Category: Australia & NZ

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Lessons for Australian banks: Why Risk Managers Should Be Spymasters | ProPublica

Jesse Eisinger’s interview with risk specialist John Breit highlights an issue facing Australian banks. Residential mortgages are allocated a low risk weighting — 15% to 17% because of historic performance — compared to 50% for US banks. The big four banks piled into this area because of the perceived low risk, leveraging up to 50 times capital. Risk-weighted capital ratios (around 10%) still appear healthy, but they conceal a hidden danger from the resulting housing bubble.

[Breit] despises the concept of “risk-weighted assets,” where banks put up capital based on the perceived riskiness of the assets. Inevitably, he argues, banks will “pile into” the same types of supposedly safe investments, creating bubbles that make the risks far more severe than the initial perceptions. Paradoxically, risk-weighting can leave banks setting aside the least capital to cover the biggest dangers.

“I could not be more disappointed,” he said. “The cynic in me thinks this is all in the interests of senior management and regulators to avoid blame. They may not think they can prevent the next crisis, but they then can blame the statistics.”

Read more at Why Risk Managers Should Be Spymasters – ProPublica.

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ASX 200 warns of correction

The ASX 200 broke medium-term support at 4950, signaling the start of a correction for Australian stocks. Reversal of 21-day Twiggs Money Flow below zero confirms medium-term selling pressure.
ASX 200 Index
Initial target for a correction is the rising trendline around 4700. Even correction back to 4500 does not disrupt the primary up-trend and would present buying opportunities for investors.
ASX 200 Index

* Target calculation: 5000 + ( 5000 – 4500 ) = 5500

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Has Australia hit the floor with interest rates?

Izabella Kaminska made a strong argument on FT Alphaville last year for the RBA to lower interest rates and weaken the Australian Dollar to protect manufacturing and export industries:

Australia’s current account deficit coupled with a deeply negative net external debt position both provide strong fundamental impetus for currency weakening. Should the RBA want to engineer currency depreciation, lower interest rates are likely to be more than enough. Indeed, even if interest rates decline only gradually to reflect a structurally slowing economy there are plenty of fundamental reasons for the Australian dollar to weaken.

The case for lower interest rates still holds true but the RBA is obviously concerned by signs of recovery in housing prices that could exacerbate the existing property bubble. Robert Gottliebsen at Business Spectator reports:

In less than three months the market price of a bottom of the range Meriton inner-Sydney apartment has risen 6 per cent from about $500,000 to around $530,000……According to Meriton’s Harry Triguboff, local buyers have jumped from 15 to 40 per cent of the market.

There is a solution. The RBA can lower interest rates provided it simultaneously introduces macroprudential steps similar to those being considered by the RBNZ: increase the amount of capital banks must set aside to cover potential losses from high loan to valuation ratio (LVR) home loans. That would make high LVR loans more expensive and discourage property speculation, taking some of the heat out of the housing market.

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Mongolia needs better roads, schools and hospitals: so why all this talk about saving for the future? | Making development work for all

Australia could also learn from the Chilean experience of resources boom-bust cycles and adopt similar policies to those being considered by Mongolia. Gregory Smith explains:

Eric Parrado, former head of the Chilean ‘Economic and Social Stabilization Fund’, tells us that “if natural resource booms are well managed they can be a blessing” and that “an important general lesson is that governments should avoid temptation to spend significant temporary surpluses”.

Read more at Mongolia needs better roads, schools and hospitals: so why all this talk about saving for the future? | Making development work for all.

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Forex: Euro correction while Aussie retraces

The euro is headed for a test of primary support at $1.26 on the monthly chart. Respect would confirm the primary up-trend, while failure would signal a down-swing to $1.20.
Aussie Dollar/USD

* Target calculation: 1.35 + ( 1.35 – 1.20 ) = 1.50

Pound sterling is testing the new medium-term resistance level at $1.53 against the dollar. Respect would confirm the primary down-trend, with a target of $1.43*. Declining 63-day Twiggs Momentum, below its 2011 lows, strengthens the signal.
Aussie Dollar/USD

* Target calculation: 1.53 – ( 1.63 – 1.53 ) = 1.43

The Aussie Dollar retraced this week to test short-term support at $1.04, but the up-trend is intact and we should expect a test of resistance at $1.06. Failure of support at $1.03 is unlikely, but would warn that primary support at $1.015 is again under threat. Narrow fluctuation of 63-day Twiggs Momentum around zero suggests a ranging market.

Aussie Dollar/USD

Canada’s Loonie rallied off medium-term support at $0.97 against the greenback. Expect some resistance at $0.99, but the CAD is just as likely to test the descending trendline at parity. The primary trend remains down and a test of primary support at $0.96 remains on the cards in the next quarter.
Aussie Dollar/USD

The US dollar is encountering increased resistance as it approaches ¥100 against the Japanese Yen. The 30-year down-trend is over. The advance is extended and a correction likely, but breakout above ¥100 would test the 2007 high above ¥120*.
Aussie Dollar/USD

* Target calculation: 100 – ( 100 – 80 ) = 120

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RBNZ steps closer to macroprudential | MacroBusiness

Houses & Holes at Macrobusiness reports on macroprudential steps being considered by the RBNZ. Macroprudential regulation are measures aimed to mitigate the risk of the financial system as a whole, or systemic risk, as opposed to the risk to individual participants.

The [Reserve Bank of New Zealand] says it wants to increase the amount of capital the country’s big four banks must set aside to cover potential losses from high loan to valuation ratio (LVR) home loans. Such a move would, in theory at least, make such lending more expensive for the banks.

Read more at RBNZ steps closer to macroprudential | | MacroBusiness.

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ASX 200: Resistance at 5000

The ASX 200 rallied above 5000 at Monday’s opening but gradually retreated to close at 4990. While failure to hold above the short-term support level is disappointing, an early break above 5000 on Tuesday would suggest a rally to 5150.
ASX 200 Index
The weekly chart shows the importance of medium-term support at 4950. Failure would signal a correction to test the rising trendline around 4700. Slight bearish divergence on 13-week Twiggs Money Flow warns of mild medium-term selling pressure. The index remains in a strong primary up-trend and only a breach of the rising trendline would threaten this.
ASX 200 Index

* Target calculation: 5000 + ( 5000 – 4500 ) = 5500

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Exploding Australia’s nuclear delusion | Business Spectator

Geoff Russell writes:

France has been producing most of its electricity using nuclear power stations for an average carbon dioxide intensity of about 80 grams of CO2 per kilowatt hour (gm-CO2/kWh) for two decades. In that time, Australia’s electricity has just gotten dirtier, rising from 817 in 1990 to 841 gm-CO2/kWh in 2010.

….Switzerland and Sweden have been using a mix of hydro and nuclear to achieve even lower carbon dioxide intensity than France.

Read more at Exploding Australia's nuclear delusion | Business Spectator.

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Reform universities by cutting their bureaucracies

Insight into the growth of bureaucracy in universities from The Conversation:

In earlier times, Oxford dons received all tuition revenue from their students and it’s been suggested that they paid between 15% and 20% for their rooms and administration. Subsequent central collection of tuition fees removed incentives for teachers to teach and led to the rise of the university bureaucracy.

Today, the bureaucracy is very large in Australian universities and only one third of university spending is allocated to academic salaries.

Across all the universities in Australia, the average proportion of full-time non-academic staff is 55%……….Australia is not alone as data for the United Kingdom shows a similar staffing profile with 48% classed as academics.

This is a fine example of Parkinson’s Law, first proposed by Cyril Northcote Parkinson in a light-hearted essay in The Economist in 1955:

Work expands so as to fill the time available for its completion.

Parkinson cited the British Colonial Office as an example: the number of staff continued to grow even when Britain had divested itself of most of its colonies. He explained the growth as due to two factors in a bureaucracy:

  1. An official wants to multiply subordinates, not rivals; and
  2. Officials make work for each other.

He noted that bureaucracies tended to grow by between 5% and 7% a year “irrespective of any variation in the amount of work (if any) to be done” — even if the amount of work is declining.

Read more at Reform Australian universities by cutting their bureaucracies .

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