Andrew Pegler – 10 June 2011

 

Is that the pitta patter of a big drop I can hear coming down the stairs?

It’s part of Aussie folklore now, that we dodged a bullet during the GFC. But if you ever get a nagging feeling that we didn’t dodge it permanently, that our desperate cleverness just temporarily propped up our house of cards, it might please you – or not – to know some pretty smart people feel the same way.

One of those is economist Steve Keen, who has predicted house prices will plunge by 30% to 40% over the next ten to fifteen years. He has even staked his reputation on a high, single-digit drop (close to 10%) over the next twelve months.

Bunkum or wisdom?

If you ask me, it comes down to how you measure demand – for housing. Regular readers will be all over this like a rash: all things being equal, if demand rises, so does the price. If demand drops, so does the value of your property.

So how strong is housing demand right now? Business Spectator recently set Steve Keen onto another economist, Harley Dale, from the Housing Industry Association. It was a duel at ten paces, mano-o-mano (although very civil). The discussion got interesting when they tackled my pet topic: housing demand.

Harley Dale, who gets paid by the housing industry, argued prices would be flat to moderately lower for the next year. He said rising demand, caused by a strong labour market and income growth, would be neutralised by upward pressure on interest rates and ‘post-GFC nervousness’. (New medical condition, anyone?)

But Steve Keen wouldn’t have a bar of it. He argues housing demand has got nothing to do with income or population pressures. He says people don’t buy houses. Say what? You heard right. He clarifies: people with mortgages buy houses. Therefore, the key driver of housing demand and prices is not rising income – it’s rising debt.

Which gets you thinking. The GFC was all about banks taking on too much debt. And right now it’s a fact, ladies and gents, that Australians have higher levels of household debt than Americans. And as we move to reduce that debt, or are forced to by rising interest rates, demand for housing – and therefore house prices – will fall along with the debt levels.

So are we looking at big price drops or not? Anyone who tells you ‘for sure’ has either invented a working prototype of a crystal ball, or is just making an educated guess. But one thing does seem highly likely: there’ll be no good news for home owners. Housing prices will be flat, slightly weaker or downright terrible. For those with mortgages, let us hope it’s not the latter.

 

Andrew Pegler – 27 May 2011

… could be far less about dollars and dinars and more about thin air.

Peer-to-peer networks are a great way to share things without exchanging cash. Right now hundreds of peer-to-peer marketplaces across the globe use new technologies to barter, swap, share and donate stuff as part of a flourishing trend called collaborative consumption. A handful of start-ups, driven by online gaming technology, are fighting to own a virtual currency to facilitate these exchanges. (Porn, gambling and real estate have driven most of the big online leaps.) These start-ups want to do to money what file sharing did to music. One is Bitcoin, a peer-to-peer currency not issued by a central bank. It’s available from Bitcoin or the Mt Gox currency exchange and tradable across an anonymous peer-to-peer network. A secure computer program ensures no one can create new Bitcoins out of thin air or spend one twice. Right now there is about US$50 million worth of Bitcoins in circulation.

Libertarians, privacy nuts and money launderers love virtual currencies because they’re completely anonymous; they leave no tracks. But central governments aren’t so happy because aside from money laundering, virtual currencies pose a genuine threat to the stability, accountability and traceability of the global financial system. But what’s a central bank going to do? Shut down one virtual currency and another will pop up next week. The Napster phenomenon.

Since peer-to-peer networks are entirely unregulated, electronic and uninsured critics point to the trust issue. They mightn’t like ‘em but people trust a bank. ON the other hand while that means something for now I do recall thinking trust would be the big issue at the start of online shopping.

And in other news… Comm Bank just surveyed 600 exporters with $5-$500 million in revenue and the consensus was that the little dollar that could may keep on coulding up to $US1.16. Interestingly the exporters surveyed reckoned 91 cents was the point at which they became uncompetitive. The Aussie dollar last traded at 91 cents in September 2010 – 16 cents below today’s figure. My ongoing concern is Dutch disease.

Andrew Pegler – 13 May 2011

Yep, the little dollar that could just keeps on coulding. As LA man Jim Morrison once opined in LA Women, it looks set to “keep on risin’”.

The latest culprit is something called the carry trade. This is where investors borrow in a currency that has low interest rates (for example, the Japanese yen), and then invest that money by lending it in a currency that has higher interest rates. What currency might that be? You guessed it: the AUD.

Before the GFC, the yen carry trade was mostly in U.S. dollars. But now their economy is in the doghouse, it’s the AUD’s turn in the spotlight.

As Alan Kohler wrote in Business Spectator, the large difference in interest rates between Japan and Australia (theirs are low, ours are high) has reignited the carry trade. He goes on to explain that the Japanese earthquake has also had an impact. In order to fuel a Japanese recovery, the Bank of Japan, in March alone, injected 15 trillion yen into the system. All those extra yen – that extra liquidity – just makes it easier for investors to sponge it up and plonk it in Australia, where they can make more money out of it.

And of course, when you have boatloads of investors selling yen to buy Aussie dollars, all that demand drives up the AUD. That’s supply and demand for you.

But that’s not all. Kohler points to two additional sources of demand for the AUD: a steady diversification out of the USD by global central banks, and the huge demand for Aussie dollars in the resource sector, which is expected to spend an historic $76 billion on mining investment in 2011/12.

It all adds up, folks.

And in other news… you might have heard Microsoft just paid an astounding USD$8.5 billion for Skype. That’s 400 times Skype’s 2010 operating income. Don’t look at me!

Skype struggles to get users to pay for premium services, and I dunno about you but I won’t be looking at pop ups while I’m on the blower to mum or sis.

The word on da street is that in playing catch up with Apple and Google, Microsoft was prepared to pay any price for the hip hit that comes with owning such an innovative, edgy company. But is it too late?

There’s been a lot of “patchwork” babble lately. Read on for the plain English translation…

Right now some parts of the economy are rockin’ while other bits are being rolled.

In the rockin’ corner we have the Aussie diggers and drillers who are filling up tankers bound for nation-building projects in Asia. The diggers and drillers are announcing record profits and it don’t look like stopping anytime soon, folks.

Meanwhile, Resources Boom Mark II is pumping the dollar big time. Last week some pointy head at St George went out on a limb and speculated the AUD could hit $US1.15 in the next few months.

Sounds great but the rising AUD renders the globally exposed, non-resources bits of our economy too expensive for overseas markets. We’re talking sectors like education, tourism, farm exports and manufacturing.

And remember the Queensland floods and cyclones have disrupted about 10% of businesses nationally, and 25% of businesses in Queensland. The flow-on effects have, in some way, impacted 60% of all Australian businesses.

So it’s rockin’ over there and rollin’ here and there. It’s a bit all over the shop. It’s a bit patchy.

Some pundits call this phenomenon a two-speed or multi-speed economy. Wayne and Julia call it “patchwork” because they reckon the differences aren’t just between states or towns or industries. They see variation at a micro level between businesses, households and individuals.

Here’s another way of perceiving this mish-mashy muddle: the benefits of the mining boom haven’t reached everyone.

Looking ahead, Mining Boom Mark II might not be as lucrative as Mark I. The rocketing AUD, already high terms of trade that are likely to taper off, and the higher levels of investment needed this time round will all eat into profits.

And interest rates? The patchwork is taking the heat out of the economy, giving the RBA board cause to pause. For now.

In other news… the UN now projects the world population, long expected to stabilize at 9 billion by 2050, will instead keep rising to hit 10.1 billion by 2100. One of the main causes will be Africa; its population is expected to triple. Oh and give yourself a pat on the back: we humans are expected to pass 7 billion in late October. Hmm, methinks that sixth wave of innovation can’t start soon enough.

Posted by Andrew Pegler on May 04, 2011

There’s a brave new world coming and it wants your leftover pizza.

We live in a wasteful world. But imagine if all this waste was not only useful but a driver of the global economy. Well you’ve just glimpsed the future, according to the writings of James Bradfield Moody and Bianca Nogrady in The Sixth Wave.

Since the Industrial Revolution, the economy has surged forward in waves of innovation, known as Kondratiev waves after the Russian economist who first identified them in the early 1900s. Kondratiev waves are periods of time – an age if you like – characterised by massive changes in technology and in the markets that fuel and fund it. Five waves of innovation have occurred, starting with the Industrial Revolution:

• The Industrial Revolution – 1771
• The Railways – 1829
• Electricity – 1875
• Oil – 1908
• Information and Telecommunications – 1971

These waves usually start in a time of turmoil, inspired by the need to solve a problem. They usher in a period of stability and prosperity before entering a final stage characterised by global economic downturn. According to the authors, we are now moving towards the end of the communications innovation wave.

And the sixth wave is…

The perfect storm of climate change and dwindling resources is driving the sixth wave, which will be about doing more with less, i.e. resource efficiency.

Speaking of efficiency, did you know only 15% of the fuel energy in your car actually goes into running it? The rest is lost as heat, pressure and noise. Whatever your politics, most agree the days are numbered for carbon belching into the atmosphere uncontested. Right now the smartest kids in the room are throwing lots of cash at renewable energy technologies – (a lithium miner in WA just won an award for its groundbreaking project using solar PV and wind in a hybrid model to reduce its reliance on diesel). Amongst other projects, investors are also funding ways to extract value from landfill waste and to control water evaporation from dams.

With the world’s population expected to hit eight billion by the end of the decade, and a developing world keen to enjoy the high life, the future must lie the clever use of our dwindling resources.

Andrew Pegler – 21 January 2011

Sorry folks, the pre-GFC halcyon days of low interest rates are gonski.

Wayne and crew may be getting on their high horse and making it easy to transfer your business between banks, but they won’t have a significant effect on the cost of borrowing.

Cost of borrowing? Our banks have to pay interest rates on the money THEY borrow, from the big banks overseas. Yep, just like us, our banks borrow too. That’s because our collective deposits are never enough to cover our collective demand for loans. To this end our banks will borrow $130 billion over the next year.

Pre-GFC, non-banks like Rams borrowed cheaply on global markets and undercut the major banks. They cashed in on the tides of fantasy money sloshing about the global financial system and, in turn, so did we. That tide has since gone out.

To quote ABC’s Stephen Long, “It was a time built on a lie and the cost of the money to banks was underpriced and wasn’t sustainable”.

The disappearance of this cheap money means higher lending rates. It also means less competition in our banking sector because non-bank lenders can’t undercut the big boys, and errr… they ain’t around anymore anyway. Additionally, overseas borrowing is now more expensive for our banks, as per the laws of supply and demand, thanks to the various bailouts in Europe, which have soaked up a lot of money.

On the subject of interest rates, HSBC economist Paul Bloxham reckons they’ll rise soon. Interest rates will be a weapon of choice for bludgeoning down the inflation stoked by flood-inspired rising food prices. And with an economy close to full employment, expenditure on reconstruction and repair will push up wages, further increasing inflation.

BTW, I am sticking with my prediction: the cash rate will end the year at around. 5.5%.

Andrew Pegler – 7 January 2011

Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

The peace and prosperity we’ve enjoyed since the Berlin Wall fell in 1989 (and arguably since the end of WWII) is unparalleled. But like air, you’ll only notice when it’s gone. Having world-leading powers – Germany, Japan and the U.S. – all bonded by the mutual assurance of prosperity and peace will come to be seen as an historical oddity.

The future won’t be so agreeable. China, India and Brazil will want to do it their way. (And keep your eye on Mexico; it’ll be a force if it can control the drug cartels.) Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

Julia Gillard has declared 2011 her year of action. A big part of that will be putting a price on carbon. I’ve explained an ETS here. Dragging the nation into such huge change will be bigger than, but similar to, the introduction of the GST. Prices will rise and politicians will spend taxpayer money to compensate those with the most clout at the ballot box in 2012.

Interest rates? After sacrificing the goat and trawling through the entrails, then reading the tea leaves as reflected through a crystal ball made in China, I reckon the only way is up. Barring unforeseen invasions by time travelling dinosaurs with thermonuclear lasers for eyes, the cash rate will end the year at about 5.5%. ‘Nuff said.

The U.S. now lags China, Japan, India and South Korea as a destination for Aussie exports. Rapid growth in Asia, led by China and India, will continue to drive Aussie growth in 2011. In other words, we no longer catch a cold when the U.S. sneezes.

The banking competition debate will heat up as Wayne tries to construct the 5th pillar. Burned by Kevin’s crash-or-crash-through approach to the mining super profits tax, he’ll proceed slowly, get punters onside and try take the sting out of the Big Four’s inevitable PR counter attack. By the end of the year the banking landscape will be altered, by the people for the people.

The Australian economy will remain the envy of developed nations thanks to farming and mining driven by the deluge of rain and the torrent of demand, respectively. Inflation will be contained by three key factors: a high AUD subduing prices, sluggish domestic demand and the quirks of a multi-speed economy.

The AUD in 2011? The Chinese will probably succeed in slowing their growth to around 8%, which is still very good. This will see us grow about 3%, which is also very good. Add in low unemployment and massive demand for our dirt and rocks, and the AUD will fluctuate between .96c and $1.10. Mind you, this could all unravel if global growth weakens, another sovereign debt crisis unfolds, U.S. interest rates rise, and Australia’s and/or China’s property bubbles burst.

Stay gold people, and keep silly this safe season.

Andrew Pegler – 7 January 2011

Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

The peace and prosperity we’ve enjoyed since the Berlin Wall fell in 1989 (and arguably since the end of WWII) is unparalleled. But like air, you’ll only notice when it’s gone. Having world-leading powers – Germany, Japan and the U.S. – all bonded by the mutual assurance of prosperity and peace will come to be seen as an historical oddity.

The future won’t be so agreeable. China, India and Brazil will want to do it their way. (And keep your eye on Mexico; it’ll be a force if it can control the drug cartels.) Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

Julia Gillard has declared 2011 her year of action. A big part of that will be putting a price on carbon. I’ve explained an ETS here. Dragging the nation into such huge change will be bigger than, but similar to, the introduction of the GST. Prices will rise and politicians will spend taxpayer money to compensate those with the most clout at the ballot box in 2012.

Interest rates? After sacrificing the goat and trawling through the entrails, then reading the tea leaves as reflected through a crystal ball made in China, I reckon the only way is up. Barring unforeseen invasions by time travelling dinosaurs with thermonuclear lasers for eyes, the cash rate will end the year at about 5.5%. ‘Nuff said.

The U.S. now lags China, Japan, India and South Korea as a destination for Aussie exports. Rapid growth in Asia, led by China and India, will continue to drive Aussie growth in 2011. In other words, we no longer catch a cold when the U.S. sneezes.

The banking competition debate will heat up as Wayne tries to construct the 5th pillar. Burned by Kevin’s crash-or-crash-through approach to the mining super profits tax, he’ll proceed slowly, get punters onside and try take the sting out of the Big Four’s inevitable PR counter attack. By the end of the year the banking landscape will be altered, by the people for the people.

The Australian economy will remain the envy of developed nations thanks to farming and mining driven by the deluge of rain and the torrent of demand, respectively. Inflation will be contained by three key factors: a high AUD subduing prices, sluggish domestic demand and the quirks of a multi-speed economy.

The AUD in 2011? The Chinese will probably succeed in slowing their growth to around 8%, which is still very good. This will see us grow about 3%, which is also very good. Add in low unemployment and massive demand for our dirt and rocks, and the AUD will fluctuate between .96c and $1.10. Mind you, this could all unravel if global growth weakens, another sovereign debt crisis unfolds, U.S. interest rates rise, and Australia’s and/or China’s property bubbles burst.

Stay gold people, and keep silly this safe season.

Andrew Pegler – 3 December 2010

How did Ireland suddenly go from the Celtic tiger to the Celtic basket case?

It grew too fast

During the 1990s to early 2000s Ireland went from being the poor man of the EU franchise to one of its richest. Before then it was a bit of a joke. In fact there was an industry around Irish jokes (“Did you hear about the Irish banana business that went broke because they threw out all the bent ones?) But then it embarked on a reform program to attract foreign cashola and lowered company tax to 12.5% and “loosened” industrial policies. And it worked. Microsoft relocated there and a few other big players made sizeable investments. In addition it had joined the EMU in the late 90s giving it access to European capital markets, not just Ireland, and rewarding it with very low mortgage rates. GDP was averaging around 8%, everyone had well-paid, high-tech jobs, and low interest rates fired up an inevitable construction boom. The Guinness was on the “Celtic Tiger” and prosperity was in the Éire.

The familiar story of credit being too easy

The aforementioned low interest rates saw the public borrow and spend beyond their means and the banks lend to people they should not have. Meanwhile the government didn’t do things it should have like raise tax rates or better regulate credit. And with its banks up to their necks in the housing boom, when that went bad they fell over.

Its economy was too specialised

Ireland was precariously dependent on international investment, banking and construction, all of which had already started to take their bats and balls and gone home when the GFC slammed the place, bursting its real estate bubble, busting its banks and sending the economy to the dogs. The unluck of the Irish.

The AUD$114 billion or so bailout package by the (European) Commission and the IMF, in liaison with the ECB (European Central Bank), has been a pragmatic response to the threat of contagion. Ireland’s largest creditors are Germany and the UK and an Irish bank default would have damaged those banking systems at a time when they didn’t need it.

The big take-away for Australia lies in the perils of a specialised economy. Right now we’re knee deep in resources boom mark II but what are we going to do when the music stops? We ought to be ploughing government revenue into subsidising innovation in our manufacturing and tourism sectors which, after years of a high AUD and the flood of investment into mining, will have withered into something unrecognisable. Guinness anyone?

Andrew Pegler – 26 November 2010

Are the banks just gouging scoundrels or is there something to this “funding costs” malarkey?

As we all know the big four banks shared a $22 billion dollars profit this year, which is pretty good work if you can get it. The Super funds were happy and shareholders were grinning, but then they went and wrecked it all by saying something like let’s hike above the RBA. The torrent of abuse from the general public has since steamrolled into a national argy bargy that even went global as it sucked the oxygen out of Gillard’s overseas jaunt. While the punter in me hears the howls of outrage, the contrarian was keen to explore this curious claim that the big four had hiked beyond the RBA because of these mysterious “funding costs”. So what the hell are they?

PricewaterhouseCoopers (PWC) has just finished a door-stopper on the major banks’ results and one of their pointy heads fronted up to Alan Kohler on Inside Business the other week to explain what “funding costs” mean. Here’s the plain English translation.

The cost of borrowing has gone up

Banks get some of the money they lend to us from big banks overseas. This source of green has become more expensive since the GFC forced a re-assessment of global risk. In other words, the fear that it may all go pear-shaped again has forced bankers to up the interest they charge other banks to cover their behinds. The big four are just passing this on.

A war for deposits

Another large part of the funding puzzle is deposits. The GFC has driven up overseas funding sources, forcing banks to rely more on our humble deposits. These longer-term sources of funds, like term deposits that can go out to five years and are highly likely to be rolled over upon maturity, are making up this shortfall. This has fuelled a price war that’s forced banks to pay more for our deposits.

Bank expenses are rising

According to the PWC report, bank expenses in general rose by 7.5% in the last two years and they gotta find ways to pay for these.

People aren’t borrowing much

Home lending hasn’t been so slow since the early eighties and business credit has gone backwards for the last two years. Over the past 25 years, credit has grown 12% a year but next year it’ll only be about 5-7%. Credit (lending money) is basically how banks make money.

Hopefully that gives the contrarians out there something to mull over.