Archive for September, 2010

Australian housing bubble about to be pricked by Fitch

September 30, 2010 Leave a comment

The Australian housing market has been in a dreamland Ponzi bubble for 30 years.  The leverage has been astonishing.  The debt levels gigantic.  Prices have to come down around 40% to be sustainable, viable and functional.

What would that do to our banks?

Fitch is about to tell us.

AUSTRALIAN banks face fresh scrutiny over their exposure to the frothy housing market, with a key ratings agency planning a stress test to assess what sort of impact a sudden collapse in property prices would have on their lending books.

Ratings agency Fitch will run several shock scenarios ranging from mild to severe. In the worst-case scenario, Fitch will assess what is likely to happen to bank ratings if mortgage defaults rise as much as 8 per cent and property prices fall a hefty 40 per cent.

The results will also be used to assess implications for mortgage-backed bonds sold by banks and other lenders.

The Reserve Bank will this morning provide its half-yearly financial stability review, with the health of the residential property market likely to come under focus.

For months, Australian banks and analysts have been debating whether the property market is starting to look like a bubble, but details of the Fitch stress test were enough to spook investors, with bank shares taking a sudden negative turn yesterday afternoon.

Shares in Commonwealth Bank and Westpac, which have the largest exposure to residential property, yesterday closed down 1 per cent and 1.3 per cent respectively.

Fitch’s managing director for Australia, Ben McCarthy, said the ratings agency had received ”numerous inquiries” from investors about the sustainability of Australian residential property prices and the possible impacts of a correction.

“While over the short-to-medium term, a downturn is not Fitch’s central expectation, the agency is performing its stress test exercise on ratings impact under the hypothesis of an imminent housing market correction.”

Australia’s capital city home prices have risen 41 per cent since June 2006, on official Australian Bureau of Statistics data. Over the same period, prices plunged in the US, Britain, Ireland and Spain.

With an estimated 60 per cent of Australian banks’ loan books secured by residential property, international investors have questioned the sustainability of house prices.

Commonwealth Bank chief executive Ralph Norris has recently embarked on an international roadshow aimed at heading off concerns that the Australian property market is behaving like a bubble.

CLSA analyst Brian Johnson is a supporter of the bubble thesis, warning prices could fall if interest rates move higher later this year. He has said the first-home buyer segment is particularly vulnerable.

Hedge funds have also been circling bank stocks, betting the market was overvalued and a collapse in prices would cause steep losses for banks.

Categories: Best assets to sell

Xerographica is a genius!

September 29, 2010 Leave a comment

Another great graph from that WP genuis Xerographica:

Categories: Miscellaneous Musings

‘This will not end until the Anglo bankers are dead and denutted’

September 28, 2010 Leave a comment

The. End. Is. Nigh.

It hath been foretold.

The ‘mad’ goldbugs were right after all…

September 28, 2010 Leave a comment

Ambrose Evans-Prtichard of the Telegraph apologizes to all the ranting, insane, paranoid conspiracy goldbug ‘nuts’ for being wrong about Bernanke.  Yes, he says, Bernanke is nuts.

Best quote of the week: You cannot solve a structural unemployment crisis with loose money.

So all those hillsmen in Idaho, with their Colt 45s and boxes of krugerrands, who sent furious emails to the Telegraph accusing me of defending a hyperinflating establishment cabal were right all along. The Fed is indeed out of control.

The sophisticates at banking conferences in London, Frankfurt, and New York who aplogized for this primitive monetary creationsim – as I did – are the ones who lost the plot.

My apologies. Mercy, for I have sinned against sound money, and therefore against sound politics.

I stick to my view that Friedmanite QE ‘a l’outrance‘ is legitimate to prevent a collapse of the M3 broad money supply, and to prevent outright deflation in economies with total debt levels near or above 300pc of GDP. Not in any circumstances, but where necessary, and where conducted properly by purchasing bonds outside the banking system (not the same as Bernanke “creditism”).

The dangers of tipping into a debt compound trap – as described by Irving Fisher in Debt-Deflation Theory of Great Depresssions in 1933 – outweigh the risk of an expanded money stock catching fire and setting off an inflation surge later. Debt deflation is a toxic process that can and does destroy societies as well as economies. You do not trifle with it.

But deliberately creating inflation “consistent” with the Fed’s mandate – implicitly to erode debt – is another matter. Nor can this be justified at this particular juncture. M3 has been leveling out. M2 has begun to rise briskly. The velocity of money has picked up. The M1 monetary mulitplier has jumped.

We have a very odd world. The IMF has doubled its global growth forecast to 4.5pc this year, and authorities everywhere have ruled out a serious risk of a double dip recession.

Yet at the same time the Bank of Japan has embarked on unsterilised currency intervention, which amounts to stimulus, and both the Fed and the Bank of England are signalling fresh QE.

You can’t have it both ways. If the US is not in deep trouble, the Fed should not be thinking of extra QE. It should step back and let the economy heal itself, if necessary enduring several years of poor growth to purge excess leverage.

Yes, U6 unemployment is 16.7pc. But as dissenters at the Minneapolis Fed remind us, you cannot solve a structural unemployment crisis with loose money.

Fed is trying to conjure away the hangover from the last binge (which Greenspan/Bernanke caused, let us not forget), as if to vindicate its prior claim that you can always clean up painlessly after asset bubbles.

Are the Chinese right? Are the Americans and the British now so decadent that they will refuse to take their punishment, opting to default on their debts by stealth?

Sooner or later we may learn what the Fed’s hawkish bloc of Fisher, Lacker, Plosser, Hoenig, Warsh, and Kocherlakota really think about this latest lurch into monetary la la land, with all that it implies for moral hazard and debt contracts.

If I have written harsh words about these heroic resisters, I apologise for that too.

Mr Bean’s monetary adventures

September 27, 2010 Leave a comment

Mr Bean is an idiot.  But you already know that.

Older households could afford to suffer because they had benefited from previous property price rises, Charles Bean, the deputy governor, suggested.

The average person is saving £102 a month, down from £130 in February, according to Santander.

They should “not expect” to live off interest, he added, admitting that low returns were part of a strategy.

His remarks are likely to infuriate savers, who are among the biggest victims of the recession. About five million retired people are thought to rely on the interest earned by their nest-eggs. But almost all savings accounts now pay less than inflation.

The typical savings rate has fallen from more than 2.8 per cent before the financial crisis to 0.23 per cent last month.

Mr Bean said he “fully sympathised”. But he continued: “Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

He added: “Very often older households have actually benefited from the fact that they’ve seen capital gains on their houses.”

In an interview with Channel Four News last night, he said that savers “might be suffering” from the low Bank Rate. But they had done well from higher rates in the past and would do so again.

Mr Bean said that encouraging Britons to spend was one reason why the Bank had cut interest rates. They have been held at 0.5 per cent for 18 months, hitting rates offered on savings accounts.

The strategy had led to Mervyn King, the governor, receiving many letters of complaint.

But it was designed to return the economy to a reasonable level of activity as quickly as possible, he said. “The faster we can achieve that, the sooner interest rates will get back to more normal levels.”

Had the Bank not acted, “unemployment would have been higher, wage growth would have been lower,” Mr Bean added.

The comments angered groups representing the elderly and those putting money aside. The Daily Telegraph has campaigned for protection for savers.

Ros Altmann, director-general of Saga, said: “Savers are being taken advantage of. They did the right thing and have been let down at the other end of the deal.

“I don’t think this is what most people would consider fair.”

Dot Gibson, of the National Pensioners Convention, said: “For years we’ve been told to put money aside for our retirement only to find that interest rates have sunk and now we have to use our savings just to pay the bills.”

Jason Riddle, of Save Our Savers, said: “The Bank was aware that there was a lack of saving before the financial crisis, but those who were prudently saving while others spent, are being heavily punished.”

Official figures show that savers have lost about £18 billion a year in interest as a result of the Bank’s response to the worst recession in a generation.

The amount Britons save has fallen by more than a fifth since the start of the year, a survey showed today.

Categories: Miscellaneous Musings

Jaws of Death

September 27, 2010 Leave a comment

Great article on why the End is Near here.  And a cute cartoon too.  Bonus.

Why gold is a no-brainer

September 27, 2010 Leave a comment

From the UK’s Daily Telegraph:

Surely the Fed has not become so reckless that it really aims to use emergency measures to create inflation, rather preventing deflation? This must be a cover-story. Ben Bernanke’s real purpose – as he aired in his November 2002 speech on deflation – is to weaken the dollar.

If so, he has succeeded. The Swiss franc smashed through parity last week as investors digested the message. But the swissie is an over-rated refuge. The franc cannot go much further without destabilizing Switzerland itself.

Gold has no such limits. It hit $1300 an ounce last week, still well shy of the $2,200-2,400 range reached in the late Medieval era of the 14th and 15th Centuries.

This is not to say that gold has any particular “intrinsic value”’. It is subject to supply and demand like everything else. It crashed after the gold discoveries of Spain’s Conquistadores in the New World, and slid further after finds in Australia and South Africa. It ultimately lost 90pc of its value – hitting rock-bottom a decade ago when central banks succumbed to fiat hubris and began to sell their bullion. Gold hit a millennium-low on the day that Gordon Brown auctioned the first tranche of Britain’s gold. It has risen five-fold since then.

We have a new world order where China and India are buying gold on every dip, where the West faces an ageing crisis, and where the sovereign states of the US, Japan, and most of Western Europe have public debt trajectories near or beyond the point of no return.

The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention.

Of course, gold can go higher.