Interest Rate Manipulation Hits Home

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T’was the night before Christmas, unless you’re a German. In that case, Frohe Weihnachten. That’s because Germans celebrate on the evening of the 24th. Yes, Santa comes early in Germany — how original. Our copy editor would protest any reference to a ‘Blitzkrieg Christmas strategy’, so we won’t make one.

In Germany, it’s actually the ‘Christ Child’ that comes instead of Father Christmas or Santa. Although in these Americanised days it’s probably both in most households. Either that or the Christ Child has grown a beard and dresses ridiculously.

There’s a distinct advantage to growing up half German, half English. You get half your presents on the evening of the 24th and the other half the next morning. Two Christmases a year must be every child’s dream.

You’d think not much is happening in financial markets so close to Christmas. Who’d be reading the financial news anyway? Maybe that’s what UBS hoped for when news of their attempt to manipulate a key Australian market interest rate hit the press.

The interest rate they tried to fudge was the Bank Bill Swap Rate (BBSW). The name is as obscure as the rate is important. Open your Australian Financial Review and take a look at the interest rate securities section. Just about any floating rate security references the good old BBSW, plus a fixed margin. Not the mention all the derivatives and off market borrowings.

In other words, a huge amount of investors’ money is linked to the BBSW. Luckily, the Australian Financial Markets Association explains that the ‘BBSW rates are independent and transparent rates…’ Or not, thanks to UBS.

Regulator ASIC says investigations into interest rate manipulation in Australia are continuing. For now, the punishment for UBS’s manipulation is to contribute one million dollars to financial literacy programs. Clearly those who invested in BBSW related investments thinking they were ‘independent and transparent rates’ need some financial literacy advice. We’d be happy to warn them that financial markets are never independent or transparent. The one million dollar fine could be 20,408 Money for Life Letter subscriptions, or a heck of a lot of Daily Reckoning subscriptions.

Now that interest rate manipulation has hit Australian shores, it’s time to think about your own investments. Could you be a victim of dodgy bankers? 2013 was the year we lost all faith in financial market prices after just about everything turned out to be manipulated by the banks. So what do you do in in a world of dodgy prices? What’s left to invest in? Dividend stocks and non-financial investments are our suggestions.

But Christmas isn’t about investing. It’s all about the level of consumer spending. Australians have been saving up all year for their Christmas shopping, of course. That’s why all eyes are on credit card debt levels. So are we spending to improve the economy? The AFR interviewed CBA retail analyst Andrew McLennan, who said signals are good, but mixed:

Early credit card data is demonstrating that this Christmas is winding up to be one of the best we’ve had in the last three of four years; and that’s not to say things are great, but it’s a lot better than it has been.

The good old ‘better than it has been’ is about as good as it’s been for years now. That’s the good thing about a financial crisis. Everything looks like it is improving on a historical basis.

It’s not just consumption goods caught up in the traditional rush to buy otherwise shunned things this time of year. The Sydney Morning Herald says international hedge funds are taking a bet on certain struggling Aussie firms. The agricultural and mining sectors’ distressed debt is offering double digit returns…if all goes smoothly. It’s great to see so called ‘vulture funds’ helping out the needy companies for Christmas, isn’t it? Especially with those sectors making up about 12% of our economy.

We hope those hedge funds are hedging their currency risk. The Aussie dollar’s drop is already slapping down travel plans across the country. Website Booking.com is reporting a fall in the average stay and travel distance of the Australian tourist this holiday season.

The government’s Christmas present to the nation is a 6.2% increase in health insurance premiums, which Health Minister Peter Dutton approved. It’s an utter outrage. What on earth is the government doing approving price increases?

Everyone else seems to be upset about the price increase itself. But prices move. We can’t get over the fact that a politician can tell health insurance companies what to charge. Next thing they’ll be telling you how much to spend for Christmas.

Speaking of which, Dario Perkins of the research firm Lombard Street Research brilliantly analysed how economists of different ideologies see Christmas. Here are a few highlights:

‘Keynesians – place a lot of emphasis on the ‘macro stabilization’ properties of Christmas. Ideally, they would vary the number of Christmases each year according to the state of the economy… The Keynesians would like to see a larger role for the state, including publically-funded Santas.

‘Austrians – Believe Christmas is dangerous because it inevitably ends with a nasty January hangover. Also worry about the moral hazard implications of gift-giving and the propensity for overinvestment in Christmas decorations. Reject the idea of ‘public’ holidays, arguing the free market would lead to a better outcome.

‘Monetarists – Convinced they are the only ones who know how Christmas ‘really works’ and quickly become frustrated with other economists’ lack of understanding. Their thinking can be reduced to a simple identity, though this is vulnerable to shifts in the velocity of Santa’s circulation. Hardcore monetarists believe in the tight control of chocolate coins to prevent the hyper-inflation of waist lines and the hyper-activity of small children.

‘Chicago School – argue Christmas has no meaningful impact because gift-giving nets out. Fully rational individuals will anticipate this and adjust their behaviour accordingly.’

Here at the Daily Reckoning we simply think you should enjoy yourself this Christmas, overinvestment and hangovers be damned. So Frohe Weihnachten.

Regards,

Nick Hubble+
for The Daily Reckoning Australia

Join The Daily Reckoning on Google+

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.
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6 Comments on "Interest Rate Manipulation Hits Home"

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Ross
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merry xmas all!

Lachlan
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and a happy new year ;)

Lachlan
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a free youtube book for christmas, The Man Vs The State

https://www.youtube.com/watch?v=f-aV6ZRnUOM&list=PLE811922B699458A6

Dulong Ttil
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One worthy action for the Australian government to contemplate to improve our economy is Japan’s monetary easing policy. Since the YEN is much cheaper now than before, Japan’s export and tourism businesses now become much more active again. This is exactly what we need for Australia. The Australian government ought to consider adopting similar monetary easing policy to drive the AUD downwards appropriately. So, our Export competitiveness can be strengthened again, our economy can be improved and our people can keep their jobs. The lower AUD currency can also help improving our Car Exports to other countries and save our… Read more »
Dulong Ttil
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Japan has adopted an assertive Monetary Easing Policy, which drives the YEN downwards successfully. The immediate result shows that their Export and Tourism industries have picked up swiftly. Japan is now enjoying healthy export growth and has much more tourists visiting Japan. With the sound and robust stimulation by Japan’s Monetary Easing Policy (which in fact mainly injecting more printed notes into the market by their Central Bank), the Nikkei has soared from 10,398 to 16,291 just in 2013. Nikkei marks its best performance in forty years, and also the top performer among Asian markets in 2013. Analysts name this… Read more »
tony
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I have always wondered how and why it is, that increases in any price for anything ( health ins.premiums,elec.prices etc.etc.)is always governed and allowed to be in percentages way way higher than any normal wage increases (excluding those of parasitic politicians). Same as the banks coming up with the ridiculous excuse for having their interest rates so much higher than the other (manipulated) reserve… Oh it costs us more to borrow to lend to business and society from foreign supplies. Then they go on to make obscene profits on top of it all and the parasites in Canberra see it… Read more »
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