Links Oct 8: Currency chaos

More join the currency war. Bloomberg
Where the US takes it next. Robert Reich
Currency volumes explode. Reformed Broker
IMF: no mood for accords. Bloomberg
Dutch Disease alert. But that's ok because we're making "space for those parts that have to grow over the next 12 months or so". Bloody hell. We need a new tradable goods peak body and fast. SMH
At least libertarian Stutchbury wants action. But his reform solutions will only make matters worse. Michael Stuchbury
The unloved BHP/Rio JV. Almost unreadable. Elizabeth Knight.
IMF predicts metals demand surge that will blow us up. Mining Weekly
Coal prices to bounce back. Steel Orbis
How talk of austerity works for British houses. Telegraph
Sell the news of QE2. Zero Hedge
US rail traffic solid. valueplays

One chart to rule them all (updated)

After this blog's recent Housing Velocity post, in which a comparison was made between total housing turnover and population growth, reader Torchwood1979 made the eminently sensible suggestion that we strip dwelling commencements from the figures and see what happens.

Well, here it is: Established dwelling sales from 1991 to 2009 in major Australian states. One chart to rule them all.

This blog cannot find a single good thing to say about it.

First, it is surely conclusive proof (if any were needed) that Australia has been in the throws of a raging housing bubble since the mid-nineties. Over the period of this chart, national population grew 24%, far from enough to justify a doubling in national housing velocity. Sure, high commodity income helped in the last six years, but without increased productive capacity in the economy that is nothing more than an one-off inheritance. Sure, we've got greater labour mobility, but not that much.

There is no reason to explain this sustained rise other than an accelerated trade in houses just because they were going up.

When we overlay the crucial economic moments is also becomes clear just how many fortunate updrafts have kept this dirigible in the air. Not least amongst the thermals is policy interference, which gives us some notion of why nobody in power can bring themselves to acknowledge the ominous shape hanging overhead.



There is also the incredibly good fortune of the commodities boom pumping more gas into the crashing balloon.

How many more lives does this flaming Hindenberg have?

N.B. All data is APM and ABS.

Update
After another eminently sensible suggestion, this time from reader "The Lorax", find below a graph presenting the percentage of housing turning over versus the overall occupied housing stock. Stock grew 27% in the states over the period and, despite that, turnover still leapt.


Will aim to get state by state charts done but, bugger ya, that's enough Excel for now.

Links Oct 7: Bulls versus bears

Correlation bubble. FT Alphaville
More like everything pricing for QE2. Zero Hedge
ADP tank signals QE2 ahead. Econompic
Goldman says buy Euro. Sell it. Zero Hedge
Dow overbought. PragCap
Wanna be right or make money? Barry Ritholz
That definitely looks like a cup and handle on the ore chart. Bloomberg
Matched by another little one on the Baltic Dry.
And more. Bloomberg
Swift revaluation of yuan also dangerous. Michael Pettis
More suggestions for G2 cooperation. VOX
More people please. Bernard Salt
Europe's new class war. Michael Hudson

Reserve Bank of Lilliput

Delusional Economics does a nice hatchet job on comments by RBA boffin Luci Ellis about the housing bubble. Sadly, however, there is more to dismember on the currency front.

From Business Day:

Reserve Bank of Australia (RBA) Head of Financial Stability Luci Ellis says the poor strength of the US dollar is no surprise, given the weak US economy and labour market.

"The US economy is in a terrible state," she said during an address to CPA Australia conference in Brisbane.

"There's a question of whether the Australian dollar is high or the US dollar is low."

But Dr Ellis predicted once the US started to recover, the Aussie dollar's strength against the Greenback would weaken.

"Once things start to pick up and their dollar starts to recover, once their wages pick up again, that's part of the transition mechanism and part of the adjustment," she said.

"So I think you'll see that temporary boost will presumably dissipate."

See the above chart. It is four currnecies priced in $US. Each one is different. The Euro is a manufacturing currency. Stirling is a financial currency. And, like the Aussie Battler, the Peso is a commodities currency. Does it look like the Aussie has moonshot past all three (and just about any other currency you can name) just because the $US is falling?

Moreover, the idea that the $US will recover when their economy does is completely backwards. The US's only hope of finding a new source of demand for its grossly under-utilised economy is a weak dollar. Clearly The US Fed understands that, which is why it's about to resume printing money like lolly wrappers. So too does the US Treasury, and the economic boffins in the White house, all of whom have said the US must export more to recover.

Pretty much every other central bank in the world understands it too, which is why they're all embarked on the greatest race to the bottom since the Great Depression.

The Chinese understand it, which is why they're so attached to the peg, as they ride the dollar lower at everyone's expense.

The gold market understands it too as it rockets toward $1500.

The Aussie Battler is ripping because Australia is a risk proxy for the global reflation story around China and commodities. And because of the carry trade on interest rates. It is not some passive and momentary phenomenon. It is a symptom of everything that remains wrong with global markets. They run and run on momentum and then suddenly reverse when spooked.

And that is when the $US will recover, when the shit hits the fan again.

Links Oct 6: Rates fallout

McCrann not wrong, RBA "confused". Terry McCrann
Big banks will raise unilaterally soon. John Durie
Japan prints and buys the lot. FT Alphaville
US-China trade war will only benefit Vietnam. NBO
US double dip still on. Rosenberg at PragCap
Stimulate the US. George Soros
US services grow. Econompic
The BHP/Rio zombie is dead. Der. SMH
Is that a cup and handle formation in the ore chart? Bloomberg
China steel prices to rise then fall. SteelOrbis

Egg all round

Yes, and some of it on this blog's face. Though it did at least take the Joye/McCrann drivel to task.

Both the RBA and the banks have suddenly backed off on rate rises (at least for mortgages).

This blog can't figure out if this is a wildly bullish or bearish signal. Probably neither. For clues, lets turn to the RBA Statement. Here is the crunch paragraph:

Asset values are not moving notably in either direction, and overall credit growth is quite subdued at this stage, notwithstanding evidence of some greater willingness to lend. Inflation has moderated from the excessive pace of 2008. The effects of the rise in tobacco taxes aside, CPI inflation has been running at around 2¾ per cent over the past year. That looks likely to continue in the near term.

The reference to asset prices is most interesting to this blog. The phrasing suggests that the RBA is prepared to factor into its decisions movements either way in asset values.

The orthodoxy of the past two decades has been to disregard asset prices and clean up after any bubble has burst. The RBA diverged from this course once in 2003 but has always maintained the rhetoric that bubbles are impossible to diagnose. This statement, however, rather sounds like it is prepared to support asset prices, as well as prevent them from rising overly.

Those who campaigned for the inclusion of asset values in monetary policy calculus may get more than they bargained for.

Take it for the team (Updated)

This blog does not have a great deal of sympathy for complaints about bank gouging when it comes to interest rates. The reason is simple. If a nation wants to run a housing bubble based upon foreign borrowing then it should accept the logical consequences - that sooner or later competition will collapse around too-big-to-fail banks.

That does not mean, however, that we should turn a blind eye to the bank gouging. We might conclude we wish to accept it in return for our bubble, but we should at least know what it is we're dealing with.

So, this blogger has been doing some digging in an effort to figure out whether the line being put by the banks that they must raise rates because of increased funding costs makes any sense.

We already know that term deposit rates have been falling recently, so it can only be wholesale money the banks are referring to.

The above chart is the available history of AA capital market rates paid by the banks. As you see, rates have been in a stable trading range between roughly 5.75% and 6.25% for at least 15 months, right up until a few days ago.

Although September was at the high end of the range, August was at the low end, and this blog can't remember any bank chatter about cutting rates. Basically, there is no argument here for increased funding costs.

Of course, as the banks role over there funding from years ago, it may be at higher rates. Though from this chart, for that to be true, it must be pre-June 07 because funding was much more expensive back then. This is at least plausible given the surplus savings being thrown around from 2004 to 2007 by emerging markets that held rates in check in developed economies.

It might also be banks being pushed toward longer maturities in their offshore funding by APRA, for which there was some evidence in the Financial Accounts recently, as noted here. This, we might determine, is a worthwhile trade.

Sadly, however, owing to the Invisopower! deployed by our financial overlords, we are in no position to judge. Just sit there and take it for the team.

Update
This blog managed to find the below chart in the bowels of the RBA:



It clearly shows that as discussed, wholesale funding rates were consistently about 75 basis points cheaper pre-GFC.

Links Oct 5: Rates day

Damn the lifeboats. Henry Thornton
Fiscal cuts too. Tim Colebatch
China serious about busting bubble. Peter Hartcher
And the real problem. John Garnaut
Steel demand set to rise. FT
But not prices. Metal Miner
Ore prices still falling. Economic Times of India
The bubbles that just won't pop. Edward Chancellor
China will do what it wants with yuan. Bloomberg
What can QE2 achieve? Econbrowser Not much, except nice bear market rallies of course!
S&P500 earnings cut. Bloomberg
Irish growth going lower. Independent

Housing velocity

Population growth is often cited as a causal factor in the overvaluation of Australian real estate. And indeed, strong population growth is a factor, particularly in recent years when housing starts have diminished, most especially in NSW.

But one infrequently quoted housing statistic that calls into question the strength of population growth causation is what this blogger likes to call housing velocity. That is, how quickly established dwellings have been changing hands over the past two decades.

This measure can be viewed as a proxy for the degree of 'flipping' in the market - the practice of turning over homes quickly and cashing out the capital gain.

The term flipping arose in the US where it became such a popular practice at the peak of the housing frenzy that it spawned its own lifestyle program. Not surprisingly, the program ultimately collapsed under the weight of its own corruption.

Australia has a different breed of the practice for a number of reasons. These include negative gearing and depreciation for investors and a 12 month live-in condition for owner-occupiers if they wish to avoid capital gains tax. Probably meaning Australia has longer maturity flippers (if you'll pardon the oxymoron).

Nonetheless, if we compare the number of dwelling transfers (sales) with population growth, housing velocity remains a reasonable measure of the level of speculative or investor interest in property.

The above chart tracks the number of properties changing hands per annum from 1991 to 2007. It tells a clear tale of a rising trade in houses. A 100% rise in fact.

Over the same period population rose 24%.

The chart begins in 1991, when, to be fair, Australia was still emerging from recession. But 1992 is a more typical year and the increase between that year and 2007 is still a whopping 71%. Well above population growth.

Now, this analysis does not claim to be exhaustive. There are many variables in the equation, not least being the number of demolitions of old homes for new and an increasing trend toward labour mobility. Nonetheless, a state-by-state breakdown reinforces the conclusion that the gap between population growth and turnover is the result of speculation.



Of the major states, WA appears best placed to claim a population-driven housing market. However, if you go back one year, the percentage growth in turnover from 1992 doubles. Go back another year and it triples. WA is simply on a different housing cycle owing to its huge exposure to commodity prices.

That leaves Qld as the strongest case for a population-based revaluation of property. And the sunshine state has run the highest per capita rate of housing commencements of the big states for many years, providing a supply-side offset to population growth. We might, therefore, expect high turnover growth.

Finally, we have NSW, VIC and even little SA, where the gap between percentage population growth and the percentage growth in dwelling transfers develops into a yawning chasm. Draw your own conclusion.

N.B. All data is either Australian Property Monitors or ABS.

Links Oct 4:

Forget a rising yuan. Baseline Scenario
Euro is toast. Joseph Stiglitz
Week ahead for the Dow. Calculated Risk
de Gaull's revenge. French plot new reserve. Zero Hedge
BHP a length ahead for Potash. The Aus
Copper breaks free. Bloomberg
As inventories dive in London, NY and Shanghai. Metal Prices
Dutch Disease or overheating. You choose. David Uren

RBAsymmetry

Terry McCrann wrote of the RBA on Saturday that:

The belief that it won't lift the cash rate on Tuesday is based on a fundamental misconception of what the RBA is trying to achieve and a misunderstanding of how and what it reads in the statistical tea leaves.

Simply, brutally, it is not trying to strike some balance between inflation and growth. Neither its mandate nor its operational perspective is symmetrical. It's always worse for it to not hike and things, as in inflation, pick up, than the opposite: to hike and to end up with slower growth.

This was noted by Australia's most idiosyncratic commentator Christopher Joye yesterday. Although he was talking more specifically of the asymmetry between undershooting and overshooting its 2-3 per cent inflation target.

This comment came in a rather pungent analysis of the RBA's actual performance over the last half decade that showed the RBA's "preferred" inflation measures had averaged 3.4-3.5 per cent over Glenn Stevens' term as governor. That's to say, above the top end of the inflation target range.

This blogger has nothing but respect for McCrann's record of predicting interest rate moves. But, simply, brutally, this is wrong. And it's wrong for two reasons. First, we are in a world with a shortage of demand, chock full of central banks hell-bent on getting local spending moving and debasing currencies.

Second, despite its independence, the RBA does not operate in a political vacuum. The history of our central bank, especially under Iain Macfarlane, who always seemed to have at least one eye trained on politics, suggests strongly that the RBA's asymmetric dynamic is one in which it is always easier to squib rises or cut than it is to take the hard yards on inflation.

As argued here last week, if Macfarlane had been less asymmetric, we would surely not today be facing such a grotesque housing bubble.

It has been this blogger's impression that Glenn Stevens is more focused where he should be. Consider, for example, his rate hikes in 2007 during the election and the 2008 commodities blow-off, as well as bold rises since the GFC. However, he faced significant resistance across the board on all three occasions and significant criticism afterwards on two.

All of the pressure is to keep rates low.

Weekend reading: US bumps along the bottom

US double dip still looms. Calculated Risk, Zero Hedge, Econompic
But ECRI coming off the bottom. Pragmatic Capitalist
Golden Cross another Hindenberg Omen. Bespoke
Gold flattens equities. The Economist
Print or be damned. Zero Hedge I, II
Commodity inflation shock coming? Bespoke
Mapping the US view of Europe. Are we so different? kottke
NAB's drama queens. The Age
Slash spending and jack up GST. Michael Stutchbury agrees with the IMF but strangely omits that the IMF also said jack up the mining tax.
All signals point to rate rise. Says Mr Rates.
Dealing with Ireland's property crash. Patrick Jenkins
Can China avoid Japan's fate? Foreign Policy

Invisopower!

There are a couple of breathless reports today, one from Eric Johnston and another from David Uren, on yesterday's announcement that the RBA now has financial stability as an official part of its mandate.

Both are at pains to report that not only has the remit been expanded it's been limited too. Uren quotes from the RBA release:

The Reserve Bank's mandate to uphold financial stability does not equate to a guarantee of solvency for financial institutions, and the bank does not see its balance sheet as being available to support insolvent institutions.

Whilst it is encouraging that our financial overlords still bother with the quaint notion of moral hazard, we should take a quick look back at whether or not such clear distinctions are actually applicable to the RBA's role.

In order to facilitate such a glimpse, this blog has gone to the God awful trouble of aggregating and graphing in monthly increments the history of RBA repo transactions since 2004, before which there were none (at least, no record of such). Repos are short-term cash loans from the RBA to banks secured against collateral. In other words, they provide liquidity.

It is pretty clear in the graph that what transpired for eighteen months between late 2007 and early 2009 cannot simply be described as a liquidity crisis. If banks require the kind of support apparent in the graph - with many months above and around $20 billion and, in the heat of the crisis, approaching $50 billion - then the notion that the RBA will never support insolvent institutions looks rather silly.

Indeed, it is only the arrival of the government guarantee in December 2008 (not a bailout, either!) that turns the gushing RBA tap off.

Now, there are a couple of problems with this blogger's argument. If you examine the graph closely, you will see that in late 2007, right around the time the French declared the US asset-backed market a circus, the RBA suddenly begins accepting some new forms of collateral for repo loans: asset-backed securities (ABS) and residential mortgage-backed securities (RMBS). Prior to this time, such assets were not considered of sufficient quality for the RBA to accept them as collateral. Then, having suddenly been allowed, they mysteriously disappear - poof!

No, the assets did not enter a wormhole. Rather, the RBA changed the rules by which it categorises repo collateral so that from late 2008 all are recorded equally as "private securities". So, having torn up its rule book, the RBA replaced it with a shiny new one, with no pages in it.

The problem, then, for this blogger's argument, is that we have no idea who, why or what is being provided liquidity.

Add to this that we don't know the who, why or what for banks that used the government guarantee and we have very little to go on.

Except, of course, the deep sense of suspicion that this Invisopower! leaves behind.

P.S. Since I stayed up very late putting together the damn data for the graph, the least you can do is forward the link to absolutely everyone you know!

August credit = rate rise

Well, the RBA's DO2 is out again and there are some noteworthy things happening. Seasonally adjusted owner occupier mortgages grew at 6.6% annualised and investors at 9.2%. Combined growth was 7.4%

Credit cards are still on the nose, down 2.2% and despite all the nice advertisements, business lending fell 6.4%.

Whilst housing credit hasn't fallen off a cliff, it is clearly down enough that house prices have begun to fall.

This gives some indication of the level of mortgage growth just needed to support house price stability. Let alone growth.

In the last quarter of 2009, as house prices soared, overall mortgage growth was tracking from 8% to 9.5% per month. Since April, as prices plateaued, it has oscillated between 5.2% and 7.4%.

Mind you, these figures may also be influenced by the changes in foreign investment laws.

Finally, so far as interest rate calculus goes, August was the strongest month since March for investment mortgage growth which will outweigh the now regular declines in business lending. A rise next week still looks likely.

Links Oct 1: European loathing

Pick of the day: Why the European bailout is doomed. Satyajit Das
BHP wants monthly ore contracts. Bloomberg
Why they will probably get them. Metal Miner
Tough Chinese rebalancing. Michael Pettis parotted by Karen Maley
On US trade war rhetoric. Naked Capitalsism
Dow still stuck in bear market dynamics. Econompic
Why the Aussie is on a moonshot. Falkenblog