Here's the DIX index updated for the December 2008 forecasts.
For an explanation of how this is calculated see here.
Things have improved a bit, but there's still some wild variances in forecasts for the cash rate, the biggest being a range of 2.75% to 4.75% for the Dec '09 rate.
I just stumbled upon the HousingPANIC blog. Now that the dire predictions that the blog focused on have come true the author has closed it down, but there's a ton of interesting stuff in there to look back on. Here's a couple of posts as a sampler:
A couple of months ago I speculated on the role played by the Queensland connection in the unexpected government guarantee handed out to banks, building societies and credit unions.
Today the AFR has a major story on "how Suncorp was pulled from the fire." References to Queensland Inc and the desire of the Queensland political milieu to keep Suncorp as a "proud regional brand" abound. It's well worth a read.
...or maybe not. The September update of the tipsters league table showed ANZ leading the pack, with the narrowest of leads over my team. The size of the rate cuts since that time (1% in October, 0.75% in November and another 1% in December) have sent the "root mean square error" mechanism into overdrive. As the formula is particularly hard on forecasts that are very wide of the mark (courtesy of the squaring process) the overall error ratings of all the tipsters has blown out. In September ANZ led with an error rating of 0.339%. The new leader is Westpac on 0.624%, although its worth noting that both the Average and No Change tipsters have snuck into the outright lead.
It's not hard to see why we've all gone backwards so fast, and ANZ in particular. It was only a few months ago, in June 08, that a majority of the tipsters we track were calling for the cash rate - then at 7.25% - to be hiked. ANZ were particularly aggressive, calling for two hikes to 7.75% by December '08. The current rate of 4.25% leaves them a mere 3.50% adrift, with some pretty clear implications for the RMSE error calculator.
While we're on the subject of allocating blame for the sub-prime mess, I found these extracts from Bush speeches that might have a bearing on the matter. In order to keep the Star Wars analogy going the choice of Jar Jar Binks was inevitable.
White House Conference on Minority Homeownership, Oct. 15, 2002
President Bush: Two-thirds of all Americans own their homes, yet we have a problem here in America because few than half of the Hispanics and half the African Americans own the home. That's a homeownership gap. It's a -- it's a gap that we've got to work together to close for the good of our country, for the sake of a more hopeful future. We've got to work to knock down the barriers that have created a homeownership gap.
I set an ambitious goal. It's one that I believe we can achieve. It's a clear goal, that by the end of this decade we'll increase the number of minority homeowners by at least 5.5 million families.
Some may think that's a stretch. I don't think it is. I think it is realistic. I know we're going to have to work together to achieve it. But when we do our communities will be stronger and so will our economy. Achieving the goal is going to require some good policies out of Washington. And it's going to require a strong commitment from those of you involved in the housing industry.
Just by showing up at the conference, you show your commitment. And together, together we will work over the next decade to enable millions of our fellow Americans to own a piece of their own property, and that's their home. ...
To open up the doors of homeownership there are some barriers, and I want to talk about four that need to be overcome. First, down payments. A lot of folks can't make a down payment. They may be qualified. They may desire to buy a home, but they don't have the money to make a down payment. I think if you were to talk to a lot of families that are desirous to have a home, they would tell you that the down payment is the hurdle that they can't cross.
It was barely a month ago that I was reporting the mea-culpa of former Fed Chairman Alan Greenspan. Now it's Bernanke's turn. The current Fed Chairman, pictured at left with his friend and mentor Greenspan (who now appears in public only in hologramatic form for fear of being lynched) has been reported as saying that:
"I and others were mistaken early on in saying that the subprime crisis would be contained. The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.
Clearly all that Jedi mind-control training was a waste of time.
As Citigroup thunders towards the precipice you can't help but cast your mind back to the wise words of its former Chairman and CEO, Charlie Prince, when describing the finer details of Citi's subprime strategy:
"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
That was July '07, and things have certainly got a little complicated since then. Mind you, life for 50,000 Citi employees is about to get a lot simpler, as they'll be spared the grind of the daily commute. Chuck too will now have time to smell the roses - he's sailed off into the sunset with a UD$38 million golden goodbye. Still, with punditry like that who could quibble with $38m?
There are a lot of measures of market volatility around the place, such as the Chicago Board Options Exchange VIX index, which measures the volatility of S&P 500 index options.
The thought occurs to me that, for Weatherman purposes at least, we really need a measure of the volatility of the interest rate forecasts set out by the financial market gurus we track on this site.
As we've recorded these forecasts since January 2000 it was a simple matter of measuring the standard deviation of each set of forecasts, and summing them month by month.
The result is the DIX index, a name which suggested itself. As you can see it's been quite steady for years, and on several occasions hit zero as the forecasters were all in complete harmony.
Alas those days are long gone, with discord replacing harmony as it has with so many things.
John Quiggin of the University of Queensland reckons we're due for a return to Bretton Woods. Have a look at his presentation here.
Sounds good to me. The place gets plenty of snow and has some sweet runs. Ten lifts....four terrain parks....those central bankers sure know how to throw it down.
But what does it all mean? You can check it out here, or if you're more interested in sliding try here.
This is a rate cut!
The he-men at the Bank of England have kicked sand in the faces of Glenn Stevens and the rest of the 97lb weaklings at the RBA by cutting rates a whopping 1.50%.
Perhaps if we cut by 2% in December they'll back off a bit. Either that or the RBA boys sign up for one of those Charles Atlas programs.
Former Fed Chairman Alan Greenspan, pictured left, has made a remarkable back flip on the subject of regulation. Greenspan, a devotee of free-market capitalism and self-regulated financial markets, is reported to be "very distressed" that his ideology has proven to be flawed.
You're not alone there Al!
According to reports, Greenspan said his mistake was thinking that financial institutions would act in their own self-interest to avoid the kind of risky lending that could bankrupt them.
Looking at the size of the golden parachutes handed out to the big players on Wall Street, you could hardly rule self-interest out of the equation. In fact, with the wisdom of hindsight you could even say that self-interest would guarantee the sort of outcome we've had.
Michael West writing in The Age today makes a very interesting point in an article entitled "Waterloo for non-banks":
"Having said the banks were fine, it's clear someone tapped Kevin and Wayne on the shoulder and said, er...not all fine, actually."
My question is, if Kevin and Wayne were the tappees, who was the tapper? Call me paranoid if you will, but do I detect a certain amount of Queensland influence here?
I see that the Grey Men in Grey Suits have concluded that marking financial instruments to market isn't such a great idea after all, at least not when the market for those instruments disappears. See the Australian story here and the IASB press release here. Alas it's just a shade too late to help with the $700 bn of losses already booked.
Suggestions of bolting horses and stable doors.
It seems that organisations from the G7 to the BIS to the quaintly named Financial Stability Institute (a joint effort by the BIS and Basel people) are starting to point the finger at the accountants. The BIS notes that the accounting treatment may have overstated the losses on AAA sub-prime mortgage backed securities by as much as 50%.
All this to avoid the evils of profit smoothing!
Excellent article in the Economist, purporting to be from the risk manager of a large global bank. Click here to get there.
Following on from my question posed in "Grey Men in Grey Suits" - namely, what impact the new accounting standards have had on the whole sub-prime/credit crunch fiasco, I was particularly interested to read this comment in the article:
Another lesson is to account properly for liquidity risk in two ways. One is to increase internal and external capital charges for trading-book positions. These are too low relative to banking-book positions and need to be recalibrated. The other is to bring back liquidity reserves. This has received little attention in the industry so far. Over time fair-value accounting practices have disallowed liquidity reserves, as they were deemed to allow for smoothing of earnings. However, in an environment in which an ever-increasing part of the balance-sheet is taken up by trading assets, it would be more sensible to allow liquidity reserves whose size is set in scale to the complexity of the underlying asset. That would be better than questioning the whole principle of mark-to-market accounting, as some banks are doing.
An interesting observation from Bernard Keane on Crikey. Click here for the full story.
Some thought low interest rates and profligate government spending were what got the world into the financial crisis. Turns out they’re apparently the solution, at least in Australia. Not so much to the financial crisis, though, but the economic crisis which is following hot on its heels.
Quietly contemplating the carnage currently besetting world financial markets, I found myself wondering what role in all this was played by the grey men (and women) behind the wonderful international financial reporting standards which have kept so many accountants so busy over the last few years.
Consider this. If a financial institution holds $100m of mortgage backed securities it records those securities on its balance sheet at market value. If market liquidity dries up, and the best price you can find for the securities is $50m, you write them down to that level and take a $50m hit through the P&L. Simple right?
But what if the underlying mortgages were still reasonably sound? What if a sensible assessment of the present value of the expected future cashflows was $80m? The accountants have been so desperate to avoid "profit smoothing" that they've driven the banks to write their investments down to market value where no market exists. No doubt there'll be a done of work to be done in sorting the mess out.
So the RBA cuts rates by 1% - the first time it's done such a thing since 1992 (when rates were much higher) and the market jumps in response.
Perhaps I'm getting paranoid but doesn't this suggest a degree of concern at the RBA that we haven't previously appreciated?
If anything, I would have thought that a cut of this magnitude would frighten the horses in a fairly big way.
This may be slightly off-topic, but I see that the RSPCA is setting a nationwide dragnet to catch the dickheads who filmed themselves beating a kangaroo senseless.
Could I suggest that they start their search at CBA's marketing department?
I've just been listening to RBA Governor Glenn Stevens giving his report to the House of Reps standing committee on economics. A copy of his crib notes is here. I must say the report was fairly uninspiring stuff, and I can't help thinking that what it really needs is some pizzazz, starting with the name of the presentation. At the moment it's presented as follows:
Title: House of Representatives Standing Committee: Economics (Reserve Bank of Australia Annual Report 2007) (HMS 9)
Contrast that with the US, where a similar report done by the Fed to Congress is known as the Humphrey-Hawkins testimony, so named for a couple of pollies (Gus Hawkins and Hubert Horatio Humphrey) who did the spadework on related legislation back in the 70's. How snappy is that?
Assuming we want to mimic the American approach (why not - we do everywhere else), what heroes of 1970's economic reform can we use? Lacking any pollies with "Horatio" in their name closes off that avenue of thought, but for economic events of earth-shaking significance it's tough to go past the Jim Cairns - Rex Connor - Tirath Khemlani loans scandal. Read about it here. It's got a bit of everything - the dreamy academic turned Federal Treasurer; the old school ALP/Communist Party man turned Federal Minerals & Energy Minister, the shadowy Pakistani banker with supposed access to billions of petrodollars, the Carlton Football Club (!) and last but by no means least the sultry private secretary romantically linked to Cairns. It's pure soap opera, and played no small part in the eventual dismissal of the Whitlam government.
 |  |  |  |  |
| Cairns | Connor | Khemlani | Carlton | Morosi |
Yesterday's RBA rate cut didn't have a huge impact on the results of the tipsters below. However, ANZ did extend their lead a bit as my team were a bit slower in latching onto the rate cut story earlier in the year.
The thought occurs that we really need to get Bendigo Bank's forecasts into the mix. Anyone that can get away with the advertising campaign they had during the Olympics deserves attention!
After seven years of relentless rate hikes the RBA has handed out a 0.25% rate cut with more to follow from reading the text of statement. Lots more, if you can believe the futures traders:
A timely article on Crikey immediately struck a chord (click it for the full text):
