Australia’s banks have the highest exposure to the residential mortgage market than banks in other major economies, making a US-style banking collapse likely should house prices plummet.
And since the AFR has a paywall that prevents us reading more, here’s MacroBusiness with details of what Moodys had to say:
The continued strong expansion in real estate loans—at least relative to other lending segments—has raised some eyebrows. The Australian banking sector has the highest exposure to residential mortgages in the world, according to the International Monetary Fund (see Chart 5). With the absence of any publicly supported securitization market—such as that provided by Fannie Mae and Freddie Mac in the U.S.—and a currently weak private securitization market, any new mortgage originations have to stay on banks’ books. This trend has been exacerbated by recent changes to RBA rules in that the central bank will accept residential mortgage-backed securities, which may be internally securitized (that is, the loans may be securitized by the originating institution and held in their entirety by the same institution on their books), as collateral for loans.
The high degree of exposure to the domestic mortgage market raises many concerns. Recent experience has shown that house prices can fall significantly and trigger serious banking meltdowns. But what are the chances of a similar housing collapse in Australia? Many international analysts think the chances of an antipodean housing bust are quite high—it would take a bold economist who has been in a decade-long coma to declare that an Australian housing correction was impossible. When trends in Australian house prices are compared globally, the signs look worrying. House prices have increased for longer and faster than in many of the markets where prices cratered during the Great Recession.
Here at barnabyisright.com, we have warned repeatedly of precisely this scenario from the inception of this blog.
And demotion, losing his Shadow Finance Minister portfolio.
But in the end, the truth will out.
The worm has begun to turn.
And some economic “experts” are beginning to agree.
Barnaby is right, on his most fundamental and politically courageous warning – the steeply rising “trajectory” (trend) of Australian government debt:
From the Herald Sun (my bold emphasis added):
GILLARD Government debt levels are forecast to blow out by 80 per cent to $165 billion in this term alone – equal to more than $14,000 for every working Australian.
Analysis of Budget documents reveals that between the 2010 election and Federal Treasury’s update in October last year, the 2012-13 net debt estimate rose $54 billion to $144 billion.
With Wayne Swan having junked the Government’s commitment to a surplus this financial year, Bank of America Merrill Lynch now forecasts Treasury will raise the estimate by a further $21 billion in the May budget.
“The government is starting to develop some form when it comes to over-estimating the improvement in its budget balance,” Bank of America Merrill Lynch chief economist Saul Eslake said yesterday…
Mr Swan’s spokesman said the Government had no plans to raise the gross debt limit. Mr Eslake said the increase that had already occurred was “troubling”.
Monash University Professor of Business and Economics Jakob Madsen said the gross debt rise was “disturbing”.
“It’s a dangerous trend and it’s at the wrong time.
…
Business Council of Australia CEO Jennifer Westacott said spending had grown “out of step” with revenue.
“If that doesn’t change we are going to have serious public debt problem,” Ms Westacott said.
Mr Eslake, Professor Madsen and Ms Westacott all said Australia did not currently have a debt crisis.
But, Ms Westacott said, “we do have a budget management crisis”.
Really?
Shame these “experts” did not notice this problem and speak up earlier. Have we not had to endure 5 years of constantly being told that the ALP government have given us “sound economic management”?
Do not be misled by all those who (still) downplay the importance of Australia’s government debt position.
Do not be misled by all those who prefer to pull the wool over your eyes, by talking about government debt using only the “net” figure rather than the gross, because the “net” figure is lower and does not sound so bad – conveniently ignoring the highly important fact that the $13 – $14 billion per year in interest expenses due are payable on the much larger gross figure:
Budget 2012-13 – Budget Paper No.1, Statement 9, Note 10
Do not be misled either, by those who – intentionally, or accidentally – distract from and dismiss the importance of ever-rising government debt, when they (quite correctly) point out that an even bigger problem is our world-leading private debt.
As your humble blogger reaffirmed less than a week ago:
“This is the #1 reason why, even though it is true that private debt is much worse than public debt, I believe that Barnaby Is Right in constantly expressing concern over the rapidly rising trajectory of public debt in Australia. Because, regardless of whether or not you agree that our public debt is “low compared to other OECD countries,” the undeniable fact remains that our rapidly rising government debt does represent a weakening of the government’s balance sheet… even before any banking crisis arrives! Foreseeing that our banking system was, just like the rest of the West, our key vulnerability, and that weakening the government balance sheet unnecessarily would only make our future problems far more calamitous, was one of the main reasons why I launched this blog in early 2010. When you hear some distinguished-looking, eminent economic “expert” – or politician – reassuring us that Australia’s public debt is “low”, just keep one word at the front of your mind. Ireland. And remember what happens to the public debt level, when a government with previously “low” public debt suddenly finds itself borrowing to the stratosphere – often from the IMF – in trying to bail out an over-leveraged banking system.”
Australia’s total government debt – using the popular “as a percentage of GDP” measure (which I loathe) – is now worse than where Ireland’s was before their private debt bubble burst. And ours hasn’t. Yet. Note well: the following charts are only current through 2011; our Green-Labor government has piled on an awful lot of additional debt since then –
IRELAND – click to enlarge
AUSTRALIA – click to enlarge
Australians should never forget that, prior to their real estate (private debt) bubbles bursting, Ireland and Spain were considered the “outstanding” economies of the EU.
From the New York Times, June 2011 (my bold added):
Where Private Borrowing Led To Public Debt
FIVE years ago, a survey of the euro zone would have shown two star countries. They were growing rapidly and running government budget surpluses. Their national debts were low. Other countries sought to emulate their success.
Which is almost exactly the same situation Australia is in.
Minus the government surpluses.
For many years our massive banking sector – now bigger by market cap than all of Europe’s combined – has borrowed heavily overseas to finance our world-leading overpriced housing bubble.
It does not take an “expert” economist to see what the future holds for us.
Just “a little ol’ country accountant”, with the courage to speak up and call it as he sees it.
Barnaby Joyce.
UPDATE: And yet another expert comes out. To say the same thing Barnaby has been warning of, for the last 3.5 years –
ONE of the nation’s top financiers yesterday joined the debate on the country’s rising debt level – describing it as dangerously high.
AMP chief economist Shane Oliver also urged the government to stop using economic comparisons to countries in Europe and the US to justify a predicted 80 per cent blowout to $165 billion this term.
“It just shouldn’t be this high,” said Mr Oliver, who said the government hadn’t taken advantage of the decade-long resources boom.
“If you take Ireland for example, it has had a similar level of public debt to Australia in 2007 and only six years later, debt is over 100 per cent of GDP.”
Want to know whether Australian house prices will rise or fall?
The RBA has the answer.
Just go to their website, and click on “Chart Pack” under “Key Information” –
Then click on “5. Credit and Money” –
… where you will see this chart –
This chart tells us the growth rate in the amount of “credit” and “money” in the economy.
As you can see, the growth rate in “credit” has plummeted to less than 5% per annum. In the period where Australian house prices rose the most in history, the annual growth rate in “credit” was three to four times higher than the present rate. Without strong growth in new “credit” issued to borrowers, house prices can not rise much. If at all.
Indeed, unless there are enough new buyers – armed with enough newly-issued “credit” – out and about and actively purchasing houses, then house prices must eventually fall.
For over twenty years, housing in Australia has been a banker-profit-driven “bubble mania” scheme, you see. To drive up prices, the #1 and absolutely essential ingredient is more and ever more new “credit” – debt – with which bright-eyed and dull-brained buyers – debt slaves – can outbid each other to buy a house.
The RBA has another chart that shows this. It will help you to see more clearly exactly why Australian house prices rose so much … until the GFC struck.
In the main menu of the Chart Pack, select “3. Household Sector” –
Then select “Household Finances” –
… where you will see this chart –
As you can see, Household Debt (ie, “credit” offered by banks) as a percentage of disposable income rose dramatically for nearly twenty years.
Until the GFC.
It turned down sharply as Australians wisely responded by tightening their belts, and paying down their debts. Then began to climb again – but only a little – thanks to the Rudd government offering “free money” in the form of a doubling of the First Home Owners Grant. This handout of what amounted to a free home loan deposit kept the bubble from collapsing. It encouraged thousands of new buyers – mostly young people with little or no savings – to go to their bank and borrow hundreds of thousands in “credit” to go and bid up the prices of houses again.
Unfortunately for them – and the bankers – this could only last for as long as the government was willing, and able, to find more “new home buyers” – new debt slaves – to dangle “free” money in front of. As you can see from the chart, the level of Household Debt to disposable income has now bounced off the ceiling for a second time.
And so, as most Australians know, house prices in most areas of Australia have basically gone nowhere in the past year or two. Some rises here. Some falls there. But overall, house prices have simply mirrored the Household Debt level … falling as debt levels fell, and rising (briefly) to bounce off the underside of that invisible private debt ceiling, thanks to that brief inflow of new “credit” that was borrowed by the government, and then handed out to First Home Buyers as deposits enabling them to apply for new mortgage “credit” from banks. And yes, the RBA has another chart that confirms this –
Now, it might interest you to know exactly when Australia’s private debt-fuelled, bankster-enriching house price bubble scheme actually hit the ceiling.
No, it was not when the GFC struck; when many Australian households began to wake up, and realise that paying down their debts might just be a good idea.
Our housing bubble actually hit the ceiling first in early-to-mid 2004. That is when the all-important rate of growth in housing “credit” topped out, and began to fall.
Unfortunately, the RBA does not make it easy for you to see this critical economic parameter. The Chart Pack only gives you “Credit” growth in aggregate – that includes other forms of borrowing like business loans and credit card “credit”. They even give you a chart for the number of “housing loan approvals”. But they do not give you a chart specifically for that all-important rate of growth in housing credit. You have to dig into their statistics, and construct the chart yourself (click to enlarge) –
Click to enlarge
As you can see, the rate of growth in “credit” for both “Owner-occupier” and “Investor” housing peaked in Feb-Mar 2004, and has been falling ever since.
It is particularly interesting to consider the magenta line showing “Investor” housing “credit”. The rate of growth in “credit” for housing “Investors” was, until early 2004, far in excess of that for “Owner-occupiers”, with the notable exception of the early 2000’s global recession that only briefly affected Australia. At that time, “credit” growth for “Investor” housing plummeted to the same level as the “Owner-occupier” rate, before recovering spectacularly to reach a whopping 30.7% annual growth in Feb 2004.
What prompted the recovery? John Howard’s introduction of the First Home Owners Grant in 2000, and in particular, his doubling it in early 2001. With a rush of newly-enslaved borrowers bidding up house prices, “investors” too rushed back into the welcoming arms of the bankers, as ever only too eager to lend “credit” at interest to willing borrowers against the “security” of “their” house.
Or houses. How many people do you know who (used to) boast about their “investment property portfolio”?
From early 2004, the well began to run dry. The rate of growth in “credit” for “Investor” housing began to fall steeply. It fell well below the “Owner-occupier” rate, which was also declining. This overall decline in the growth rate for housing credit has continued ever since.
However, thanks to the “stimulus” provided by Kevin Rudd’s further doubling of the First Home Owner’s Grant in 2009 – again, using borrowed money – aided and abetted by the RBA slashing interest rates in response to the GFC, both “Owner-occupier” and “Investor” credit growth bounced briefly. Indeed, “Investor” credit actually overtook “Owner-occupier” credit again for a very short time in 2010, before both continued falling together.
Clearly then, house prices in Australia were not driven up over the past 15-20 years by “demand” from “population growth”, from people who needed somewhere to live (Owner-occupiers). On the contrary, by far the strongest rates of growth have – during the bubble phase – been driven by so-called “investors”.
Speculators, in other words. People who have come to believe that borrowing money to “invest” in property is a guaranteed path to riches, because house prices “always go up”. Meaning, they believe that if they can only buy now, they can sell later for an easy profit.
Sadly, it is not just “investors” who have come to believe this. Most Australian owner-occupiers have come to believe the same thing. It is the very definition of a “bubble mania”, when most people have come to believe they can profit from buying and later selling an “asset”.
Who benefits most from a “bubble mania”? Who has the most powerful vested interest in ensuring that the bubble does not burst … that is, not until they are positioned to profit from the “downside” as well?
And so, dear reader, I suggest that you bookmark this post. In the weeks and months ahead, the powerful banking and property (sales) industry will undoubtedly ramp up the propaganda – and the pressure on government and the RBA to “do more” to support “home buyers”.
Meaning, do more to prop up the Ponzi scheme that keeps them all in caviar, Bollinger, and the latest Aston Martin.
You will hear all kinds of oh so plausible-sounding reasons and statistics, presented by “experts”, encouraging you to believe that house prices will soon go up, and that now is a good time to buy (meaning, to “borrow”).
Whenever this coming bombardment of propaganda causes you to wonder if what they are all saying might just be true; when the charts and statistics and testimonials from credible-sounding people causes you to start feeling “con-fident” about Australian housing, come back and read this post again. Or visit the RBA’s website, and click on the Chart Pack to see the Credit and Broad Money Growth chart.
Because the simple truth is this.
Unless the government can find a new source – a BIG source – of new people willing to borrow enough “credit” to keep bidding up house prices, there is only one way for them to go.
Unless the government can find a way to reverse the trend of that last Housing Credit chart, then in time, there is only one way that house prices can go.
And “up” it is not.
Finally, although I am loathe to ever suggest that anyone heed what the RBA Governor says, here is one exception.
Correction – how careless of me! The RBA does indeed provide a chart in their chart pack that shows the growth rate in “credit” for housing. Simply select “5. Credit and Money“, then choose “Credit Growth by Sector” –
As you can see, the annual growth rate for Housing “credit” is in a long and steady decline. It is presently less than a quarter of the rate of lending that the bankers achieved at the peak.
So, The Easy Way To Know Where House Prices Will Go, is to visit the RBA’s Chart Pack and look at that particular chart. If it hasn’t started shooting back up again, to the kind of pre-2004 levels that financed the near twenty-year “boom” period, then you know where house prices will go.
China Local Debts Dwarf Official Data Prompting Too-Big-to-Complete Alarm
Click to enlarge
A copy of Manhattan, complete with Rockefeller and Lincoln centers and what passes for the Hudson River, is under construction an hour’s train ride from Beijing. And like New York City in the 1970s, it may need a bailout.
Bloomberg News tallied the debt disclosed by all 231 local government financing companies that sold bonds, notes or commercial paper through Dec. 10 this year. The total amounted to 3.96 trillion yuan ($622 billion), mostly in bank loans, more than the current size of the European bailout fund.
There are 6,576 of such entities across China, according to a June count by the National Audit Office, which put their total debt at 4.97 trillion yuan. That means the 231 borrowers studied by Bloomberg have alone amassed more than three-quarters of the overall debt.
The fact so few of the companies have accumulated that much debt suggests a bigger problem, says Fraser Howie, the Singapore-based managing director of CLSA Asia-Pacific Markets who has written two books on China’s financial system.
“You should be more worried than you think,” he said of Bloomberg’s findings. “Certainly more worried than the banks will tell you.
“You know how this story ends — badly,” he said.
The findings suggest China is failing to curb borrowing that one central bank official has said will slow growth in the world’s second-largest economy if not controlled. With prices dropping in China’s real estate market, economists warn that local authorities won’t be able to repay their debt because of poor cash flow and falling revenue from land sales they rely on for much of their income.
Provinces and cities are going deeper into the red to finish projects, from the Manhattan on the east coast, to highways in northwestern Gansu and a stadium fronted by Olympic rings in Hunan, central China. Many were started as part of China’s stimulus program to beat the 2009 world recession. The financing companies accounted for almost half of the 10.7 trillion yuan in all local government debt tallied by the official audit.
The 231 borrowers whose public filings were reviewed by Bloomberg raised a combined 354.1 billion yuan by selling securities this year. They have credit lines from banks of at least 2.3 trillion yuan that have yet to be drawn down, the documents show.
And in other news from Bloomberg:
China’s November Home Prices Post Worst Performance This Year Amid Curbs
New home prices dropped from the previous month in 49 of the cities monitored by the government, compared with 33 posting decreases in October, the national statistics bureau said in a statement on its website yesterday. Only five cities had gains in home prices, according to the statement.
“Home prices will fall further as the government’s tightening continues,” said Jinsong Du, a Hong Kong-based property analyst for Credit Suisse Group AG. “We’ll see more small developers file for bankruptcy or sell off their assets next year.”
The Chinese locomotive has been losing steam throughout 2011 as investment and real estate led growth becomes harder and harder to come by due to diminishing marginal returns. The effects of the slowing of the up-and-coming Asian giant ripple through Asia Pacific and push other countries into recession. If there ever was a country dependent on the well-being of China it is Australia with its heavy dependence on mining and natural resources. And as China’s demand for these goods weakens Australia is pushed into a recession, which is then exacerbated as the housing sector finally experiences its long overdue crash – a half decade after the rest of the developed world.
Not so outrageous, methinks.
Indeed, precisely what we have long been forewarning.
Little old Australia gets guernsey #4 in Saxo Bank’s annual list of “Outrageous Predictions” (6.5Mb pdf download):
4 – AUSTRALIA GOES INTO RECESSION
The Chinese locomotive has been losing steam throughout 2011 as investment and real estate led growth becomes harder and harder to come by due to diminishing marginal returns. The effects of the slowing of the up-and-coming Asian giant ripple through Asia Pacific and push other countries into recession. If there ever was a country dependent on the well-being of China it is Australia with its heavy dependence on mining and natural resources. And as China’s demand for these goods weakens Australia is pushed into a recession, which is then exacerbated as the housing sector finally experiences its long overdue crash – a half decade after the rest of the developed world.
Given all the data and info we have seen here at barnabyisright.com over the past 12 months, I’d not call this prediction “outrageous” at all.
But then, we don’t ascribe to the popular groupthink here, do we.
For context, here is the preface to the 10 point “Outrageous Predictions” given by Saxo Bank chief economist, Steen Jakobsen (my emphasis added):
2012: The Perfect Storm
Generating this year’s Outrageous Predictions has been even more of a pleasure than usual, as it seems that never before have there been so many path uncertainties for the future, so we have had an infinite variety of scenarios to draw on. As usual, we try to keep at least a measure of consistency across the predictions by using a unifying theme. For this year, we settled on the theme for 2012: The Perfect Storm.
Saxo Bank’s yearly Outrageous Predictions report has always been one of our more popular publications, and understandably so, as it frees us and our readers from the constraints of the high probability events in the middle of the supposed bell curve of possibilities. But there are a few key points I need to underline about this publication:
The first is that we always focus on “fat tail” predictions, i.e. events that are unlikely to happen, but are perhaps far more likely than the market appreciates. Saxo Bank first launched this publication 10 years ago as an exercise in looking at events which, should they happen, would change the outlook and performance of markets. This was before the concept of Black Swans was popularised. Our publication was rather inspired by option theory and looking at the tail-risk – an event which based on odds or logic has a very small chance of happening, but somehow still happens far more often than any model is able to predict.
Consider volatility during the 2008 Financial Crisis which no model could even imagine. Or think about a natural disaster like the earthquake/tsunami that hit Fukushima. Disaster planning could supposedly handle a very substantial earthquake and Fukushima was supposedly located in a low risk zone. But instead, Japan suffered an earthquake of severity which seemed impossible in Japan’s geology, and the resultant tsunami wiped out back-up power. The unimaginable happened once again.
Saxo Bank’s yearly Outrageous Predictions are not intended as real predictions and certainly not as “forecasts” in any way. Rather, the Outrageous Predictions are 10 important events with under-recognised probabilities in our view. Should any of them come to pass, they would change the way we need to analyse, trade and report the markets.
It is also important to note that our Outrageous Predictions nearly always have a negative bias, which is in fact a natural antidote to how the market normally operates. Human beings have a tendency to think positively, which is a natural part of our motivation to get up and go to work every day and a vital part of our survival instinct. Day in and day out we think about building a better future based on a continuation of the present.
This is good for morale but does a poor job of preparing us for reality.
In that light, please do not let our Outrageous Predictions get you down. They have been prepared in the spirit of encouraging you to think outside the box and prepare for world-altering events. Thinking outside the box is rarely a comfortable exercise, but neither is dealing with an unpleasant surprise for which one has failed to prepare in any meaningful way.
Should one, two or three of our Outrageous Predictions come to pass, it would make 2012 a year of tremendous change. This may not necessarily be a negative thing either – and given the structure and uncertainties in the marketplace here at the end of 2011, we would suggest that even if none of our predictions come to pass, equally important and totally unanticipated events will. Sometimes we need to get to a new starting point before we can gain the right perspective. We hope 2012 will be the year where we start on the long march towards re-establishing jobs, growth and confidence.
Maybe, just maybe, our Outrageous Predictions can at least lead to a discussion on how we can prevent some of them from happening. We would like nothing more than to be proven wrong on negative views, but only if they are replaced with something better than the current central bank and government-manipulated paradigm.
Jakobsen’s full list of “Outrageous Predictions” as follows”:
1 – THE STOCK OF APPLE INC PLUMMETS 50 PERCENT FROM 2011 HIGH
No sovereign or corporate empire has ever maintained its superior position for long because attacks mount and loyalty fades. Going into 2012 Apple will find itself faced with multiple competitors such as Google, Amazon, Microsoft/Nokia, and Samsung across its most innovative products, the iPhone and iPad. Apple will be unable to maintain its market share of 55 percent (three times as much as Android) and 66 percent on the iOS and iPad as Android will gain further momentum and Amazon’s low priced Kindle Fire will cut deeply into Apple’s tablet reign. In relation to current earnings Apple is not expensive but expectations about future profit growth will come down hard as competition reaches insane levels and crushes Apple’s profit margins.
2 – EU DECLARES EXTENDED BANK HOLIDAY DURING 2012
The December EU Treaty changes prove insufficient to solve EU funding needs – particularly those in Italy – and the EU debt crisis returns with a vengeance by mid-year. In response, the stock market finally caves in and drops 25 percent in short order, prompting EU politicians to call an extended bank holiday – closing all European exchanges and banks for a week or more. EU leaders gather like Vatican cardinals at a conclave to hammer out a “New Europe”. This could result in EU officials overstepping their mandate once again with new burdensome command and control measures that further violate the principles of the EU and free markets. Regardless, this “final” attempt leads straight to a popular overthrow of the old order and beginning of destruction of the sovereign debt time bomb. A period of pain is inevitable, but this will quickly allow a “new EU” to regroup with new membership and a new base from which its economies and markets can start planning for the future, rather than dealing with the mistakes of the past.
3 – A YET UNANNOUNCED CANDIDATE TAKES THE WHITE HOUSE
In 1992, a savvy, yet highly erratic Texas billionaire named Ross Perot managed to take advantage of a recessionary economy and popular disgust with US politics and reap 18.9 percent of the popular vote. Step forward to 2008, and Obama promises “real change” from eight years of Republican rule as the economy is nose-diving. Now, three years of Obama has brought too little change and only additional widespread disillusionment with the entire US political system. Going into the election in 2012, the incumbent Democrats are in ideological disarray and will get the blame for continued economic malaise and the favour-the-rich Republicans will never win the popular vote with the US rich/poor gap at a record width and social tension rising. In short, conditions for a third party candidate have never been riper. Someone smart enough to sense this and with a strong programme for real change throws his hat in the ring early in 2012 and snatches the presidency in November in one of the most pivotal elections in US history, taking 38 percent of the popular vote. A new political order is born.
4 – AUSTRALIA GOES INTO RECESSION
The Chinese locomotive has been losing steam throughout 2011 as investment and real estate led growth becomes harder and harder to come by due to diminishing marginal returns. The effects of the slowing of the up-and-coming Asian giant ripple through Asia Pacific and push other countries into recession. If there ever was a country dependent on the well-being of China it is Australia with its heavy dependence on mining and natural resources. And as China’s demand for these goods weakens Australia is pushed into a recession, which is then exacerbated as the housing sector finally experiences its long overdue crash – a half decade after the rest of the developed world.
5 – BASEL III AND REGULATION FORCE 50 BANK NATIONALISATIONS IN EUROPE
As 2012 begins, pressure will mount on the European banking system as new capital requirements and regulatory pressure force banks to deleverage in a great hurry. This creates a fire sale on financial assets as there are few takers in the market. Troubled sovereigns, structural funding gaps and massive trading books set the scene for the largest bank rescue operation in Europe’s history. Politicians, eager to score points with the public, create a regulatory mob enforcing value destruction in the banking system “in the name of greater good”. A total freeze of the European interbank market forces nervous savers to make bank-runs, as depositors distrust deposit guarantees from insolvent sovereigns. More than 50 banks end up on government balance sheets and several known commercial bank brands cease to exist.
6 – SWEDEN AND NORWAY REPLACE SWITZERLAND AS SAFE HAVENS
Sweden and Norway are at risk of replacing Switzerland as the new safe havens – “risk” because, as we saw with Switzerland, becoming a safe haven in a world of devaluing central banks presents a number of risks to a country’s economy. The capital markets of both countries are far smaller than Switzerland, (the combined FX volume in Sweden and Norway being a mere fraction of Switzerland’s), but the Swiss are aggressively devaluing their currency and money managers are looking for new safe havens for capital. At the same time, Germany and its balance sheet are embroiled in the EU debt debacle and the classic safe haven appeal of 10-year Bunds is fading fast. Sweden and Norway sport excellent current account fundamentals, prudent social policies and skilled and flexible labour forces. Flows into the two countries’ government bonds on safe haven appeal becomes popular enough to drive 10-year rates there to more than 100 basis points below the classic safe haven German Bunds.
7 – SWISS NATIONAL BANK WINS AND CATAPULTS EURCHF TO 1.50
Switzerland’s persistency in fighting the appreciation of its currency will continue to pay off in 2012. After the dramatic failure of direct FX intervention in the market in 2009 and 2010 and after EURCHF threatened to destroy the Swiss economy with its death spiral towards parity in mid-2011, the Swiss National Bank and Swiss government finally joined forces to engineer an aggressive expansion of money supply and established a floor in EURCHF at 1.20. With Swiss fundamentals – particularly export related – continuing to suffer mightily in 2012 from past CHF strength, the SNB and government bear down further to prevent more collateral damage and introduce extensions to existing programmes and even negative interest rates to trigger sufficient capital flight from the traditional safe haven of Switzerland to engineer a move in EURCHF as high as 1.50 during the year, much to the chagrin of those who believe central banks can’t intervene successfully.
8 – USDCNY RISES 10 PERCENT TO 7.00
The impressive growth rates in the world’s second-largest economy, China, since the end of the Great Recession have been predicated on investment and exports. As marginal returns from building million-inhabitant ghost towns diminish and exporters struggle with razor-thin margins due to the advancing CNY China gets to the brink of a “recession”, meaning 5-6 per cent GDP growth. Chinese policymakers come to the rescue of exporters by allowing the CNY to decline against a US Dollar – buoyed by its safe-haven status amid slowing global growth and an on-going Eurozone sovereign debt crisis – and send the pair up to 7.00 for a 10 percent increase.
9 – BALTIC DRY INDEX RISES 100 PERCENT
Despite the dry bulk fleet being expected to outgrow demand in 2012, leading to further over capacity, several factors could surprise resulting in a price spike in the Baltic Dry Index. Lower oil prices in 2012 could lead to an increase in the Baltic Dry Index as operating expenses go down. Brazil and Australia are expected to expand iron ore supply, further leading to lower prices and therefore higher import demand from China to satisfy its insatiable industrial production. In combination with monetary easing this leads to a massive spike in iron ore demand. The last shock that could impact the dry bulk market is exceptional dry weather, due to El Nino, leading to a plunge in hydropower electricity generation and thereby fuelling demand for coal imports.
10 – WHEAT PRICES TO DOUBLE IN 2012
The price of CBOT wheat will double during 2012 after having been the worst performing crop in 2011. The drop was brought about due to a combination of farmers responding to high prices in 2010/11 and normalised weather in the Former Soviet Union. However with 7 billion people on the earth and money printing machines at full throttle bad weather across the world will unfortunately return and make it a tricky year for agricultural products. Wheat especially will rally strongly as speculative investors, who had built up one of the biggest short positions on record, will help drive the price back towards the record high last seen in 2008.
Along the road to one of China’s most famous tourist landmarks – the Great Wall of China – sits what could potentially have been another such tourist destination, but now stands as an example of modern-day China and the problems facing it.
Situated on an area of around 100 acres, and 45 minutes drive from the center of Beijing, are the ruins of ‘Wonderland’. Construction stopped more than a decade ago, with developers promoting it as ‘the largest amusement park in Asia’. Funds were withdrawn due to disagreements over property prices with the local government and farmers. So what is left are the skeletal remains of a palace, a castle, and the steel beams of what could have been an indoor playground in the middle of a corn field.
All these structures of rusting steel and decaying cement, are another sad example of property development in China involving wasted money, wasted resources and the uprooting of farmers and their families. It is a reflection of the country’s property market which many analysts say the government must keep tightening steps in place. The worry is a massive increase in inflation and a speculative bubble that might burst, considering that property sales contribute to around 10 percent of China’s growth.
And here is little old Australia, staying (barely) afloat in unprecedentedly turbulent global economic seas, by wearing Floaties bought with the proceeds of flogging iron ore and coal to China.
A China whose steel mills apparently aren’t needing so much of our product anymore.
From ZeroHedge (emphasis in original, underline mine):
Forget Copper; Steel Is The True Indicator Of The Chinese Hard Landing
“The investment landscape for industrial metals is becoming increasingly more difficult to navigate. As highlighted in last month’s letter, we are continuing to see a rapid deceleration of growth in China, specifically within the cyclical industries. A recent trip to visit steel companies outside Beijing underlined the impact of extremely tight liquidity and continued restrictive policy in the Chinese housing market. Steel capacity cuts – through idling or accelerated maintenance outages – are now commonplace and the speed of these cuts has certainly surprised the market. Construction is the principal end-market blamed for this weakness…
…
Zoomlion, China’s second largest construction machinery company, recently said, “Demand for construction machinery has shrunken drastically and growth will no doubt continue to slow next year.” Within the context of declining housing starts, plummeting transaction volumes and the beginning of a meaningful move down in housing prices, these shifts in the steel market have been an interesting harbinger of more substantial problems in the Chinese economy. Our principal concern is the extension of housing weakness into the banking system through the mechanism of both failing developers as well as the opaque and informal lending. We are concerned that the recent strength in iron ore, steel and copper has been misinterpreted by the market. In our view, any suggestion that the Chinese market is undergoing a substantial restock is misplaced.” Today, we get a confirmation of just this warning courtesy of Citigroup which has charted weekly Iron Ore China port inventories and of broad steel inventories. Needless to say, domestic steelmakers, who better than anyone know the state of domestic end product demand, have seen the writing on the wall, and have one message for the world: short Brazil and Australia.
‘Hard landing’ coming in China, warns Nouriel Roubini
AUSTRALIA faces the threat of a “hard landing” in China within two years and the growing risk of being hit by a double-dip global recession sparked by the European debt crisis, one of the world’s leading economists said yesterday.
China’s Economy At Risk Of “Hard Landing”, 60% Chance of Banking Crisis By Mid-2013
Nouriel Roubini, one of the dozen or so economists who predicted the GFC, has just given an ominous warning for all those – like Wayne Swan, the Treasury department, former Treasury secretary (and now personal adviser to Gillard) Ken Henry, and the RBA – who are blindly banking on a never-ending China boom, with continuous record high terms-of-trade, to get us out of their $1.59 millionper hour Interest-only debt hole.
The Australian mainstream media continues its fine record of keeping us ill- and under-informed.
Remember our Wayne’s tireless refrain on the economy?
That investment (mostly from China) in our resources sector will ensure a budget back in surplus (for one year), and “lasting prosperity” via an endless “boom”?
Faber joins hedge fund manager Jim Chanos and Harvard University’s Kenneth Rogoff in warning of a crash in China.
China is “on a treadmill to hell” because it’s hooked on property development for driving growth, Chanos said in an interview last month. As much as 60 percent of the country’s gross domestic product relies on construction, he said. Rogoff said in February a debt-fueled bubble in China may trigger a regional recession within a decade.
Remember the devastating critique of the May budget by Macquarie Research? The one that said Wayne’s (ie, Treasury’s) forecasts for business investment – the key assumption underpinning all the budget projections – are “truly extraordinary”?
Upbeat growth forecasts from the Treasury and the Reserve Bank of Australia (RBA) are based on very optimistic forecasts for private sector business investment.
The RBA and Treasury forecasts for business investment over the next couple of years are truly extraordinary.
In our opinion, achieving such stratospheric growth would be extremely difficult.
By putting all their eggs in the mining investment basket, policymakers appear to have no Plan B for what will support the economy if investment disappoints. And this note provides three clear reasons why one should be cautious about counting those mining investment chickens before they are hatched.
It says that 10% or more of Chinese GDP is bad debt, and claims that the “China debt problem (is) bigger than stated”.
From Moody’s Investors Service, via ZeroHedge (emphasis added):
Moody’s Investors Service says that the potential scale of the problem loans at Chinese banks may be closer to its stress case than its base case, according to an assessment that the rating agency conducted following the release of new data by China’s National Audit Office (NAO).
Since these loans to local governments are not covered by the NAO report, this means they are not considered by the audit agency as real claims on local governments. This indicates that these loans are most likely poorly documented and may pose the greatest risk of delinquency,” the analyst adds.
Credit Suisse economist Dong Tao said the numbers backed up concerns he’s been voicing for the past two years on China’s toxic loan problem.
“Ultimately, we believe that the central government will need to separate the local government’s bank debt from banks’ balance sheets and recapitalize the banks,” Tao said in a note following the release of data on China’s local-debt obligations by the National Audit Office.
Reuters reported last month that Beijing is considering a bailout that could see the central government accept to 2 trillion to 3 trillion yuan of local governments’ outstanding debt in an effort to ensure against a mass default, which could bring down the economy. See report on China’s initial bailout plans.
Stress is building within the system, Tao said, as local governments face a growing pile of debts coming due at a time of declining land sales, normally a key revenue stream for the provincial authorities.
Meanwhile, local governments are also having trouble finding new sources of lending as state-controlled banks grow increasingly wary of their deteriorating ability to service existing debt.
Standard Chartered said last week there were early signs of major financial distress building at the local government level.
Anecdotes of local-government investment vehicles in Shanghai and in Yunnan province struggling to meet loan payments “signal the beginning of the wave of difficulties,” Standard Chartered’s China economist Stephen Green said in a note Thursday.
And Bloomberg reports that both Fitch Ratings and Standard & Poors have also flagged serious concerns:
Fitch Ratings lowered its outlook on China’s AA- long-term, local-currency rating to negative from stable on April 12 because of the risk the government would have to bail out banks. As much as 30 percent of loans to local government entities may go bad, accounting for the biggest source of banks’ non- performing assets, Standard & Poor’s said that month.
Now, are you one of those who doubts that China’s “boom” is/was driven by massive borrowing by local (regional) Chinese banks to finance over-investment in “infrastructure” – the mother of all real estate bubbles world wide?
Then take a look at these pictures from Time magazine, showing just how massive speculative over-investment in property construction has left China with literal ‘ghost cities’:
Click to visit the complete Time photo series
If like many readers you have skimmed over this article and not bothered to click on … and carefully read … all of the links embedded in this article, then you are doing yourself and your loved ones a disservice.
Because you are about to leave this site … ignorant.
With only part of the story.
Do not be a Goose.
Like Swan.
Educate yourself.
Lots of labour has gone into collating all these news articles from around the world.
Over many, many months.
Do yourself a favour, and become better educated about reality than the buffoon who lives in Wayne’s World.
So that you too can see with crystal clarity the gaggle of Black Swans that are soon to blot out our Aussie sun.
This compares to a downwardly revised 13,342 units in April.
In the year to May, building approvals were down 14.4 per cent, the Australian Bureau of Statistics (ABS) said on Monday.
Economists’ forecasts had centred on a 0.5 per cent fall in approvals in May.
So.
The economists’ “forecasts” were not worth the binary code they are “printed” with.
As usual.
And they were wrong … on the “too confident” side.
Interesting.
Could it be that these unnamed “economists”, whose forecast for a tiny fall was (yet again) so far off beam … are connected to the banking industry … which lives and breathes off its lending hundreds of billions into our now-bursting, debt-driven, housing bubble Ponzi scheme?
And could it be that our next Treasurer – the Liberal Party’s Joe Hockey – is just as clueless as the dribbling imbecile currently in the job?
It appears so … if his comment on Twitter in response to the building approvals data release is anything to go by (emphasis added):
Joe has drunk the Kool-aid (as they say in North America). He’s drunk the sweet sugary orange Cottee’s cordial, in other words.
He’s bought into the great “housing shortage” myth.
You know. The one that every other country with a housing bubble fervently believed in too.
The myth that has been comprehensively debunked here in Australia, by Money Morning amongst others.
One can only wonder what Joe would make of the following advertisement, that was brought to my attention by Twitter user @iClevercat.
The advertisement was in a magazine insert included with the weekend edition of a major West Australian newspaper. Placed by a major home builder, in our only economic “boom” state.
You know. The state where all the mining “boom” money is supposed to be. Where you’d imagine that demand for new McMansions should be really strong. And where builders certainly should not need to start offering incentives like this, just to get people to sign up to buy a house –
Now, what’s the ABS data say about the trend for building approvals (ie, demand for new houses) in our last remaining economic nirvana, Western Australia?
Click to enlarge
So.
The “trend estimate for total number of dwelling units approved in Western Australia fell by 1.9% in May and has now fallen for six months.”
And major builders in that same “boom” state are offering a $14,500 RRP “free” car, as an incentive to encourage people to sign up for a new house.
What say you, Mr Hockey?
Or must we conclude that our economic fate is to be handed over from the Goose to another babbling buffoon who’s dense as puck.
Yesterday, RBA Assistant Governor Guy Debelle indulged in some MOPE.
Management Of Perceptions Economics.
Lies, deceit, and propaganda, in other words.
But for those with an ear to hear, and an inclination to check the “authorities'” claims, what he really did – unintentionally – was to give us a heads up.
Go grab a modest quantity of your favourite beverage, and settle in. You are about to learn – in detail – why we cannot trust a word the banksters say.
Today I am going to talk about a few interrelated issues concerning the banking system: collateral, funding and liquidity.
The financial crisis brought into sharp relief the liabilities side of a financial institution’s balance sheet, that is, the funding structure. This had previously been somewhat neglected, but the fates of Northern Rock, Bear and Lehmans were clearly affected by the nature of their funding. While their funding structure played a significant part in the downfall of those institutions, I would argue the ultimate concern was about the quality of their assets. The funding problems were symptomatic of concerns about asset quality.
The solvency of any bank first and foremost is a function of the quality and value of its assets. This is, of course, true of any entity, but it is particularly true for banks because of the implications asset quality has for liquidity and because of the leveraged nature of financial institutions.
The crux of my argument today is this: if I am a creditor of a bank, my due diligence should be spent mostly on assessing the asset side of the bank’s balance sheet in determining whether or not I will get repaid in full.
Exactly.
Now, in the classic British political satire Yes Minister, master of obfuscation and manipulation Sir Humphrey Appleby said that it is always best to “dispose of the difficult bit in the title; it does less harm there than in the text.”
And by beginning his speech with this quite correct and valid talk of asset quality – and then not examining those “assets” in any detail – this is the clever game that Mr Debelle has played here.
No doubt he expected that no one would actually bother to check the banks’ asset quality. They’d just take it on presumption, and Mr Debelle’s inference, that they’re fine. And indeed, none in the mainstream press have bothered to check.
So let us do just that, shall we? Let us assess our Australian banks’ all-important “asset quality”.
Just two days ago ( “Our Banks Racing Towards A ‘Bigger Armageddon'” ), we saw that our banks held a combined $2.68 Trillion in On-Balance Sheet “Assets” at March 2011. So $2.68 Trillion is the claimed “value” of their Assets.
Now, about Mr Debelle’s “ultimate concern”. The all-important “quality” of those Assets.
What exactly are these bank “Assets”?
$1.76 Trillion (65.56%) of these “assets” are actually loans.
That’s right – your loan is considered the bank’s “Asset”. They own you, as their debt slave.
$1.018 Trillion (57.84%) of those loans, are Residential loans.
That’s right – fully 38% of our banks’ Total “Assets” is the notional value of their loans given as mortgages.
Here’s a chart sourced from the RBA’s own data, showing the % breakdown of our banks so-called “Assets”:
In other words, do you really think that having over 65% of your Total “Assets” in the form of loans to households and businesses, who are all increasingly vulnerable to (eg) cost-of-living pressures, loss of employment, house price falls, and/or a recession, could be considered as having high “asset quality”?
Don’t answer that yet.
There’s more to consider.
Our banks presently hold a staggering $16.83 Trillion in Off-Balance Sheet “Business”. That’s around 15 times the value of Australia’s entire annual GDP. And most of that Off-Balance Sheet Business, is in derivatives. The exotic financial instruments at the very heart of the GFC. These are the instruments of intergalactic-scale gambling that the world’s most famous investor, Warren Buffet, famously called “a mega-catastrophic risk”, “financial weapons of mass destruction”, and a “time bomb”.
In other words, whether it be Greece, Portugal, Spain, Italy, Belgium, or any of the other massively indebted EU nations embroiled in a debt crisis, when one (or more) of them finally does go under – an inevitability – our “safe as houses” banks will go under with them:
Now, yesterday Mr Debelle contradicted the HSBC and Fitch Ratings’ warnings. While admitting that Australian banks’ reliance on funding from overseas does represent a foreign exchange risk, he argued that there is nothing to worry about.
Why? Because, quoth he, our banks’ foreign currency exposures are “fully hedged” into Australian dollars (emphasis added):
If a liquidity issue were to arise around this funding, it is of critical importance that the foreign-currency denominated funding is fully hedged into Australian dollars, which indeed it is.
Now, that critical claim is one we should all take with a crate of salt.
Here’s why.
In supposed proof of his claim that our banks’ foreign exchange exposure is “fully hedged” into Australian dollars, Mr Debelle referred (in his speech’s footnote #9) to a paper that appeared in the RBA Bulletin, December 2009.
Doubtless no one in attendance bothered to check that old paper. Certainly, not a single journalist who reported on Mr Debelle’s comments in the mainstream press bothered to check first, and then report the truth.
But I did.
In that old paper, we see that the authors did claim that our banks had their foreign exchange exposure fully hedged.
Well … sort of.
Here is what they actually wrote. Note carefully the all-important weasel words (my emphasis added):
Summary
The 2009 survey of foreign currency exposure indicates that Australian institutions remain well hedged against the risk of sharp movements in the exchange rate. Australia’s foreign currency debt liabilities are essentially fully hedged into Australian dollars using derivative instruments…
Hardly a categoric affirmation.
And here’s the really crucial point. Mr Debelle’s referencing this paper in support of his claim is a nonsense – and thus, suspicious – simply because the data in that old paper is (obviously) now completely out-of-date!
Mr Debelle must know this. Because the RBA publishes its own statistical data for our banks’ derivatives exposure – and their most recent data is current to 31 March 2011.
Moreover, the data used in that old paper was sourced via an ABS survey – that is, it relied on the banks honestly reporting their true positions (!?!). And, the data was only current to 31 March 2009 – more than two years ago.
At that time, the banks’ admitted to holding a notional value of foreign exchange derivatives positions, allegedly for “hedging” purposes, totalling gross $2.802 Trillion:
Table 2: Residents’ Gross Outstanding Foreign Exchange Derivative Positions By counterparty, notional value, A$ billion, as at 31 March 2009(a)
Counterparty
Long foreign currency/short AUD positions
Short foreign currency/long AUD positions
Net positions
(a) Positive values represent derivative positions under which the holder will receive foreign currency in exchange for Australian dollars at a predetermined exchange rate (that is, a long foreign currency/short AUD position). Negative values represent derivative positions under which the holder will receive Australian dollars in exchange for foreign currency at a predetermined exchange rate (that is, a short foreign currency/long AUD position).
Source: ABS
Resident
554
−554
0
Non-resident
991
−703
288
Total
1,545
−1,257
288
As you can see, the breakdown of our banks’ foreign exchange derivatives “positions” at March 2009, was Long foreign currency $1.545 Trillion, and Short foreign currency $1.257 Trillion. For a net Long position of $288 Billion.
And the counterparty to that $288 Billion Long “position” (ie, gamble) was … “Non-resident”.
Now, a few important points to consider.
Firstly, these 2 year old figures did not represent solid proof of a “fully hedged” foreign exchange position. And it certainly is not proof of that claim being true now, 27 months later, in June 2011! Instead, what it represented was a $288 Billion Long foreign currency position, at 31 March 2009. A net $288 Billion bet that foreign currencies would improve in value, compared to the Aussie Dollar.
[Hint: These days it’s euphemistically – and deceitfully – called “spin”, or a “smokescreen”]
Thirdly – and perhaps most importantly – as we saw just 2 days ago, at 31 March 2011 our banks’ gross foreign exchange derivatives position has grown (blown?) from the claimed $2.80 Trillion … to $3.98 Trillion:
Click to enlarge
Let us not even bother going into the huge question marks over this.
Including very basic questions. Such as, why did the banks report a $2.80 Trillion FX derivatives exposure to the ABS survey … when the RBA’s own statistics report that they had a $3.58 Trillion exposure at that date (see highlight in chart above). Or, the basic question of why did Mr Debelle fail to reference the current, and much larger, foreign exchange derivatives exposure of our banks.
And let us not bother going into the even bigger questions (and dire implications) over our banks’ $11.68 Trillion exposure to Interest Rate derivatives – that’s the going-parabolic blue line on the above chart.
We’ve seen more than enough to know that Mr Debelle’s belated assurances about our banks are a sham.
It is my view that Fitch Ratings’ and HSBC’s warnings are most likely closer to the real truth.
And the reality of our banks’ extreme vulnerability, due to their off-shore funding reliance, their truly staggering derivatives exposure, and perhaps above all, their poor “asset” quality, is the real reason why Mr Debelle gave the speech that he gave yesterday.
Whether he meant to or not, the simple message for the wise and prudent to take away from (the inconsistencies, lies, and deceptions in) his speech is this.
He is essentially saying, “Don’t worry folks … our banks are going to fail … but the RBA can just print money to bail them out”.
Don’t believe that printing money is what Mr Debelle was saying?
Here it is in his own words:
As I discussed earlier, an Australian dollar liquidity issue can be addressed by the Reserve Bank. The Reserve Bank can meet a temporary liquidity shortfall by lending Australian dollars against the stressed bank’s assets denominated in Australian dollars.
Where does the RBA get its dollars from, in order to “lend” support to our soon-to-be-insolvent, imploding banks?
It creates them. Out of thin air.
Click click on the mouse button. Tap tap on the keyboard.
Just like all “independent” central banks.
And then lends those dollars, at interest.
As we have seen previously ( “Our Banking System Operates With Zero Reserves” ), thanks to the way our banking system is designed, printing more money is the only thing that the RBA can do in response to a bank insolvency crisis.
And as we also saw previously, that is exactly what they did do, in the GFC.
Welcome to the Grand Opening of our Zimbabwe Experience, dear reader.
Brought to you by your friendly “independent” RBA banksters, and their Big Four cronies.
A final thought.
It is particularly interesting that Mr Debelle was effectively reassuring everyone that the RBA is able to provide “liquidity support” (ie, money) for our banks in the event of their running into trouble with their wholesale funding from abroad.
So, if Mr Debelle is arguing/reassuring that the RBA is able to provide liquidity support for our banking system, then why is the Australian taxpayer on the hook to backstop the banks?
And why did Mr Debelle not mention this very important fact in his speech?
"Everyone has the right to freedom of opinion and expression; this right includes freedom to hold opinions without interference and to seek, receive and impart information and ideas through any media and regardless of frontiers."
Barnaby Is Right 
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