Category: Australia & NZ

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Australia: Submarine folly

The Australian government is poised to commit to building 12 new diesel submarines at a cost of $40 billion without even considering the option of more efficient, more powerful, nuclear-powered alternatives.

Simon Cowan, author of Future Submarine Project Should Raise Periscope for Another Look, released today by The Centre for Independent Studies, says the government risks repeating the mistakes of the current Collins Class submarines, with high running costs and reliability issues.

“Australia needs world-class submarines and the US Virginia Class looks like the best option.”

“Nuclear-powered submarines are superior in almost every way to diesel-powered submarines – they can travel further, faster and stay deployed for longer, and they have more powerful weapons, systems and sensors.”

“However, the government has refused to consider nuclear-powered submarines for reasons that don’t stack up.”

“Safety considerations are important when talking about nuclear power,” Cowan notes, “but the safety record of the US Virginia Class is flawless. These subs don’t carry nuclear weapons and never need refuelling – and if Australia leases them from the United States, the US could dispose of spent nuclear material.”

“Australia could also save more than $10 billion by leasing eight Virginia Class submarines and up to $750 million a year on operational and maintenance costs as well.”

via Axe dud subs and look to nuclear option, says new CIS report.

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Australia: Becoming a welfare-dependent state

Extract from an opinion by Robert Carling:

In democratic welfare states, the proportion of the electorate that attracts more in social benefits from government than it pays in tax has become so large that candidates who promise to curb the welfare state have a hard time winning elections.

The same issue has been raised in the United Kingdom, where a recent study by the Centre for Policy Studies revealed that 53.4% of households receive more in benefits than they pay in taxes……

The Australian Bureau of Statistics (ABS) has compiled data on total taxes paid [including GST] and total social benefits (cash and in kind) received by households in 2009–10 classified into five slices (quintiles) from bottom to top according to their private income. The first three quintiles (that is, 60% of households) each received more in direct social benefits than they paid in taxes……

via Centre for Independent Studies: Self-sustaining leviathan.

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Forex: Euro, Pound Sterling, Canadian Loonie and Aussie Dollar

The Euro rallied off support at $1.28 and is headed for resistance at $1.32. Recovery of 63-day Twiggs Momentum above zero suggests a primary up-trend. Breakout above $1.32 would confirm, offering an immediate target of the 2012 high at $1.35.

Euro/USD

* Target calculation: 1.32 + ( 1.32 – 1.28 ) = 1.36

Pound Sterling is testing primary support at €1.23 against the euro. Breach would signal a primary down-trend. Target for the completed head and shoulders reversal would be $1.18*. Reversal of 63-day Twiggs Momentum below zero would strengthen the signal.

Pound Sterling/Euro

* Target calculation: 1.23 – ( 1.28 – 1.23 ) = 1.18

Canada’s Loonie found strong support between $1.01 and $1.02 (USD).  Breakout would indicate an advance to the 2011 highs at $1.06. Rising 63-day Twiggs Momentum strengthens the signal.

Canadian Loonie/Aussie Dollar

The Aussie Dollar found support at $1.02/$1.015 against the greenback. Expect another test of $1.06. 63-Day Twiggs Momentum troughs above zero indicate a primary up-trend. Breakout above $1.06 would offer a target of the 2011 high at $1.10*, though there is bound to be some resistance at $1.08.

Aussie Dollar/USD

* Target calculation: 1.06 + ( 1.06 – 1.02 ) = 1.10

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Australia’s Future Fiscal Shock | Centre For Independent Studies

by Robert Carling

Long-term prospects for Australia’s public finances are not receiving the attention they deserve. It is one thing for Commonwealth and state governments to balance their budgets in the short term, as they are attempting to do, but spending commitments are being made as though nothing beyond the four-year horizon of the forward estimates matters. Under current policies, Australia is heading in the long term for a substantially larger share of government spending in the economy, which will bring pressures for higher taxation or borrowing or both. Spending by governments at all levels as a proportion of gross domestic product (GDP) (currently around 36%) could rise to well above 40% over the decades ahead, if not sooner…….

via Australia’s Future Fiscal Shock (pdf).

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Forex: Euro recovers, Aussie & Sterling weaken

The Euro is headed for another re-test of resistance at $1.32 and its descending trendline. Breakout would signal a primary up-trend. Recovery of 63-day Twiggs Momentum above zero strengthens the signal. Reversal below $1.26 is unlikely but would warn of another test of primary support at $1.20.

Euro/USD

* Target calculation: 1.275 + ( 1.275 – 1.20 ) = 1.35

Pound Sterling is testing support at €1.23 against the Euro. Breach of support — and the rising trendline — would warn the primary up-trend is ending. Retreat of 63-day Twiggs Momentum below zero would strengthen the signal.

Pound Sterling/Euro

Canada’s Loonie is testing support against the greenback at $1.02/$1.01.  Respect of support — with recovery above $1.027 — would confirm the primary up-trend. A 63-day Twiggs Momentum trough above zero would strengthen the signal. Target for the advance is the 2011 high of $1.06.

Canadian Loonie/Aussie Dollar

* Target calculation: 1.04 +( 1.04 – 1.01 ) = 1.07

The Aussie Dollar found support at $1.02/$1.015 on the daily chart. Follow-through above $1.03 would suggest another test of $1.06. Failure of support is unlikely but would signal a primary down-trend. 63-Day Twiggs Momentum troughs above zero indicate continuation of the primary up-trend. Expect strong resistance at $1.06: the Aussie may be range-bound for some time.

Aussie Dollar/USD

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The difference between California and Texas

Amusing parable told by Dallas Fed President Richard W Fisher at the Cato Institute:

“The governor of California is jogging with his dog along a nature trail. A coyote jumps out and attacks the governor’s dog, then bites the governor. The governor starts to intervene, but reflects upon the movie Bambi and then realizes he should stop because the coyote is only doing what is natural.

“He calls animal control. Animal control captures the coyote and bills the state $200 for testing it for diseases and $500 for relocating it. He calls a veterinarian. The vet collects the dead dog and bills the state $200 for testing it for diseases. The governor goes to the hospital and spends $3,500 getting checked for diseases from the coyote and getting his bite wound bandaged.

“The running trail gets shut down for six months while the California Fish and Game Department conducts a $100,000 survey to make sure the area is now free of dangerous animals. The governor spends $50,000 in state funds implementing a ‘coyote awareness program’ for residents of the area. The Legislature spends $2 million to study how to better treat rabies and how to permanently eradicate the disease throughout the world.

“The governor’s security agent is fired for not stopping the attack. The state spends $150,000 to hire and train a new agent with additional special training, re: the nature of coyotes. People for the Ethical Treatment of Animals (PETA) protests the coyote’s relocation and files a $5 million suit against the state.

“The governor of Texas is jogging with his dog along a nature trail. A coyote jumps out and tries to attack him and his dog. The governor shoots the coyote with his state-issued pistol and keeps jogging.

“The governor spent 50 cents on a .380-caliber, hollow-point cartridge. Buzzards ate the dead coyote.

“And that, my friends, is why California is broke and Texas is not.”

Australians will identify with his description of a “nanny-state”.

via The United States Is Not Europe and Texas Ain't France: America as the Thoroughbred Economy – Dallas Fed.

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Australia: ASX 200 breakout

The ASX 200 broke through long-term resistance at 4450, signaling a primary up-trend with an initial target of 4900*. Rising troughs on 13-week Twiggs Money Flow indicate buying pressure. Retracement to test the new support level remains likely, however, in the next few weeks.

ASX 200 Index

* Target calculation: 4450 + ( 4450 – 4000 ) = 4900

The hourly chart reflects buying pressure, with initial retracement to 4475 after the breakout, instead of the expected 4450. Follow-through above 4500 confirms a strong breakout. At some point in the medium term we are still likely to see a test of the 4450 support level. Respect would confirm a healthy primary up-trend.

 

ASX 200 Index

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Is the high Australian Dollar the real culprit?

Excellent comment from Loonyright at Macrobusiness.com.au on damage to Australian industry caused by the higher dollar:

Australia has been losing investment in research and manufacturing well prior to 2002. The volatility of our currency is of nothing compared to the static, elevated cost of doing business – all resulting from higher wages, unattractive taxation, and unattractive levels of regulation. We are a stable, well educated populace – this should be the ideal home of all kinds of investment. Instead we have slowly and steadily dug ourselves into an entitlement mindset out of proportion to our ability to fund it. If we truly want a competitive, diversified economy that is not reliant on commodity prices and low interest rates to drive activity via the property market, then our uncompetitive wages, taxation and regulation MUST be addressed. It is fantasy to think we can change our fortunes without changing these factors.

via Gotti canvasses the unthinkable | | MacroBusiness.

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Are Australian banks adequately capitalized?

Basel III Capital Adequacy Ratios (CAR) will require banks to hold a minimum Total Capital of 8% against risk-weighted assets (RWA), the same as under Basel II, but with additional capital buffers of between 2.5% and 5.0% depending on credit market conditions. With an average ratio of 11.5% (September 2011), Australian banks are short of the maximum Basel III requirement of 13.0% for markets in a credit bubble.

The problem, however, lies not only with CAR but with the definition of risk-weighted assets. Under RWA, loans and investments are not taken at face value but adjusted for perceived risk. These adjustments vary widely between banks in different countries. US banks still apply Basel I risk-weightings:

  • zero for cash and government debt (OECD Sovereigns);
  • 20 percent for (OECD) banks;
  • 50 percent for mortgages;
  • 100 percent for corporates.

Their counterparts in Asia and Europe apply Basel II risk-weightings, with more lenient mortgage risk weights, averaging 15 percent and 14 percent respectively.

Australia’s 4 major banks similarly apply risk-weightings (supervised by APRA) for residential mortgages as low as 15%, with an average of 17%. That means the big four hold less than 2% capital against residential mortgages. Even after mortgage insurance, Deep T pointed out earlier this year, leverage is close to 50 times capital.

Basel III introduces a minimum 3% leverage ratio which ignores risk-weighting and compares Tier 1 capital to total exposure — total assets plus derivative exposure and off-balance sheet assets. But this is a catch-all and allows banks with high quality assets to continue leveraging at 33 times capital. Fed guidelines are more conservative, requiring a minimum leverage ratio of 4% (“adequately capitalized“) with a recommended 5% minimum for well-capitalized banks. The ratio, however, excludes off-balance-sheet assets. None of Australia’s four majors appear to meet the Fed’s requirement at September 2011 — ranging between 3.9% and 4.8% of Tier 1 capital to tangible assets.

With household debt at a historic high of 150% of disposable income, 3 times higher than in the early 1990s, Australia shows classic symptoms of a credit bubble and cannot afford to be complacent. There are three areas of the banking system that require attention. Capital adequacy ratios need to be lifted as well as risk-weightings for residential mortgages. Improving these two measures should enable Australia’s four major banks to achieve a minimum (Basel III) leverage ratio of 5%.

Sources:

Click to access bcbs189.pdf

http://en.wikipedia.org/wiki/Basel_III
http://en.wikipedia.org/wiki/Capital_requirement

Click to access wp1290.pdf

Click to access wp1225.pdf

Casualties of the externality

Click to access EY%20Reg%20Alert%20Basel%20III%20June%202012.pdf

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