UK house prices dead for a decade; America's green weeds; How the BoE cooked its forecasts; Dilbert
Here are my Top 10 links from around the Internet at 10 past 10 am. I welcome your additions and comments below or please send suggestions for Thursday's Top 10 at 10 via email to firstname.lastname@example.org
1. Funding deluge - The big four Australian banks are preparing a 'deluge' of borrowing on international markets in coming months, Bloomberg reports from a Morgan Stanley note. This will more difficult and expensive in the wake of the ructions in the European Financial Markets. It's why mortgage rates (and deposit rates) are likely to keep rising at the same rate or maybe a faster rate than moves in Official Cash Rates, on both sides of the Tasman.
Commonwealth Bank, Westpac Banking Corp., National Australia Bank Ltd. and Australia & New Zealand Banking Group Ltd. need to borrow about A$140 billion ($122 billion) in the year to Sept. 30 and A$162 billion in the following 12 months, Morgan Stanley strategists led by Pieter Van Der Schaft wrote in a note e-mailed today.
Investors will “increasingly differentiate between banks on the basis of funding requirements,” the strategists said. Most sales will have to be done “at a higher cost offshore due to limited onshore absorption capacity of new bank issuance.” Australia’s top four banks, facing tougher capital rules requiring them to hold more liquid assets and less of each others’ debt, are seeking funds offshore in an effort to cut borrowing costs.
The extra yield investors demand to hold Australian financial company debt instead of government bonds has jumped 22 basis points since the start of June, a Bank of America Merrill Lynch index shows.
2. Stressful tests - Der Spiegel reports that up to 15% of European banks could fail the stress tests due to be released on July 23. It could be a volatile week or so before our Reserve Bank decides on the Official Cash Rate again on July 19.
The planned stress tests of European banks could be tougher than first thought. According to a German media report, up to 15 percent of the European banks to be examined may fail -- even though the criteria for the tests have been watered down.
The pan-European stress tests for banks won't be as easy to pass as previously thought, and 10 to 15 percent of banks assessed may fail them, German business daily Handelsblatt reported on Monday, citing an unnamed management board member of a large German bank.
More than 10 banks in Europe, including one or two in Germany, may fail the tests, the board member said.
3. Weeds rather than Green Shoots - Eric Sprott from Sprott Asset Management writes at Zerohedge about how the US economic recovery is a mirage and cites some powerful evidence, including very weak consumer spending and a broken banking sector.
Economic data released over the past two weeks have decimated any remaining belief in a lasting economic recovery. Slowdowns are appearing in the US, Europe, Japan and even China. Auto sales, housing starts, employment, consumer confidence, factory orders, consumer purchase intentions - just about every aspect of the economy that can be measured, is showing decided weakness. Of particular interest to us over the past year has been the GDP forecasts released by The Consumer Metrics Institute in Colorado ("CMI").
CMI caught our attention with their real time tracking of consumer retail sales data. Consumer spending represents 70% of GDP, and that spending can provide great insight into the workings of the underlying economy. CMI’s retail sales data has indentified a long, negative contraction in the economy based on their data set for the last 180 days. This was confirmed most notably in Walmart’s poor first quarter sales results when CFO Tom Schoewe stated, "More than ever, our customers are living paycheck to paycheck."
If that sentiment applies to other large retailers, it doesn’t bode well for 2010 GDP. The stock market rally that began in March ’09 was driven by monetary phenomena rather than anything fundamental, and based on data from CMI for 2010 it appears that we have already entered an economic contraction phase. The market is now beginning to reflect the fact that the green shoots were actually just the early signs of weeds, and it would suffice to say that virtually all the major world governments have some serious gardening to do.
4. Interesting set of accounts - Bank of America, one of the 6 Too Big To Fail banks, seems to have been reporting that its end of quarter assets were consistently lower than its averages for the quarter, ProPublica and Australian blogger John Hempton have been pointing out. Initially Bank of America denied it had done anything wrong. And then this:
So I was interested to read this Wall Street Journal Page 1 headline over the weekend: “BofA Admits Hiding Debt.”
In recent letters sent to the SEC, Bank of America “admitted to making six transactions that incorrectly hid from view billions of dollars of debt,” reported the Journal. The transactions—made between 2007 and 2009--involved as much as $10.7 billion, less than to the $50 billion that Lehman hid before declaring bankruptcy in 2008. (Read Bank of America's letters from April 14 and May 13.)
According to BofA, its error was in booking these six “repos,” or short-term borrowing, as sales. Doing so moved debt off its balance sheet, making the company’s profile look better to investors. This is also what happened when Lehman booked its Repo 105 transactions as sales instead of borrowing.
Chalk one up for the bloggers.
5. Why aren't Americans revolting? - James K Galbratith, the US economist who is the son of John Kenneth Galbraith, has written a searing and broad assessment in the New Republic of Barack Obama's failure to rein in the Too Big To Fail banks. Anyone who thinks Obama has done a good job should read it. Here's a taste. I agree with him completely.
Upon taking office, President Obama had a chance to change course and didn't take it. By seizing the largest problem banks, the government could have achieved clean audits, replaced top management, cured destructive compensation practices, shrunk a bloated industry, and cut the banks' lobbying power and therefore their capacity to obstruct financial reform.
The way to write-downs of bad mortgage debt and therefore to financial recovery would have been opened. None of this happened. Instead the Treasury administered fake "stress tests" and relaxed mark-to-market accounting rules for toxic assets which permitted the banks to defer losses and to continue to carry trash on their books at inflated values. This reassured the banks that they would not be permitted to fail—and so back to bonuses-as-usual they went.
The banks survived, and the administration today claims this “proves” they didn’t need to be taken over. But to what end did they survive? The banks are bigger, more powerful, and moer obstructionist than ever—and largely uninterested in making new commercial, industrial, or residential loans.
Today the former middle class is largely ruined: upside down on its mortgages and unable to add to its debts. With housing prices low and falling, banks are delaying foreclosures because they don't wish to recognize their losses; it is a sick fact that the cash homeowners conserve by non-payment is one source of the anemic recovery so far. But construction remains depressed, state and local budgets continue in a death-spiral of spending cuts and tax increases, the stimulus will soon end, and exports may soon fall victim to international austerity and the rapidly declining euro.
6. 'Risky assets' - The Telegraph reports that Pricewaterhousecoopers is saying UK house prices will not recover for another decade and should be viewed as risky assets. HT Blair via twitter.
The PwC research, published on Tuesday, not only puts British growth lower than the official Office of Budget Responsibility's (OBR) forecast but also paints a grim picture for home ownership in the UK for the next 10 years. After 30 years of almost uninterrupted house price rises, Britons have piled in £3,500bn into bricks and mortar.
Only pension contributions equal the 39pc of total net private wealth that is invested in the property market. But according to PwC: "Housing is a risky asset that is not guaranteed to generate positive real returns in the future even though this has been the pattern in the past." In fact, PwC says, there is a strong possibility that house prices continue to fall for the next five years and could drop further even beyond 2020. According to the report, this would significantly drag back the speed of economic recovery – which PwC claims faces a risk of a double-dip recession.
By the way, New Zealanders have over 90% of their net private wealth invested in the property market...
7. Especially for Wally - Copper prices may drop on talk the Chinese crackdown on property development could hit demand for all those pipes and cylinders and stuff that's made with copper, Bloomberg reports.
Housing policies such as lending rules will be enforced “strictly” to prevent speculative investment, China’s Ministry of Housing and Urban-Rural Development said today.
Concern about efforts to rein in the country’s surging economy helped to pull copper down by 17 percent in the second quarter. There is “concern about China’s determination to cool real-estate markets,” Marc Elliott, an analyst at Fairfax IS in London, said in a report.
European banks, rattled by investor uncertainty about their ability to withstand a sovereign-debt crisis, are poised to win a reprieve in Basel, Switzerland, this week as regulators from 27 countries shape new capital rules. A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks.
Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said. Another concession may involve granting transition periods of up to 10 years to ease concerns of some member countries that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold. As a result, the amount of capital European banks will be forced to raise in the next two years won’t be as much as investors fear.
“Politicians in France and Germany are worried about the impact of the rules on their economies,” said Chris Bates, a regulatory lawyer at Clifford Chance LLP in London. “Basel has managed to bring diverging banking systems and economies together. It’s more than just a capital regime. It’s a showcase of global cooperation. So the U.S. and the U.K. cannot let it break down.”
9. How the Bank of England cooked its forecasts - David G Blanchflower has written a startling opinion piece at Bloomberg detailing how the Bank of England governor Mervyn King used to massage the bank's economic forecasts.
Estimates have a tendency to whizz around all over the place in the face of small changes in assumptions, data used and time period covered. And errors can be huge, especially at turning points, so carefully considered judgment matters. Economic forecasts can be massaged, so independence is vital.
During my time on the Bank of England’s Monetary Policy Committee, which makes quarterly economic prognoses, Governor Mervyn King controlled the hiring and firing of the forecast team, who did his bidding.
They had to produce a result that was consistent with King’s views, or else they would be history. A patchwork of arbitrary fixes and prejudices frequently drive forecasts, which for the uninitiated are hard to see. King always emphasized the importance of top-down judgments, which means you can just make stuff up as you go along.
Worryingly, this was often only loosely based on the workings of the real world. Such glorified guesswork operated reasonably well during the boom years, but failed miserably when the recession hit. To put it bluntly, it isn’t that hard to manipulate a forecast. I have seen it done.
10. Totally irrelevant video - Here's Stephen Colbert on the handgun thing. Off to do REINZ figures. May come back to replace with something better
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