Hale also relays some very hawkish comments from the RBA. Here's a taste.
''I was at conference last week that the Federal Reserve had out at Santa Barbara, California, with all the Asian central banks. Ric Battellino, your Reserve Bank deputy-governor, was there. He was quite emphatic about the need to get your money market yields from what's now 3.5 per cent to 4 per cent as quickly as possible. ''He regards 3 per cent as exceptionally low, a truly emergency setting. Now that things are OK, they can't stay there - they have to go to what the bank regards as a cyclically adjusted number for a moderate Australian economy.That's 4 per cent. If growth gets really strong, they might go back to 6 per cent.'' Mr Hale expects exceptionally strong growth, and another two-Australias scenario with Queensland, Western Australia, and in his mind South Australia, benefiting at Sydney and Melbourne's expense.
3. Hail Ludwig - This opinion piece from Mark Spitznagel in the Wall St Journal is a timely reminder of the warnings of economist Ludwig von Mises, who highlighted in the 1920s the danger of artificially low interest rates and government intervention. It all seems incredibly familiar in this day and age. HT Gertraud via email.
Mises's ideas on business cycles were spelled out in his 1912 tome "Theorie des Geldes und der Umlaufsmittel" ("The Theory of Money and Credit"). Not surprisingly few people noticed, as it was published only in German and wasn't exactly a beach read at that. Taking his cue from David Hume and David Ricardo, Mises explained how the banking system was endowed with the singular ability to expand credit and with it the money supply, and how this was magnified by government intervention. Left alone, interest rates would adjust such that only the amount of credit would be used as is voluntarily supplied and demanded. But when credit is force-fed beyond that (call it a credit gavage), grotesque things start to happen. Government-imposed expansion of bank credit distorts our "time preferences," or our desire for saving versus consumption. Government-imposed interest rates artificially below rates demanded by savers leads to increased borrowing and capital investment beyond what savers will provide. This causes temporarily higher employment, wages and consumption. Ordinarily, any random spikes in credit would be quickly absorbed by the system"”the pricing errors corrected, the half-baked investments liquidated, like a supple tree yielding to the wind and then returning. But when the government holds rates artificially low in order to feed ever higher capital investment in otherwise unsound, unsustainable businesses, it creates the conditions for a crash. Everyone looks smart for a while, but eventually the whole monstrosity collapses under its own weight through a credit contraction or, worse, a banking collapse.
4. Squid equals shark - Goldman Sachs is known for its blue-bloodedness, but not many know it has been involved in the sleaziest of sub prime lending in the United States. Greg Gordon from McLatchy Newspapers reports on how a couple called the Beckers have just beaten Goldman in a court case over sub prime lending. HT Iain Parker via email. Rob Stock and Emma Page at the Sunday Star Times have also reported on what's happening with mortgagee sales here. The banks are becoming more aggressive.
Goldman spent years buying hundreds of thousands of subprime mortgages, many of them from some of the more unsavory lenders in the business, and packaging them into high-yield bonds. Now that the bottom has fallen out of that market, Goldman finds itself in a different role: as the big banker that takes homes away from folks such as the Beckers. The couple alleges that Goldman declined for three years to confirm their suspicions that it had bought their mortgages from a subprime lender, even after they wrote to Goldman's then-Chief Executive Henry Paulson -- later U.S. Treasury secretary -- in 2003. Unable to identify a lender, the couple could neither capitalize on a mortgage hardship provision that would allow them to defer some payments, nor on a state law enabling them to offset their debt against separate, investment-related claims against Goldman. In July, the Beckers won a David-and-Goliath struggle when Goldman subsidiary MTGLQ Investors dropped its bid to seize their house. By then, the college-educated couple had been reduced to shopping for canned goods at flea markets and selling used ceramic glass.
5. Money, money, everywhere - But not a drop to drink. The WSJ reports that US banks again tightened lending standards in the September quarter despite being loaded up with cash from Ben Bernanke's helicopter. The Zombies continue to stagger towards stagnation while the investment bankers are set to receive a record US$30 billion in bonuses this year as they use the Fed's guarantee and near zero interest rates to play on the stock market and debt market casinos. When are American taxpayers and the 30 million plus unemployed and underemployed going to revolt?
"Wall Street is beginning to resemble Clark Gable as Rhett Butler in the film "˜Gone With the Wind': "˜Quite frankly, my dear, I don't give a damn,'" Paul Hodgson, a senior research associate on compensation at the Portland, Maine-based Corporate Library, said in an e-mail. "It doesn't seem as if even political threat, disastrous PR, envy, rising unemployment rates and home repossessions is enough to get any of these people to refuse the bonuses they have "˜earned.'"
6. Technically insolvent - Here's a gold bug's view of the coming commercial real estate debacle in US banking. It includes some good detail from 'The Golden Truth' blog on the problems at Bank of America.
A good friend on mine works for a real estate consulting firm in NYC. One of his deals is evaluating a client's investment in an insolvent commercial property. The deal has $110 million bank loan funded by Bank of America. My friend said the property is worth $30-40 million. What I found interesting, and which confirms that banks are not even close to marking their assets properly, is that my buddy said that B of A is carrying the loan on its books at the full $110 million. I just did a "drive-by" on B of A's latest 10-Q. It has $2.1 trillion in assets, not including cash. It is reporting $257 billion of shareholder equity. Now, BAC is over-marking the above-referenced asset by 70%. Assume across all of its assets, BAC is being generous in its marks by only 10%. This exercise implies that a true mark-to-market of BAC's balance sheet would wipe out BAC's shareholder equity. Is this unrealistic? I think, if anything, my analysis errs in the favor of BAC. Why? BAC has $159 billion of home equity loans on its books. We know that, in general, most home equity loans are probably worth nothing. Let's say BAC's are worth 50 cents on the dollar (this is generous). That adjustment alone would reduce BAC's book value by nearly $80 billion. The bank has a loan loss reserve of 3.8% of its $914 billion in loans. But the charge-off ratios for residential mortgages and credit cards (not including commercial r/e) was 4.73% in the latest quarter for mortgages and 12.9% for credit cards. Clearly, BAC is unequivocally under-reserving for the purposes of managing earnings and mainting its vital capital ratios. And we know that the banks are undeniably stretching out their declarations of delinquencies, defaults and charge-offs.
7. On the way to Mt Kosciusko - Perma bear and Australian housing crash forecaster Steve Keen has lost his bet with Macquarie Bank economist Rory Robertson about prices falling 20% over there. They only fell 3.8% so Keen is about to walk up Mt Kosciusko to fulfill his side of the bet. But Keen hasn't quite given up yet, as he explains that this is largely because of the government's first home lenders boost. His charts are ominous.
The main factor behind the revival of the bubble is what is formally known as the First Home Owners Boost (FHOB), but what is more accurately described as the First Home Vendors Boost. As at the end of September"“the date of the latest ABS house price data"“171,000 applicants had received this $7,000 bribe. Since many are couples, more than 1 percent of Australia's population has leapt into the property market pool at the behest of a government stimulus. So how has a mere $1.2 billion injection of government money driven the average house price up by 8% in six months? By the "magic" of leverage: the typical First Home Buyer (FHB) took that $7,000 to the bank and leveraged it up to another $40-50,000, which then was handed over to the First Home Vendor (FHV) as cold, hard cash. The FHV then took that extra $40-50,000 and leveraged it to an additional $200,000-$250,000, which meant that that new place which had been just out of reach prior to the FHOB was now well within range. Competing with other lucky recipients of government and bank largesse, he drove up the price of that middle to upper tier house by an additional $100,000 or more. The aggregate impact of this government enticement into private debt was that Australian households reversed the deleveraging process that had begun in late 2008, and as a result the mortgage debt to GDP ratio, which had been falling, began to rise once more. The FHOB has led to Australians taking on an additional $50 billion of mortgage debt. That "demand" factor, far more than any other, is why I've lost the second half of Rory's bet with me.
8. Kill the CDS - Renowned hedge fund manager David Einhorn has called for the destruction of the Credit Default Swap market, the FT.com reports. This is an insider saying this and his critiques are devastating. HT Yves Smith at Naked Capitalism.
David Einhorn, founder of Greenlight Capital, was one of the earliest and most prescient users of credit default swaps. Now he is calling for these instruments, in effect a form of insurance on individual firms (or governments) that pays out when the institution defaults or restructures, to be banned. "I think that trying to make safer credit default swaps is like trying to make safer asbestos," he writes in a recent letter to investors, adding that CDSs create "large, correlated and asymmetrical risks" having "scared the authorities into spending hundreds of billions of taxpayer money to prevent speculators who made bad bets from having to pay". CDSs are "anti-social", he goes on, because those who buy credit insurance often have an incentive to see companies fail. Rather than merely hedging their risks, they are actively hoping to profit from the demise of a target company. This strategy became prevalent in recent years and remains so, as holders of these so-called "basis packages" buy both the debt itself and protection on that debt through CDSs, meaning they receive compensation if the company defaults or restructures. These investors "have an incentive to use their position as bondholders to force bankruptcy, triggering payments on their CDS rather than negotiate out of court restructurings or covenant amendments with their creditors", Mr Einhorn says.
9. Withholding tax - California is so desperate for cash it has changed the withholding tax rules to collect an extra US$2 billion, the LAtimes.com reports. HT Gertraud via email.
Desperate to close a $26-billion deficit hole, Gov. Arnold Schwarzenegger proposed and the Legislature passed a speedup in personal income tax withholding starting Nov. 1. The withholding increased by 10%, generating a projected $1.7-billion revenue bump in the current fiscal year. Additionally, starting in 2010, taxpayers required to make quarterly estimated payments will be told to send in 70% during the first half of the calendar year. The state figures to make $250 million off that during the current fiscal year. So all told, it's a $2-billion one-time boost in personal income tax revenue. And don't be distracted by words such as "liability" and "refund."
10. For no relevant reason - This is a video of a flock of birds in Denmark. Sort of cool in a shapeshifty sort of way.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.