downturn in the economy - suffer what it termed an "Oz-pop".  Noting the sector's current strengths, banks unlike property developers have not written down the value of their  loan portfolios collateralised by residential properties (for which Australia is one of the most overvalued markets globally according to the Economist).

....The markets of the world are littered with the victims of housing bubbles  those that bet against them too soon as well as those that did not see them coming. Australia is no different. Developers are writing down land values but the big banks, which rely heavily on homeowners for profits, are still investor darlings...

....[Commonwealth Bank] has the sort of stodgy balance sheet regulators everywhere now praise as the model [vast majority home loans and local]. But if the Aussie housing market stumbles, so will its big lenders and market headway from here looks uncertain at best. Stockland and Mirvac, two large developers, have knocked a combined A$600m off the value of their properties in the past fortnight....(here).

Monday 11 February 2013

Where it all went wrong...

Nice piece in the Sydney Morning Herald which hits all the major factors.  No one cause and no simple solution.  In particular with he banking system - as elsewhere private sector risk is now sovereign risk.

...On one half of the pincer, government does not have any choice but to aim for surpluses. This is because the federal budget guarantees Australian banks’ offshore debts, which funds much of the service sector’s growth.....The other half of the pincer inhibits monetary policy.  The lower interest rates get, the greater the likelihood that the banks will need to resume borrowing offshore to fund renewed credit expansion as deposit growth falters and credit demand climbs (here)


...In short, whatever mix of monetary and fiscal policies Australia chooses, growth will be squeezed by the legacy of yesteryear’s offshore bank borrowing binge....The only way to grow out of this in the long run is via productivity gains and/or external demand. So far that has been gifted to us by China. But to keep growing as the mining boom ends we will need to be competitive at both the fundamental and currency levels....
....Basically, Australia’s entire macroeconomic structure is geared towards a dated growth model of borrowing offshore to fund excessive and unearned income inflation. The astute might also observe that this set-up is entrenched also in both political parties....



Oz property is bust...

Some distance away from the squabble about rate cuts being passed on by the banks, a fairly significant assessment from the New York Times of the much broader picture, namely that the property market overall is slowing, and in quite a big way - not a panic yet, but few signs of optimism.



....Data released Monday by the Australian Bureau of Statistics showed that the number of home loans taken out in December had dropped 1.5 percent, the third straight month in which that number fell, and a five-month low....Annual growth in housing credit slowed to an all-time low of 4.5 percent at the end of 2012, a long way from the double-digit pace common in the previous two decades. Indeed, growth peaked at no less than 22 percent in 2004. ....“Most economic indicators remain far weaker than they normally are this far into an interest rate easing cycle, suggesting monetary conditions are still too tight,” Mr. Oliver said.....(here).

The failure to pass on rate cuts is an issue of the banks, but note that it reflects on the banks' own capital weakness.
....Lower variable rates would have a much bigger effect on housing demand, and there are signs that intense competition is driving banks to offer better deals....But the banks are reluctant to ease any further on their own, because much of their funding comes from deposits, rather than markets, and rates on those accounts remain relatively high.....competition for that money is fierce, making it costly. Rates on bonus saver accounts, with higher interest rates, have increased by 2.5 percentage points relative to the cash rate since 2009...

Saturday 9 February 2013

Australian mortgage stress - the high AUD bites?

Interesting take on mortgage delinquencies - not only are they continuing but indicating impacts of the high Australian dollar are noticeable, with stress in areas reliant on tourism (and sensitive to the exchange rate) - with mentions of the Sunshine Coast are we seeing a repeat of Florida-style stress in the US subprime crisis?


....RBA's easing of interest rates over the last few months have helped ease the number of mortgage delinquencies across Australia, but many postcodes remain on the repayment blacklist....According to a list released by credit ratings agency Fitch Ratings, overall mortgage delinquencies across Australia decreased to 1.2 per cent in September 2012, down from 1.6 per cent at end of March 2012 (here).
...Australia’s tourist and coastal areas had some of the highest levels of mortgage delinquencies, while city centers had the lowest rates, Fitch Ratings said.... A cash rate matching a half-century low helped boost home prices by 1.8 percent in January from a year earlier, after a 0.4 percent decline in 2012, according to the RP Data-Rismark home value index. The central bank yesterday held the benchmark interest rate at 3 percent, while signaling it has room to cut further, as the local currency remains elevated....“Coastal regions that rely on tourism are less affected by monetary policy and more by the high Australian dollar,” James Zanesi, Sydney-based associate director at Fitch, said in the e- mailed statement (here).

Credit risk rising


The cost of insuring corporate bonds from non-payment in Australia increased, according to traders of credit-default swaps....The Markit iTraxx Australia index rose 0.5 basis point to 113.5 basis points.....The gauge has fallen 14 basis points since Dec. 31, extending a 53 basis-point drop in 2012, CMA data show....Credit-default swap indexes are benchmarks for insuring bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite (here).

Flipside of depositholder gouging

The Reserve Bank of Australia has continued its campaign to shame Australia's large banks to pass on interest rate cuts by pointing out that the banks' argument of rising funding costs is baloney.  On the flipside however, it is interesting to note that wholesale funding costs are not getting cheaper and that this only highlights the dependence Australian banks have on overseas funding - not a great position to be in entering a currency crisis.

...The big four banks, ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), Westpac Banking Corporation (ASX: WBC) and National Australia Bank (ASX: NAB) have repeatedly cited wholesale funding costs as one of the prime reasons for not being able to full pass on the RBA’s cuts to the official cash rate....Additionally, in an election year, the banks may come under sustained pressure to pass on in full the RBA’s cuts to mortgage borrowers. RateCity estimates the banks have passed on 1.33% of the RBA’s 1.75% cuts to the cash rate since November 2011 (here).


....There has been speculation in recent months that a recent slide in wholesale funding costs would give Australian banks room to cut mortgage lending rates in 2013.....But, in its quarterly Statement on Monetary Policy, released on Friday, the RBA said bank's overall funding costs were relatively unchanged, compared to late 2012....The RBA said although the cost of unsecured and covered bonds had fallen in recent months, making it cheaper for banks to source funding though those avenues, banks were still paying higher rates for previously issued bonds (here).

Thursday 7 February 2013

Black gold to go to storage?

Rather than the Beijing residents, a few journos have noticed that the real victims of Beijing's smog or "airpocalypse" may in fact be Australian exporters as Chinese authorities look to clamp down on coal use.

....The first sign of change came last week when China’s State Council set a total primary energy consumption target (including renewable energy and transport fuel) ...[which] translates to annual growth in energy consumption of about 3.5 per cent over the next three years, down from 6.6 per cent a year in the five years to 2010...  Jiang Kejun, leader of the modelling team that advised the State Council on energy use ... said. “there’s no market for further development of energy-intensive industry.” If Jiang is right that will affect growth in our iron ore exports because steel making is energy intensive (here).

..."Within the (Chinese) thermal power sector there will be a greater reliance on natural gas," Prof Garnaut said....However huge reserves of gas in China and the US mean Australia will face more competition selling to China. (here)



Do you trust Wayne Swan?

Whilst there is an argument to be had about whether it even matters if Australia maintains a budget surplus (as rapidly retreating capital flows, currency and property collapse could dwarf any impacts from fiscal policy), it is probably worth considering the Treasurer's credibility as Australia soldiers on into 2013.  A couple of headlines gave food for thought on this.

....The Treasurer - facing a united push from the Coalition and the Greens in the Senate for the tax office to provide details of the budget's projected $2 billion payments this financial year for the minerals resource rent tax - has fobbed off demands to release details of revenue forecasts....Since Mr Swan's pledge last October, there have not been any monthly forecasts or outlooks published of MRRT revenue....It is clear none of the big three miners - BHP Billiton, Rio Tinto and Xstrata, which are liable for more than 90 per cent of the MRRT payments - has made any payments in the first six months of this financial year (here).
...“I’m optimistic that 2013 will be a better year for the global economy,” Swan said yesterday in his weekly economic note. “One cause of optimism is recent evidence that China’s economy appears to be stabilizing after economic conditions moderated in 2012.”....(here)

Wednesday 6 February 2013

AUD - breaking China's fall?

....The Aussie dipped below the 1.0400 level once again in Asian session trade today, after a report by the S&P suggested that China’s investment boom will have to cool considerably in the foreseeable future. According to S&P economists, who’ve come up with a model to determine the vulnerability of economies to an investment led collapse, China ranks number one on the list....(here).

Traders seized on the line stating the benign inflation outlook "would afford scope to ease policy further, should that be necessary to support demand.".....That was enough to send the Aussie dollar to an intraday low of US$1.0391 following the RBA decision from US$1.0448 before the bank announced its move (here)

...Retail trade fell 0.2 per cent in December, Australian Bureau of Statistics said, which was below market expectations of a 0.3 per cent rise. (here)

Australian Property - Channel Stuffing


...Developers, including Stockland and Peet, have said they're facing the worst housing market conditions in 20 years and expect little change in 2013. Stockland, Mirvac Group and Australand Property Group may report “negative earnings surprises” in the fiscal year ending in ........Australian home-building approvals unexpectedly declined for the second time in three months in December. (here).
While industry body is hoping on a wing and a prayer? ... . A Housing Industry Association survey also published last week showed a 6.6% jump in new home sales in December..."This is potentially a sign that more stock is beginning to be absorbed... (here)


Test Code - YCHUZMS9RURT - Ends

Tuesday 5 February 2013

Gittins on Australia's lopsided, distorted economy


.... in a paper to be issued on Wednesday, ''Corporate power in Australia,'' by Dr Richard Denniss and David Richardson, of the Australia Institute, we're reminded that things here are far from ideal.....The authors argue that ''big business exerts influence through campaign contributions, influence over university funding, sponsorship of think tanks and in other ways''....
....The four most disproportionately influential industries in Australia, they say, are superannuation, banking, mining and gambling.... (here)

RBA Rate Cuts...will come too late ?

....Translation: We cut rates four times between May and December last year, pulling the cash rate down from 4.25 per cent to 3 per cent. That’s a hefty reduction, and there's evidence that it has boosted activity. Even though this variable rate-based economy spreads the cut fairly quickly, however, we don't think we have seen the full impact of those earlier cuts yet.........

......The currency is high mainly because rates in the developed economies overseas are at or close to zero, however. Foreign money has been pouring in, to capture our still-relatively high fixed interest rates, and to hide from the northern hemiphere’s economic carnage. Another rate cut won’t change that dynamic materially. The $A is probably high until either the northern hemisphere begins growing strongly again, pushing rates there higher, or – a much worse ‘‘solution’’ – global growth stalls, killing australia’s resources economy in the process.....(here)


....AUD/USD is down in Tuesday trading, and has dropped below the 1.04 line. Although the Reserve Bank of Australia maintained its benchmark interest rate at 3.0%, market sentiment turned against the Australian dollar as the central bank left the door open to further cuts in the near future. (here)

Monday 4 February 2013

Brokers/Analysts misreading the market?!

There may be an equity upturn, but any new year flush is likely to lose steam and there are too many big questions of fundamentals which are going to weight down any momentum for lift off.  Same for bond crash predictions - money may be moving into equity, but doesn't make it smart or sustainable...

This piece is typical of false positives...

....Many analysts are quietly confident as the recovery in global markets gathers steam,...
...In the past quarter the ASX 200 index has risen 12 per cent in lockstep with the surge in global sharemarkets. In the US, Wall Street is just 5 per cent off an all-time high and in Europe equity markets have also risen as the ''rotation'' from bonds to equities gathers steam. Price-to-earnings ratios have jumped from 10.6 a year ago to 13.7 and volumes going through the market have almost doubled.....(here).

Sunday 3 February 2013

RBA's Glen Stevens doesn't get it!

...Reserve Bank Governor Glenn Stevens does not think Australian house prices are unreasonably high and does not believe they will drop. Nor does he agree that we have a price bubble (here).

Using price-to-income ratios - a gauge of affordability - and price-to-rent ratios, The Economist suggests home prices are overvalued by about 25 per cent or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (here).




“Property booms are never driven by supply and demand – they are driven by credit. And credit is the pretty hand-maiden of debt,” he told a room of about 300 people at the ticketed event....“It screams to me – running naked down Darling Harbour – that this property market is overvalued,” he said. (here)
The AUD at this very moment is hollowing out the economy – anyone not believing that should go have a chat with any exporting or import competing company and see if they are looking to take on more people and have more work, or are easing back.... .....Now cast your eyes to Australia’s banks. They are a significant factor in the overseas borrowings. They know that they can get overseas funds which are looking for a yield, and that they can place those funds in Australia. ............Bank lending, particularly for mortgages has helped inflate Australian housing prices to insane levels. The mortgages taken out by Australians have helped push their private debt levels to global highs. Current private debt to disposable income is circa 145%, mortgage debt to GDP is about 85% (here).

Australia in denial about currency war...

...THE entry of Japan into the global currency war -- a kind of echo of its bombing of Pearl Harbour in December 1941 to enter World War II -- presents a fresh challenge for policymakers everywhere, but especially in Australia......But it's against the Australian dollar that the yen has fallen the most. The Aussie has appreciated 19 per cent against the yen since October but only 3 per cent against the US dollar...(here).



...Australia's economy requires "active management" this year to offset the slowing mining boom and the high value of the Australian dollar, said a board member of the Reserve Bank of Australia, or RBA, in an interview Wednesday.... Heather Ridout, one of nine policy setters on the RBA's board was speaking ahead of the first meeting of the central bank this year scheduled for Feb. 5, when concerns over the persistent strength of the Aussie dollar above parity with the U.S. greenback will again be in focus. Some 1.75 percentage points of rate cuts since November 2011 have failed to ease ...(here).


Canada's Banks downgraded, Australia's are next!

Australia's banking sector has regularly been compared to Canada's banks, but this comparison is likely to sit uncomfortably following the surprise credit rating downgrade over the bulk of the Canadian sector early on Tuesday..... (more here).

Moody's Investors Service Inc. downgraded six of Canada's largest banks, citing concern about high consumer-debt levels and elevated house prices......Canada's banks are still among the world's most highly rated, tied with Australia in second place behind Singapore, Mr. Beattie said. (here)

Fuse is Lit

Great piece by Greg Canavan - highlighting the risks to Australia for 2013.  Don't be deceived by benign daily news...!

Video here.

Hello 2013!

This Blog is going to explore what is going on with Australia's financial institutions and what is going to effect them going forwards.  Australia has surived the GFC well.  But the past is no guide to the future!