Iceland is the standout performer for 2012

December 17, 2012

Iceland does it their way.

Emotionally, I love Iceland’s financial policies since the crash of 2008:

Iceland went after the people who caused the crisis — the bankers who created and sold the junk products — and tried to shield the general population.

But what Iceland did is not just emotionally satisfying. Iceland is recovering, while the rest of the Western world — which bailed out the bankers and left the general population to pay for the bankers’ excess — is not.

Bloomberg reports:

“Few countries blew up more spectacularly than Iceland in the 2008 financial crisis. The local stock market plunged 90 percent; unemployment rose ninefold; inflation shot to more than 18 percent; the country’s biggest banks all failed.

This was no post-Lehman Brothers recession: It was a depression.

Since then, Iceland has turned in a pretty impressive performance. It has repaid International Monetary Fund rescue loans ahead of schedule. Growth this year will be about 2.5 percent, better than most developed economies. Unemployment has fallen by half. In February, Fitch Ratings restored the country’s investment-grade status, approvingly citing its “unorthodox crisis policy response.”

So what exactly did Iceland do?

First, they create an aid package for homeowners:

To homeowners with negative equity, the country offered write-offs that would wipe out debt above 110 percent of the property value. The government also provided means-tested subsidies to reduce mortgage-interest expenses: Those with lower earnings, less home equity and children were granted the most generous support.

Then, they redenominated foreign currency debt into devalued krone, effectively giving creditors a big haircut:

In June 2010, the nation’s Supreme Court gave debtors another break: Bank loans that were indexed to foreign currencies were declared illegal. Because the Icelandic Krona plunged 80 percent during the crisis, the cost of repaying foreign debt more than doubled. The ruling let consumers repay the banks as if the loans were in Krona.

These policies helped consumers erase debt equal to 13 percent of Iceland’s $14 billion economy. Now, consumers have money to spend on other things. It is no accident that the IMF, which granted Iceland loans without imposing its usual austerity strictures, says the recovery is driven by domestic demand.

What this meant is that unsustainable junk was liquidated. While I am no fan of nationalised banks and believe that eventually they should be sold off, there were no quick and easy bailouts that allowed the financial sector to continue with the same unsustainable bubble-based folly they practiced before the crisis (as has happened throughout the rest of the Western world).  

And best of all, Iceland prosecuted the people who caused the crisis, providing a real disincentive (as opposed to more bailouts and bonuses):

Iceland’s special prosecutor has said it may indict as many as 90 people, while more than 200, including the former chief executives at the three biggest banks, face criminal charges.

Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.

That compares with the U.S., where no top bank executives have faced criminal prosecution for their roles in the subprime mortgage meltdown. The Securities and Exchange Commission said last year it had sanctioned 39 senior officers for conduct related to the housing market meltdown.

Iceland’s approach is very much akin to what I have been advocating — write down the unsustainable debt, liquidate the junk corporations and banks that failed, disincentivise the behaviour that caused the crisis, and provide help to the ordinary individuals in the real economy (as opposed to phoney “stimulus” cash to campaign donors and big finance).

And Iceland has snapped out of its depression. The rest of the West, where banks continue to behave exactly as they did prior to the crisis, not so much.

NEW WORLD CURRENCY IS ALREADY HERE! It is the IMF’s Special Drawing Rights

October 10, 2012

By Mike Cobb, Hemispheres Publishing

Now before you write me off as another tinfoil helmet whack job, take a look at how the 2nd largest US airline defines its liability for lost luggage:

“For international travel to which the Montreal Convention applies (including domestic portions of international travel), United’s liability is limited to 1,131 SDR (Special Drawing Rights) per customer for checked and unchecked baggage.”

 That’s right. United Airlines uses SDR as part of its normal and customary business practices. Now technically, only a sovereign country can acquire and hold SDR (right now) so what United Airlines is doing is quoting SDR as a measure of value.

 But it gets better. In 2011 there was a serious proposal to price oil, gold and other hard assets in SDR. This would, in one fell swoop, replace the US Dollar as the world reserve currency. As long as SDR are country to country, they represent a sovereign reserve. But when lost luggage is priced in SDR, and maybe oil too, this sounds like a new form of money.

 And now, SDR have been proposed by the International Monetary Fund (IMF) as a possible global currency. In their own words: “In the even longer run, if there were political willingness to do so, these securities could constitute an embryo of global currency.” And, “(g)eneralized use of SDR as a unit of account for global trade invoicing would also create demand for SDR- denominated assets as both the public and private sectors develop exposure to SDR- denominated flows.”

 Where did all this start? The International Monetary Fund (IMF) invented the Special Drawing Rights (SDR) in 1969 to function as an “international reserve asset.” The SDR were created as part of the Bretton Woods Agreement, which operated on a gold/US dollar standard until 1973. Initially the SDR was tied to gold, but with Nixon’s breaking of the gold standard, the value basis was switched to a basket of currencies and has remained such since. Exchange rates for the SDR to the Euro, Yen, Pound and Dollar in August 2012 are as follows:

SDRs per Currency unit for August 2012

 Currency        August 1st 2012     August 31st 2012

 Euro                          0.8150090000        0.8285730000

Japanese Yen        0.0084974600         0.0083750700

U.K. Pound Sterling  1.0357600000    1.0406600000

U.S. Dollar               0.6627170000          0.6570240000  

Australian Dollar  0.6963170000          0.6768000000

Chinese Yuan         0.1046860000          0.1035520000

 http://www.imf.org/external/np/fin/data/rms_mth.aspx?SelectDate=2012-08-31&reportType=SDRCV

The currency value of the SDR is determined by summing the values in U.S. dollars, based on market exchange rates, of a basket of major currencies (the U.S. dollar, Euro, Japanese yen, and pound sterling). The SDR currency value is calculated daily (except on IMF holidays or whenever the IMF is closed for business) and the valuation basket is reviewed and adjusted every five years.”

The SDR has now taken on a life of its own. The IMF now also sees the SDR as a means to create liquidity in the system. In 2009, when banks in the US and around the globe were teetering on the brink of collapse, the IMF “printed” about 180 billion new SDR to inject into the financial system. To help mitigate the effects of the financial crisis, a third general SDR allocation of SDR 161.2 billion was made on August 28, 2009.

Separately, the Fourth Amendment to the Articles of Agreement became effective August 10, 2009 and provided for a special one-time allocation of SDR 21.5 billion.

Money Magazine’s online edition reported in 2011, that “Dominique Strauss-Kahn, managing director of the IMF, acknowledged there are some ‘technical hurdles’ involved with SDR, but he believes they could help correct global imbalances and shore up the global financial system.” He went on to say, “Over time, there may also be a role for the SDR to contribute to a more stable international monetary system.” Recent proposals have been floated to increase the amount by another couple trillion more.

The IMF and member countries see the SDR as a powerful way to keep the financial system stabilized, but that stability rests on a house of cards created by the IMF and each country’s ability to print more money as needed. The US dollar still remains strong even with the trillions injected in various stimulus packages in the past decade. The main reason is that even though huge sums of new dollars entered the system, the velocity of those dollars is slow. Most of it has gone into propping up the capital reserves of regulated banks and financial institutions. If and when these dollars begin to circulate in the economy, the effect will be felt as inflation to the consumer.

In the last decade, the cost of commodities in dollar terms has soared. The HIRE act has wittingly or unwittingly made the US dollar difficult to utilize as an international means of settlement. In November of 2010, China and Russia stopped requiring companies to trade in dollars and settled accounts in Rubles and Yuan. What company would want to risk the seizure of 30% of their transfer just for the privilege of trading in dollars? As more and more companies decide to use their own currencies, the strength of the dollar is bound to fall. The SDR is the logical replacement and is being positioned to take its place.

China is running around the globe buying mining companies, oil production, and other hard assets with their huge stockpile of US dollars. They are effectively dumping dollars for commodities, or actually even better, the source and production of commodities. Talk about a long-term multigenerational play.

HIRE Act and Dollar Depreciation

Match this up with the draconian provisions of the HIRE Act, a strong form of US currency controls and, “The idea was that an off-market reserve pool managed by the Fund would provide an opportunity for large reserve holders to diversify their reserve assets while limiting the risk of market disruption, particularly a sharp depreciation of the dollar.”

Where this will end up is anyone’s guess, but the push for a new currency that takes the US dollar out of its current role as the world reserve currency is not happening willy nilly. There is a strategic focus behind the change and the better we understand what is happening and why, the better we can protect ourselves and the value of our assets.

 Watch this space for further developments.

HIGHER EMPLOYMENT NUMBERS IN USA IS GOOD NEWS!

October 10, 2012

Adam Carr writing for Business Spectator, an edited version -

Jack Welch, ex GE CEO, might think the numbers are being manipulated but in the absence of that the US jobs figures were strong. I’d go with that. They were fantastic actually and commentary and conspiracy theories like Jack’s show the depths people will fall to in talking the economy (global and domestic) down. 

The unemployment rate dropped to 7.8 per cent in September from 8.1 per cent the month prior and an expectation of 8.2 per cent. This was on the back of very strong jobs growth of 873,000. The good news is that the participation rate rose to 63.6 from 63.5 annually — almost 3m jobs have been created. Which is very strong.

Payrolls themselves were up 114,000 which was lower than expected but the result was accompanied by upward revisions to prior data. So far and for the last 3 months payrolls have increased by 140,000 per month which is just above the pre-GFC average — and they were the boom times people. By extension then, jobs growth is back at boom time rates. Unless of course you don’t consider the years from 2003-07 as a boom.

Put simply, the US jobs data is critical. It highlights the flawed assumptions both the US Federal Reserve and our own Reserve Bank are operating under. First, it is inconsistent with the view of Bernanke and others, that the US economy is growing at a pace that is too slow to produce solid jobs growth and reduce the unemployment rate. The data shows why this has been wrong – that is, unless you subscribe to the view of Jack Welch. 

The truth is that the model Bernanke and his followers have relied on has been wrong from day one — and these jobs figures are just the latest proof.

Unfortunately for the RBA, the data also highlight why, again, the analysis they provided or the justifications they made to lower rates are as flimsy as previous episodes. As I have pointed out before, the global economy looks to be accelerating rather than slowing and US economic data certainly backs this case. Unfortunately the RBA’s track record is as questionable as those domestic economists who have continually pushed for lower rates. 

Recall late last year and earlier this year the RBA cuts rates on the pretext of weak domestic growth. Domestic growth was strong and actually accelerated. For mine, policy is exacerbating the business cycle rather than smoothing it.

Think back to 2008 — the RBA hiked rates too excessively. Then in 2009 they cut rates too aggressively. I would argue that now in 2012 they are over doing it again. This is not a good track record and stumbling around in the dark is not a good way to conduct policy. 

And for no good reason. It simply is not needed. I think more than ever the country needs stability — a steady hand. Not panic. Or ‘insurance’ as it’s now called. That card has been overplayed.

For whatever reason the market didn’t get much of a lift from the strong jobs report. The looming US earnings season perhaps. Stocks were mixed and commodities were belted – crude down another 2 per cent. It doesn’t look like it will be a great start to the week then and I’m not sure if there is any real hard hitting data or news that will change that.

For Australia the key dataflow includes the confidence indicators from NAB (business) and Westpac (consumer). Recall that confidence has in fact been weaker since the RBA’s easing cycle, as has lending, which highlights again the flawed assumptions the RBA and others are operating under. Hopefully the ECB’s decision to buy European bonds can offer some respite and buttress confidence a bit. Certainly the fact that global equities have had a solid run should help to offset the RBA’s ill-considered measures. 

Thursday brings the domestic employment report and the expectation here is that employment will rise about 3000, while the unemployment rate is forecast to rise to 5.3 per cent from 5.1 per cent. I don’t have a problem with those forecasts and think in general, a modest increase in the unemployment rate — to maybe 5.7 per cent over the next six months – is probably about right. 
That is still an exceptionally low unemployment rate by the way. 
 
On the global front there isn’t too much that’ll rock the market. It’s the Columbus day holiday today in the US for a start and for the rest of the week there isn’t much data – small business optimism on Tuesday, the Beige Book on Thursday morning. Thursday night yields jobless claims and the trade balance, while on Friday we get producer prices and consumer confidence.

I’d watch Turkey and Syria very closely as things seem to be deteriorating quite rapidly and obviously Europe is still there. 

Latest news flow is that Greece may run out of money by November. We’ve been here many times before and such headlines don’t seem to move the market much these days. There are a few meetings worth watching as well – European Finance Ministers, Spanish and French leaders and then German Chancellor Merkel travels to Greece. Looks like it’ll be a track two then this week – Europe imploding.

THE PROBLEM WHEN BANKS ARE TOO BIG TO FAIL

August 16, 2012

 This article was written by Alan Kohler one of my favorite commentators on the Australian and Global Financial Issues:

 A New York hedge fund manager told the ADC Leadership Retreat at Hayman Island on the weekend that he expects US bankers to be led away in “handcuffs and pajamas” pretty soon over Libor rigging. What’s more, he reckons, civil damages over the scandal could end up being greater than all bank capital.

Nobody believed him; the audience smiled politely and moved on, thinking: “yeah, sure”. The market’s not too worried either: Barclays’ shares are up 22 per cent from their post Libor lows, and back to where they were in May, and shares in Standard Chartered Bank, which has been fined $340 million for breaking US sanctions on Iran, have gone up 16 per cent since that scandal broke.

But leaving aside the (remote) possibility of arrests over Libor rigging and the slap on the wrist for Standard Charter over Iran, you’d have to say the world’s bankers have gotten away with the greatest two scams in history, which are the US Sub-prime Mortgage Affair and the Great Euro Periphery Heist. Not only have they not been arrested in their pajamas, they haven’t had to give back their bonuses, regulators are getting nowhere and governments are still baling them out with cash and cheap money.

The difference between their treatment and that of the tobacco companies is rather stark, you’d have to admit.

In Australia the banks didn’t join in the two big scams, at least not much anyway, because they’re better regulated and APRA wouldn’t let them. But they’re making hay now because their competitors have disappeared along with the swindle-ridden securitised mortgage market.

As a result, they have rebuilt their net interest margins and have become the world’s most profitable banks according to return on net assets. Of them, Commonwealth Bank is the stand-out: it’s the world’s most expensive bank by market value to net assets and yesterday broke $7 billion in profit (still only about a quarter of JP Morgan’s profit).

At this point after the 1929 crash, which was also caused by banks, US Congress had received the report of the Pecora Commission and already passed the Banking Act, also known as the Glass-Steagall Act, which separated the activities of banking and dealing in securities. In general, the regulatory attack and public opprobrium on banks in the 1930s was ferocious and effective.

The new law lasted for 66 years until it was repealed in 1999 as a result of bank lobbying. They were then free to do again what they did between 1922 and 1929, and the result was the same except this time politicians and central bankers are scared of them, not ferocious.

Not only has there been no Ferdinand Pecora, the fierce senior counsel to the US Senate Committee on Banking and Currency in 1932 whose name went on their report, but the efforts to re-regulate them have been pathetically easy to deal with (the banks have been playing whack-a-mole with politicians) and central bankers have been keeping the insolvent banks alive with cheap money. 

This time, you see, the banks are ‘too big to fail’. That means they are too big to prosecute as well, by the way, since prosecution usually means failure, and they’re too rich to regulate. That means bankers are above the law as well as fantastically rich and powerful.

There is one potential as the new Ferdinand Pecora: Gary Gensler, the chairman of the US Commodity Futures Trading Commission, who led the investigation into Barclays and the $450 million settlement with it, and is now conducting a global investigation into rate-rigging by more than a dozen banks, and is pushing hard for a return to Glass-Steagall.

But how come the CFTC, which regulates futures, is suddenly leading the charge against the banks and emerging as the banking regulator? Because there was a little provision in the 2,319 page Dodd Frank Act that was passed in 2010 to respond to the GFC, that the banks didn’t notice or didn’t realise the importance of, so they didn’t lobby to have removed. It greatly expanded the responsibility of the CFTC in regulating derivatives, and the 2008 banking crash, unlike the 1929 one, was all about derivatives. Every euphoria and panic has something new, and this time it was banking derivatives.

The thing the banks focused on in their lobbying was the Volcker Rule, the section of the Act that was meant to reintroduce a form of Glass-Steagall, specifically banning proprietary trading (“we must be able to gamble – it’s vital”).

So far the banks have managed to emasculate that rule, although the recent epiphany of Sanford Weill, the former Citibank CEO who was responsible for the repeal of Glass-Steagall, has swung opinion back towards strengthening it again. Weill mused in an interview that, actually, maybe it wasn’t a good idea to repeal Glass-Steagall after all and maybe banks shouldn’t be allowed to do anything they want. The latest convert is Paul Ryan, the Republican vice-presidential candidate for this year’s election.

But the underlying problem is that if they’re too big to fail, they’re too big to regulate, and the efforts to do something about that more fundamental problem are moving very slowly. In November last year, at their summit in Cannes – three years after the crash – G20 leaders asked the Basel Committee and the Financial Stability Board to look into it. They have come up with the idea of a capital surcharge for “globally systemically important banks” (G-SIBs) as well as “improving global recovery and resolution frameworks”, whatever that means.

The Basel Committee has just released a consultative document for dealing with “domestically systemically important banks” (D-SIBs) which is waffly and about as far from Ferdinand Pecora as is possible to be.

In fact, Australia’s APRA could teach them what to do, and it’s all about vigilance, not rules.

APRA has a wonderfully named system called PAIRS/SOARS, which stands for Probability and Impact Rating System (PAIRS) and the Supervisory Oversight and Response System (SOARS). Basically, and to cut out the jargon, APRA is all over them like a cheap suit, constantly issuing speeding tickets and forcing changed behaviour.

Unless you’re going to break the banks up so there’s lots of little ones instead of really big ones, that sort of principles-based, hands-on regulation is the only way to go.

It works in Australia but would it work in the United States? Perhaps not: money doesn’t talk there, it shouts.

Check out http://www.businessspectator.com.au for similar articles of quality and insight.

Australian Reserve Bank has the facts Wrong, Implications for the Housing Market

February 14, 2012

This article was written by Steve Keen for Business Spectator, see http://www.businessspectator.com.au

 He is a Professor of Economics & Finance at the University of Western Sydney and author of Debunking Economics and the blog Debtwatch.

The RBA’s decision to not reduce rates this month caught most pundits by surprise, including me. Given the international and local data, I thought they would err on the side of caution and cut rates.

As I always note when asked to call what the RBA will do next, this is a call on how another body will respond to what they perceive as the economic data and the direction their model of the economy predicts the actual economy will move in. That’s closer to picking which cockroach is going to walk out of a circle first in a Changi prison gambling den than it is to economic forecasting per se (which is dubious enough activity in itself). So making a wrong guess about what the RBA will do is not the same as making a wrong economic forecast; you’re just making a different forecast of the future than is the RBA.

The RBA’s explanation for its decision shows that it is making a rosy call of both the current data and the direction in which the Australian economy is headed:

“Information on the Australian economy continues to suggest growth close to trend… the unemployment rate increased slightly in mid year, though it has been steady over recent months… In underlying terms, inflation is around 2.5 per cent… the Bank expects inflation to be in the 2-3 per cent range.

“Credit growth remains modest, though there has been a slight increase in demand for credit by businesses. Housing prices showed some sign of stabilising at the end of 2011, after having declined for most of the year. The exchange rate has risen further, even though the terms of trade have started to decline… With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment.”

As The Sydney Morning Herald editorialised, the RBA message was that the future looks good:

“Move right along folks. Nothing to see here. By keeping interest rates on hold this week, the Reserve Bank is sending a subconscious message to borrowers: the economy is doing reasonably well. There is no need to panic…

“Although we in NSW seem bogged Eeyore-like in our sad and dank little corner of the forest, glumly chewing our thistles day after day, perhaps we really ought to cheer up. Gloom is not just miserable in itself. When it comes to the economy, it’s dangerous.”

This is not the take that the majority of economic pundits have on the data – and for once, I’m with the majority. Normally the majority is bullish (because they have a neoclassical perspective on the economy that largely ignores credit, and thinks the economy always returns to equilibrium) and I’m bearish (because I have a “Post Keynesian” perspective that sees credit as the key motive economic force, and believes the economy is always in disequilibrium).

The majority of economic pundits lined up with me for a change because there was a range of data that implied the economy was stalling. Firstly, unemployment has been trending up, and the “steady over recent months” phenomenon that theRBA referred to above was entirely due to a fall in the participation rate. Had this remained at the November level, the ABS unemployment rate would have jumped to 5.6 per cent last month.

Figure 1

  

And that’s the good news: as was widely reported,employment fell by almost 30,000 last month, so that net job growth in 2011 was zero – the worst outcome in 20 years.

Secondly, a broader measure of unemployment maintained by Roy Morgan Research hit 10.3 per cent – 5 per cent above the ABS figure. The ABS treats someone who has worked for one hour in the previous two weeks as employed, a definition that Roy Morgan rightly rejects:

“Surely if someone is not working, is looking for work and considers themselves to be unemployed, then they should be considered unemployed regardless of whether they happen to have done a couple of hours work here and there during the month?”

The ludicrous official definition of unemployment is a classic case of bureaucracies (including the United Nations International Labor Organization in this case) eliminating a problem by redefining it rather than solving it. Many people have criticised this definition (including Peter Brain from the National Institute for Economic and Industry Research, who found that over a dozen official redefinitions of unemployment had all reduced the recorded level); since the late 1990s, Roy Morgan has gone one better and conducted a monthly survey using a definition of unemployment that actually makes sense:

”According to the ABS definition, a person who has worked for one hour or more for payment or someone who has worked without pay in a family business, is considered employed regardless of whether they consider themselves employed or not.

“The ABS definition also details that if a respondent is not actively looking for work (ie: applying for work, answering job advertisements, being registered with Centrelink or tendering for work), they are not considered to be unemployed.

“The Roy Morgan survey, in contrast, defines any respondent who is not employed full or part-time and who is looking for paid employment as being unemployed.”

Roy Morgan’s definition therefore necessarily records a higher level of unemployment than the ABS– and they are also a more legitimate measure of real unemployment. However their results are also more volatile, since their sample is smaller than the ABS’s, and the results are not seasonally adjusted.

Figure 2

 

Overall however, Roy Morgan’s figures are a more accurate indicator of the level of unemployment than the ABS’s, and also as a harbinger of where the ABS data may move in the future. The current gap between the two measures is the highest it has ever been – over 5 per cent, when the average gap has been about 2.5 per cent – and this implies that the next move in the ABS figures could be substantially upwards. Gary Morgan warned prior to the RBA’s meeting that the economy is a lot weaker than the central bank seems to think:

“Today’s Roy Morgan unemployment estimates strongly support anecdotal evidence of continuing job losses throughout Australia. Just in the past week we have been told that Westpac has announced 550 jobs to go; ANZ is axing 130 jobs; Holden will cut 200 jobs at its Adelaide plant; Toyota will cut 350 jobs in Melbourne; Reckitt Benckiser (maker of Mortein & Dettol) is to retrench 200 jobs at its Sydney operations; defence firm Thales shedding 50 jobs in Bendigo – these are just the most prominent examples of job losses occurring in the Australian economy!

“Economists and politicians are wrong to talk about a ‘tight’ labour market in Australia driving wage pressures. Wage demands (inflation) at the moment are being driven by unions – a small minority of the Australian workforce – not by a tight labour market with workers changing jobs to secure better wages and conditions. Today’s Roy Morgan employment estimates show why inflation in Australia is contained, and will remain contained – at it’s meeting next Tuesday the RBA must drop interest rates by at least 0.5 per cent and probably more.”

Figure 3

 

If Gary Morgan is right, the RBA’s rosy forecast for the future will be shown to be in error. The primary source of that error will be not merely misplaced optimism, but reliance upon neoclassical economic models about the economy that ignore the role of credit just at the moment that decelerating credit is finally setting in in earnest in Australia, after being delayed by the First Home Vendors Boost.

Figure 4

 

The First Home Vendors Boost was the sole cause of the reversal of deleveraging in Australia after the crisis began, with the growth in mortgages more than offsetting the reduction in debt by the business sector.

Figure 5

 

With that artificial stimulus to credit growth over, credit growth is now decelerating in Australia, and causing unemployment to rise despite the offsetting impact of the resources boom.

Figure 6

 

Mortgage debt is now decelerating strongly, and taking house prices down with it.

Figure 7

 

From its comment that “Housing prices showed some sign of stabilising at the end of 2011″, the RBA appears to be buying the RPData spin that a one month upwards blip in their data series after 11 months of decline signals a bottom to the housing market. However a simple comparison of house prices here to those in Japan and the US after their bubble economies burst makes it hard to argue that “Australia is different”.

Figure 8

 

Of course, at this stage it is too early to tell whether we’ll follow the long slow decline of Japanese prices, or the sudden fall that marked the US. But by the end of 2012, Australia’s house price decline profile should be apparent.

Figure 9

 

 The areas yet to be canvassed are, what are the wider implications to Australian Standards of Living, with the obvious coming reduction in money supply, which reduced housing prices, reduction in employment, reduced credit supplied into to business, and reduced consumer spending bring with them. It is going to be tough for another 5 years, is how I see it. (Editor’s comment)

What it takes to join the ranks of the world’s richest 1%

November 25, 2011

This article was written by Michael Yardney, who I have known for many years as one of Australia’s best property development educators and advisors. You can follow his commentary by subscribing to his newsletter at www.propertyupdate.com.au

 

I can see 2011 going down as a year that will be remembered for civil unrest.

It started with a street vendor setting fire to himself in Tunisia and moved on to civil unrest in a number of countries in the Middle East. Then there were riots in London and, more recently, protests around the world against the richest 1%.

The protesters say they are opposed to “the fundamental inequality in society — social, economic, ecological — and want to change the ways that our society is structured and run so that way, the vast majority of people — the 99% — have their interests accounted for, their voices heard, their needs represented.”

As many of these protestors claim our society is run for and by “the 1%”, I found it interesting to read an article explaining exactly what it takes to join this exclusive club in a recent copy of the Australian Financial Review.

 

And by the time I finish explaining how to join the ranks of world’s richest 1%, you may find you’re already in it. But I’m getting ahead of myself…

What it takes to make it into the Rich1% Club.
Apparently it takes assets of $11.2 million to be amongst the richest 1% of Australia’s 8.4 million households.

The top 1% has a lazy $1.07 million kicking around in cash or it’s equivalent according to the Australian Financial Review. That compares with just less than $120,000 for the top 20% of households.

The average value of cars owned by the top 1% is $84,000; compared with $32,000 for the top 20%. And their financial security is covered by $1.4 million in superannuation, more than double the super held by the wealthiest 20 per cent.

Those who make it in the top 1% of rich people tend to have extensive share portfolios, worth $450,000 and have a business valued at an average price of  $3milion.

This is in line with the Merrill Lynch Cap Gemini report of High Net Worth Individuals that found 80% of this club made their wealth through business.

But that doesn’t mean that the wealthiest Australians don’t like property – they do and they are amongst the keenest property owners in the world.

If you are in one of those 84,000 households that make up the 1%, you are likely to live in a house worth on average $1.9 million and own other property holdings worth over $3milliion.

Now clearly there is a wide gap between the top 1% and the average Australian and figures from the Australian Bureau of Statistics show that Australia’s richest households are expanding their wealth three times faster than the poorest groups, and many are using property to leverage their wealth. I wrote about it here in a recent market commentary.

Another Perspective.

No one’s hardship should be belittled. Becoming unemployed or not being able to keep up your mortgage payments aren’t just financial problems. They’re social and emotional problems that strike at your sense of worth.

But things always need to be kept in perspective. Some really interesting numbers emerge when you expand your view and look at the richest 1% in the entire world.

It’s no secret that Australia is among the richest nations on Earth, so how much do you need to earn to be among the top 1% of the world?

According to an article by Motley Fool in Motley Fool the answer is US$34,000.

This article explains that in his book The Haves and the Have-Nots, World Bank economist Branko Milanovic shares that be in the top half of the globe, you need to earn just $1,225 a year.

To be included in the top 20% of income earners in the world all you need is a salary of US$5,000 per year. To be the top 10% you would need to earn US $12,000 a year. And to be included in the top 0.1% requires an annual income of US $70,000.

Dig even deeper and the figures become unconceivable.

According to the U.N., “Nearly half the world’s population, 2.8 billion people, earns less than $2 a day.” According to the World Bank, 95% of those living in the developing world earn less than $10 a day.

When you consider the context of the entire world, it means that the Australians we consider poor are among some of the world’s richest people.

A new report from Credit Suisse Global Wealth has revealed what many of us Aussies already know; that we are indeed living in the lucky country!

In term of average wealth per adult in 2011, Switzerland, Australia and Norway are the three richest nations in the world, with the average Australian worth close to $221,704, which is four times more than that amount boasted by each US adult. And the proportion of Australian adults who can claim a worth of more than $100,000 is eight times the global average. 

In short, most of those occupying Wall Street or Melbourne or Sydney would be considered extraordinarily wealthy by much of the world.

Many of those protesting the 1% are, in fact, the 1%.

Apart from having amongst the highest incomes in the world and the second best lifestyle, the ABS advises we also have one of the highest life expectancies on the planet.

Since 1990 six years has been added to the life expectancy of Australian males and four years has been added to the life expectancy for women. 

Anyone can join the 1% club.
But the protestors in Australia should remember that we live in the best country in the world. A country of opportunity where virtually anyone can make it into the BRW Rich 200 list. 

Clearly that’s just not possible in many other parts of the world.

Just look at this year’s Rich 200 List…

While 17 percent inherited some of their fortune, most were self made successes, some coming from working class backgrounds.

And there’s no use complaining about the school you went to, because attending a private school and having an elite education is clearly not a prerequisite to joining Australia’s wealthy. While some forged important networks at school, many went to public schools and others didn’t even finish high school. In fact less than half of those in the Rich 200 list have tertiary qualifications. 

And don’t say it’s too late…

You’re never too young and you’re never too old. The youngest member of this year’s BRW Rich 200 is aged 35 and has an estimated wealth of $1.01 billion, which is even more than the oldest member who at the age of 92 has accumulated $289 million.

Some final thoughts.
Just to make things clear – this isn’t to belittle the protestors’ message. I see merits in some of the Occupy protestors’ arguments.

And I’m definitely not against protesting – I grew up in the age of protests against the Vietnam War.

Needless to say I can understand why people would be upset when many of top 1% are perceived to have earned their income unjustifiably. Being paid by big corporations that in some cases have been run into the ground and then been bailed out by their governments doesn’t sound right.

Nor does a tax system where the wealthy seem to avoid tax and the poor seem to pay a disproportionate amount.

It’s hard to argue with that logic.

Remember…I’m not having a go at the protestors.

The Occupy Wall Street movement has attracted support around the world and many believe they have a genuine grievance. High flyers in the world of finance helped create the Global Financial Crisis and the poor of the world are now paying for it.

I’m just offering another perspective and reminding them that even though our system has lots of faults, it has created more prosperity, even for the lowest 1%, than most of the world can comprehend.

 

Where is the Euro Going – Steady after Bale Out!

October 31, 2011

Outgoing European Central Bank (ECB) President Jean-Claude Trichet (L) hands over a bell to his successor Mario Draghi at the end of a farewell ceremony in Frankfurt/M.,Western Germany.

All eyes will be on Italy’s Draghi next week as he takes the helm of the ECB just days after European leaders hammered out a deal to solve the Eurozone debt crisis.

Mario Draghi to look after the Euro, and the European Central Bank

 

Mario Draghi now at the helm

All the world’s business leaders, economists and politicians eyes will be on Italy’s Mario Draghi next week as he assumes control of the European Central Bank just days after European leaders hammered out a deal to solve the Eurozone’s debt crisis.

The 64-year-old former Goldman Sachs banker officially takes over from Jean-Claude Trichet as head of the guardian of the Euro on Tuesday and then chairs the ECB’s regular monthly policy-setting meeting on Thursday.

The Italian could not be taking over at a more testing time for the single currency and its 17 member states as the world looks to see ifEuropecan really implement the landmark accord to tame a two-year-long debt crisis.

Analysts say the eurozone is not out of the woods and whileGreecemay have gained some breathing space through the deal, Draghi’s home country ofItalyis fully in the spotlight as it grapples with its massive debt.

Furthermore, with economic growth slowing noticeably across the globe, the spectre of recession has not been completely banished.

“Good luck, Mr Draghi — you will need it,” wrote the British daily The Telegraph in its edition on Friday.

Analysts agree that the legacy of Trichet, who for the past few years has been trying to steer the euro and the ECB through the toughest crisis in their short existence, is still unclear.

In May 2010, the Frenchman took perhaps one of the most controversial steps of his career when he decided the ECB should buy the bonds of eurozone countries that were having difficulty in getting financing the usual way via the markets.

Trichet, who was nicknamed the “Ayatollah of the strong franc” during his time as governor of the Bank of France, justified the move by insisting it was only a temporary measure.

But his critics argued it took the ECB beyond its core mandate, which is to keep a lid on inflation in the 17-nation eurozone.

Two of the ECB’s most experienced German policymakers — Bundesbank President Axel Weber and chief economist Juergen Stark — resigned in protest.

“The jury is necessarily still out on whether Jean-Claude Trichet will be the man who saved the Euro,” wrote Guntram Wolff, deputy director of the Brussels-based think-tank Bruegel, in a recent report.

Nevertheless, while the ECB was first seen as an institution that only set interest rates, under Trichet’s leadership it has taken on much more “far-reaching competencies and broad executive authority” and now played a “leading role in assuring financial stability in the euro area,” Wolff wrote.

For incoming Draghi, there are a number of key challenges, he added.

Amid calls for a cut in interest rates to combat the economic slowdown, the ECB has to also show that it is keeping a close watch on inflation.

The ECB would also have to reconsider the role it should play in the sovereign debt crisis, particularly after the latest developments.

At the same time, it should continue to work for a true euro-area fiscal authority, and last but not least, seek to regain the trust of EU citizens which has deteriorated sharply in recent months, Wolff argued.

Turning to possible interest rate moves, ECB watchers believe it will be too early for Draghi to announce a cut just two days after taking office, even if such a move might be warranted on the economic side.

Berenberg Bank economist Christian Schulz said a rate cut could have “a positive growth impact without shifting inflation risks to the upside” but Draghi would likely wait until December when the ECB’s next economic estimates are published.

Jennifer McKeown, senior European economist at Capital Economics, similarly felt the latest economic data “point strongly to the need for more policy support (but) there have been few hints that the ECB is intending to cut interest rates at its November meeting.”

Nevertheless, Draghi “is likely both to signal a rate cut in December and pledge to maintain the ECB’s unconventional support in the form of both unlimited lending to banks and further … bond purchases,” she said.

Commerzbank economist Michael Schubert believed the ECB “will probably have to considerably trim back its growth and inflation outlook before it is ready to slash rates.”

GOLD – Biggest two-day fall since 1983

September 26, 2011

This article was written by Alan Kohler www.businessspectator.com.au

It’s hard to get a fix, as it were, on what the sudden drop in the gold price means because at the same time as the US dollar has rallied strongly, the Chicago futures exchange operator, CME Group, has whacked up margin requirements.

The minimum cash deposit for trading gold futures has been hiked by 21 per cent to $US11,475 per 100 ounce contract. The deposit for trading silver has been lifted by 15 per cent to $US24,975.

Speculators are dumping their contracts and fleeing the market, which is perhaps not a bad thing, and the gold price has returned to its five-year trend line on the charts.

Gold and silver futures prices were already falling as part of a widespread commodity bust and because the US dollar has gone up 6 per cent this month. There are now massive realignments taking place among currencies.

Gold – everybody’s favourite alternative currency – dropped 9.3 per cent in two days last week, its biggest two-day fall since 1983, and the Australian dollar has plunged nearly 10 per cent.

Commodity futures generally are dropping like so many stones, as speculators flee rising margin requirements and, more fundamentally, rethink speculative trading strategies entirely.

Global investors appear to have gone into capital preservation mode in a way that was not evident after the 2008 crisis.

That was because in 2008 central banks responded to the Lehman Brothers and AIG collapses by flooding the world with sustained liquidity, which led to a renewed burst of speculation in commodities.

Liquidity is now evaporating again because of the Greek default threat but central banks are in no position to ante up another flood of liquidity, and governments are in an even weaker position to provide fiscal support.

So not only are recessions now more likely in the advanced economies, there’s no money to be playing with commodity futures for quick trading gains. And the capital preservation strategy of last resort is the US dollar – cash or bonds.

As an aside: the jump in the US dollar is the last thing the United States needs right now. It desperately needs to increase exports to offset the weak consumer spending at home.

Is the American Government lying about the debt crisis?

July 2, 2011

Written by Martin D. Weiss, Ph.D. of “Money and Markets” eletter@e.moneyandmarkets.com

Do you believe what government officials and experts are saying about the debt crisis?

If so, you’re taking your financial life into your hands.

Just consider how many times they’ve been wrong,

issued deliberately misleading statements, or simply lied:

In 2007, they swore on a stack of Bibles that the debt crisis

was limited to sub-prime mortgages.

 

But the crisis promptly spread to all kinds of mortgages,

ripping through giant mortgage lenders like Countrywide,

Fannie Mae, and Freddie Mac.

In 2008, they admitted it had spread,

but swore that it was strictly contained to the housing and mortgage sector.

But in a few short months, it had enveloped commercial paper,

money markets, and nearly all of Wall Street.

Nearly every one ofAmerica’s largest banks either failed

or came within a hair of insolvency.

 

In late 2009, they rescued the bankrupt banks and mortgage lenders

using the $700 billion in emergency capital approved

under the Trouble Asset Relief Program (TARP).

Then, they ran deliberately lenient “stress tests”

on the biggest banks to “prove” to the public

that the emergency had passed.

 

But with the government now assuming liability for trillions of mortgages

and other bank obligations,

they transformed a Wall Street debt disaster

into an even largerWashingtondebt disaster:

The federal deficit ballooned to four times its pre-crisis size.

And in the euro zone,

where governments had also pumped massive sums into bankrupt banks,

the weakest countries likeGreecebegan to collapse.

In 2010, the European Union and the International Monetary Fund

put together a sovereign debt rescue package

that was even larger than TARP.

They pulledGreecefrom the precipice and

vowed never to let the contagion reel out of control.

 

But within a few short months,

the contagion toppledIrelandandPortugal

threatened a similar fate forSpain,Italy, andBelgium,

and even raised serious questions about the financial fate

of the two largest economies in the euro zone -FranceandGermany.

 

Clearly, each outbreak of the contagion, each government rescue,

and each new happy-talk pronouncement

has merely spawned a bigger disaster, impacting bigger institutions.

Has gutted the portfolios of more investors,

and ruining the lives of millions more Americans.

Now, here we are halfway into 2011 and they’re at it again.

This time with a complete package of misleading statements

and lies that make all previous ones seem candid by comparison.

 

Lie #1. They’re again saying that the debt crisis of 2008-09 is “history.”

 

The truth: The core cause of the crisis —

the gigantic pyramid of high-risk derivatives —

has never gone away.

 

Quite the contrary, the pile-up of derivatives on the books

of majorU.S.banks is now much larger — $244 trillion,

compared to less than $200 trillion before the debt crisis,

according to the U.S. Comptroller of the Currency (OCC).

 

Lie #2. They say thatAmerica’s largest banks have virtually no exposure

to a Greek debt default or a broader European sovereign debt crisis.

 

The truth: All major European andU.S. banks are linked through an even larger global network of derivatives,

now representing more than $600 trillion,

according to the Bank of International Settlements.

 

Therefore, even thoughU.S.banks may not hold large amounts

of European debts themselves,

they are directly exposed to European banks

that do hold large amounts of loans to

Greece,Ireland,Portugal, and others in jeopardy.

 

 

Lie #3. They insist thatAmerica’s largest banks are safe.

 

The truth: The largestU.S. banks continue to hold

nearly all of the derivatives in the country.

Goldman Sachs has $44.9 trillion in derivatives.

Bank of America has $52.5 trillion.

Citibank has $54.1 trillion.

And JPMorgan Chase towers over all others with $79.5 trillion

of these potentially dangerous investments.

 

In total, JPMorgan, Goldman, Citibank, and the BofA alone are exposed to $234.7 trillion in derivatives.

In contrast, among the thousands of other U.S.banks, the grand total of derivatives is a meagre $9.3 trillion.

In other words, these four banks are exposed to more than 25 times

the sum total of all derivatives held by every other bank in theUnited States.

Never before has so much financial power — and risk — been concentrated in the hands of so few!

Yes, these numbers, reflecting the “notional” value

of the financial instruments at play,

are far larger than the actual amounts invested.

But still, the risks are huge …

The derivatives held by Bank of America are

36 times larger than TOTAL assets;

 

At JPMorgan Chase, they’re 46.1 times larger than the assets;

 

At Citibank, 46.6 times larger; and

 

At Goldman Sachs Bank, a shocking 533 times larger!

Yes, in recent months,

some banks have reduced somewhat their exposure to defaults

by their counterparties.

But here again, the exposure remains massive:

According to the OCC, for each dollar of capital …

Bank of America has $1.82 in credit exposure to derivatives;

 

Citibank also has $1.82;

 

JPMorgan Chase has $2.75; and

 

Goldman Sachs is, again, at the greatest risk of all —

with $7.81 in credit exposure for each dollar of capital.

 

That means that if JPMorgan’s counterparties defaulted on 36% of their derivatives, every last dime of the company’s capital would be wiped out.

And at Goldman Sachs,

defaults on just 13% of its derivatives would wipe out its capital.

 

Lie #4. Misinformation about the government’s supersized debts is equally egregious.

They want you to believe that, although large,

the government’s debts are far below the danger zone —

thought to be around 100% ofGDP.

 

The truth: According to the Fed’s latest Flow of Funds report, the U.S. Treasury owes a total of $9.6 trillion, 64% ofGDP, which isn’t too bad.

But the U.S.government is also responsible for $7.6 trillion in debts

owed by government agencies, such as Fannie Mae and Freddie Mac.

The U.S.government’s total debt burden: $17.2 trillion

or 115% of GDP—

similar or WORSE than that of countries like

Greece, Ireland, Portugal, and Spain!

 

Lie #5. They argue thatAmerica is special because it controls the world’s dominant reserve currency.

The truth: Yes, that givesWashington the ability to print money with impunity … press other rich countries to accept its debts,

and borrow huge amounts abroad to finance its deficits.

But it’s more of a curse than a blessing!

 

It means that, more so than any other major nation,

theU.S.government is beholden to investors overseas —

often the same investors who have repeatedly attacked countries

like Greece and Ireland.

Ultimately, that could make the  U.S.even more vulnerable than Europe.

The 4 major Banks exposed.

 

Now the question is, what do you think?

The debate is Australia is often confused by Slogans that Politicians pump out, to gloss over the truth,

and to make you to think everything is not OK,

except if things where handled their way they would fix it.

And the problem would go away. That is far too simple.

The truth of the matter is far more complex than that.

And while facts presented here are correct,

does it actually mean the USA economy is at risk?

Well to clarify the issues you really need to understand how “Hedge” markets operate, and what is the size of the overall world market? And which other institutions share the risk? Or how they mitigate it?

 

The role of the Hedge market is actually to mitigate risk, not create risk.

Certainly there are speculators playing in the market, and spikes in the market soon show if interest in a particular area is out of proportion with the rest of the market. To rely on regulators and Government authorities to manage or monitor excesses in this market is extremely difficult. You need to assess this whole complex area with a clear mind, and measure the potentiality of any risk that could cause this market area to implode.

Complex yes but not outside a reasoned explanation that would reduce the level of anxiety that the tenor of this article creates.

 Tell me what you think? 

The Military’s New Green Energy Strike Force

May 4, 2011

Report written by Giles Parkinson

The world’s biggest economy, the United States, may be spurning the opportunity to develop coherent climate change and energy policies, but the world’s biggest individual consumer of energy, the US Department of Defence, is certainly not.

The world of climate change policies is full of unlikely contradictions. In Australia, a Labor/Green coalition pushes for a market-based system to reduce emissions while the small government Tories argue for increased government intervention. In the US, the government finds itself incapable of providing the market signals that could unleash the forces of innovation, so the task of driving innovation and providing the budgets to bridge the path to commercialisation has fallen to its largest subsidiary, the United States Armed Forces.

Ambitious renewable energy policies are usually criticised for being both costly and risky, but the US Army, Navy and Air Force have a counter-intuitive view: they have developed the most ambitious policies anywhere in the world because they want to cut their costs and increase their security. The US Navy plans to replace 50 per cent of its petroleum consumption with alternative fuels by 2015, and wants half its overall energy consumption to be sourced from alternatives by 2020. The US Air Force wants to wants to source 50 per cent of its jet fuel from alternative fuels by 2016, while the US Army wants to sources 25 per cent of its energy needs from renewable sources by 2025.

US Navy secretary Ray Mabus recently said its pro-active position shouldn’t be a surpise, having helped pioneer the switch from from sail to coal for powering its ships in the mid-19th century, then the switch from coal to oil, and later from oil to nuclear power. It recently launched the first hybrid electric ship, dubbed the Prius of the sea.

In an environment where so many dismiss renewables as being either too hard or too expensive, it is refreshing to hear the Navy’s ambition. “Every time there were naysayers, who said you’re trading one form of proven, available energy for another that is expensive and not well known, and you shouldn’t do it,” Mabus told a conference in New York last month. “Every single time, those naysayers have been proved absolutely wrong, and they’ll be proved wrong this time.”

Lockheed Martin

These mandates have certainly grabbed the attention of the US armed forces’ principal contractors, such as Lockheed Martin, which has devoted much of the resources of its 140,000 engineers and scientists on to the energy sector. “We’ve been pretty good at getting people into space, make airplanes that fly upside down and backwards, and making fast ships. Now we’re applying those resources to energy,” says Christopher Myer, Lockheed Martin’s vice president in international business and energy markets, who is in Melbourne attending Clean Energy Week.

Some of the ideas it is pursuing are highly experimental. It recently won a $US400 million contract to develop high altitude blimps that are powered by flexible solar panels and fuel cells. It has also been mandated by the US Navy to develop a power plant using ocean thermal energy conversion (OTEC), where cold water is piped from the ocean’s depths and the energy generated from the temperature differential with the warm surface water is harnessed to drive a conventional rankine cycle turbine. Some say such technology has the potential to provide one third of the world’s energy needs.

Navy to reduce Costs

In any case, the Navy is keen to develop 24/7 energy sources. Hawaii currently relies on imported diesel for 96 per cent of its energy requirements, exporting more than $6 billion a year to fund those imports. WillOTECbe cheaper? “Not initially,” says Myers. “But over the long run, yes.”

The Navy’s huge bases at Guam and the Marshall Islands rely almost exclusively on burning oil. In Guam, it burns more than 10,600 barrels of oil a day, and wants 80MW of renewable energy installed within two years. On the Marshall Islands, it imports 30 per cent more oil, and pays nearly 40c/kWh for its energy needs – more than the cost of virtually any renewable source. Mabus said recently that every rise of $1 a barrel in the price of oil adds $30 million to its fuel bill. He says the single hybrid electric ship will save $250 million in fuel costs over the lifetime of the ship. The scale of its mandate is credited with a 50 per cent fall in the price of biofuels in 2010.

Lockheed Martin has also teamed up with several different wave and tidal companies to explore ocean energy sources, including for remote sensor buoys, and is investing heavily in alternative fuels, including algae and synthetics.

It is looking at the development of solar and fuel cell technologies for army bases, as well as generating energy from waste materials from those bases. It is a question of both energy security and personal security – most losses of life in the theatre of war occur along fuel supply lines. Lockheed also has contracts to develop woody biomass power plants, and others fueled by medical waste from army and veteran hospitals. And it is also investing heavily in concentrating solar thermal, applying its engineering expertise to look at how production processes can be improved to lower costs.

Interestingly, for Australian innovators and emerging renewable developers, Lockheed Martin is on the lookout for good ideas – particularly in the biodiesel sector, but also in other renewables – that could benefit from its contacts with the defence department, its massive balance sheet, and its expertise in project delivery. “Most innovative technologies struggle to get a product to market,” Myers says. “We can partner them and offer the product to the US government and others. We are a large company, we can close on projects, and we can give banks comfort.”

And if you doubt the Navy’s determination to wean itself off fossil fuels, consider this undertaking by Mabus: By next year, he wants to demonstrate a “Green Strike Group” composed of nuclear vessels and ships powered by biofuel. By 2016, he wants to sail the Strike Group as a “Great Green Fleet” composed uniquely of nuclear ships, surface combatants equipped with hybrid electric alternative power systems running on biofuel, and aircraft running on biofuel.

And Australian politicians fret over suggestions that they should mandate a marginal improvement in car fuel efficiency.


Follow

Get every new post delivered to your Inbox.

Join 2,323 other followers