Gotti’s Plot-free Zone

Another extraordinary spray from Gotti in today’s Business Hysteria.  Try foaming at the mouth while reading this to give it it’s full effect:

Will garbage statistics throw rates reason?

Robert Gottliebsen

Published 7:15 AM, 2 Aug 2011 Last update 10:20 AM, 2 Aug 2011

---

Do not do it. Do not do it. This is my message to the board of the Reserve Bank as they meet later today to consider whether to lift interest rates. There are a series of dodgy figures which the zealots at the Reserve Bank will see as a call to interest rate action. The board must look beneath those figures into the real world. And, believe me, there is little joy out there in non-mining Australia.
But there is a good chance the zealots will win at today’s Reserve Bank board meeting and interest rates will rise. If they do, then the board of the Reserve Bank needs to understand that they are putting the job of governor Glenn Stevens on the line. If an interest rate hike catapults the non-mining Australian economy into a deep downturn – as I expect it will – then the governor would have to offer the government his resignation.

Damn those zealots!

It’s intriguing that every time the RBA looks to hike rates someone has to pin the blame squarely on the RBA Governor.  Who can forget this priceless font page from the Daily Telegraph back in April 2008:

 

I doubt we’ll ever see another shot of Pup and Lara arm in arm, but I suspect we’ll continue to see the RBA Governor slagged every time the commentariat feels we’ve gone a rate hike too far.

It’s intriguing how little credibility Stevens gets for his role in helping to steer the country through the GFC so effectively.  At least he’s now paid well to cop the abuse.

What constitutes “non-performing”?

The latest (March 2011) RBA Financial Stability Review includes the following chart showing default rates amongst different classes of bank assets:

This was discussed in some detail over at Business Spectator.

I’d be very interested to get a better handle on what constitutes “non-performing”.  The Housing data used here obviously reflects 90 day arrears – its broadly consistent with the 90 day numbers reported by Fitch, S&P and Westpac.  However, I’m not sure what the Business and Personal default rates reflect – my suspicion is that they are simply a reflection of absolute actual default levels, irrespective of the term or severity of the defaults.  If this in fact the case, I’d have a few issues with the analysis:

• I don’t really understand why 90 day home loan arrears are treated as non-performing but 30 days aren’t.  A loan that’s 30 days overdue can hardly be called “performing”, given that they’ve probably missed two fortnightly payments by that stage
• Bear in mind that almost all Australian banks measure their home loan arrears on a “scheduled balance” basis, not a “missed repayments”.  This means that the arrears balance is only 30 days overdue if the current balance exceeds what the balance should have been (if all payments had been met) by the amount of a month’s payments.  If the borrowers had been making extra voluntary payments when the going was good (and huge numbers of people do), they could go for months without making a payment before their current loan balance exceeds the scheduled balance.  On the other hand, if the “missed repayments” method is used, the earlier voluntary payments don’t count and the 30 day arrears position is reached as soon as a month’s worth of repayments are missed.

S&P’s regular RMBS Performance Watch documents these different approaches to default measurement.  I’m assuming that the RBA/APRA data reflects the same approach as the S&P data, although I couldn’t find anything to verify if that’s the case.  If it is in fact the case, the “housing” line in the graph above could conceivable be well above 2%, if 30 day arrears and missed repayments were used.

ASX Debut at #1

It’s been a while since I updated the cash rate tipsters league table, and in the interim the stats I’ve been keeping on the cash rate forecasts implied in the pricing of bank bill futures have now reached the point that I can include them in the results for the last 3 years. Note that to get this data I’ve used the ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve. 

It should be no surprise that bill futures, which represent the net of all the bets on the future direction of interest rates, should prove to be the best at predicting the cash rate, but nevertheless I’m still surprised.  Futures traders are way more focussed on where they believe the futures market is moving, rather than the underlying reasons why its moving, and the two don’t have to move in tandem.  Witness recent occasions when the futures strip implied a chance of a rate cut, when that clearly wasn’t on anyone’s mind, but the sheer weight of selling pressure (when expectations of future rate hikes suddenly got unwound following some bad data) pushed prices too low.  However, the stats don’t lie (these ones don’t at any rate).

Here’s the ladder for the last three years:

 

 

 

And since August 2001:

Accountants going backwards

It’s always good fun when financial services people attempt to use “inspirational” climbing-themed photography to promote their wares.  This one from the Chartered Accountants in today’s AFR caught my eye:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In view of the fact that this bloke is clearly abseiling, wouldn’t this be more appropriate?

As for the last line of their text, “If you want to rise to the highest heights, choose Chartered”, you might want to consider choosing someone that can tell up from down.

Mind you, as good as this one is, it still doesn’t get close to the head-scratching wierdness of the Macquarie Graduate School of Management previous attempt at a similar theme:

Gotti’s Irony

Interesting piece in today’s Business Spectator (aka BS), which sees Gotti foaming at the mouth about “Dutch Disease” and the demise of the manufacturing sector, the banks, tourism, education and pretty much anyone with a job, as the rocketing $A and a contraction in business lending puts the skids under the non-resource sectors.  All of which begs the question as to whether we as a nation are extracting sufficient value from our once in forever boom in the demand for and price of our resources, given the collateral damage that it’s obviously causing.

However, it seems like only yesterday that Gotti was leading the charge of the anti-RSPT cadre, bellowing to all and sundry about the evils of the government’s attempts to claw back more of the minerals wealth:

“When new Prime Minster Julia Gillard announces a completely revamped mining tax it will be an enormous victory for the nation”, he wrote back in July 2010 (see “An RSPT Victory”), and went on to boast that

Here at Business Spectator, Alan Kohler, Stephen Bartholomeusz and myself realised that Rudd and Swan had made a diabolical mistake soon after it was announced. We decided to highlight every aspect of this terrible measure until it was changed. In all the KGB wrote some 80 commentaries on the tax and I think that, with a few print journalists, including Matthew Stevens on The Australian and Terry McCann on the Herald Sun, we led the push for the government to act in the national interest. Our readership soared to 400,000 as the business community turned to Business Spectator to understand what was happening. This is the first time I have been involved in an exercise like this and I have found that electronic communication is more powerful than print.

Perhaps Gotti would now be kind enough to define “national interest”.

ROI on Housing…..Zilch?

Someone’s just pointed me at an article in the Federal Reserve Bank of Philadelphia Business Review of Q3 2010 which essentially put the ROI of home ownership in the States over a 35 year period at slightly less than zero. I realise “we’re different” but thought it might be worth pointing out.

http://www.philadelphiafed.org/research-and-data/publications/business-review/2010/q3/brq310_benefits-and-costs-of-homeownership.pdf

Bank ROE History Lesson

I found this graph in PwC’s latest Major Bank Analysis, which provides an analysis of – oddly enough – major banks.  What is odd is that the PwC paper deals with the 4 big Australian banks, but the graph covers UK banks – a shame someone couldn’t do the same analysis for our lot, but presumably it would look similar, shifted a few years to reflect the later introduction of financial deregulation, and also missing the catastrophic GFC related plunge at the end.

 

Yoda on Dodd-Frank

Perhaps Alan Greenspan, at the ripe old age of 85, should be excused for an occasional foray into fantasy land, but his latest screed at FT.com (reproduced in the Business Spectator here) can’t pass without comment.

“Dodd-Frank may ruin us all” runs the alarmist banner headline.  It’s not really clear what he mean when he says “us”. Presumably not the millions already screwed over in the financial collapse so ably overseen by Al himself.

A central plank of Al’s criticism is that “The financial system on which Dodd-Frank is being imposed is far more complex than the lawmakers, and even most regulators, apparently contemplate.”

I’m not convinced this is true.  It’s bigger, and some of its products are quite complicated, but the basics of the market are unchanged.  Perhaps Greenspan’s failure to regulate the market properly in the lead up to the GFC was a product of this view – that the financial world is so clever nowadays that a system designed to reward people for writing loans that borrowers can’t afford to repay is somehow not a problem.  It doesn’t matter how you re-package those loans or how many times you on-sell them, the basics are quite simple, and it was all very wrong.  So wrong in fact that its simply astounding to see Greenspan continue to oppose those who take a different view from his own laissez-faire approach to financial market regulation.

My problem with Dodd-Frank is a bit different.  If the regulators failed to use the powers they had pre-GFC to put the brakes on the nonsense lending happening at that time, or the more bizarre bank funding mechanisms that were used in some places (e.g. Northern Rock), what use are more regulatory powers?  The missing element seems to me to be the willingness to use the powers the regulators have,  not the extent of those powers.  Remember Sarbanes-Oxley?  Fat lot of good that did!

Freddie and Fannie – where are they now?

This “causes of the GFC” article is well worth reading, dealing as it does with  the rarely discussed but hugely significant failure of the two big US GSE home lenders, Fannie Mae and Freddie Mac.

I’m not sure I agree with all of the sentiments – particularly the suggestion that the failure of US regulators to control their own lenders somehow reduces the culpability of the private sector to do the same thing – but the focus on the role played by Fannie and Freddie is appropriate given their almost unbelievable size.

Business Spectator article, originally appearing in Online Opinion.

The Great House Price Debate

The Great House Price Debate

The Governor of the RBA gave an interesting speech in London recently (“The State of Things”, 9/2/11). In addition to scoring some points in terms of how the economic recovery in the Asia Pacific region is proceeding compared to that in Europe and North America, he also used the question and answer session after his speech to mount a strong defence of the current level of house prices in Australia:

There is quite often quoted very high ratios of price to income for Australia, but I think if you get the broadest measures of country-wide prices and country-wide measure of income, the ratio is about four and half and it has not moved much either way for ten years. That is higher than it used to be but it is actually not exceptional by global standards.

This speech was timely, given the recent piece in The Economist, which described Australian homes as the most overvalued in the world (the Economist says Australian housing is over-priced by 56 per cent) together with a Demographia report in which Australian cities again dominated the “severely unaffordable” category, with Adelaide now listed as the 8^th least affordable major metropolitan centre in the seven nations surveyed (and higher on the list than both Perth and Brisbane).

Stevens’ comments immediately triggered another round in this long running debate, centred on the price versus income measure. The statement that “...it has not moved much either way for ten years” is difficult to reconcile with these graphs:

Even using the “average income” method it’s difficult to see how Stevens’ view can be reconciled with the data, but of more significance is the use of “average income” in the first place. This method, which has been used for some time in the Rismark/RP Data property price analyses, provides substantially different outcomes from a “median income” analysis used by other commentators, owing to the extent to which small numbers of very high income earners skew the average income figures. Average income data (as sourced through the ABS national accounts) also has potential issues with imputed rents and superannuation contributions, neither of which are of much use in the context of mortgage debt servicing.

In its recent report Demographia makes the point that:

This inappropriate practice [the use of average income] portrays Australian housing affordability as considerably more favourable than the reality, because average household incomes are materially higher than median household incomes. Average/median multiples and Median Multiples are not comparable.

Using Demographia’s methodology the picture is far less attractive:

On a city by city basis their data is as follows:

Same market, two very different stories.  Who to believe?