Archive | March, 2010

Treasuries Sell-Off Raises US Debt Fears

31 Mar

From the UK’s Telegraph:

Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets.

The yield on 10-year Treasuries – the benchmark price of global capital – surged 30 basis points in just two days last week to over 3.9pc, the highest level since the Lehman crisis. Alan Greenspan, ex-head of the US Federal Reserve, said the abrupt move may be “the canary in the coal mine”, a warning to Washington that it can no longer borrow with impunity. He said there is a “huge overhang of federal debt, which we have never seen before”.

David Rosenberg at Gluskin Sheff said Treasury yields have ratcheted up 90 basis points since December in a “destabilising fashion”…

Mr Rosenberg said the yield spike recalls the move in the spring of 2007 just as the credit system started to unravel.

Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market.

The rise in US bond yields has set off mayhem in the 10-year US swaps markets. Spreads turned negative last week, touching the lowest level in 20 years.

Barnaby Joyce has been warning of the dangers of sovereign debt levels – and in particular the massive US debts – since October 2009. He has been ceaselessly ridiculed by the Labor government, and the mainstream media, for daring to say so.

Please take the time to browse the dozens of articles on this blog, from all around the world, citing leading economists, financiers, traders, and commentators – some of whom predicted the first round of the GFC. Not one of our economic “authorities” did.

Barnaby Joyce is far from the only one who is questioning our economic future, due to massive (and rising) sovereign debt levels, especially in the USA, UK, and Europe.

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Australia’s ‘Goldilocks’ Economy

31 Mar

From The Intelligent Investor:

Australia is the western world’s ‘Goldilocks economy’. My own particular concern is that the market now assumes this status to be a permanent state of affairs. Most domestic commentators, alive to the opportunities that stem from our increasing reliance on China, are asleep to the potential risks.

The consequences of a significant Chinese downturn will be enormous for us; the Goldilocks economy may start to look like other western nations; indebted, economically promiscuous and unable to spend less than we earn. The resources, banking and property sectors look particularly exposed.

While not all of our analysts are as concerned as I am about the potential dangers of a Chinese downturn, we all agree it’s important for Australian investors to consider the possibility that the Chinese miracle may sour for at least a few years.

A few questions should be asked of your portfolio and financial circumstances; Does your brand of diversification mean that the 15 stocks in your portfolio are all in the mining business? Do you own some genuinely defensive investments? Do you have some spare cash reserves or term deposits? Have you paid down your margin loan? Now’s the time to consider these questions.

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How Long Has The Lucky Country Got?

31 Mar

Edward Chancellor is the author of the classic text on financial manias, Devil Take the Hindmost. In 2005 he wrote Crunch time for credit: An enquiry into the state of the credit system in the United States and Great Britain, in which he correctly predicted the GFC. His recent report for Boston-based GMO outlined ten signs of a mania in progress, and showed that the Chinese economy meets all ten of those signs. He has also written recently about the Australian housing mania.

From the Financial Times:

Between 1996 and 2006, US home prices rose by nearly 90 per cent in real terms. Australian home prices rose by roughly the same amount.

Over this period, the US private sector increased its indebtedness by two-thirds of GDP. Australian private debt increased by a similar magnitude. Over the past three years, US home prices have fallen by 30 per cent, according to the S&P/Case-Shiller Composite Index. American households have started to deleverage. By contrast, Australian home prices have climbed 30 per cent since 2006 and households continue to pile on debt.

There are a number of explanations for this divergence…

While other governments expended their resources on shoring up busted banks, the Australian stimulus went straight to consumers. Fiscal transfers increased personal disposable incomes by 4 per cent, according to Professor Steve Keen of the University of Western Sydney. Canberra also bolstered the housing market, raising the subsidy for first-time home buyers to a maximum of A$21,000 (£12,200, €14,000, $18,600). Rising home prices arrested incipient deleveraging by Australian households. Outstanding mortgage debt has actually grown by 6 per cent of GDP since February 2009.

Australia may have been fortunate. But it is not out of the woods. For a start, the real estate market remains in bubble territory. Australian home prices are currently some 70 per cent above their long-term trend level. A recent survey by Demographia International finds that all of Australia’s major housing markets were valued at more than five times average incomes, and defines them as “severely unaffordable.” Initial mortgage payments for a home in Sydney or Melbourne are likely to exceed half of your disposable income, claims Demographia. The Australian housing market looks vulnerable to further rate rises.

Then there are the waning effects of the government’s stimulus to consider. The extra subsidy for first-time home buyers ended last year. The removal of this grant could have a similar effect on Australian real estate as the UK government’s reduction in mortgage interest relief in 1988, which killed off the frenzied Lawson housing boom. Prof Keen claims the first-homeowner’s grant has sucked people into the housing market who would not otherwise have bought. One report suggests many recent first-time buyers in Australia are already struggling to meet payments. This is eerily reminiscent of early stage delinquencies on subprime loans in the US back in late 2005. Australia is also exposed to the removal of China’s stimulus measures. China’s actions boosted commodity prices and improved Australia’s terms of trade. Now, Beijing appears more concerned about inflation and potential bad loans from uneconomic investments.

Aussie house prices have not fallen since the early 1950s. A certain complacency is therefore understandable. Yet not long ago many Americans also believed that domestic home prices could never fall. So far Australia has avoided its day of reckoning. But how long will the lucky country’s luck last?

Not long at all.

A recent survey of 26,000 mortgage borrowers showed that:

Almost half of first-home buyers lured into the market by the Rudd Government’s $14,000 grant are struggling to meet their mortgage repayments and many are already in arrears on their loans.

Thousands of young home buyers are using credit cards or other loans to meet obligations, while those in “severe stress” are missing payments.

Just weeks after the grant was withdrawn, a survey of more than 26,000 borrowers conducted by Fujitsu Consulting has found 45 per cent of first-home owners who entered the market during the past 18 months are experiencing “mortgage stress” or “severe mortgage stress”.

On Monday, RBA Governor Glenn Stevens appeared on commercial TV – an unprecedented act by an RBA official – to warn the public about the dangers of the property market.

On the same day, I came across the following comment by a reader of The Australian newspaper:

Waiting for the “correction” Posted at 1:22 PM Today

Now here’s something interesting. My “relationship manager” at Westpac says the housing market is heading for a “significant correction” because the major banks are about to insist on much higher deposits because of their alarm at the amount of questionable loans on their books. This guys says the word is that the Commonwealth will soon insist on a 30 per cent deposit for new purchases and then only to existing customers. “When that kind of thing happens, the heat will immediately go out of the market so stay out of it till the dust settles”. This bloke says Westpac is especially worried about the impact of the first home buyers grant and they’re already seeing significant loan defaults as interest rates rise. “These people took their $14-thousand, then got Mum and Dad to throw them the rest of their deposit because they were led to believe they’d miss the boat. Kevin Rudd has used taxpayer funds to entice a whole lot of young people into buying places they couldn’t afford and going bankrupt as interest rates rise”. That’s a direct quote from a guy at Westpac who used to be in the business of throwing money at you. God’s honour. Maybe the South Seas bubble IS about to pop?

To learn more about the dangers of debt, and how it has fueled the Australian housing bubble, visit the website and blog of Professor Steve Keen.

Special Note:

On April 15th through 23rd, I will be joining Professor Keen in his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by Federal Government and RBA policies.

Please consider joining us, for the whole trek or even just for an afternoon section of the walk.

If you’d care to assist a genuinely worthy cause, then please consider sponsoring Professor Keen, or indeed myself. Funds raised will support the wonderful charity Swags For Homeless.

Thanks!

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Wong Wastes Water Money

31 Mar

Media Release – Senator Barnaby Joyce, 30 March 2010:

Reports in the Australian Financial Review today confirm that Penny Wong is presiding over a water buy back scheme that is frittering away money. Senator Joyce said “reports suggesting that Penny Wong has overpaid to the tune of $40 million and that some water sellers are getting special deals fuel the confusion and uncertainty surrounding Senator Wong’s plan for the Basin. Who expects irrigators to invest in water-saving technology in this climate of confusion?”

Senator Joyce spoke yesterday to a number of irrigators and farmers. These initial discussions have confirmed reports in the media today. The Government is not providing sufficient feedback on the status of some farmer’s tenders. As the Productivity Commission reported last year, Senator Wong’s scheme has also failed to recognize the effects on local communities of farms closing down. Senator Joyce will be travelling along the Basin over the next few weeks to get first-hand experience of these impacts.

Senator Joyce reiterated that he has no problems with the buying of water, or moving towards to a nationally coordinated use of water from the Murray-Darling Basin. “We need a water policy that provides jobs in regional areas, guarantees food security for all Australians and protects the environment. Current policy appears to ignore this triple-bottom line approach,” Senator Joyce said.

More Information- Jenny Swan 0746 251500

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Only US Collapse Can Save The Euro

30 Mar

From Zerohedge:

For once, some actually good insight from a CNBC guest. Philip Manduca, Head of Investment of the ECU Group, discusses Greece and the very severe implications of what the final outcome will look like. “Trichet (Ed: President of the European Central Bank) said the Greeks are crooks, and they’ve been lying about the numbers. There is a deeply embedded corruption within the Eurozone. Combined with the endemic European socialism and there is just no way you are going to get spending cuts and tax raises and maintain a GDP that makes any sense of the percentage aspect of debt to GDP. So the whole show is wrong. This is an intractable situation, this is going to continue on and on. The only hope for the Eurozone, and the Euro as a currency, is that someone takes the spotlight soon, and that may be the United States.”

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We’re About To Discover That Sovereign Nations Can Go Bust Just Like Companies

30 Mar

From BusinessInsider:

Bill Gross (Ed: Head of PIMCO, the world’s largest bond trading firm) knocks the halo off of sovereign bonds in his latest March outlook.

He highlights how sovereign debt has been struck with more bad news than corporate debt lately.

While sovereign credit used to be generally considered more secure than that of private companies, suddenly the default of nations such as Greece, the U.K., or even Japan seems on the table, while that of many strong corporates remains remote.

What’s happening, according to Mr. Gross, is that government bonds are starting to look just like corporate bonds, rather than existing on some privileged less-risky peer as in the past. Because it’s anything goes and anyone can default in the new ‘unibond’ market.

Bill Gross commented that:

Government bailouts and guarantees such as those evidenced and envisioned in Dubai and Greece, as well as those for the last 18 months with banks and large industrial corporations across the globe, suggest a more homogeneous “unicredit” type of bond market. If core sovereigns such as the U.S., Germany, U.K., and Japan “absorb” more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee. The Kings, in other words, in the process of increasingly shedding their clothes, begin to look more and more like their subjects. Kings and serfs begin to share the same castle.

Barnaby Joyce began raising questions about the possibility of ‘default’ by nations such as the USA last year. He was roundly ridiculed by all and sundry for doing so.

Unfortunately, no one raised the point that there is more than one way that a sovereign ‘default’ can occur. Historically, the most common form of ‘default’ is simply where the sovereign nation inflates away its debts. How? By destroying the value of its own currency:

Thus there are no longer any holy bond cows left in this world.

Heck, even U.S. bonds are subject to ‘stealth-default’ risk, which is simply the eating away of bond value over time via inflation and dollar depreciation.

Barnaby is right.

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‘Concentrated Risk’ Threat to Aussie Banks

29 Mar

From Contrarian Investor’s Journal:

We must confess, we are getting more and more nervous about the potential for a Black Swan hitting the Australian economy. Particularly, we are looking at a vulnerability in the banking system. Here are some facts about Australian banks:

  1. As at December 2009, around 75% of the Australian mortgage market is held by the Big 4 banks. 50% are held by Commonwealth and Westpac while 25% are held by ANZ and NAB. (source: CoreData’s Australian Mortgage Report Q1 2010)
  2. 60% of Commonwealth’s lending books are residential mortgages.
  3. 50% of Westpac’s lending books are residential mortgages.

Now, here’s an interesting news report from almost two years ago:

“The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.”

That is only one concern for Australia’s banking system. You know, the one that we are constantly reassured is “world-leading”, “safe and secure”, “the best in the world”.  The banking system that needed a Government (ie, taxpayer)  Guarantee on customer deposits since October 2008, to stop the “run on the banks” that threatened to collapse it.  The banking system that still has wholesale funds frozen to withdrawals, leaving hundreds of thousands of retirees destitute and forced to go back on the government (taxpayer) pension.

There’s also this concern. Australia’s banks have $13 Trillion in off-balance sheet business.  Yes, that’s Trillion with a ‘T’. But, they only have $2.59 Trillion in on-balance sheet assets.

From Money Morning:

We’re sure the banks and the RBA will claim that all the off-balance sheet business is completely offset, so that losses are contained. Personally, we don’t think you should believe a word of it. The number one risk with the off-balance sheet business is counterparty risk. As long as each counterparty can keep the ponzi scheme going then sure, everything will be tickety-boo.

But as we all know, that can’t happen. We’ve seen counterparties collapse before (Lehman, Bear Sterns, etc…) and they’ll collapse or need bailing out again.

There’s only so long that banks can keep the ponzi going. They’ve scraped through by the skin of their teeth thanks to an unprecedented bail-out by the taxpayer.

Our “world-leading” Big Four banking system is a total disaster just waiting to happen. And it’s all thanks to greed… and Debt.

Barnaby is right.

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Junk Bonds Record in ‘Goldilocks’ Market

29 Mar

From Bloomberg:

Junk bond sales reached a record this month as rising profits and record low Federal Reserve interest rates foster lending and investment to the lowest-rated borrowers.

Companies worldwide issued $38.3 billion of junk bonds this month, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point this month to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show.

This is “an almost ‘Goldilocks’ environment for leveraged credit markets,” JPMorgan Chase & Co. analysts led by Peter Acciavatti, the top-ranked high-yield strategist in Institutional Investor magazine’s annual survey for the past seven years, said in a March 26 report to the bank’s clients.

This is very bad news.

There has been growing concern around the world that the sales of junk bonds prior to the GFC will lead to a junk bond apocalypse in 2012:

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

Now, the ongoing Zero Interest Rate Policy (ZIRP) in the USA, and near zero interest rates in Japan and many other developed nations, has led to a new record in the sales of those same high risk ‘junk bonds’.

In other words, central banks and governments around the world are adding more fuel to the fire.

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Global Turmoil Looms: Keating

27 Mar

From The Age:

Paul Keating has delivered a bearish assessment of the world economy, warning that another bout of global turmoil is possible if trade and capital imbalances go unaddressed.

The former prime minister and treasurer last night argued current account surplus nations such as China and Germany must urgently shrink their surpluses by lifting the role of domestic demand.

Failure to do so could trigger another sharp deterioration in global economic conditions, he said, damaging Australia’s growth prospects.

Mr Keating also casts doubt on China’s ability to continue growing at recent rates of near 10 per cent. He said this rate was being artificially supported by excessive investment and its pegged currency, which makes its exporters more competitive.

“Our biggest customer China is growing for the moment… but only on investment steroids,” he said.

The former prime minister also highlighted risks to foreign countries with large debts, such as the US and Europe.

In the event of a double-dip recession, Mr Keating said the developed world would not have the funding to support massive fiscal packages.

“If a financial crisis comes in the future there won’t be the method to deal with it as we’ve seen in this crisis,” he said.

Keating is correct.

Thanks to Rudd Labor’s panicked, massive “stimulus” spending – tens of billions of borrowed money wasted on pink batts, foil insulation, and Julia Gillard Memorial School Halls – Australia no longer has a safety net.

And despite the daily warnings of crisis dead ahead – now coming even from former “world’s greatest treasurer” Paul Keating – Rudd Labor is continuing to borrow well over $1bn a week.

When the next wave of the GFC comes, everyone will know that Barnaby is right.

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Australia’s Property Bubble: It’s Here

27 Mar

From the Sydney Morning Herald:

It’s official: 60 per cent of investors believe Australia has a property bubble. A confluence of housing shortages, low interest rates, speculative fervour and last year’s move by the Rudd Government to relax foreign ownership rules on real estate have turbo-charged house prices.

This is all scary stuff.  Investors played a key role in expanding the property bubble through the late 90s. In 1990 investment loans represented 16 per cent of Australian mortgages at $13 billion. By 2008 that figure had ballooned 2400 per cent to $310 billion, or 31 per cent of total mortgages. Investor attitudes matter.

The survey revealed, however, that moral hazard may be much larger than investors themselves admit, with 42 per cent expecting the Rudd Government to introduce another round of first home buyer grants if the current boom shows signs of ending.

The increase in foreign purchases also cannot be under estimated, following the decision last March by the federal government to relax its rules on property ownership. This abolished mandatory reporting of such acquisitions in a bid to ”enhance flexibility in the market”.

Before the change, foreign investment in Australian residential property had already started increasing, up 33 per cent to $20.4 billion. It is not known what the figures stand at in 2010 but there are suggestions that more than 30 per cent of homes auctioned are purchased by foreign speculators. If this is the case, it will dramatically add to the property bubble.

It is a potential political time bomb. Numerous readers have written in complaining that they are being priced out of the market by overseas bidders…

Another Investor Pulse reader wrote: “So much for Rudd’s ‘working families’. Australians should get priority over foreign investors for what limited housing we have. How can Australians compete when Chinese borrow at home at 1 per cent? The Australian property market is strong and doesn’t need to be propped up. The Government should act now to stop this misguided and UN-Australian policy. Shame on you, Mr Rudd, for selling out on Working Families.”

Barnaby Joyce is the only Australian politician who has been brave enough to endure smears and criticism, by daring to question the Rudd Government’s relaxing policies on foreign investment.

Here’s just one of Senator Joyce’s press releases on the topic from last year,  “FIRB Changes – Australia’s Sovereignty At Risk“:

Senator Joyce today called on Treasurer Wayne Swan to re think his undermining of the present system of reviewing foreign investments and takeovers.

Mr Swan’s announcement should sound very loud alarm bells to anyone concerned with maintaining Australia’s sovereignty over its resources and business interests given that  Mr Swan plans to remove  Foreign Investment Review Board supervision of over 20 percent of all business applications currently reviewed by the board.

This effective sidelining of the FIRB relating to a substantial number of applications is deeply troubling as it removes a long standing and much needed level of accountability and transparency of foreign investment in Australia particularly by individual investors from countries such as the Peoples Republic of China.

It is astounding Mr Swan would seek to punch such a big hole in Australia’s foreign review processes, leaving the back door wide open for foreign interests to buy Australia paddock by paddock, business by business without any accountability to the Australian people.

Unfortunately for Australia each of the announced measures will allow that hole to get bigger to the detriment of Australia’s sovereignty and its national interest.

Yet again, Barnaby is the only one who is on the ball.

UPDATE:

From The Age:

Foreign buyers inflating market

Reserve Bank governor Glenn Stevens says foreign buyers are a factor in rising house prices.

Mr Stevens said the bank was monitoring how much the federal government’s decision last March to relax its rules on foreigners owning property had contributed to surging prices for housing.

He said the role of foreign purchases was ”an important one and it’s one we’re giving some attention to”.

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