Economy Archives - Page 98 of 132 - the patient investor

November 21, 2012

S&P declares Australia a “one trick pony” | macrobusiness.com.au

By Houses and Holes on November 22, 2012

One-Trick Pony

London-based Kyran Curry, the long-time primary credit analyst for Australia at S&P, is back and the news is getting worse. From the AFR:

“The banks are highly indebted, they’re highly leveraged, they are the main vehicle Australia uses to fund its current account deficit…Australia has, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia’s external position….It’s got high levels of liabilities, it’s got very weak external liquidity and that basically means the banks are highly indebted compared to their peers….They’re benefiting from a safe haven at the moment – nonetheless investor sentiment can turn very quickly…We just worry that at some point, the people who are funding the Australian banks may decide that enough is enough and may begin to lose confidence in the bank’s ability to roll over their debt….That would come through a weakening in Australia’s major trading partners flowing through to a dramatic weakening in Australia’s fiscal position.”

Curry said this could be a two or three year scenario. But he added:

“Anything that weighs on the ability of Australia to bring forward new energy projects and that weighs on its export growth potential, that’s something that would put pressure on the rating. Australia is looking increasingly like a one-trick pony.”

Regular readers will note that S&P has pretty much captured my entire ‘peak Australia’ thesis. It is simultaneously ripping aside the veil of invisopower that regulators have dispersed around the banks and seeing for it is the singularly backward macroeconomic strategy of embracing Dutch disease. My two great fears.

The last line is the worst. I am of the view that LNG will rationalise – the current set of projects that is – not the fictitious pipeline. That means there is a risk that this is not a two or three scenario at all. Which does offer an answer to the question: why is S&P ramping its warnings now?

Canberra must immediately dispatch to Beijing a high level delegation to demand further stimulus. Perhaps a high-speed rail link from Beijing to the Bush Capital? That way, when they’re ready, the Chinese can relax in comfort on the way down to buy our banks.

Reproduced with thanks to Houses and Holes at Macrobusiness.com.au

November 20, 2012

Australia: Leading indicator surprise

The annualised growth rate of the Westpac–Melbourne Institute Leading Index jumped from –0.4% in April to 4.1% in September this year — above its long-term average of 2.8%. According to Westpac, main contributors to the growth improvement were:

manufacturing materials prices (1.2 ppt’s);
overtime worked (1.0 ppt’s);
productivity (1.2 ppt’s);
corporate operating surplus (1.1 ppt’s);
dwelling approvals (1.0 ppt’s); and
All Ordinaries index (0.2 ppt’s).

Negative influences were:

U.S industrial production (–0.9 ppt’s); and
real money supply (–0.2 ppt’s).

November 18, 2012

Australia: Housing market sentiment

Houses & Holes writes:

The Westpac Red Book for October is out and paints a picture of housing market sentiment turning strongly upwards: One of the highlights in last month’s survey was a big 9.6% jump in the sub-index tracking views on ‘time to buy a dwelling’ to the highest level since Sep 2009…….

I am as skeptical as he is of the conclusion that the housing market is about to recover: “Unemployment is not done with us yet.” If you took a survey of the major banks I would be surprised to find, with lending margins squeezed and the end of the mining investment boom approaching, that any of them are planning to aggressively expand mortgage lending in the current climate.

via Red book paints housing sentiment breakout | MacroBusiness.

November 18, 2012

French fury at Economist’s ‘time-bomb’ warning | FRANCE 24

Katharyn Gillam at France24 writes:

In its edition set to hit news stands on Friday, the highly-respected British weekly [The Economist] warned that France’s high taxes on businesses were eroding the country’s competitiveness and that France was a bigger danger to Europe’s single currency than the debt-stricken countries of Italy, Spain and Portugal………The right-leaning magazine highlighted [France’s] strategic position in the Eurozone and its massive public sector that accounts for 57% of gross domestic product…….

via French fury at Economist’s ‘time-bomb’ warning – FRANCE – FRANCE 24.

November 18, 2012

Shadow Banking Grows to $67 Trillion Industry, Regulators Say – Bloomberg

Ben Moshinsky and Jim Brunsden write:

The size [$67 trillion] of the shadow banking system, which includes the activities of money market funds, monoline insurers and off- balance sheet investment vehicles, “can create systemic risks” and “amplify market reactions when market liquidity is scarce,” the Financial Stability Board said in a report, which utilized more data than last year’s probe into the sector……

via Shadow Banking Grows to $67 Trillion Industry, Regulators Say – Bloomberg.

November 18, 2012

The Foolproof Way

In his 2003 paper Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others Lars E.O. Svensson describes his Foolproof Way of escaping from a liquidity trap — experienced by countries such as Japan, and lately the US, when central bank interest rates are close to zero.

The Foolproof Way consequently consists of announcing and implementing three measures: 1) an upward-sloping price-level target path, starting above the current price level by a price gap to undo; 2) a depreciation and a crawling peg of the currency; and 3) an exit strategy in the form of the abandonment of the peg in favor of inflation or price-level targeting when the price-level target path has been reached.
As discussed in the previous subsection, a currency depreciation and a crawling peg is unique in providing the central bank with a concrete action that demonstrates the central bank’s commitment to a higher future price level, establishes credibility for the peg, induces private-sector expectations of a higher future price level, and stimulates the economy by reducing the real interest rate. As argued, via a depreciation and a crawling peg with a rate of appreciation approximately equal to the average foreign interest rate, the central bank can actually implement approximately the optimal way to escape from a liquidity trap and strike the optimal balance between current stimulus of the economy and the future price level. Furthermore, as discussed, the exchange rate is unique in providing a relatively direct measure of the private-sector expectations of the future price level.

November 18, 2012

The Liquidity Trap

In his 2003 paper Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others Lars E.O. Svensson describes the liquidity trap experienced by countries such as Japan and lately the US, when central bank interest rates are close to zero percent.

If the nominal interest rate is initially low, which it is when inflation and expected future inflation are low, the central bank does not have much room to lower the interest rate further. But with deflation and expectations of deflation, even a nominal interest rate of zero percent can result in a substantially positive real interest rate that is higher than the level required to stimulate the economy out of recession and deflation. Nominal interest rates cannot fall below zero, since potential lenders would then hold cash rather than lend at negative interest rates. This is the socalled “zero lower bound for interest rates.”
In particular, conventional monetary policy seems unable to provide sufficient stimulus to the economy and address recession and deflation once the zero lower bound for interest rates has been reached. The problem is that the economy is then satiated with liquidity and the private sector is effectively indifferent between holding zero-interest-rate Treasury bills and money. In this situation, standard open-market operations by the central bank to expand the monetary base by buying Treasury bills lead the private sector to hold fewer Treasury bills and more money – but this has no effect on prices and quantities in the economy. When this “liquidity trap” occurs, expanding liquidity (the monetary base) beyond the satiation point has no effect. If a combination of a liquidity trap and deflation causes the real interest rate to remain too high, the economy may sink further into a prolonged recession and deflation.

November 16, 2012

How Mitt Romney lost the unlosable election

William Bennett writes that President Obama won the 2012 election by winning 93% of the African-American vote and 71% of Latino votes, while Mitt Romney won white voters 59% to 39%, according to exit polls. If the GOP believe they lost the election because of race, they are destined to repeat the same mistakes over and over again. The key to their loss is that Obama won 60% to 38% among those who make less than $50,000 a year and among 18- to 29-year-olds he won 60% to 37%.

Capitalism is failing these two sectors of the population: low income earners and the youth. Poverty rates are highest among Black and Hispanic voters but young voters are also becoming disaffected, with almost half recent college graduates unemployed or under-employed. The seriousness of the situation is illustrated by the following statistic:

According to a Pew Research poll taken last year, 49% of Americans age 18-29 have a positive view of socialism while just 46% have a positive view of capitalism.

Mitt Romney might have sold his message to the middle-class and small business owners but he alienated the very people who suffered most from the economic downturn. He failed to define his campaign as a war against poverty and unemployment. Instead of looking the disaffected in the eye and telling them what he could do to get them a job, he spent his time preaching to the choir.

via Republicans lost the culture war – CNN.com.

November 16, 2012

US: Poverty rates

From the US Department of Health & Human Services:

US Poverty Rates

I suspect that most US voters are concerned about poverty (don’t believe everything you are told during an election) but where they differ is on how to address the issue. The view from the left is to raise taxes on the rich in order to increase welfare benefits to the poor. The right believe the solution is to get the economy back on track. That would create more jobs and increase tax revenues — which could enable more welfare spending. It is important to avoid the trap of long-term welfare dependency, but the solution is always going to be a compromise between the two extremes.

If Republicans want to be taken seriously by Black and Hispanic voters they need to pay more than lip service to fighting poverty.

November 16, 2012

Fed monetary policy

I read this excerpt from a speech by Ben Bernanke in September (courtesy of Cullen Roche):

The tools we have involve effecting financial asset prices. Those are the tools of monetary policy. There are a number of different channels. Mortgage rates, other interest rates, corporate bond rates. Also the prices of various assets. For example, the prices of homes. To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase. So house prices is one vehicle. Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend. One of the main concerns that firms have is that there is not enough demand… if people feel their financial position is better… they’ll be more likely to spend, and that’s going to provide the demand firms need in order to be willing to hire and to invest.

It stopped me in my tracks. Here is why:

The Fed Chairman avoids stating the obvious: there is only one aim of monetary policy: to increase or decrease the amount of debt in the economy. Their tools are designed to encourage people to borrow more — or occasionally less, when the results of their earlier policy materialize.
Raising prices to increase demand? Raising home prices is unlikely to clear inventories of unsold homes or stimulate the construction industry.
What Bernanke is referring to is known as the “wealth effect” — raising asset prices by lowering interest rates stimulates spending. The “wealth illusion” would be a more appropriate name.
Rising asset prices make people more willing to spend. He is 100% correct here. But he fails to mention the resulting asset bubble that follows. Low interest rates and rising prices feed speculation….. which lead to higher prices and more speculation….. which lead to a self-reinforcing spiral.

Economics is not a hard science like engineering or physics, where one can accurately gauge outcomes. It is a soft science, like psychology, and many practitioners with competing theories as to how to treat the patient. With spectacular failure rates. Theory after theory is consigned to the waste basket as we struggle to understand the human condition.