Australia is a basket case!

Well not quite...but a toy kangaroo is certainly in the frame - for the royal baby soon to be born to Duchess of Cambridge Kate Middleton (and Prince William of England)!

For those unaware of Australia's odd constitutional arrangements, the head of state currently is English Queen Elizabeth II and through their shared history Australians maintain a strong connection to events in old Blighty.

That doesn't explain the whole stunt though.  Due to massive party infighting ahead of the September general election, Julia Gillard is trying all manner of things to regain the initiative and garner lost popularity, amidst infighting with former also-ran Kevin Rudd.  One such step was to announce a return to her traditional side by commencing a knitting of a soft toy for the English royal baby (while having only engaged in a sexist tirade at fellow male parliamentarians the week before).  Quite daft really.

But there is a serious point here - the political sideshow is distracting from serious economic headwinds.  As Warwick McKibben notes at MacroBusiness, problems lie ahead:

The biggest risk Australia faces is the political uncertainty which is undermining consumer and business confidence.
It won’t be until the end of 2013 that there is a clear indication of the direction of government policy. The good news is that the portfolio shift into Australian assets has probably passed, partly due to this political uncertainty. A weaker exchange rate is to be expected. This will be a two-edged sword. It will help with the profitability of trade-exposed companies but it will also add to imported goods inflation which will likely push inflation outside the RBA comfort zone.

Jim Rickards on the RBA - "foolish"

And its policy will lead to inflation not growth.

Fresh from releasing his bestseller introducing the world to the ongoing Currency Wars, Jim Rickards interviewed on ABC's Business program (see link here) and was really on point on the current dynamics driving monetary policy in China and the US and impacts for Australia.

While not the first to identify infrastructure overkill in China, Rickards was emphatic and went into detail about what is wrong with Australia's policy settings and likely outcomes.

Oh and in case you missed it the RBA has joined the Currency Wars!  This Blog has advocated this as somewhat inevitable (although there are ways to implement and Rickards is correct that the Brazil example is not a good one to follow - hence the criticism to the extent which Australia has followed although not sure if this is accurate).

Rickards' proposed solutions of 12 months ago are unorthodox although it is now an academic question as to whether they would have been successful.

Watch out Australia!

Bond sales mean higher interest rates

The global credit and equity markets are in turmoil following the US Federal Reserve announcement that it will curtail or "taper" its flagship quantitative easing policy soon.  The selloff in government and corporate bonds means rising yields which means increasing interest rates.  Good for savers? Not if the  economy is wrecked as could be the case for emerging market economies and their co-dependants, like  Australia.

Australian 10-year bonds were caught up in a global sell-off today, pushing yields above 4 per cent for the first time in a year....The yield on 10-year government debt soared more than 7 per cent today, continuing a trend that started last week when the US Federal Reserve signalled a possible end to its $US85 billion-a-month stimulus program. Bond yields move in opposite direction to bond prices. 

“This market move is quite unique,” US interest rate strategist Andrew Lilley said.“In the last 10 large sell-offs in bonds, inflation expectations were rising quite significantly because the economic outlook was getting better. This sell-off is unique because 10-year inflation expectations in the US in the last six weeks have fallen about 0.5 per cent.”
Local bonds were sold off more harshly than US bonds as global investors continued to pull out of Australian dollar-linked assets. The yield spread between Australian and US 10-year bonds increased to an almost two-month-high of about 140 basis points. 

"As bond yields start to go up, the support that equities and credit have received from lower bond yields start to disappear," he said.(here).

Too big to fail?

Or big boys being set up to fail?

While global financial markets are on the precipe, check out this piece lionising the oversized Aussie banks - here.

The byline makes a point about the lack of competition in the Australian market - too right.  But not the only worry for regulators and savers.

Killing the golden goose

Ominous for Australia is the fact its biggest earner, iron ore, is on the wane.

One year ago it was dubbed the second-best business on earth behind the production of Apple iPads, but now Rio Tinto is cutting scores of senior staff from its West Australian iron ore division.

About 50 people were told late on Wednesday that their roles were no longer needed within the division, which ranks as the most profitable business in Australia's most lucrative export industry. It also is Rio's flagship, contributing close to 80 per cent of earnings.

But that exalted status has not saved it from the sort of job cuts that have swept the rest of the Australian economy in recent years (here).

Another sign of worse to come. 

QE down under

So after a week which saw journalists under attack for suggesting all might not be tip top for the Australian economy (Wayne Swan's Treasury note here and the denials about the shrinking Western Australian miracle here), there is now talk of QE as the short cut to restoring dollar competitiveness.

Readers all around will be familiar with the money printing in the US and UK which though lowering the respective exchange rates has corroded savings and stoked inflation.  In Australia, a similar trade off putting ordinary Australians second to the finance sector looms and readers might consider it an open sign of failure by the Australian ruling class.  That or a belated stumble to catch up in the currency war.  Quotes below and stay tuned for more.

With the non-mining sectors of the Australian economy responding less promptly to lower interest rates than in history would suggest, and the A$ still at elevated levels by historical standards, in our view the chances of a smooth ‘baton change’ between growth led by resources investment and growth led by exports and other components of domestic demand are declining.(here)

One miner feeling the heat...

Not only those falling gold prices it seems but lawyers are getting involved...

Besieged gold producer Newcrest Mining could face multiple legal claims within the next month as former contractors push for millions of dollars worth of compensation, and shareholders mull a possible class action.

Fresh from dealing with an ASIC probe into the share price slump that preceded last week's corporate restructure, Newcrest is believed to be preparing to front two mediation hearings in coming weeks on disputes linked to the troubled Lihir project in Papua New Guinea.

An engineering, procurement and management contractor is believed to be demanding more than $7million as part of a dispute over a cancelled contract....A Queensland-based labour hire company is also believed to be claiming it is owed almost $5 million under a contract it previously held on the Lihir project.

That company is expected to launch legal action to recover the money unless a resolution is reached at mediation sessions.Newcrest declined to comment.
Maurice Blackburn principal Andrew Watson said he was investigating whether shareholders could launch an action over potential breaches of market disclosure laws.''It beggars belief that Newcrest knew nothing of the catastrophic impact that the gold price slump would have on the value of its assets until the day it announced the write-down,'' he said. (here)

The recession that shall remain nameless...

There is a lot of press about Wayne Swan and cronies trying to shut down any talk of recession...

The deputy prime minister of Australia, Wayne Swan attacked Goldman Sachs Group Inc. (NYSE:GS) analyst for creating overly pessimistic view of the Australian economy. Goldman Sachs Group Inc. (NYSE:GS) economist Tim Toohey said in a research report (embedded below) yesterday that the resource-rich economy has a 20 percent chance of falling into a recession. Australia has posted uninterrupted economic growth for more than 21 years.(here).

Meanwhile even without the R-word the signs are there for all to see.  And when bankers start downsizing...

BOSSES of some of Australia's largest investment banks are overhauling their real estate operations, with most of the top groups having axed staff and at least one considering a move deeper into unlisted wholesale real estate funding....Almost all the big banks have let go of at least one senior investment banker from their real estate teams in the past 18 months, including UBS, JPMorgan, Goldman Sachs, Deutsche and Merrill Lynch (here).  

And over to the employment numbers:

Economists are revising up their unemployment rate forecasts for this year, ahead of the release of the May jobs figures tomorrow....Analysts expect the unemployment rate to tick up by 0.1 per cent to to 5.6 per cent in May, with 10,000 jobs removed from the economy...

‘‘[The economy’s] not growing fast enough in a fundamental sense to generate enough jobs to keep the unemployment rate level,’’ NAB chief economist Alan Oster said (here). 

Australia's banking system is rotten

Judge for yourself!  International rating agency Moody's has looked to downgrade Australia's big four banks, factoring in availability of government support for troubled banks (here), while the Herald group has been exposing Australia's own subprime industry - Low Doc loans, which are as toxic as their US equivalents - and of course the regulator it seems may have been asleep at the wheel and then very keen to deflect blame!  Seen it all before?

She says the emails which are being released - sent from 30 banks and other lenders into the 20,000-strong mortgage broker 'channel' - prove the banks are calling the shots. The emails examined by BusinessDay suggest some banks orchestrated the reckless fall in lending standards as the credit boom approached its crescendo in 2007 (here).

Of the borrowers who have asked for help from Ms Brailey's action group, Banking & Finance Consumers Support Association, 1170 of them claim their loan application forms (LAFs) have been tampered with. In most cases, the income figure has been increased to justify more credit. "There is not one clean 'LAF' among them," said Ms Brailey, 70, a consumer advocate from Western Australia. "This is Australia's subprime crisis.'' (here)

The Commonwealth Bank concealed financial improprieties by a top financial planner controlling an estimated $300 million in investments for 1300 clients, many of them retired and with serious health problems....The planner, Don Nguyen, who joined the nation's biggest bank in 1999 and has since been banned from providing financial services advice until 2018, allegedly forged signatures, created unauthorised investment accounts and overcharged fees.
A Fairfax Media investigation has revealed that bank staff took part in a cover-up that allegedly included the falsification of documents after Mr Nguyen left his position in July 2009.... one whistleblower, Jeff Morris, agreed to be identified by Fairfax Media to warn others about the perils of whistleblowing and the lack of support he got from the regulator, the Australian Securities and Investments Commission.  (here)

A collateralised economy?

The FT Alphaville has a fascinating blog examining the trend for distortions in long term pricing trends of commodities due to monetary easing and negative inflationary expectations.  The journalists have noticed that monetary easing by the Federal Reserve has adjusted the yield curve for commodities and for the last few years encouraged holding of commodities as collateral (rather than to be used for  industrial and traditional purposes).  All well and good but the amount of money tied up has led to an overhang which stands to be wiped out when rates rise - which they are doing now and money moves from commodities into finanical instruments again.

Link here:  http://ftalphaville.ft.com/2013/06/05/1525542/the-rise-of-the-real-collateral-mining-business/

The article explains a lot of the distortions in commodity markets and consequentially the financial markets.  But it seems to raise a question - while all of the above is bad for individual entities or whole industries which suffer from commodity stockpiles, could a whole economy with a sufficient commodity weighting be at risk?

Meanwhile Aussie banks are suffering from the outflow of liquidity in the primary instance anyway - so  Australia learns it is now an unpredictable emerging (resources) nmarket as far as international financiers are concerned?!

Given that the near costless credit and liquidity the Fed, the European Central Bank and the Bank of Japan have been pumping into the global financial system has spawned a multitude of carry trades and a global search for yield, even the slightest prospect that the US might begin scaling back its quantitative easing program was likely to spark a rush for the exits from those trades. (here)

Big risks come home to roost

So you thought China was simply a customer for Ozzie raw materials?  Well yes but there's a whole lot more.  Some infrastructure financing apparently:

Roads such as the F3-M2 and WestConnex will be partly paid for by Chinese immigrants under a state government plan to snap up Treasurer Mike Baird's previously poorly subscribed Waratah Bonds.
Desperate to sell Waratah Bonds to pay for roads and rail, the state government found a solution - joining forces with the federal government to get Chinese immigrants to invest in them (here).

But more significantly China contagion presents an ugly prospect for Australia: 

Today, the home of shadow banking is China. Rating agency Moody’s estimates that shadow banking is equal to 55 per cent of China’s GDP, or $US4.74 trillion....If returns on capital in China are in the high teens but credit is restricted by regulators, then borrowers and lenders will find an informal way to interact so that each party can make the high returns available. The result has been an explosion in shadow credit which Chinese regulators have battled to control.... 

...The RBA is keeping an eye on China’s shadow banks and sees a twofold problem. One is that the shadow banking sector collapses and creates a credit crisis in China with knock-on effects for Australia. The other is that as Chinese regulators rein in the shadow banks, Australia will find out just how much of a role informal credit has played in our own growth story (here).

And as forecast journeyman Ross Garnaut explains we are at the end of the line for the Kangaroo bounce:

The prosperity of the past two decades has been a wonderful thing. Since the recession of 1990-91, Australians have had the longest period of economic expansion unbroken by recession of any developed country.
The China resources boom has passed its highest point and will soon end. Export prices are falling. Resources investment is about to decline. We will be left with an extraordinarily high exchange rate, forcing contraction of trade-exposed industries essential for the expansion of employment and output as the boom recedes (here).

And the adjustment is happening right now:

Running out of cash, Australian miners get creative to survive (here)Construction hit by $1 billion slump (here)