Tag Archives: mortgage debt

Aussie Banks In Market Crosshairs

11 May

The markets have begun lining up Australia’s banking system in the crosshairs.  How do we know?  Late last week, the spreads on credit default swaps (CDS) for Australia’s banks widened the most of all banks in the world.

By the close of trading on Friday, all 4 members of our “safe as houses” 4-pillar banking system, along with our own ‘Goldman Sachs’-style investment bank Macquarie, saw deteriorations in their CDS spreads by amounts that were the worst in the world.

What does that mean?  Simply, the cost of taking out “insurance” against the bank defaulting on its debts increased dramatically.

From CMA Market Data‘s “Sovereign Risk Monitor”:

Friday, 7 May 2010 — 23:30

Largest Widening Spreads (Greatest Credit Deterioration)
Entity Name 5 Yr Mid Change From Close
bps bps %
Westpac Banking Corporation (SUB) 165.09 +50.23 +43.74
Australia & New Zealand Banking Group Limited (SUB) 167.06 +50.23 +42.99
Commonwealth Bank of Australia (SUB) 165.10 +48.44 +41.52
National Australia Bank (SUB) 167.05 +48.14 +40.49
Macquarie Bank Limited 174.28 +49.45 +39.62

It seems the markets are a wake up to the ever-growing threat the Eurozone crisis poses to Australia’s financial system. Unfortunately, very few Australians realise (or will honestly admit) just how vulnerable our banking system is:

The chief executive of National Australia Bank, Cameron Clyne, referred last week to Australian banks’ dependence on wholesale funding markets as their Achilles heel…

On average, Australian banks are sourcing just under a third of their funding from overseas wholesale markets and still too much of their existing borrowings are short term.

Australian banks are among the more vulnerable plays in the world to another Lehman-style event because of their dependence on overseas wholesale markets, which have proven already they can freeze up for extended periods.

But overreliance on international wholesale capital funding is far from being the only risk to our banking system.  Australia’s banks also have a chronic overexposure to the domestic housing (mortgage) market. A fall in property values here – just as in the rest of the Western world – would be catastrophic for our banking system.

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.”

A final thought.

Our banks have over $13 Trillion in off-balance sheet business.

From Money Morning:

We dropped the line yesterday about the banks having $13 trillion of off-balance sheet business. We’ve mentioned this number several times over the last year, but if you’re a new reader to Money Morning, here’s a link to the Reserve Bank of Australia spreadsheet that contains the awful truth.

To be precise, it currently runs to $13,058,814,195,842.70.

Just to put that in perspective, the banks have a total of $2.59 trillion of on-balance sheet assets. 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.

The issue of counterparty risk is precisely why the Greek debt crisis is a threat to Australia – despite what Ken Henry and Glenn Stevens would have us believe.

It is clear that our Aussie banks are not so safe after all.

China May ‘Crash’ In 9-12 Months

4 May

Noted investor and publisher of the fabled “Gloom, Boom and Doom” report, Dr Marc Faber, warns that the Chinese economy may crash within the next 9 to 12 months.

From Bloomberg:

Investor Marc Faber said China’s economy will slow and possibly “crash” within a year as declines in stock and commodity prices signal the nation’s property bubble is set to burst.

The Shanghai Composite Index has failed to regain its 2009 high while industrial commodities and shares of Australian resource exporters are acting “heavy,” Faber said. The opening of the World Expo in Shanghai last week is “not a particularly good omen,” he said, citing a property bust and depression that followed the 1873 World Exhibition in Vienna.

“The market is telling you that something is not quite right,” Faber, the publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong today. “The Chinese economy is going to slow down regardless. It is more likely that we will even have a crash sometime in the next nine to 12 months.”

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.

For those who doubt that China is currently experiencing the global mother of all real estate bubbles, 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’.

House Prices Tipped To Implode

3 May

While Barnaby may not have spoken about private debt, it is arguably the great threat to Australia’s economy.  The first to suffer from excessive debt burdens are the thousands of overextended First Home Buyers.

From The Australian:

Australia is in the midst of an unsustainable housing bubble that could burst at any time, warns the man who predicted the global credit bust of 2007.

Edward Chancellor, of US investment bank GMO, says the Australian economy is yet to emerge from the global financial crisis, despite the widespread belief it has escaped the worst of it ahead of the rest of the world.

Mr Chancellor, whose Crunch Time for Credit? was published in 2005, estimates Australian house prices are more than 50 per cent above their fair value – a once in 40-year event. “If house prices were to revert to their historic long-term average (ratio of average price to average income) they would fall quite considerably,” he told The Australian.

He described Australia’s banking system as a “cartel” and said luck rather than skill had allowed the Australian economy to fare better in the global financial crisis than other developed economies.

“My view is Australia had a private sector credit boom just like the US and the UK and it had a real estate boom,” he said.

“Those are the facts and you can’t paper over them.

“In this environment, house prices rose last year and that seems to me to actually have exacerbated the problem.

“The problem is the bubble and that hasn’t gone away.”

A key area of concern for Mr Chancellor was first-home buyers. As interest rates rose, the ratio of their mortgage repayments to their income would rise to very high levels, he said.

“It’s the rising interest rates, particularly with real estate bubbles, that tend to generate the collapse,” he said.

Another potential trigger was China, particularly if the demand for iron ore, coal and liquefied natural gas were to collapse.

“We would see the Chinese demand for Australian commodities as being potentially vulnerable,” Mr Chancellor said.

UPDATE:

The latest housing data says that our housing bubble – fuelled by years of easy credit, the First Home Owners Grant, and propped up during the GFC by Rudd Labor’s doubling of the FHOG – is now running out of control.

From The Australian:

Australia’s established house prices soared 20 per cent in the 12 months to March, deepening fears that a house-price bubble would emerge, and at the same time clearing the decks for a further rise in interest rates tomorrow.

The annual rise in house prices was the fastest ever recorded by the Australian Bureau of Statistics data series, which began in mid-2002. A rise of 4.8 per cent over the fourth quarter of 2009 was the second-biggest quarterly increase.

“This is a shocker,” said Rob Henderson, head of Australian economics at National Australia Bank. He added that the Reserve Bank of Australia now needed to get more aggressive, and acknowledge the need for a restrictive policy stance.

KeenWalk To Kosciuszko

15 Apr

From today through April 23rd, I am joining Professor Steve Keen on his 230km “Keenwalk” from Parliament House to Mount Kosciuszko, in protest against Australia’s property (and debt) mania that has been driven directly by the ill-conceived policies of successive Federal Governments, the RBA, and Australia’s high risk, mortgage-loaded banking system.

Please consider joining us 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 are supporting the wonderful charity Swags For Homeless.

On my return – hopefully still upright and with all joints intact! – I will be back here collating more news stories from around the world, showing that Barnaby Is Right.

Thanks!

Aussie Banks To Cut Lending, High Risk

11 Apr

From the Sydney Morning Herald:

Banks could be forced to curb sales of mortgages after a feeding frenzy on housing over the past 18 months has seen their exposure to the property market hit record levels.

Last month, BHP Billiton’s outgoing chairman and former head of the National Australia Bank, Don Argus, likened the big banks to ”giant building societies”, accusing them of neglecting business lending to chase the mortgage market.

Of the big banks, the Commonwealth has the most concentrated exposure to the property market – 65 per cent of its lending book is tied up in mortgages. For Westpac and St George combined it is 62 per cent.

ANZ and NAB, which traditionally have a bigger exposure to business lending, have pumped up their mortgage exposure – it accounts for more than 50 per cent of their Australian loans books.

Could Australia experience a property crash, just like those in the USA, UK, Ireland, Spain … in fact, like most of the Western world?

Professor Steve Keen, the only Australian economist to forecast the Global Financial Crisis, believes our property bubble must burst too. It is just a matter of time.

Thanks to the Rudd Government’s doubling of the First Home Owners Boost, tens of thousands of (mostly) younger Australians were suckered into huge mortgages when interest rates were at their lowest.  Now, with household debt levels at an all-time high, the experience of so many other nations says that our bubble will burst too.

“If you do not manage debt, debt manages you”.

Barnaby is right.

US Banks Understating Debt

11 Apr

From AFP:

Major US banks have been masking the size of their debt, and thereby their risk levels, by temporarily lowering it just before reporting it to the public, the Wall Street Journal reported Friday.

The newspaper, citing data from the Federal Reserve Bank of New York, said 18 banks have understated the debt used to fund securities trades by lowering them an average of 42 percent at the end of each of the past five quarterly periods.

The banks included Goldman Sachs Group Inc, Morgan Stanley, JP Morgan Chase and Co, Bank of America Corp and Citigroup Inc, the Journal said.

It said the practice was legal but gave investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

It noted that overborrowing by banks was one of the causes of the financial crisis.

Barnaby Joyce has been warning about the dangers of rising US debt since October last year.

Now we see that not only is the US Government going deeper into debt by the month.  We also learn that the Wall Street banks are fiddling the books to mask their true debt and risk levels.

Barnaby is right.

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.

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!

Ten Ways To Spot A Bubble In China

26 Mar

From SeekingAlpha:

Edward Chancellor, author of the seminal book on financial speculation and manias “Devil Take The Hindmost,” is now turning his eyes to China. He sees a number of red flags which point to excess in China.

Chancellor writes:

“In the aftermath of the credit crunch, the outlook for most developed economies appears pretty bleak. Households need to deleverage. Western governments will have to tighten their purse strings. Faced with such grim prospects at home, many investors are turning their attention toward China. It’s easy to see why they are excited. China combines size – 1.3 billion inhabitants – with tremendous growth prospects. Current income per capita is roughly one-tenth of U.S. levels. The People’s Republic also has a great track record. Over the past thirty years, China’s Gross Domestic Product has increased sixteen-fold.

So what’s the catch? The trouble is that China today exhibits many of the characteristics of great speculative manias

  1. “Great investment debacles generally start out with a compelling growth story.” 100% yes. Check.
  2. “Blind faith in the competence of the authorities.” See Roach’s comments above or read Goldilocks is not sleeping in America anymore; she’s now in China. Check.
  3. “A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear.” See my posts China’s present growth story is built on malinvestment and Jim Chanos still bearish on China, talks malinvestment for evidence that China is misallocating resources. Check.
  4. “Great booms are invariably accompanied by a surge in corruption.” Remember this post “I want to be a corrupt official when I grow up”? That’s exactly what Chancellor is talking about. Check.
  5. “Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward.” Andy Xie: Chinese monetary policy has to be tightened Check.
  6. “Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts.” Think Latvia or Argentina. Are the Baltics the new Argentina? And we know China’s peg is creating problems because that’s a bone of contention right now. Check.
  7. “Crises generally follow a period of rampant credit growth.” “Enron-Esque Characteristics” Hiding An Even More Explosive Credit Growth In China. Check.
  8. “Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned.” See Stephen Roach’s comments again. Check.
  9. “A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious.” See #7 again. Check.
  10. “Dodgy loans are generally secured against collateral, most commonly real estate.” The Andy Xie story shows you this. Check.

It looks like China is ten for ten. Is China in a bubble blow-off top like Japan post-Plaza accord? I say yes. Anyone who thinks this will not end badly is in for a rude awakening.

Household Finances Deteriorate

20 Mar

From the Sydney Morning Herald:

The Australian economy is set to grow further in 2010, but household financial conditions are deteriorating to the extent the nation could experience a W shaped economic recovery, a report shows.

Melbourne Institute bulletin of economic trends shows the domestic economy is set to grow by 0.8 per cent in the March quarter and by 0.6 per cent in the June, September and December quarters.

But the report’s household financial conditions index fell 16.6 per cent to 28.8 index points in the March quarter of 2010.

It was the first fall in the index after four consecutive quarters of improvement.

More than half of the 14.4 per cent households who consider themselves to be financially stressed, are employed while employed people with a household income of over $80,000 are the most financially stressed out of all income groups.

The report said part of the deterioration in financial conditions was due to the increased need to service household debt, in particular mortgage debt.

This report indirectly highlights the very real danger of Australia’s unprecedented level of private debt. And in particular, mortgage debt.

Economist Steve Keen, who predicted the GFC in 2005, is Australia’s leading proponent of the argument warning against high private debt levels, and against government policies which have dangerously inflated Australia’s private debt, such as the First Home Owers Boost.

Visit Professor Keen’s ‘Debtwatch‘ website to learn more.

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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