Coming of Age

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Are you qualified to write about Superannuation to individual investors? Do you have at least five years of experience in the Super industry? Are you curious by nature? Do you want a job with our growing financial publishing business here in Australia?

We ask those questions before launching into today’s Daily Reckoning for a specific reason. We’d like nothing better than to discuss – in detail – the benefits and drawbacks of the Cooper Review of superannuation. But we can’t!

That is, the terms of our current Australian Financial Services License do not permit us to comment, report, or repeat the comments of others on financial subjects for which we are not licensed. The Corporations Act is so broadly defined that virtually anything you publish – even just publishing the opinions of a third party – can be considered financial advice. And if you’re not licensed to publish that advice…uh oh!

But naturally it would be silly of us to NOT cover super. But in order to do so, we must add a capable member to our research team who has worked in the industry and has the relevant qualifications to write about Super matters. If that’s you, and if you believe that fiat money is a giant fraud and that the only way responsibly prepare for your retirement is to actively question ALL conventional wisdom, then we may have a job for you. Serious inquires only to dan@dailyreckoning.com.au

Now, back to the business of business. And yesterday on Wall Street, business was good! The Dow rallied by nearly three percent and so did the S&P 500. For one day at least, investors decided to price stocks for a recovery instead of a recession. The very positive retail sales figures helped.

About those figures. The International Council of Shopping Centres (there is such a group) reported that sales at big-box U.S. retailers are growing at the fastest pace in four years. And just like that, the theme that emerges is that the U.S. consumer is healthy, happy, and spending again. Who needs China? America is back baby!

Or maybe not. The big picture, we believe, is that after a generation of going into debt to support asset price purchases and high consumption levels, U.S. households are deleveraging and beginning to live within their means. You could argue U.S. spending is supported by people who are not paying their mortgage. That can’t last.

More importantly, what kind of brain-dead moron thinks the way to future prosperity lies in spending more money?

And speaking of spending borrowed money, shall we talk about refinancing it? “Australia’s big banks will need to borrow more than $130 billion over the next year to repay existing debts and fund growth in mortgages, forcing them onto shaky international financing markets where costs are ballooning,” reports George Lionidis in the Australian Financial Review.

According to JPMorgan, $90 billion of that borrowing will simply be to refinance existing debt that matures next year. The rest is for new mortgage lending. JPMorgan reckons the Big Four will need to borrow $142 billion in the next financial year and then $116 billion the year after.

Of course maybe by the time it’s time to refinance these debts the anxiety in European credit markets will have gone away and funding costs will go down. But if not, Australian banks will have to raise more deposits locally to fund mortgage lending. And generally, to attract deposits, you have to raise interest rates, which means you probably have to raise mortgage rates too.

According to the figures, Commonwealth Bank increased its mortgage lending by $80 billion in the last two years. Westpac followed in a close second by expanding its loan book by $67 billion. CBA grew deposits by $30 billion in the same time, presumably borrowing the difference – $50 billion – to expand the loan book. Westpac grew deposits by $27 billion, borrowing the other $40 billion.

A billion here…$40 billion there….

And China?

“Standard Chartered has told clients to prepare for a fall in property prices of up to 30pc in Beijing, Shanghai, Shenzen, and other large cities in China as the delayed effects of monetary tightening begin to bite. Stephen Green, the bank’s China economist, said a glut of newly built homes were hitting the market just as buyers are restrained by higher down-payments and curbs on speculation.”

Global credit bubble equals misallocated capital and elevated asset prices. Central banks act to support by slashing interest rates. Levitation achieved. Gravity asserts itself. Asset prices fall.

This is the world for which we’re preparing an investment strategy. Mostly it’s defensive. But not always. More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. ” investors decided to price stocks for a recovery instead of a recession.”

    I dont know about that Dan.

    From ZH..

    ..”stocks have surged as mutual funds have seen one of their biggest weekly outflows in 2010
    “So yes money was actively being allocated to cash yet somehow the powers that be managed to ramp the computerized stock market farce that is the Dow by something like 500 points in 4 days”
    “Will three blind mute retarded monkeys who actually still have any faith left in our redonculously manipulated market please follow all the other lemmings over the cliff, not forget to pay Goldman Sachs the $200 suicide fee and shut the lid on their way out”

    Ha ha.

    Reply
  2. Hi Dan,

    Just one thing about your article. In a fractional reserve system of banking like Australia’s doesn’t the 30bn of deposits with the CBA equate to around 300bn of lending capacity ? Maybe I’m missing something here. I can’t see deposits being used at a 1 to 1 ratio to lending.

    Reply
  3. “JPMorgan reckons the Big Four will need to borrow $142 billion in the next financial year and then $116 billion the year after.”

    A cynic might be tempted to suspect that JP Morgan are short the Aussie banks and talking their book? Some other numbers follow – Including the statement that “Total deposits in all Australian banks now top $1.26 trillion.” Which if lent out on leverage of 9 times is near enough to $11.5 trillion. And with the total value of the Oz stock market being only $1t and of Oz housing being $3.5t (and a lot of both of those being owned outright), sounds like there’s still a few pesos left for other purposes. Although, yes, I still gather we are net importers of capital:

    http://www.theaustralian.com.au/business/cash-is-king-for-investors-around-the-world/story-e6frg8zx-1225889998927

    But if JP Morgan are that keen to throw stones, then maybe they can chew on this rock:

    “He suggests we not be fooled by recent earnings reports or government stats, pointing to U.S. bank earnings as especially inaccurate. JP Morgan has a balance sheet of $1 trillion and can borrow at essentially zero, he notes. So if they just go out and buy 10-year bonds at 3% they should be able to earn $30 billion a year. Yet the bank announced a profit of $3.3 billion last quarter.

    “What does that tell you? It says they are losing money on everything else,” Das says. “Strip out the gifts, and it’s big net loss.” ”

    http://www.marketwatch.com/story/europes-latest-fashion-rage-the-austere-look-2010-05-27

    Reply
  4. More DOW/SP500 counter trend rally coming up it seems.

    Daily trend should point up next week but…

    Weekly and monthly charts remain BEARISH.

    Reply

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