January 2010

Andrew Pegler - 08 January 2010

Now that you have recovered from your annual Christmas dose of family enmity I want to chat to you about moral hazard. And, no, this is not a sermon on your behaviour over the break; it’s a finance term and it will be a big issue this year.

At the height of the GFC, after the Lehman Brothers collapse froze international credit and we were all going to hell in a handbasket, Australia, like many other countries, issued a federal government bank guarantee. What this meant was that Kev and Wayne promised that if your bank went belly up they would guarantee your deposit. In addition to that, any institution that lent money to an Aussie bank would be paid back by the Australian Government if all else failed. Both these guarantees ensured banks stayed in business and that the economy didn’t grind to a halt. Nice day’s work boys.

But there is a flipside and it’s called moral hazard.

Moral hazard refers to the idea that people who are insured take greater risks. (Kinda like that hire car you thrashed in Byron Bay last year.) In this case the people who now have insurance are the banks and by default all the super funds, financial institutions, hedge funds and just about every other corner of the financial system i.e. pretty much anywhere you have parked your hard-earned. The fear is that once things recover these guys may start to take more risks than they ought in the knowledge that if it goes pear shaped again the good ole federal government will bail ‘em out.

Now I am not against the idea of a bank guarantee. We were all stuffed without it but it sends a bad message to the financial services and investing community. A message of moral hazard.

So this year as the whole GFC mess starts to recede keep your eyes on what people start to do with your hard-earned and be prepared to move it if you think they are getting a little careless. But right now it’s still very early January so kick back and continue hallucinating to the freestyle beats of your evaporative cooler.

And in other news… while on the subject of moral hazard Greece is currently a great example of how it can apply to a whole country. As I have written before, the Greek economy is currently up Ouzo creek without a souvlaki and it’s hoping the EU will bail it out. However, if the EU does come to the toga party, as it’s being pressured to do, what’s to stop Greek policy makers continuing to pursue bad policies in the knowledge they have fall-back if the wheels fall off again?

As always I welcome your feedback and any ideas for subjects I can tackle. So go on, let us know what’s on your mind - log in and post your comments below.

Andrew Pegler - 29 December 09

As they say get two economists in a room and you’ll get ten different answers to the same question. But what the heck, it’s the time of the year to gaze into the crystal ball, read the tea leaves and pore over the goat entrails to boldly predict what lies ahead for 2010.

The recession was less disastrous than many feared but I reckon its aftermath could be more dangerous than many expect. For starters ending the fiscal and monetary stimulus will be much harder than starting it. Plus, with so much stimulus slashing about the globe inflation may blow out. But let’s steer away from Armageddon talk and take philosopher Frederick Nietzsche’s advice and don’t stare into the abyss for too long or it may start staring back.
With so much of global demand still dependant on government support, the global stability we have ended the year with will remain fragile plus we haven’t really addressed the problems in the financial serves sector that started this whole mess.

Moral hazard will become a big issue over the year as banks bounce back and start to take on risk again. And don’t worry if you don’t know what moral hazard is as I plan to give it the plain English treatment early in the New Year.

Large household debt and busted banking systems across the world will keep demand in the industrial west pretty weak. This of course affects the demand for widgets from the emerging economies, like China which also faces a housing bubble fuelled by loose monetary policy.

The share market will continue to grow as the world dusts itself off and gets back on the horse but not at the same pace. I predict ours will grow by 15%. If not I predict I will blame my failure on a typing error.

Gold will lose its lustre as the US economy picks up and dips below US$1000 an ounce.

The Reserve Bank won’t lift rates in February but will in March by 25 basis points. And official interest rates will sit between 4-5% by year’s end.
Unemployment will be gripped by the gravity of recovery and only go down from February to be 5.3 % by year’s end. On the subject of the RBA, I also predict Governor Stevens will not join the Spice Girls as “Banker Spice”.

Australia will emerge as one of the best economies around and seeing this Russia will buy Australian treasury bonds to augment its foreign reserve. Nostrovia!
Companies reporting in February for the second half of the year will surprise us with good results and strong forecasts sending the $AUD back up past 90c for a bit.

And yes folks it’s a federal election year so get ready for baby kissing, bold statements and a lot of blah, blah, blah. Climate change will be the key issue and Kev will take an ETS to the electorate seeking our thumbs up which he’ll probably get. Sorry Tony.

Andrew Pegler - 29 December 09

What a difference a year makes. We started firmly astride the seven horses of the apocalypse galloping right into the belly of the beast where we sat frozen by what looked like the headlights of doom but turned out to be shards of sunlight blazing though the woods from which we are now emerging. In other words, the sky didn’t fall in; it just passed quite close.

Things kicked off ceremoniously with Obama inaugurated into the biggest mess since the Great Depression. With little more than a blink he threw US$787 billion at it, Gordon Brown US$330 billion and Kev and Wayne about $70 billion. For now things seem to be under control. It’s the longer-term implications for inflation and inter-generational debt that will be the elephants in the room.

Star Wars: the stock market strikes back! The share market defied expectation, logic and intuition in 2009 to roar back from its 2008 lows and recover 50% of its losses. Bank shares have fully recovered, resources stocks have boomed and super has pretty much made up its falls. The most amazing thing is this happened in one year. Nice.

China’s economy began to roar again in 2009 following a sharp decline. Its returning appetite for raw materials has been a big part of the spectacular rise of the Aussie dollar, which some bearish types are tipping for parity. The jury is still out on that one.

With uncertainty the only certainty a lot of money fled into the safety and stability of gold, which rocketed past US$1000 an ounce. Its rise was also fuelled by the US dollar losing its lustre. The counter argument is summed up wonderfully by legendary US investor Warren Buffet. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

The Australian economy continues to be a shining light in an otherwise bleak global landscape. Thanks to the low debt left by Peter Costello and the swift stimulation of the Rudd Government we’ve ended the year with unemployment actually going down, banks still standing and (touch wood) no real property collapse … yet.

On the crime front, epic shonk Bernie Madoff got 150 years for his $65 billion Ponzi scheme and Texan billionaire and cricket promoter Sir Allen Stanford got arrested for an alleged $8 billion fraud.

And finally, when the global swarming in Copenhagen wound up we were left with agreements to disagree about agreements or something. In other words we’re as resolved to tackle the problems and shape an ETS as we were in January.

In Sopranos parlance “fugeddaboutit”, it’s over, move on and have a spanking NY’s knees-up. I’ll cop you on the other side.