Market Insight: Central bankers turn deaf ear on balance sheets – FT.com

John Plender at FT observes:

The sheer size of the move in US Treasuries is striking. From the beginning of May to the end of last week, yields on the 30-year Treasury bond rose by nearly 40 basis points while the 10-year yield rose around 30bp. That is a measure of the market’s sensitivity to assumptions about an exit from the era of central bank balance sheet expansion. It is also an indication of how far we are from a return to normality.

Read more at Market Insight: Central bankers turn deaf ear on balance sheets – FT.com.

Australia: Property risk highest in a long time

Posted by Houses and Holes in Australian Property, May 20th 2013:
Index

MB contributor, Rumpletstatskin, wrote an interesting post on the Australia property cycle this morning. In it he mused that:

The crucial lesson in all this is that Australian nominal asset prices have been supported by fiscal policy during the financial crisis, ongoing monetary policy adjustments, and foreign investment (including in mining infrastructure), which all supported employment and incomes.

This support allowed a slow melt adjustment since the financial crisis. Home prices have fallen, mortgage rates are down, and rents have increased. This means that buying a home is more affordable compared to renting than it has been for 15 years.

My message, if it wasn’t clear, is that if you have been holding off purchasing a home because of the risk of capital losses, then these risks are probably lower now than at any time in the past decade. Maybe prices will be a couple of percent lower at the end of next year, but I have a hard time wrapping my mind around downward price movement more severe than a couple more years of the slow melt, or around 3% in nominal terms. The chances of price gains is also now much higher.

Unfortunately this coming 2 year period is also likely to be economically unstable, with low wage growth and a fragile labour market. That is the catch with trying to time the residential property cycle – it is a game for players with lots of capital.

Cameron argues his post well but I vigorously disagree with these conclusions.

Australian property prices are not affordable on any spectrum that looks beyond the current cycle. Indeed, they remain at nose-bleed levels on any historical comparison.

Yet, prices have held at these high levels for over a decade and there is no saying that they won’t continue to do so. Throughout the GFC and afterwards I argued that the time of reckoning for the Australian housing bubble was not yet at hand. This was based largely upon the assumption that the nation had lots of firepower left in monetary and fiscal policy that would protect the downside. And so it turned out to be.

But each successive challenge has sapped these supports and insurance policies. Monetary policy is at 2.75% and probably has, at best, 1% of cuts left before it is exhausted. Fiscal policy too has limits now that the Budget guarantees bank borrowings. Not to mention the political paralysis preventing spending. We will never see another post-GFC stimulus program.

Most importantly, these limitations are apparent as the Australian economy enters a very serious challenge in the form of declining mining investment. In its editorial this morning the AFR wrote:

If Professor Garnaut is right, Chinese steel use per capita – the great driver of Australia’s resources boom – may not grow much further. He believes Australian resource investment will slide from 8 per cent of gross domestic product to just 2 per cent, effectively taking out about two years’ worth of national economic growth. This is already showing up in a string of profit warnings from mining services companies and an emerging slump in profitability in coal.

Think about that a moment. 6% of Australian GDP disappearing over the next three years before we even start to grow. This is the same forecast currently projected by ANZ and Goldman Sachs. It must be taken very seriously.

If this comes to pass, then it will be very difficult for Australia to avoid a recession and property bust of some kind. There will be very big falls in the dollar and they will protect Australian property prices to an extent. The fall will trap Asian investors already in the market but it will also deter future investors as currency risk becomes the new reality.

But the fall in the dollar is also going to hit consumers, much more quickly than it is going to benefit tradable sectors. Consumers will see purchasing power eroded as high inflation in oil and all imported goods overwhelms income growth. This will keep confidence under the cosh.

More to the point, a 6% draw down in business investment will hit the labour market hard and potentially trigger forced selling in property markets. Perth and Darwin especially are going to be at risk of property busts as the many project labourers on our major mining projects flood back into town with nothing to do. Not to mention the trouble we’ll see in the many sundry industries that have benefited from the mining boom. Brisbane is at risk of this dynamic too but has already corrected sharply so has less downside.

These factors, along with a generalised stalling in income growth, have the potential to feed bad loans back into the banking system. The majors can absorb serious losses. But how serious? And how much credit rationing would it take to pop the grossly oversupplied Melbourne and Canberra property markets, the latter afflicted with big job losses from a new government as well? Sydney is strong but only so long as credit keeps flowing.

There are of course arguments about high immigration, underlying demand, under supply and rising rents to support the market. And they will play some part. But none of these will matter in the circumstances I’m describing. If there are not enough jobs then people will move in together. Shortage will turn to surplus.

Cameron’s argument that the property cycle could be approaching a turning point will hold if these turn out to be normal times. A moderate retrenchment in mining investment will allow time to rebalance the economy so long as the dollar falls. Even so, things will seem abnormal. Inflation be high and property prices may rise in nominal terms but not so much in real.

But that is far from certain, indeed, may not even be the base case.

I am not saying any of this will happen. But if the mining investment cliff turns out to be precipitous in the next two years then the risk of a property shakeout is higher than at any time I can remember.

Reproduced with kind permission from Macrobusiness Australia.

Carney Warns Europe Faces Decade of Stagnation Without Key Reforms | WSJ

Nirmala Menon at WSJ quotes Mark Carney, incoming governor of the Bank of England:

Mr. Carney, currently Canada’s top central banker, said Europe can draw lessons from Japan on the dangers of taking half measures……..“Deep challenges persist in its financial system. Without sustained and significant reforms, a decade of stagnation threatens,” Mr. Carney said in his final public address as governor of the Bank of Canada.

Read more at Carney Warns Europe Faces Decade of Stagnation Without Key Reforms – Real Time Economics – WSJ.

Can two senators end ‘too big to fail’? | The Big Picture

Barry Ritholz writes:

The idea that two senators from opposite sides of the ideological spectrum can find common ground to attack a problem with a simple solution is novel in the Senate these days. If Brown and Vitter manage to end the subsidies to banks deemed “too big to fail,” they will have accomplished more than “merely” preventing the next financial crisis. They will have helped to create a blueprint for how to get things done in an era of partisan strife.

Read more about the progress of the Brown-Vitter (TBTF) bill at Can two senators end ‘too big to fail’? | The Big Picture.

The monetary policy revolution

James Alexander, head of Equity Research at UK-based M&G Equities, sums up the evolution of central bank thinking. He describes the traditional problem of inadequate response by central banks to market shocks like the collapse of Lehman Brothers:

Although wages hold steady when nominal income falls, unemployment tends to rise as companies scramble to cut costs. In the wake of the crash, rising joblessness created a vicious circle of declining consumption and investment that proved very difficult to reverse, particularly as central banks remained preoccupied with inflation.

Failure of both austerity and quantitative easing has left central bankers looking for new alternatives:

…..Economist Michael Woodford presented a paper [at Jackson Hole last August] suggesting that the US Federal Reserve (Fed) should give markets and businesses a bigger steer about where the economy was headed by adopting a nominal economic growth target. In September, the Fed announced its third round of QE, which it has indicated will continue until unemployment falls below 6.5% – the first time US monetary policy has been explicitly tied to an unemployment rate. US stocks have since soared, shrugging off continued inaction surrounding the country’s ongoing debt crisis.

While targeting unemployment is preferable to targeting inflation, it is still a subjective measure that can be influenced by rises or falls in labor participation rates and exclusion of casual workers seeking full-time employment. Market Monetarists such as Scott Sumner and Lars Christensen advocate targeting nominal GDP growth instead — a hard, objective number that can be forecast with greater accuracy. Mark Carney, due to take over as governor of the BOE in July, seems to be on a similar path:

Echoing Michael Woodford’s comments at Jackson Hole, he advocated dropping inflation targets if economies were struggling to grow. He has since proposed easing UK monetary policy, adopting a nominal growth target and boosting recovery by convincing households and businesses that rates will remain low until growth resumes.

While NGDP targeting has been criticized as a “recipe for runaway inflation”, experiences so far have not borne this out. In fact NGDP targeting would have the opposite effect when growth has resumed, curbing inflation and credit growth and preventing a repeat of recent housing and stock bubbles.

Read more at Outlook-for-UK-equities-2013-05_tcm1434-73579.pdf.

Are Australian banks really sound?

Business Spectator reports:

In a statement APRA chairman John Laker said that, in implementing the Basel III liquidity reforms, the authority’s objectives were to improve its ability to assess and monitor ADIs’ liquidity risk and strengthen the resilience of the Australian banking system.

“APRA believes ADIs are well-placed to meet the new liquidity requirements on the original timetable and doing so will send a strong message about the soundness of the Australian banking system,” he said.

If you repeat misinformation often enough, people will believe it is true. Australian banks face two risks: liquidity risk and solvency risk. Addressing liquidity risk does not address solvency risk. Australian banks report risk-weighted capital ratios which are misleading if not downright dangerous. Risk-weighting encourages banks to concentrate exposure in areas historically perceived as low risk, such as residential mortgages. When all banks are over-weight the same asset, the risk profile changes — as Eurozone banks discovered with government bonds.

If we remove risk-weighting, as proposed in the US Brown-Vitter bill, the four majors in Australia would have capital ratios of 3 to 4 percent. Not much of a capital buffer in these uncertain times.

What happened to the liquidity trap?

Mark A Sadowski comments:

In November 2012 the CBO estimated that the maximum level employment effect would be a decrease of about 200,000 jobs, 640,000 jobs (80% 0f combined payroll and UI effect of 800,000 jobs lost) and 800,000 jobs for the high income tax increase, payroll tax increase, and sequester respectively: http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-08-12-FiscalTightening.pdf

In other words, according to these estimates, the sequester should already have decreased employment by over 500,000 jobs relative to baseline, and the tax increases should decrease employment over 400,000 relative to baseline by the next employment report at the latest.

What happened to the liquidity trap?

Read more at Macro and Other Market Musings: Is the Fed's Able to Offset Austerity? Insights from the Employment Report.

Urban sprawl isn’t to blame: unsustainable cities are the product of growth fetish

By Brendan Gleeson, University of Melbourne

In a recent article on The Conversation Robert Nelson argues we are all morally culpable for unsustainable urban sprawl. He goes on to suggest we fix this by taking advantage of opportunities for higher density development in sparsely populated inner suburbs.

But his argument is based on a false opposition: mounting evidence shows that high density development in inner areas performs very poorly in terms of resource consumption and greenhouse emissions. The idea that outer suburbs are inherently less sustainable than inner ones doesn’t bear scrutiny.

The key question is not where we accommodate growth; it’s our slavish pursuit of growth itself.

Urban accumulation

The metro fringe is expected to accommodate 40% of our national population increase in the next 15 or so years. Australia has for some time been experiencing record population growth, cheered on by business lobbies, and rationalised by the expertise they buy. Not all of it is corporate conception, or undesirable: the fertility spike and commitment to a humane migration program are also contributors.

The urban sustainability crisis betrays not bad consumption patterns but the awesome success of accumulation. Our cities express the ceaseless economic expansion imperative and its politico-cultural expression, which Clive Hamilton has memorably described as the “growth fetish”.

We have sprawl in every possible physical form – from low density suburbia to the vertical sprawl produced by market driven compaction. It is a fallacy to describe the latter as sustainable.

The existing urban footprint simply cannot absorb the human increase. It is a physical, social and political impossibility. And the underlying imperative of accumulation will drive excessive urban expansion in its various forms.

Risky business

The physical form of cities and suburbs has little influence on overproduction and its social and ecological consequences.

We are, as Nelson correctly implies, in the tightening grip of a species crisis. As the German sociologist Ulrich Beck describes it, we live in a World at Risk – from climate warming, resource depletion, economic default, and social breakdown. The ecological crisis may be the gravest of these as it appears to be moving with wild speed and threatens to upend the planetary order entirely. But it cannot be divorced from the other calamities which all derive from a human modernity that, as Beck states, is devouring itself.

The looming human catastrophe is not a moral crisis or a consequence of ethical failure. It is the product of a political economy that has defined, if not always exclusively, the process of modernisation through the past five or so centuries. The long haul of capitalist accumulation has brought us to the abyss of species threat.

It is wrong to explain this historical process in moral terms. This merely distracts attention from the role of capitalism as a driver of growth. As the philosopher Slavoj Žižek put it recently, “The point of emphasising morality is to prevent the critique of capitalism”.

Capitalism is a force for ceaseless accumulation driven by valorisation (value creating value). It is hard-wired to expansion, and can never be reconceived or reformed as a “steady state” economic order. It expands or it dies.

And therein lays its marvellous, terrifying power. It is a human order set in epic contest with the natural order, scaling ever upwards the heights of risk. One day it will reach the precipice of possibility and a structural transformation will ensue. Humanity will survive this, as it has all other historical transformations, but we do not know what new social dispensation will be possible in its wake.

Weathering the storm

It is simply impossible to dramatically change the urban form in the timescales of looming climate and resource emergencies. Absent war or massive calamity, cities resist sudden change. We cannot design our way out of a crisis generated by the underlying political economy that has driven modernisation for centuries.

However, good planning and design are vital to the project of making our cities as safe and resilient as possible. Elsewhere I have urged us to reconceive cities as lifeboats that will carry an increasingly urbanised humanity through the storms that lie inevitably in our path.

It is only fair that we break from our long habit of malign neglect and cut the outer suburbs an appropriate share of national resources. The investment should be in a massive suburban overhaul to realise the latent environmental potential of the low density form. In quest for resilience, households should be assisted towards self-sufficiency in water, energy and food production.

Paul Mees’ important Australian book, Transport for Suburbia, shows decisively that good public transport is possible in the low density form. We must lament the intellectual and political idiocy that has convinced us that it cannot be made to work in the suburbs.

The outer suburbs simply aren’t the source of our mounting environmental problems. And neither is social delinquency a helpful way of thinking about what is a long run failing of the market economy. We have to prepare the lifeboats for what lies ahead.

Brendan Gleeson does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.

The Conversation

This article was originally published at The Conversation.
Read the original article.

Colin Twiggs:

I agree with Brendan Gleeson’s defense of suburbia, but what concerns me is the focus on sustainability in terms of energy usage and a critique of the economic system. No doubt these are important, but I would like to see more attention given to the health dangers of high-density living, both physical and psychological — from the impact on childhood obesity to feelings of isolation, increased aggression and pathological behavior in inner city environments. Biologists as far back as Konrad Lorenz (Civilized Man’s Eight Deadly Sins) have warned of the dangers of over-crowding and their impact on aggression levels.

Lorenz also warned of the ‘avalanche’ effect of positive feedback from technological development and how this could create an environment where humans struggle to cope. Prof. Gleeson I believe is trying to make a similar point when he refers to a ‘growth fetish’.

Capitalism is a force for ceaseless accumulation …… It is hard-wired to expansion, and can never be reconceived or reformed as a “steady state” economic order. It expands or it dies.

To lay the blame for this ceaseless expansion at the foot of Capitalism is I believe misguided. Capitalism covers the full spectrum from intense competition in cities like New York to peaceful co-existence in rural communities such as Pennsylvania or the Outer-Hebrides. And we find a similar spectrum in Communist or Socialist societies. The underlying cause of the malaise appears to be the impact of high-density living — no matter what economic system — and the consequent breakdown of the individual’s sense of community and belonging. A study (can anyone recall the name?) done in Australia several years ago found that Australians living in small to medium-sized towns (10,000 to 50,000) enjoyed greater psychological well-being than their city or rural counter-parts. These towns seem to offer balance between community (belonging) and the spectrum of opportunities only normally available to larger communities. More effort should be made to identify the underlying causes of that well-being and attempt to replicate the benefits in both rural and city environments. Economic and energy efficiency are important, but first and foremost we need to create cities that are healthy to live in — from both a physical and psychological aspect.

The insufferable conceit | MacroBusiness

Sell on News at Macrobusiness observes:

Columbia University economist Jeffrey Sachs recently commented that the financial system is plagued by large scale fraud. He blamed it on a docile president, a docile White House and docile regulators……..

Sachs is right in his observations, of course. But I am not sure he is right to imply that it is new. I think Greed and Wall Street have been bedfellows as long as Wall Street has existed.

Read more at The insufferable conceit | | MacroBusiness.