Wednesday 31 July 2013

"Horrendous"

Quite a strong adjective!  Used to describe Australia's latest PMI figures which some commentators are figuring are worse than crisis hit Spain.
The headline number fell to 42.0 from 49.6 a month ago.
Any number below 50 signals contraction.
“Manufacturers are telling us that, while the fall in the Australian dollar and the May interest rate cut have been extremely welcom, they have not yet been enough to turn around a very challenging business environment, locally and internationally,” said the Austrailia Industry Group.
The production sub-index tanked to 37.7, down 12.5 point from July.(here)

Tuesday 30 July 2013

What a commodities slowdown looks like

Kudos to the BBC for sending a correspondent into the mining regions for some images which many Australians may be familiar.  An eerie silence in the background as Linda Yueh how long growth will last as China slows (here).

The highlight was the digger loading up $1 million of iron ore an hour.  How much longer will it continue to run profitably? 

Households teetering on the edge?

So Ozzie's personal finances show a high level of debt, but not to worry as it's being reduced and it's backed by investments in...housing?!

AUSTRALIAN household debt is still high by world standards, but it is not affecting the stability of the financial system. 
In 2012, the mean average debt level for Australian households was $151,488, a report from the Melbourne Institute showed. 
Commonwealth Bank senior economist Michael Workman says there are a number of factors why the high level of debt is not necessarily a problem."Some commentary on Australian household balance sheet positions conveys the impression that household debt levels are too high, leaving many households with unmanageable debt servicing commitments. 
...Australia's average debt-to-disposable income ratio, was at 147 per cent in 2012, a 28 per cent increase from 10 years earlier, the Melbourne Institute's 2012 Household Income and Labour Dynamics in Australia (HILDA) report showed.However, the average debt-to-assets ratio was a respectable 17.6 per cent, showing that most of that borrowing was high value assets like owner-occupied or investment housing (here)

Banks fine if miners default?

...senior executives at Australia’s largest banks are expecting an increase in bad debts from mining and mining services companies as the value of commodities continue to fall amidst the decline in growth in China.
According to The Australian Financial Review, the survey found that the bad debt situation in mining over the next 12 months is expected to “deteriorate somewhat” with Chinese authorities now becoming more concerned about China’s growth prospects.
The looming threat didn’t stop ANZ from offering up $1 billion in finance to Gina Rinehart last week however, in order to bridge her Western Australia iron ore project. Whilst the prospects of the mining sector have remained quite bleak in recent times,(here)

Wednesday 24 July 2013

Drought for Aussie consumers

or how strapped consumers followed the international trend and moved down market to save cash:
The local offshoot of Anglo-Dutch consumer products giant Unilever, which sells everything from shampoo and ice-cream to tea and laundry powder, has been hit by a profit collapse of almost 50 per cent to $43.12 million as revenues flat-lined in 2012.
The souring profit and unresponsive sales performance comes as suppliers in Australia, both big and small, are facing increasing pressure from the supermarket giants to take margin haircuts and invest heavily in their own supply systems to improve efficiencies in the supply chain.
Unilever's heavy reliance on its empire of brands is also challenged by cautious consumer behaviour and the growth in popularity of unbranded private-label groceries at the supermarket checkout (here).

Times changing for big Aussie banks...

Some details about CBA and ANZ shifting their strategies to meet new challenges - CBA stripping back its balance sheet to meet stricter capital requirements (although question if a recent private wealth scandal had anything to do with it) and ANZ looking to expand beyond Asia.

But changing is hard to do and to what extent will problems in the core outweigh any escape attempts at the periphery? Mutterings of increasing mortgage insurance costs don't bode well.

Interestingly though there seems to be a divergence between those with a domestic focus at the moment (CBA and Westpac) and those focussing overseas (ANZ and NAB).  It was noted previously that CBA and Westpac have larger domestic lending books and as this article indicates they are busier than ANZ and NAB due to integration of their Australian subsidiary groups (BankWest, Bank of Melbourne, St George, Bank of SA).

In the event of Ozzie contagion could it be that ANZ and NAB survive better due to less local exposure? Could be worth a study of long/short strategies!

Learning how to make stuff again...

Australia's manufacturing industry has been decimated by a high currency, weak consumer demand, distorted tax and incentive systems and crowding out by the resources sector.  With a weakening currency, falling commodity prices, and talk of further interest rate cuts that is shifting however the game has changed and this time Australia is going to have to work for its growth.

Why so?  Well the Oz economy can no longer rely on the internet or rapid increases in the terms of trade to lift Australian's incomes.  As set out in macrobusiness it happened before, but now it's back to basics:

 the surge in incomes over the 2000s was extraordinary – driven primarily by the once-in-a-century lift in commodity prices – and that income growth will be much slower going forward. Indeed, to the event that the terms-of-trade continues to retrace back towards its longer-term average level, it will detract from household income growth, unwinding much of the gains enjoyed over the 2000s. 
In the years ahead, Australians will have to get used to much slower income growth than they have become accustomed to and will instead have to earn pay rises the old fashioned way: via improved productivity.(here)  
What is productivity? Making or doing things better and more efficiently.  This is why Kevin Rudd has been sounding out on the issue.  So Australia may not necesserily be making more stuff, but needs to be doing it smarter.  And when New Zealanders start to gloat about this - something needs to change! 

Tuesday 16 July 2013

Ozzie banks vulnerable

Business press seized on comments from Moody's as to overexposure of Australia's banks to a housing crash:

According to the Financial Review, Australia’s biggest banks have been fighting over the mortgage market for too long and if property prices fall too far, we could be in for a US-style banking collapse.
With the exception of ANZ (ASX: ANZ), our top four banks are not exciting from an investing perspective and are too heavily leveraged on growth through their mortgage books. If Australia were to experience an unemployment boom, loans would struggle to get paid, leading to more defaults and eventually lower housing prices.
This would paint an ugly picture for our biggest mortgage writers like Commonwealth Bank (ASX: CBA) and Westpac (ASX: CBA) (here)


And worringly this is structutal - a function of the market and simply how the banks are:

Banks in Australia have the highest concentration of residential mortgages than any other type of institution in the world, making them vulnerable to a possible house price correction according to the analysis of a leading credit market economist.
Moody's Analytics managing director Tony Hughes says that house prices in Australia were overvalued which could pose a major concentration risk for banks.  The high exposure to residential mortgage represents a valid risk for banks and the Australian economy. (here)

Nothing like being so exposed in one asset that you become the market (when it plummets):

Australia’s banks have the highest exposure to residential mortgages of any financial institutions in the world, leaving them vulnerable to a “looming” house price correction, a leading credit market economist has warned.(here)


Wednesday 10 July 2013

Soulsearching Bankers

Perhaps it is the slight break in market conditions which allowed the heads of Australia's banking sector to share their great wisdom as to the shape of things finance in Australia.

First up, preferred financier to Mexican drug cartels, HSBC:
HSBC group chief executive Stuart Gulliver has heaped praise on Australia's banking sector, arguing that Britain could have avoided having to rescue its ailing banks if it had emulated Australia's four pillars bank policy, according to The Australian Financial Review. 
Well he would say that, being under seige and seeing a half decent banking still working after all.  Further:
“Your banks are actually very profitable and therefore, as a society, you are ex-ante providing for financial crises by allowing your banks to make very high returns so the taxpayer should never have to touch them,” Mr Gulliver said, according to the AFR(here)
Hogwash! True on the latest figures but for how long? And have all major risks been accounted for in that statement? The few and big view of banking is an argument which is being dismantled by the Chinese banking system (whose banks love to finance empty cities and lots of copper sitting in warehouses).  As has been noted here and elsewhere Australian banking is not competitive and consumers are worse off from the lack of competition.  Cue one of the major banks to defend the indefensible:

Westpac’s (ASX: WBC) CEO Gail Kelly has argued that the retail banking market is still competitive, despite Australia’s big four banks writing nearly 90% of all new mortgages.
With credit growth sitting at around 3% and running on par with GDP rates (compared to around 11% or 12% growth pre-GFC), Kelly told The Australian Financial Review that “on mortgages it is a competitive sector… that’s because it is such a low growth arena and has been for some period of time”.
Her comments came in retaliation to HSBC Australia’s chief, Tony Cripps, who last month said that “if you look at the retail space, the major banks hold about 90% of the mortgage market, so there’s obviously not much competition there”. (here)
Wrong on so many levels!  Last thing I recall from Gail Kelly she was defending why her rates were so high (remember the video about the smoothie stall and the cost of wholesale funding/bananas?!).  Putting that to one side did you spot the gem from HSBC's Tony Cripps contradicting his boss that in fact there isn't much competition and that's a bad thing?! (Stuart!).

It's not that others didn't try and have a go.  In its statements upon exiting a poor investment in Australia, there is a sense of the difficulty for newcomers to break into the market or at least have a go:
Lloyds has had a torrid experience in Australia, where it inherited a significant operation through its ill-fated takeover of UK rival HBOS at the height of the financial crisis...While most Australian banking operations have thrived in recent years, the Lloyds unit has racked up losses. One person familiar with the unit recently told the Financial Times that aggregate losses in Australia were £3bn, equivalent to a fifth of its original book of business.(here
As it happens, like their peers around the world Australia's banks face liquidity and solvency challenges, but are likely to be rendered obselete by technology.

Ugly Sisters

A great piece from bondvigilantes.com featuring slides from a M&G presentation showing the extent of the bubble in property prices!

Here

Friday 5 July 2013

Unintended Consequences

Not a phrase central bankers would like to associate with.  

Just this week, shrugging off questions about his time at the head of the Finance Ministry when it entered into the budget flattering derivatives which have now been revealed to have lost the Italian government about $8 billion, Mario Draghi was able to team up with fresh faced new Bank of England Governor Mark Carney to talk markets up and interest rates (and currencies) down.  So far, so forward guidance (link here, although the FT was more sceptical, feeling a short term effect before rising US rates markets took the stage again).

In complete contrast Australian central bank governor Glenn Stevens had a proverbial foot in mouth moment (exacerbated by his deputy) - telling a "joke" about how much the rates committee had deliberated about holding interest rates at their last meeting (although with the door left open for likely declines soon).
The Reserve Bank of Australia’s deputy governor has been speaking on Thursday. Sadly there were no jokes but Philip Lowe did attempt to explain his boss’s side-splitting gag. 
RTRS – RESERVE BANK OF AUSTRALIA DEPUTY GOV LOWE SAYS BOARD DID DELIBERATE FOR VERY LONG TIME, BUT ALWAYS DOES
RTRS – RBA’S LOWE SAYS GOVERNOR’S REMARKS WERE MEANT TO BE LIGHT HEARTED, WERE MISINTERPRETED 
But some people still don’t get the joke (which you can find on the RBA website).
Here’s a furious ANZ. 
"The Australian Financial Review reported an RBA spokesperson confirmed the RBA Governor’s comments yesterday that the Board deliberated for a very long time on Tuesday (before doing nothing) were meant as a “joke”, rather than a steer on policy. Presumably, however, the Governor would not be unhappy with the further fall in the Australian dollar to a new recent low that occurred partly as a result of this particular remark, but no doubt also as a result of the sober assessment of the challenges facing the economy in transitioning to other sources of growth amid considerably weaker mining investment over the next few years. 
The “joke” was important in our decision to add a further rate cut in August, changing the probabilities of an earlier move in our view (we had still been expecting a further cut later in the year). Given this information has been shown to be false, we should revert to our view of the day before yesterday that the RBA will cut rates again, but probably not until slightly later in the year as, for now, the currency is doing much of the easing work for the Bank and that the bias of risks for Australian official interest rates in 2014 is still assessed to be to the down side....(here)
Most would agree this has all gone a bit overboard.  But it raises a couple of points:

i) as noted in the quote Governor Stevens' statements were much more effective than many previous deliberatons in lowering the exchange rate (which has been a key objective with Australia finally entering the currency war of countries seeking to devalue their currencies).

ii) but central banker's main tool regarding market sentiment is their comments and misusing the tool could weaken it and cause adjustments by market participants (in the above quote ANZ is one example of such a participant).

iii) while the falling Aussie dollar is broadly welcome for Australia, it is not a fait accompli, if the dollar were to fall quickly, in adverse circumstances, it could trigger a loss of confidence which could exacerbate a crisis (such as might occur if there is a sudden withdrawal of hot money, or another meltdown in a big market nearby in Asia).  To lose control of the direction or tempo of currency policy would be a failure of the RBA (and currency management is a de facto remit of central banks in the era of currency wars).  High pitch fears of bears for the Aussie dollar (predicting future lows of US 75c are starting to resonate for some (here).

iv) even if there are no adverse outcomes, the overworking of the Governor's comments may blunt them as a tool in future (with market participants less responsive), making it harder for the central bank to steer policy in a crisis.  Which could be a big concern indeed..

TBTF (Too big to fail)

An interesting analysis of the Canadian banking system from FT Alphaville, following former Canadian Central Banker Mark Carney starting as head of the Bank of England, with a useful comparison to Australia.

Australia and Canada are very similar economies and jurisdictions - English heritage, resource and commodity exporters to the major economies of China and the USA and structural booms remaining in place (barely) with suggestions of currently overvalued property markets.

On the banking side both have conservative sectors with several (four or five) major banks at the pillar.  Interestingly the FT hailed one of the strengths of Canadian regulators recently was that they stopped the banks growing too big during, blocking earlier mergers amongst the top pillar banks.  A couple of questions:

i) while they look in good shape now (helpful for looking at Mark Carney today) will this hold into the future?  If not will Australian banks follow down a similar path? (hard to imagine given they are rated a world leaders at the moment on some metrics)

ii) in Australia it could be argued that one bank, CBA succumbed to merger fever when it acquired ailing BankWest, as CBA now has absorbed the loan book and swollen its income to be the leader of the pack of Aussie banks.  Might CBA now be too big to fail?  Certainly signs from the recent private wealth adviser frauds at the CBA aren't a good sign.  

Sleight of hand from the banks

Banks have clawed back billions of dollars by not being fully transparent with fixed-term deposit customers.... 
The Australian Securities and Investments Commission (ASIC) warns depositors that when an initial term ends, the interest paid can automatically roll over from a high advertised rate to a much lower one.... (here)

Monday 1 July 2013

Bringing a Chinese ghost town to a city near you...

A really strange proposal is doing the rounds of Macquarie Street (headquarters of the NSW State governement).  Described in glowing terms by the Sydney Morning Herald as the brainchild of a former Macquarie banker and parliamentarian Ros Cameron (who else but infrastructure infamous MacBank?) and his backers have managed to cobble together a proposal which would tear up the fabric of Sydney and all cherished planning and development standards of the city.  Oh for a buck sure.  But do Messrs Cameron and others really think Unions would allow foreign low cost labourers to be imported with the  materials (they blocked Gina Reinhart from doing something similar)? Or that politicians would forgo the local job creation of such a large city changing project?

In case you are guessing, the Cameron led proposal seeks to take a Chinese building site and dump it in Sydney, switching some transport pathways to do so.  The plan is original and does offer a fresh approach but seems over the top - absolutely everything shipped in and dumped in the centre of Sydney  with 150 prefabricated skyscrapers?

Who would fill these?  Who would buy them?  Who would think they could pass approval? or be safe?

No it seems this is an overdone proposal - possibly for consumption only.  It seems likely that this is a PR circulation to soften up the population for some more subtle changes - low cost import workers here or poor cheaper construction there.  Watch this space.

Political objectives aside the proposed development could be seen as another world famous China export - of big, not very appropriate cities and buildings, many of them empty.  For example!

Australia is certainly taking all things Chinese to heart! (Ghost cities link here)

The money is betting against the Dollar and the Banks

The Fed's tapering looking to hit Australia hard - 

When Stanley Druckenmiller, the legendary hedge fund manager, told an investor conference in New York a month ago that the Australian dollar was overvalued and would “come down hard”, local traders took note.They reasoned Mr Druckenmiller’s comments would be the cue for the hedge fund world to gang up on the Aussie, particularly as it was already struggling against a resurgent US dollar.
They were right.
Bearish wagers against Australia’s currency have risen to the highest level on record, according to the latest figures from the US Commodity Futures and Trading Commission. They show a net 58,600 contracts worth a notional A$5.86bn (US$5.5bn) are betting against the Aussie.(here)
And as for the banks (only weeks ago market stars):
International investors are bailing out of Australia's banks as the United States prepares to wind back its economic stimulus programmes and the Australian dollar tumbles.
Shares in the big four banks were sold off this month after US Federal Reserve chairman Ben Bernanke said the central bank would begin slowing the pace of its quantitative easing stimulus later this year.
Among Australia's big four banks, only shares in Westpac and ANZ are traded on the NZX. Westpac shares fell from a high of $41 in May to a low of $32.70 on June 21, a decline of more than 20 per cent. ANZ shares dropped from $38.30 on May 1 to $32.60 on June 21. (here)

The $17 million kitchen... not Chinese...

Such could be a headline to do with the exit of Julia Gillard, who of late had been playing her gender cards on her sleeve, while readers from the UK and other less honest jurisdictions might expect a headline about exposed extravagance by the former prime minister.  Such would be not on the mark, but not far off point.

The Gillard exit has caused an uproar, the best manifestation of which could be the rant in the Senate by upper house member Michaelia Cash, very much in the mould of Australian rough and tumble politics.

To be sure it is a dramatic story, with Rudd facing a looming challenge to restore order and fight a rapid election campaign.  But interestingly there is quite a silence in the media on a far greater issue.  In a sense it doesn't matter who is in government, Australia faces a tsunami from China and in two ways.  First from the resources pull back.  Second from the shockwaves if the Chinese economy collapses.

On the first point there was a good overview piece in the FT which looked at Rudd's challenge and the scale of the slowdown for Australia's golden goose (resource projects worth $150 billion cancelled etc)  But more on that kitchen - a nice focal point:
Sitting in a warehouse outside Brisbane airport in Queensland is a kitchen designed to feed up to 2,000 mine workers a day. But it was never delivered to BHP Billiton, the world’s biggest mining company, because the project it was destined for was put on hold. The kitchen is now on the market for A$17m, local media say.
On the second point some pretty direct words of warning:

The risks are growing that China, which underwrites the Australian economy, will succumb to a financial crisis. This has not sunk in for Australian policymakers, perhaps because the implications are just too large, but it is the view that is forming among a large number of investors and economists who watch the data and investigate ground-level conditions closely.
There are huge uncertainties but, at face value, it looks like China is in the midst of one of history's great credit expansions – bigger than Japan's at the height of its bubble – and all that money is no longer generating growth in gross domestic product. The accelerator is pressed to the floor, the tank is getting low but the wheels are not getting traction like they used to. (here)
The above article refers to expert Victor Shih of Northwestern University.  A video of him explaining just how many trillions of bad debt are locked up in Chinese banks is here.

Similarly from William Pesek:
Australia has been called many things: Oz, the land Down Under, the lucky country. But the equivalent of a collateralised-debt obligation?
Canberra can't be happy to hear its AAA-rated economy likened to one of the reviled investment vehicles that blew up amid the 2008 global crisis. Yet the comparison is being made by some economists, who see the asset underlying Australia - demand from China - beginning to evaporate.
No country is more vulnerable to the much-dreaded slowdown in China than resource-rich Australia. The mining boom that fuelled nearly all of its recent growth is nearing a cliff of economic risk.
“Australia is a leveraged time bomb waiting to blow,” says Albert Edwards, Societe Generale's London-based global strategist. “It is not just a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
AdvertisementThere's a bit of hyperbole in this view. But highly-advanced Australia is about to pay the price for growing so addicted to a developing nation. Exporting natural resources led to the neglect and atrophying of other critical sectors.
Oh dear.  Where to from here?