Tag Archives: Property Bubble

View From The Couch – 06/Sep/2014

Lessons For A Saturated Economy

I found this commentary about the impact of the property bubble in the Sydney Morning Tabloid this week. it’s written from the perspective of the younger people who cannot get into the market. A lot of people seem to think it’ young people whining, but there are lessons in history from all this property bubble business (that all these banks are denying exists here). The experience in Japan in the late 1980s through to earl 1990s was pretty instructive. The Bubble and the aftermath of the Pop created economic havoc on the Japanese Gen-X who were coming into the workforce at the time. This resulted in high youth unemployment as well as low rates of marriage and birthrates – and effectively brought forward the peak population date of Japan. The resulting impact of that event was that all the projections the government had made about pension plans and how the labour force was going to support the retiring Baby Boomers went out the window. Much of the low growth and sluggish economy of Japan in the aftermath of The Bubble can be put down to a generation of working people essentially placed out of options and never finding the traction that earlier generations had.

I have friends who are basically economic refugees from Japan. They got out because there were no immediate options that were rewarding or befit their education. Many ended up without kids, others delayed having kids. The 90s and early 2000s saw a remarkable exodus of young, educated Japanese people, who are now not over there contributing to economic growth.

The process of writing off and paying down debts in Japan has been grueling, and worse still government intervention into what they called PKOs – price keeping operations for assets – has distorted the markets leaving what can only be called zombie companies.

The PKO money came out of the government to shore up the asset values of shares and property which is to say, they socialised the debts. The Japanese government under Ryutaro Hashimoto argued that this was necessary to stop a disorderly exit, which is to say, it allowed some investors to keep their bubble profits to pay off the bubble debts instead of getting wiped out. You wonder how those parties got to enjoy such favourable treatment, but then if you see how entwined Japanese heavy industry, banking and the old MITI was in its day, it was one of those things that people acknowledged tacitly without putting up a big fight. After all, what happens to Japan should Mistubishi or Sumitomo should fail? The option cost of bailing out those companies essentially ate the future of Japan.  And that’s just Japan. The GFC has exposed the same problem in advanced economies across Europe and North America as well as Australia and New Zealand.

The point of all this is to say, private sector debt has a way of becoming public sector debt, and “too big to fail” essentially eats the future. A few things are very clear from the property bubble in Australia is that the private sector debt is bigger than it has ever been, and should it get called in, it would wipe out our four major banks (BASEL II and III notwithstanding). Because those banks are still in the TBTF category, the government will socialise those losses by bailing them out, and then we’ll see our future spending go up in smoke to preserve the inflated prices everybody paid for their houses.

The finer point of all this is, if you don’t think there’s a housing bubble, then that’s one problem. If you do thing that there is a housing bubble but think it’s just a matter of the market correcting itself, then you’ll be in for a surprise.

Ross Garnaut Says There Is a Bubble – But So What? Cut Rates

This one‘s related but really interesting. Ross Garnaut thinks there is indeed a bubble going on in the housing market, and that the Reserve Bank of Australia is keeping a close eye on it. Basically, Garnaut is saying the rest of the economy outside of housing could do with the lowering of rates. The rates being as they are keeps the Australian Dollar too high, and makes Australia’s economy less  competitive. The only thing keeping the rates where they are, is this deep concern that there is a housing bubble going on, so the rates need to sit at as high a place a possible given the parameters. Instead Garnaut is saying if the RBA cuts rates, then the rest of economy would be able to compete and grow, and the housing bubble should be dealt with specific measures. He also says governments should stop favouring housing for the purposes of capital adequacy.

“It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP,” he said.

“And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership.

“It would also contribute to putting a lid on the housing bubble so we could reduce interest rates and the exchange rate as required by the rest of the Australian economy.

“But the problems can’t be solved by the Reserve Bank alone. It requires co-ordination of prudential regulation, monetary policy and fiscal policy.”

It’s an interesting idea that evokes the old definition of inflation. Inflation, is essentially too much money chasing too few assets. This explains exactly why housing bubbles happen. Given that housing is given a privileged position in measuring capital adequacy, banks are better off lending out mortgages than lending out business loans for capital expenditure. The money headed to mortgages become much easier money by dint of a definitions for capital adqaucy. This devalues businesses against property ownership, even though property ownership in of itself – especially home ownership – can’t contribute to the economy in the way that a productive business can. Things like negative gearing simply make it worse. So all the money goes into the property market but of course the overall supply side of the property market itself can only grow at a certain rate. As more money gushes into the property market, it can do nothing but create a condition where the prices of homes inflates. Too much money chasing too few assets.

Is China Finally Wobbling (Just A Little bit?)

It’s been like five and a half years since the market bottom following the Lehmann Shock which triggered the GFC. Since then the world has looked on… make that Australia… Australia has looked on to China to keep its economy afloat. China in turn obliged by doing massive stimulus spending, which resulted in it sustaining its 7%+ annual GDP growth rate. There are some who think China has been inflating its GDP figures for years to get more investment, and think there is a 30%discrepancy between what China’s real size as an economy is and what the stated size is. That would explain the vast lack of growth in consumer spending that China has so needed to move from an export-driven economy to a consumer driven economy.

China subsequently pushed all levels of government to take on debt and give stimulus to the market and that has resulted in a massive ballooning of debt in China to fund this 7+% growth. Since the GFC, year after year, economists, investors, traders ad analysts of all persuasions have pointed at China and said it is unsustainable. Somehow China never imploded or popped or collapsed. All those ghost cities built in the middle of nowhere with speculation money? No problem. All that re-hypothecated collateral minerals that went missing? No problem. All those companies that started going sour and failed to pay their bonds? Government intervention has saved the day. If you had bet on China to unravel in the last few years, you would have lost money on all those bets.  It would’ve been hard losses to take too, because rationally speaking, China had every reason to come unstuck. The proof was in the pudding, and the pudding’s been magic so far.

Now, there are signs the magic pudding isn’t going to hold up. I don’t know how China is going to kick the can down the road next time, but they may yet have a way of doing so. After all, one of the interesting aspects of the great recession has been the way things just keep going on in spite of the numbers. If China can’t kick the can down the road, this is going to be it for the 23 long years of economic growth in Australia. The cracks are already showing up in commodity prices. Iron ore – the biggest corollary to the health of Chinese industry has sunk to a five year low. This is going to hit our export figures. Falling commodity prices should bring the value of Australian Dollar down. Things are about to get very bumpy.

I can report to you that the money-go-around in Sydney has stopped to a snail’s pace. There are a lot of companies sitting on unpaid bills, the companies themselves waiting to receive payment to pay those bills. I have to say it hasn’t been this slow since August 2007, which was exactly the peak of the market before the GFC. I’d start selling shares this month if I had any to sell.

 

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News That’s Fit To Punt – 03/Sep/2014

Why? Because Fuck You

Everything this Federal Government does is tainted by a sort of grubby conflict of interest. Of course that’s not confined to the Federal Government, because the greater conflict of interest might actually be Clive Palmer who owns a dirty big mining company, gets to make deals where a tax like the mining tax can get repealed. It’s hard to imagine a more egregious and gratuitous case of helping yourself because you can.

The deal has meant that the government will halt the rise of superannuation. Naturally, with the sensibility of a cheesy movie villain, Tony Abbott tried to sell this as more cash in hand for employees which, frankly made me choke on my lunch. I’m sorry to tell you Mr. Prime Minister, but that’s money that’ll stay in the pockets of companies. Paul Keating has lambasted the government but honestly, if he wanted to still have a meaningful voice, he should’ve stayed on in parliament after 1996.

The repeal of the Mining Tax was of course one of the platforms of the Coalition so we ought not be surprised, but really, it is pretty disgusting how the Coalition are totally happy to sell out Australian citizens in favour of a gaggle of mining billionaires – Clive Palmer among them – and try to sell it as being good for the worker. Can it get any worse?

Yes it can. Here’s how.

An Inconvenient Ruse

The emissions for energy generation jumped the most in eight years, since the end of the carbon tax.

So much for Al Gore coming to lend a hand in fighting the good fight against global warming. Thanks to the repeal, polluters have gone back to a kind of burn-baby-burn mentality and now it’s out of control. Of course the plan by this government is also to smash the renewables industry, and directly pay these polluters to stop polluting.

It’s like government by stupidity. You’d never have guessed thing would get this bad. No sane mind would have guess it would get this bad. But this unrelenting awfulness – “Operation Ongoing Enormous Clusterfuck” according to FDOM – was their platform! Grin and bear it.

Pink Batts Coming Home To Roost

Pleiades swung this one at me today. The best bit of news might be how the Royal Commission into the Pink Batts has yielded interesting results. In as much as it was a blatant witch hunt, it looks like it delivered a result that was assumed by the proponents of the Commission. Here’s something from Crikey which is behind a pay wall:

 

First, Hanger found the training regime and regulations at the time of the first of four fatalities in October 2009 to have been seriously inadequate:
“With the exception of South Australia, which had a licensing regime for insulation installers, there was no insulation-industry specific regulation beyond the generally applicable occupational health and safety regulation.”
But here’s the thing: then-minister for the environment Peter Garrett and his staff had spent most of 2009 tightening regulations and procedures. Hanger listed more than 40 interventions to address safety deficiencies — all completed before October. So if the safety framework was still deficient by then, it must have been woefully, if not criminally, inadequate prior to 2008. Having presided over industry growth to the level of about 200,000 new and existing houses insulated annually, the previous Coalition government cannot escape culpability.

Secondly, Hanger opened wide the door to those wanting compensation for the program’s sudden termination:
“I find as follows:
“… the effect of the losses was to devastate many long-standing businesses … and to cause as well personal financial collapse and severe despair and emotional harm;
“that harm and such circumstances justifies pre-existing businesses being compensated.”
If compensation is won, it will be the Abbott government scrambling to find the funds.
This has a certain rough justice about it, of course. There is an argument that the scheme was not intrinsically dangerous and was not failing, rather that it suffered from extreme misreporting from the outset, by both Coalition MPs and a feral media.

Thirdly, the Commissioner was scathing about Abbott’s staff in the course of the inquiry:
“The Commonwealth did not suggest one witness that ought to be called. It did not generally volunteer documents that were not the subject of a summons to produce. It did not elicit any evidence of its own volition. All of this is despite the fact that it was the repository of the critical documents and the corporate knowledge of what had transpired.”

Not even Peter Garrett copped such a shellacking:
“Furthermore, the Commonwealth hampered the work of those assisting me by the way in which documents were produced … Other than in response to a specific request from the Commission, there seemed no logic in the order in which documents were produced. The Commission asked that documents be produced chronologically, however the Commonwealth did not oblige.”

Finally, the Commissioner made it clear that if the federal government initiated the program, then safety is definitely its problem. Never mind the long history of state responsibility.
“There was much debate about whether workplace health and safety issues were a matter that was of any concern to the Australian Government, or whether it was more properly the concern of the States and Territories. It was said, by a number of federal public servants, that the Australian Government had no regulatory power in the field of workplace health and safety, and therefore that it was not a risk that the Australian Government could control. In my view, this attitude was deplorable.”

That means occupational health and safety is now firmly a problem for the Federal Government. Every time somebody dies in an accident, he article suggests a ministerial head is going to roll. Worse still, the responsibility for the failure didn’t just get sheeted home to the Rudd Government, it also got sheeted home to the Howard Government, and last I checked Tony Abbott was the health minister in the government. This thing is going to boomerang right back at him.

The Housing Bubble That Isn’t But Of Which We Must Be Wary

For months – no make that years! -we’ve been hearing that Australia does not have a housing bubble problem. All the economists who have come and pointed out the great anomalies of housing prices in Australia have been laughed out of the public discourse while the anomalies only get bigger. As late as last month Glenn Stevens of the RBA was talking down any possibility that what we had on our hands was an actual bubble! No, he simply reiterated that sometimes the property market goes down. This month he’s taking a different tack and saying there might be nasty shocks. Included in that link is a bit covering China where he cites a downturn in China might manifest itself as a nasty shock. If that wasn’t enough, David Gonski of the ANZ Bank told the Australian British Chamber of Commerce that booming prices cannot possibly continue forever (now there‘s a brave call).

And lo an behold there’s news that China’s real estate market is going screwy. Some might even say it is crashing like it was a Global Financial Crisis. Speaking of crashing, the commodities market in China is crashing. I wonder if those things combined would form this so-called ‘Nasty Shock’ Glenn Stevens is talking about? Or will Sydney’s housing prices simply just shrug it off and keep climbing?

Stay tuned for more fun!

 

 

 

 

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News That’s Fit To Punt – 13/Jul/2014

Garbage In, Garbage Out Process

Leading economists are rejecting the basis on which the Abbott Government is proceeding with cuts. They don’t think there is a budget crisis. At all.

We knew this going into the election last year, we’ve known it since; people ave been saying it across different media for most of the time since; and the only people who think there is a crisis is the Coalition Government. I know we’ve been through this topic on several occasions, but basically our Federal government debt is miniscule compared to the debt carried by other OECD nations; most of the government debt we do carry is in the local councils; and the big debt problem is in the private sector, where low interest rates have ruled supreme since the Global Financial Crisis has allowed for bubbling asset speculation on borrowed money.

In short, the government could possibly wipe out the debt in a small number of years if it were bloody-minded enough to not to care what happened to he economy. But nobody asked for this, and it would rewrite the social consensus about what government does. While that is an enormous problem all of its own, I want to focus on something for a moment. This government came up with the worst-received budget of all time on the assumption that there is a budget crisis when there manifestly is no crisis at all whatsoever. it stands to reason that none of the solutions they’ve reached for have gained any traction in the electorate.

Never has a bigger load of garbage been shoved into the process of government in this country, and never has it given rise to so many garbage policies you wouldn’t wish upon anybody (okay, except maybe Iran).

Cue Jerry Harrison

The myth that grew up around Senator Ricky Muir arriving in Canberra was that he was a ‘Bogan’ – meaning exactly what, it’s hard to say because Bogan-ism isn’t a political credo, it’s a class-conscious insult – but here’s an article that reveals he might not fit the prejudices of the media. The way the media have portrayed him, he’s been anything from the second coming of Pauline Hanson to some rural Victorian village yokel idiot who got lucky in the exchanging of preferences (as if such things happen regularly).

The so-called ”rev-head senator” outlined personal passions that include organic food, which he grows and eats from his garden in rural Victoria, preventive healthcare, which he is interested in championing at a political level, and renewable energy, following his surprise intervention last week to protect the Australian Renewable Energy Agency from the government’s budget knife.

——

Senator Muir revealed a broad belief in the environment, renewable energy and organic food. ”Just because someone is a motoring enthusiast doesn’t mean they are an environmental vandal,” he said. ”I don’t think many people would argue that renewable energy is the way of the future.”

Asked whether he would use his balance of power influence to push for preventive health programs, he said: ”I will certainly look at it with a very open mind, that’s for sure.”

For the Coalition, that’s a Trojan Horse. The guy called himself a “motoring enthusiast” sounding like he’s pro-roads and pro-construction and he’s turned out to have a far more nuanced and sophisticated take on the environment and civilisation than anybody on the side of the Coalition. You could do a lot worse than that, and in looking at the sorry lot in the Coalition ranks, Australia has done a lot worse than Ricky Muir for a very long time, but Australia might have just got lucky right there with this Senator.

She said let’s ride, rev it up, rev it up little boy and ride!

Not A Bubble (Nudge Nudge Wink Wink)

As we’ve learnt over our lifetime, nobody ever sees the big financial disaster coming. It’s always “This time it’s different”. So in that spirit, I just want to say it’s very different this time with housing in Australia because there’s a ton of money being laundered out of China looking for landing spots and Australian Housing has turned out to be one of those asset classes.

Thus you have to take it with a grain of salt when economists say “yes it’s overpriced but no, it’s not a bubble”. If you believed that then maybe I can interest you in this nice little coat hanger-shaped bridge in Sydney Harbour that you might want to buy. The conventional wisdom now is that it’s never a bubble until it pops.

As with these things I’ve had a little while to reflect on it and it seems if there’s one thing that limits future growth in an economy it is rent-seeking and there are a lot of rent-seekers. This is understandable because housing construction forms such a large part of the economy in Australia, somebody has to be the lobby that twists the economy in some way. In that sense negative gearing appears to be just one of the economically irrational policies we have going. Naturally if you look through old articles in the SMH for negative gearing, it is is littered with articles defending the policy – which in turn reminds us of this blanket denial that there is no bubble going on. Sure. No bubble, and negative gearing is working a treat.

So as with most things to do with what pundits say, you can be assured of two things. They’re wrong, and we’ll be the ones to pay for it.

The World’s Worst Kept Secret Is ‘Out’

Ian Thorpe says he’s gay. I don’t know what to say except we knew about this from way back in the heady days of the 2000 Sydney Olympics and all those gay people saying they gave him a pearl necklace. The denials over the years were comical and the topic of much derision. In this day and age, it shouldn’t be such big ‘news’ but I guess wowserism is always going to make this news.

People, come on, he didn’t win because he was or wasn’t straight or gay.

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China’s Looking Scary

Bubble? What Bubble?

It’s been a strange year in the world of market-watching. There are as usual, quite a number of ructions that make you wonder about the health of markets or in fact there is any sanity prevailing in markets. Crimea has grabbed headlines and so Australian stocks have followed the lead of the world, up and down, with the news cycle surrounding Ukraine and its coup. Ukraine of course is a basket case waiting to blow up, but it’s not like it’s even in the top 30 economies of the world. Even if there was a full economic meltdown in the guise of a default, there wouldn’t really be too much of a problem short of a shooting war breaking out.

China on the other hand is the world’s second largest economy, warts and all. And there are a lot of warts and other nasty lesions that mark the Chinese economy, one of which is the size of the debt it has created since the GFC. If you tally it up, it is larger than the combined debt of the USA, the Euro zone and Japan combined. The criticism has been that much of this debt has been pumped into general construction companies that have built ghost cities of luxury apartments while other parts have gone into a shadow banking system that has blown this easy credit on god-only-knows-what. Of course, this being China, the debts were collateralised with commodities such as copper, rubber, nickel, iron ore silver and of course gold. Which is all well and good if the commodities are going up, but they have instead been falling in value for some months now. This, has logically led to loans being called in, bank runs on minor banks and a general drying up of liquidity.

As I mentioned last week, the Chinese market has experienced a number of defaults this month – something unheard of prior to this leadership group coming to power – and all of a sudden things are turning a little hairy over there.

In that light I’d like to share a few links so you can have think about what this might mean. The first link is here:

After Hong Kong, the UK takes the lead by far. (As a note, banks in several countries, particularly in emerging markets like Russia or Latin America, aren’t listed, because they don’t report to the Bank for International Settlements):


Total-loans-to-Chinese-companies-US-billions_chartbuilder
Some UK banks’ long historical ties with China—HSBC and Standard Chartered, in particular, have roots in Hong Kong—mean they have been lending there for decades, though in recent years, loans to Chinese companies and banks have also grown steadily. Neither will be a good thing if analysts’ worst fears about China come to pass.

Right. Of course Australia is on that list with US$28.7billion which is about AUD$ 30bn right now.

Keep that in mind as we have a quick look at what the AFR is saying about Australian banks, courtesy of Pleiades who gave me the heads up as I was telling him about whats reported as going on in China.

A study by funds management giant AMP Capital presented to the ­superannuation funds at an industry conference this week, showed that a typical fund has more than 12 per cent of total assets invested in the banks, but banks accounted for a quarter of their investment risk.

Industry averages suggest a fund’s value shouldn’t move by more than 8 per cent in a given year. However, more than a quarter of that volatility risk in Australian funds is driven by the banking sector, demonstrating just how sensitive our retirement savings are in the continued health of the big lenders.

“The system is quite exposed to these four banks. From an equity point of view, the weight in financials in ­Australia is at a peak,” AMP Capital’s head of credit markets Jeff Brunton told an audience at the CMSF conference in Queensland this week.

At 30 per cent, Australian’s index exposure to the banks is the highest its ever been – doubling since 1993.

Worryingly, in United States, Japan, Germany and United Kingdom, the weighting of banks had fallen sharply from their peaks.

Yes. That means, it’s a bit like we’ve put all our eggs into the property basket twice. Once through taking out huge mortgages in a property Bubble, but also through our superannuation accounts that own dirty big lots of banking shares which are exposed to real estate., and are also over-priced The scary bit is over here:

AMP also presented controversial findings about the ability of banks to withstand stress. The banks and ­the prudential regulator had conducted stress tests – based on a 40 per cent fall in property values and 4 per cent ­foreclosure costs – which AMP ­replicated. “We get the same number – $17 billion of losses,” Mr Brunton said.

“That’s nothing. That’s why the banks and APRA say our system is safe.

“But the insight we put on the table is that the remaining mortgages, those who haven’t defaulted, will actually be at a very different loan-to-value point than when they took out their ­mortgages. More than half of ­Australians will be in negative equity and a lot of us in significant ­negative equity.

So it seems there’s AUD $17bn sitting there on the ledger as potential losses that’s separate to the AUD $30billion mentioned above, but linked together by the health of the Chinese economy. All this robust property valuations and auction prices and what have you are sitting on a bubble that is the Chinese economy. When the music stops, there are going to be tears.

Just how exactly is China doing? Here’s a glimpse:

Over the past month, we have explained in detail not only how the Chinese credit collapse and massive carry unwind will look like in theory, but shown various instances how, in practice, the world’s greatest debt bubble is starting to burst, resulting not only in the first ever corporate default but also in the bursting of the associated biggest ever housing bubble. One thing we have not commented on was how actual trade pathways – far more critical to offshore counterparts than merely credit tremors within the mainland – would be impacted once the nascent liquidity crisis spread.

Today, we find the answer courtesy of the WSJ which reports that for the first time in the current Chinese liquidity crunch, Chinese importers, for now just those of soybeans and rubber but soon most other products, “are backing out of deals, adding to a wide range of evidence showing rising financial stress in the world’s second-biggest economy.”

While apologists of China’s collapse have been quick to point out that China’s credit collapse would be largely a domestic issue, with little foreign creditor exposure at either the public debt, or private – corporate – debt levels, one thing nobody can deny is that if and when Chinese trade routes grind to a halt, the downstream impacts would be devastating, and spread like wildfire as the offshore supply chain is Ice 9’ed.

The fact is, it’s just starting. The way it’s going is that the importers of commodities have run out of liquidity so they’re cancelling and tearing up contracts.  The unsold glut of commodities is leading to the collapse in the price of commodities. Because the shadow banking system uses commodities as collateral, a lot of loans are going to get called in as result of this collapse. it’s pretty much as people have predicted the collapse of the Chinese credit bubble. When this collapse moves on to property, there’s going to be knock on effects to Australia and suddenly that $47bn problem is going to come home to roost. If that doesn’t scare you, its probably because you don’t have a mortgage and you don’t own bank shares.

Just watching the share price movements this week, it appears that twice this week, people bought in hoping for a stimulus package to be announced by the communist party bosses. Except they have made it explicit that they won’t be doing any more stimulus packages because it only kicks the can down the road. That means China will test a market downturn and all the people buying up shares this week were exercising what can only be described as irrational exuberance.

That’s really not great news.

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News That’s Fit To Punt – 15/Oct/2013

Tony Says He’s Got A Man Date

It’s a bit gay isn’t it Tony?

Alrighty, so Tony Abbott is saying that he has a mandate to repeal the Carbon Tax. He’s been banging on with this since winning the election and as far as we can tell, he’s put the topic at pole position of his agenda in Parliament. I guess if you say you’re going to do it and win an election it might look like you have a mandate but most people polled seem to think this is a terrible idea; and that the reason they voted for Abbott was because they reviled the Rudd-Gillard-Rudd ALP so much but hadn’t really given much thought on the ramification of ousting the ALP government.

So much for the wisdom of crowds. Our electorate is stupid.

You can basically see that not too deeply down, Tony Abbott is still a Climate Change Denialist who has hijacked the agenda so he’s in a hurry to sort this out in favour of his denialist position as quickly as he can. This then turns into the absurd spectacle of Tony Abbott trying to apply pressure on to the new Opposition Leader Bill Shorten like so:

Prime Minister Tony Abbott says he believes Bill Shorten will be forced to back the Coalition’s plan to repeal the carbon tax, saying Labor’s new leader is “nothing if not a political pragmatist”.

Mr Abbott dismissed the new Labor leader’s repeated statements in support of pricing carbon, saying his government was “giving the Labor Party a chance to repent” on the issue.

It’s interesting how he uses that word “repent”, as if introducing the Carbon Pricing mechanism was somehow a sin. You imagine that in Tony Abbott’s mind, any market driven mechanism to push down carbon emissions is somehow ‘evil’ (like ‘adultery’ or ‘murder’ – the mind boggles). Is it the tax part that bothers him? Or is it simply that he just disagrees with the mountain of scientific data?

Whatever little faith you had in his Direct Action policy to replace the Carbon Emission Trading Scheme evaporates like so much morning dew in the rising heat when you consider that word “repent”.

I Voted For Him But He’s A Terrible Pundit

Mark ‘Arm-Breaker’ Latham said that the ALP faithful shouldn’t vote for Anthony Abanese because ‘Albo’ had terrible political instincts and was basically too wishy washy for Mark Latham’s Liking. Whilst ranting on against union power and factional deals within the ALP, Latham said he was voting “ABA. Anybody-But Albo”. Which is to say he voted for Bill Shorten but didn’t really want to endorse Bill Shorten in any positive manner, no.

I guess Bill Shorten is a tough character to take given the Rudd Gillard years and the role he played in both PM swaps. As ‘faceless men’ go, he’s been the very public face of the faceless men, and so, on some level probably deserves to be given the shot in the same spirit that led to John “I don’t take bribes But I don’t report Them’ Robertson leading the ALP in NSW. I guess we could be heading for a travesty with Bill Shorten as Opposition Leader but I doubt Albo was a better choice.

While I am no member of the ALP – so this is completely an outsider’s view – I think Albo was and still is a potential liability. One shouldn’t cast aspersions but one has to ask how close Albo is to Eddie Obeid and whether he will get linked to those wonderful ICAC hearings slated to deal with the morbid Obeidity in NSW. Oh, and that Ron Medich guy who put out a hit on that McGurk guy. In that sense ‘Deputy Prime Minister Albo’ might have been the high point of Anthony Albanese.

Shorten has his failings. People have been writing about those in spades. In amongst reading all the bad press, one thing I did like about Bill Shorten was that after he switched back to supporting Rudd, he came out fighting. He wasn’t fighting for his reputation, but for deeply core ALP values. You know, the stuff we always ascribe to Gough and Bob and Paul. On that level he appears to be a politician who speaks on behalf of a greater portion of Australia than Julia Gillard, while possibly not having the insane charisma of Kevin Rudd. You’d have to say the guy has a fighting chance; especially against a willful, dogmatic, Tory ideologue like Tony Abbott.

The other net benefit of the Shorten leadership over an Albo leadership is that you get Tanya Plibersek as Deputy Opposition Leader.I’ll be honest with you, I think Tanya Plibersek has been great through the election campaign and into this post-election period. Any time I’ve seen her on Q&A, she’s been setting the record straight and has countered the attempts by the Coalition to paint the Rudd-Gillard government as somehow a failed government. She’s been logical, persuasive and very circumspect.

If you had to come up with a credible one-two punch, it’s hard to do better than this duo, given the ALP’s current state. Anna Burke might feel bitter and twisted about the shadow cabinet selection, but the Shorten-Plibersek team up gives you a lot of hope that the ALP can get their mojo back. When I think back to how negatively I felt about the original Rudd-Gillard team up back in 2006, I think this is a lot more promising. And I never thought I’d be saying that so early after an election loss. They haven’t even gone back to Parliament yet.

Housing Bubbles Are Harder To Observe Than The Higgs Boson

Look, if a Nobel Prize winning economist says you’re in a housing bubble, you probably are in a housing bubble.

Robert Shiller, the joint winner of the Nobel prize for economics, is worried about bubbles. The Yale University professor expressed alarm at the rapid rise in global house prices soon after the award was announced.

“There are so many countries that are looking bubbly,” he said.

If he’s right, and bubble trouble besets Australia, it’s bad news for growth and jobs.

The Reserve Bank has cut interest rates to record lows to encourage businesses and consumers to spend and invest as the effects of the mining boom fade. The aim is to boost non-mining sectors like home building, retail and tourism so they can take over from mining as drivers of national economic growth.

But low interest rates have also stoked demand for established houses. Sydney has led the way – the city’s median dwelling price (comprising houses and units) rose by a frothy 13.1 per cent in the year to September.

If house price growth becomes unsustainable the Reserve might decide to take some heat out of the property market by lifting interest rates. It would be unlikely to tolerate the longer-term risk of a devastating house price collapse.

But under that scenario, interest rates would be set at a higher level than required by the broader economy. The cost of containing house prices could be subdued growth and fewer jobs.

The really odd thing about all this is that the RBA has been insisting we don’t have a Housing Bubble in face of the same evidence being presented to the Nobel Laureate Economist. I mean, we take the existence of the Higgs Boson on about the same level of scrutiny – and they gave Dr. Higgs his Nobel earlier in the month – so I’m sitting here wondering what exactly the RBA thinks is going on that makes it not a bubble; but here it goes…:

But AMP capital chief economist Shane Oliver believes many of them don’t fully understand Australian property markets.

“The basic problem here is a lack of supply caused by chronic under-building,” he said. “There is a shortage of housing in Australia and that partly explains why it is so unaffordable.”

Given the blend of very low interest rates, a stable economy and pent up demand, it is no surprise property markets are showing signs of life. While Sydney property prices have grown strongly in the past year, this follows nearly a decade of weak growth. Data published by the Housing Industry Association this month shows the average annual growth in Sydney house prices over the past 10 years has been just 3.4 per cent – a rate that has hardly kept up with wages.

At this stage, the Reserve Bank isn’t convinced by talk of housing bubbles in Australia. Last month the bank’s assistant governor, Malcolm Edey, said those predictions were “unrealistically alarmist”.

Dr Edey cautioned against reaching for “the bubble terminology” whenever house price increases were higher than average, because by definition that’s half the time.

AMP Capital’s Shane Oliver offers an explanation why Australian real estate is so expensive and unaffordable, but it’s really not an answer as to why or how this is not a Housing Bubble. The RBA says if you take the average growth of property in Australia, it’s only 3.4% p.a. which sits behind wage growth over that time, so it can’t really be considered a bubble. I’m more interested in how that ‘average’ was derived, because the mathematician inside me smells a rat.

I guess we’ll just have to wait and see how things play out.

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Fear Of The Known

They Believe In Their Own Bullshit

What really frightens me about the Liberals and the Nationals is no not just what they will do, but just how much they believe in their own utter bullshit about how they are better managers or that they are better managers of the economy. It’s true that they’re not going to come out and say “hey the ALP did a great job in riding through the GFC” but instead it’s been this huge diatribe about government debt. Well, there are two things bigger and scarier than Federal government debt in Australia and that is local council debt and private sector debt.

Here’s the vaunted Economist magazine’s Global Debt Clock page. yes, that’s Australia in red there, and the thing is Australia’s public debt is high. Yes, it’s true, but if you look at it, the figure sits at 27.1% of GDP. As of 31 August, the Federal Government component of it is 11.3%. It’s not comparable to places where the debt is sitting at 78.3% of GDP (the USA) or for that matter 232% (Japan). You should check out what other countries in red are suffering. It is true that the Federal budget position is worsening as revenue drops, but it is hardly the kind of crisis the Liberal is talking us up into. If after all that spending and all that alleged mismanaging, the debt is 11.3%, then hooray to the ALP.

More to the point, there’s something like 16% of GDP sitting on the shoulders of local councils – and nobody really knows how they’re going to pay that back. But I guess that’s not really a Federal issue to win votes so  you don’t see the Libs and Nats running around talking up that even bigger public debt.

Private debt is another matter entirely, and nobody wants to touch this because the economy is a house of cards built on confidence. Nobody wants us to lose the confidence we have in our economy but quite frankly we’ve not really made it through the property bubble and prices are heating up again in major cities. We’re nowhere near digesting the debt tied up in mortgages across the country, and we’ve started to look at housing as the next engine of growth after the mining boom tapers off. Except you don’t hear a peep out of the Libs or Nats about this too because they like the wealth effect of having inflated asset prices on people’s ledgers. They won’t be repealing negative gearing any time soon. They like inflated property prices, low disposal income. They like being asset-rich cash-poor, even if that ends up hurting growth prospects for the economy.

It’s a joke that they’re out in front with such shoddy economic thinking that even a novice can see is bullshit, but there they are believing in the self-flung shitstorm of bullshit. Somebody help us out here. We’re about to vote in the party of the property bubble again. And they haven’t learnt their lessons at all. They’re coming at us with the same rhetoric they came at us in the first place. If it’s the personal failing of Tony Abbott, that’s one thing but it’s not – the whole lot of the front-benchers are trotting out this bunkum. Their back-benchers? Staying out of the spotlight as much as they can so as not to put their foot in it.

So this is it. The inevitable moment when the born-to-rule club comes back into power to run their austerity program which will inevitably hurt the economy. Good grief Charlie Brown.

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News That’s Fit To Punt – 23/Apr/2013

Why You Can’t Trust Inflation Figures

The curious case of mismatched experiences of inflation against the official figures has been something interesting for some time. Here’s an article that attempts to explain the gap.

The secret lies in the “basket” of goods and services the Bureau of Statistics uses to measure the consumer price index (CPI) each quarter.
About 40 per cent of the “basket” consists of tradables, goods that have prices determined on the world markets, such as clothing and electronics. The bureau deems goods as tradable if more than 10 per cent is exported or imported.

The other items are non-tradables – goods and services that have to be consumed where they are bought, such as rent, utilities, insurance and education.

“When you look at the path of tradables and non-tradables, what you see is the domestically generated prices in services have been growing much more strongly in the past five years than tradables prices,” JPMorgan economist Ben Jarman said.

One the one hand, non-tradable inflation – also known as domestic inflation – has remained over 3 per cent for the most of the past decade, while tradables have experienced deflation brought about by the strong Australian dollar, Commonwealth Bank chief economist Michael Blythe said about the “two-speed divide” in an economic note.

It’s been an interesting few years since the GFC. Australia has somehow managed to claw on to the asset price gains before the GFC in property, and regained much of the value in share markets. Unemployment hasn’t exactly exploded, but our productivity has caved in (more on that later). The problem of the mismatch then seems to come from the fact that our property bubble largely remains unpopped, and that we’re slowly grinding our way down so that the property values fall back in line with historic norms. This is possibly why the RBA remains steadfast in keeping rates higher. They’re looking to slow the rush to property as much as possible while the market readjusts.

Which leads me to this article here about the rising costs in Australia.

In the past 11 years Australia has become one of the most expensive places to live, costlier than New York, London, Frankfurt and Singapore on everything from five-star hotels, car rentals, public transport, a pint of beer, cigarettes, jeans and an iPhone.

The survey, compiled by Deutsche Bank on prices and price indices on a range of products collected largely from the internet, concludes the US is the cheapest developed country in the world and Australia and Japan two of the more expensive.

According to the survey, Sydney remains the most expensive place for a weekend away, almost double the cost of a weekend holiday in New York. To put it into perspective, New Zealand weekend getaways are 25 per cent cheaper than in New York.

Singapore-based Deutsche Bank global strategist Sanjeev Sanyal said the survey is a survey of prices and deliberately does not try to explain the data. It is more a case that the price comparisons speak for themselves and in Australia’s case it is massively more expensive on most goods and services. Like all surveys that compare prices, there will be some distortions but even if these are stripped out, a basic trend has been captured that is disturbing in a global context.

Australia is part of a global community operating in a competitive world. When prices are relatively higher than the rest of the world it raises questions about how we can compete and how do we become less expensive?

This is peculiar and interesting because if the first article tells us that inflation figures are somewhat distorted by the basket of goods used to measure the inflation, then the second article points out that it’s been going on for a long time – so much so that our situation is untenable.

The funny thing about markets is that if there’s a greater fool to pay the price for something, then there’s a market for that price. When you think about it, this greater fool philosophy has driven such things as Westfield rent price rises to Sydney property markets to prices of vintage cars and guitars and whatever else you can slap a price tag upon.

What we have in Australia and its pricing is the boiled frog effect where the gouge has been going on gradually for some time with little competition, to correct for the gouge, and now everybody is over-invested in the gouge growing because we think that’s economic growth. Except the problem is we’ve run out of greater fools to on-sell our gouge-prices and we’re wondering why we’re so damn expensive. We’ve been telling ourselves that the RBA has got inflation under control for some time, but clearly that’s been happening that way because the RBA is incentivised to under-report inflation so that they can look better. Then they complain about falling productivity.

More Taxes, Less Fun

Here’s the complimentary third piece of the day that’s worth a read and a think.

First, tax revenue has collapsed, and Treasury secretary Martin Parkinson warns that, on current settings, it will stay weak for years ahead. The high dollar has flattened profits or driven them down in much of the economy. Mining companies are making big profits, but they use depreciation deductions to write off their $284 billion of investment over the past decade against taxable income.

Second, Labor has introduced three big new fiscal commitments without the revenue to pay for them. The mining tax was meant to fund the government’s share of the increase in superannuation contributions from 9 per cent to 12 per cent, but that is now essentially unfunded. So is the commitment to $9.4 billion of new education spending from the Gonski report and so is the national disability insurance scheme.

Third, the pressures of an ageing society on the budget, which Treasury has warned of for years, are becoming real. The Howard government only intensified this with new entitlements for older Australians, and Labor has done too little to right the balance.

None of that is terribly ‘new’ news. It kind of suggests that Australia is one country that could afford to tax a bit more and work a little harder (“yes you, laddie!”). Sounds a bit like ‘austerity’ to me and of course we know austerity has lost credibility in the last few years. I would say that just because the argument for austerity in countries like Portugal, Ireland, Greece, Spain Cyprus and so on has turned out to be a crock, doesn’t mean it’s uncalled-for; it is possible that a little bit of austerity might do us a bit of good seeing that we haven’t done much in that way since the GFC came to roost.

Gold Crashes

Look, I don’t really have a great nugget of thought about gold prices crashing. Marcus Padley on the other hand has a good column here. There’s this really crucial bit I want to share with you all.

If you consider all the gold ever dug up forms an essentially static 20.4-metre by 20.4-metre by 20.4-metre cube, a cube that doesn’t change much in size, then you begin to realise all the price really reflects is what a herd of hot potato passers are prepared to pay today.

Meanwhile the cube just sits there not doing anything, returning nothing, while the herd goes stampeding around and on occasion having a ”freak out” as it did this week. It must wonder what all the fuss is about because even it, a large lump of brainless inert metal, knows nothing is really changing at all, except the fear, greed and delusion that controls the price.

So there isn’t much value you can add doing fundamental analysis on the gold price and a lot of the highbrow discussion is redundant because making money out of the current gold price collapse is going to be a function of technical rather than fundamental skills, in which case 90 per cent of you can simply ignore it.

The man is right on.

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