Squishy Ball Test for Banks

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It’s an all-out attack on the greenback and everyone else is winning! The Aussie dollar has reached parity with the Canadian dollar (the Loonie) and is fast approaching its previous highs against America’s number one export (the U.S. dollar). So is this a turning point in the currency wars?

Well, like all wars, a sensible question to ask is, what are we fighting for?

Are we fighting for honest money that doesn’t lose purchasing power? Are we fighting for low deficits and strong growth? And who are we fighting anyway? The Chinese? The Europeans? Team America?

The point we’re trying to make is that metaphors are only useful if they reveal some insight into a problem that you can’t get in a straight forward way. Are nation’s using currencies as a weapon against each other? Well, maybe. But it’s more likely that each nation seeks to maximise its trading advantage by managing its currency in a certain way.

In the post World War Two era, for example, it’s been sensible to keep your currency cheap relative to the U.S. dollar. Americans were big spenders, even when they didn’t have money. And from the American perspective, what a great trade! You send paper to people…and they send you real goods and services in exchange. And you get to make as much paper as you want because the rest of the world can’t get enough of it!

It does seem like kind of a fraud. But then, money is a fraud, when it’s not backed by anything tangible. When money is backed by confidence (or a large economy, or the rule of law, or a blue water navy, or a large nuclear arsenal) people don’t ask a lot of questions until it’s too late and the currency is fatally compromised by massive debts incurred in it.

Is it too late for the U.S. dollar? The last time the Aussie neared parity, the whole world fell apart. Correlation is not causation. There’s no reason why the Aussie can’t smash through parity and go beyond. After all, Australia’s terms of trade remain high. And the Treasury expects the roaring commodity trade with Asia to deliver the Federal budget into surplus in just a few years.

Frankly, it all seems just a bit too neat. But over the last few years, we’ve found that our first week from a major overseas trip has been marked by a fuzzy brain. It’s probably something chemical. But you look at the markets right now and it just looks too good to be true. We realise that is an utterly superficial and shallow level of analysis. But it’s our first intuition, so we’re going to keep investigating.

One thing to watch for: the end of the quarter. With such a good month for stocks topping off a good quarter, it will be worth watching to see what the smart fund money does next. We use the word “smart” loosely. September surprised everyone with how good it was. You normally see a lot of “window dressing” by fund managers at the end of the month. They buy whatever went up so it looks like the owned it all along.

But getting ready for the next quarter may require less following and more leading. For example, yields on four-week T-Bills in the US have fallen by 45% in the last few days. They’re down by 60% since late August. This indicates a preference for near-cash, low-yield instruments that are not stocks. It’s an indication of risk aversion.

Will the risk trade go off the boil now? “The ASX is sinking like a stone this morning,” a colleague chimed in from across the room. “But all the gold stocks are up,” said another. “And BHP and Rio are down.” “So what’s falling?”

It must be the banks!

Not that there’s a banking crisis in Australia, at least not yet. There may not even be a problem. Heck, there may not even be any stress. But we’ll find out soon if there should be!

Wire services are reporting that ratings agency Fitch is ready to stress test Aussie banks for a 40% fall in house prices. Since Australian house prices never fall, Fitch probably won’t find anything. But it’s going to look anyway.

The agency is going to design something that tests, “different scenarios of varying property price decline.” What that means is it wants to see if falling house prices or rising mortgage default rates (that could never happen either, even if interest rates went up, which they never do) impact banks and insurers negatively (also probably impossible).

What prompted the stress test of an asset class/market that is immune to stress? Fitch says that, “Weighted average established house prices for Australia’s eight major cities rose by 18.4 per cent in the year to June 2010 according to the Australian Bureau of Statistics, and are now 41 per cent higher than they were in June 2006.”

Rising prices don’t always indicate a bubble. But sometimes they do. And since we’ve already established our position on this issue, we’re going to shut up about it now. Until tomorrow!

Dan Dennning
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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162 Comments on "Squishy Ball Test for Banks"

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Biker
Guest

DD: “…established house prices for Australia’s eight major cities rose by 18.4 per cent in the year to June 2010 according to the Australian Bureau of Statistics, and are now 41 per cent higher than they were in June 2006.”

Jeez, the exact _opposite_ of Keen’s prediction. Who’d have thunk it? ;)

Steve
Guest

Like some of the bloggers and your fellow countrymen said on that site
Perth is the best performing capital city in the correction. West Australians might be smarter people than I first thought :D

Biker
Guest

“West Australians might be smarter people than I first thought ”

_We_ learn how to use full stops by the time we’re six, Steven! :D

Macca
Guest

And_underscores_are_really_popular_out_west,_Biker.

Ross
Guest
DD: “what are ‘we’ fighting for?” ‘We’, and global savings based capital aren’t doing anything. USD near zero interest rate leverage created carry and “investment” (now the stupidest application of a word in history) is doing everything. When fear drives carry more than greed it will be all over. The banksters write the so-called risk trade narrative, like the BRIC one. They also call time on it when they taken enough suckers in and run up a big enough asset inflation bubble on someone else’s asset turf or currency. They trade their book until they decide to call time, and… Read more »
Steve
Guest

When I go on Domain why am I seeing so many houses with “UPDATED” next to them?

Stillgotshoeson
Guest

Deliberately took a loss of $7100 on some shares today..

Ross
Guest
Can’t be your IMP SHoes because they’re still over 22.2% up after the redistribution from when you mentioned them to me. I bailed on CTX at a high ex dividend just recently. MGX is 2% down on what I sold them in March. Ag shares all doing fine. My GFC ASX bellweather below ASX sector Indexes current vs 7 May 08 +/- percent XEJ energy -15.1 XXJ financials x prop -8.4 XHJ healthcare -13.2 XNJ industrials -29.8 XMJ materials -23.0 XPJ property trusts -52.0 XSJ consumer staples + 5.1
Stillgotshoeson
Guest

Still liking IMP… Might even get more.. Cold Winter in the New York State area this year I am thinking.. I see minimal risk on IMP at the moment and into the future

Ross
Guest

Another item for DD, the last quadrupal witching was done on the lowest turnover in history by a country mile until ….. post close trades. No volume with everything that does happen cooked up in the off hours. Crook as Rookwood we say in Sydney. Rookwood being the cemetary. There’s a little railway station just south of Central Station where they used to load up the coffins, maybe theres a place like that in NYC where they all meet up and decide what the computers are going to say for them today.

Biker
Guest

“When I go on Domain why am I seeing so many houses with “UPDATED” next to them?”

Much better. For our American DReAders, our ‘full stops’ are your ‘periods’. In Australia, most six-year-olds have mastered simple punctuation (full stops, commas and capital letters) by the end of their sixth year.

After twenty five years (with over two years’ _intensive_ tutoring) Steven has nearly mastered the art of writing a simple sentence.

His mathematical skills remain at pre-school level.

(No smileys, folks. It really isn’t all that funny… .)

SteveNG
Guest
“_We_ learn how to use full stops by the time we’re six, Steven! :D ” “For our American DReAders, our ‘full stops’ are your ‘periods’. In Australia, most six-year-olds have mastered simple punctuation (full stops, commas and capital letters) by the end of their sixth year.” But we’re never too old for juvenile behaviour. Call the cops! Someone didn’t use correct grammar on the Internet. Anyway, nice way to drag a conversation off-topic, Biker. Ad hominem attacks are the staple of the Internet troll and blowhard. House prices 5% down in 3 months in the middle of a boom, in… Read more »
SteveNG
Guest

Let me correct myself before the pedantry arrive. Property prices down 4.8%, not house prices (and not 5%). *sigh*

Ned S
Guest

I assume you saw this one Ross ? :

http://www.zerohedge.com/article/introduction-road-through-2012-revolution-or-world-war-iii

CGT for those who might harbor any thoughts of fleeing our land of abundance and plenty should it ever prove not to be quite so:

http://smh.domain.com.au/real-estate-news/cgt-rules-have-devilish-details-20100930-15y5v.html

Biker Pete
Guest

“House prices 5% down in 3 months in the middle of a boom, in Boomville. Nothing to see here.”

The boom hasn’t started, son.

“But we’re never too old for juvenile behaviour.”

As your mate proves, time and time again:

“Biker Property is a NEED everyone VAULES it, just like I VALUE oxygen, just like I VALUE food, just like I VALUE water.”

Classic stuff… . :D

SteveNG
Guest

“The boom hasn’t started, son.”

If not now, when? When China re-doubles its ghost town building efforts?

But seriously … when?

“As your mate proves, time and time again:”

I was referring to the bloke on here who condescendingly refers to strangers as “son”, yet behaves like a child. That guy.

Ned S
Guest

So what are you saying SteveNG? That Biker is a TROLL ??? – Because he points out spelling and grammatical errors? Or that you think some Oz house prices might go down someday?

If the former, F orf ya creep. If the latter, then yep, you could well be correct. IMO.

Just looked up the meaning of ‘Ad hominem’ – Ta muchly for pointing it out so clearly in the general body of your dialogue to us what’s obviously not so clever as you ‘edumacated’ types cuz! :D

Biker Pete
Guest

Well, I meant the kid who frequently uses F*#* and $#+t and ‘morons’, ranting like a petulant door-kicking child because FHBs aren’t selling him their homes for the 40% discount he was promised. That one. Your mate, Steve.

SteveNG
Guest

“So what are you saying SteveNG? That Biker is a TROLL ???”

I wasn’t saying that, Ned. Although the last time I spoke with you, I accused you and Biker of being the same guy.

Regardless of whether I’m right about that, you’ve just reinforced my thinking with your impeccable timing.

Biker Pete
Guest

HaHaHa… the old Biker-is-Ned theory. :D

He hasn’t even caught the irony of our two simultaneous comments. ;)

Ned S
Guest

Steve’s young and just maybe hasn’t been able to bring himself to accept that Sydney might not be one of the best places in the world to get ahead at this time for him Biker? Ross and I seem to have both tried to patch the holes that history made in our opportunities by working overseas for a while? Shoes seems to have attempted to do so by coming to Oz? And you’ve done what you’ve done. While others have done what they’ve done.

SteveNG
Guest

You haven’t even heard the full theory yet!

Biker Pete
Guest

Place your bets, fellas.
I think Ned put half-a-billion on the line.
I haven’t got that much, but I’m ready to add several million in cash.
Willing to put your money where your mouth is, SteveNG…
or are you all yap, like The Other Steves?

Ned S
Guest
Am I missing something? Is SteveNG claiming to be Shoes who did for a little while incline to the thought that Biker was Ned? But SteveNG surely isn’t Steve who reckoned he’d known both us old baskets [Ned ‘n Biker] for long enough to reckon it wasn’t likely we are the same bloke. Nope, my gut hunch is that SteveNG isn’t ‘Steve’ or ‘Shoes’. But by all means correct me if I am wrong please Steve or Shoes … But hey, same call as I made a while back – I’ve got half a mill that says Biker ‘n Ned… Read more »
Stillgotshoeson
Guest

I am me and no one else…

Ned S
Guest

“I think Ned put half-a-billion on the line.” – You beat me to it mate.

Put up or shutup SteveNG?

Biker Pete
Guest
Ned, my chief objection to Steven’s rants is his belief that his fellow Sydneysiders must all be bankrupted, so that he can get a half-price house. We’ve been repeatedly told by Steve that anyone who disagrees is a moron. I’d be tempted to believe his generation is a totally lost cause, but for the fact that my sons and their friends (his age) don’t share Steven’s sick perception of personal achievement. The bleating here is something I expected to find on a site whose initial descriptors include ‘Australian House Prices are Severely….” The folly of those who still believe in… Read more »
SteveNG
Guest

“Put up or shutup SteveNG?”

Erm … put up what?

Biker Pete
Guest

Yep, I think you called it, Ned.
I think you’ve also spotted _something else_ highly significant here. ;)

Biker Pete
Guest

Erm… ?!~ Holy Excreta… Look who’s back!!!!!~

Biker Pete
Guest

HaHa… ! Welcome back, Prozak. Where _have_ you been hiding?!~ :D

Erm…!~ ;)

SteveNG
Guest

“HaHa… ! Welcome back, Prozak. Where _have_ you been hiding?”

Are you trying to bully me, Biker? That’s pretty weak.

Ned S
Guest

“I am me and no one else” – And I certainly do believe you when you say that Shoes. As I also believe that ‘Steve’ is Steve and ‘Biker’ is ‘Biker and ‘Ross’ is Ross and ‘Lachlan’ is Lachlan and ‘Don’ is Don.

Don’t start bouncing round the TROLL word here though SteveNG unless you have big balls and some real money to back your mouth. As the very minimum entry requirements to any ‘Let’s chat about Trolls’ game?

SteveNG
Guest

“Don’t start bouncing round the TROLL word here though SteveNG unless you have big balls and some real money to back your mouth. As the very minimum entry requirements to any ‘Let’s chat about Trolls’ game? ”

The lady doth protest too much.

All of a sudden it’s getting very noisy here. It’s like Biker Ned is trying to squash any other voices. Now that’s not the first time I’ve seem him do that!

Ned S
Guest

Prozak has been calling himself NV Biker. IMO?!?! But I couldn’t be bothered calling him on it as he was being pretty benign and hadn’t expressed an overt wish to EFF any regular blogger’s missus or mother. A harmless enough non-entity for mine.

SteveNG
Guest

And then it went quiet … ssssh.

Anyway, anyone interested in my Biker Ned theory?

Biker Pete
Guest

Well, I think he’s been called on the SteveNG, Ned. NG? NV? (Envy? Probably.)

“Now that’s not the first time I’ve seem him do that!”

Bit of nervousness showing there. This is the bloke who bet his left testicle I was a Kiwi actor residing in Sydney, you’ll recall. Jeez, this is a fairly incomplete set of bears… . :D

Biker Pete
Guest

“Anyway, anyone interested in my Biker Ned theory?”

Erm*… Who holds the cash, SteveNG, I mean Prozak, or Envy… ?
Are you even employed? Do you own anything at all, apart from mouth parts?

*ROFLMAO…!!~~

SteveNG
Guest

“This is the bloke who bet his left testicle I was a Kiwi actor residing in Sydney, you’ll recall.”

Moi? I would love to see that post! Got a link?

Davo
Guest

I’m me too, or you can call me Dave, which is my real name.

Davo
Guest

Davo is what my better half calls me, but I’ll respond to either.

Ned S
Guest

“Anyway, anyone interested in my Biker Ned theory?”

I’d Love to hear it Prozak! PLUS your degree of confidence in expressing same and how much money you’d be prepared to back it with???

By all means DO proceed please …

SteveNG
Guest

Anyone besides Biker Ned, silly!

Ned S
Guest

“I’m me too, or you can call me Dave, which is my real name.”

I figured that as well of course Dave. Both being Northside Brissy boys we could even arrange a BBQ one arvo to PROVE it without a huge amount of hassle I reckon! ;)

Biker Pete
Guest

“Moi?”

Yep, it’s him all right. Honestly didn’t think we’d hear from Prozak again, Ned. ‘Envy’ is the kind of Freudian slip I’d expect from Pillman.

Ahhh well, I’ve had the best laugh in years. Congrats on spotting him before I did. Should have, but he hasn’t ‘erm-ed’ or ‘moi-ed’ for a year or so. :)

We’ll have to get together, old son. Can’t see any of his multiple identities paying up on the Biker Ned call, but I now paste-and-copy the best of these screamers for future laughs over a glass or few!!~ :D

SteveNG
Guest

Ah, well. I’ll wait until there’s some real posters on here to listen to my fabulous tale. See ya Biker Ned.

Biker Pete
Guest
G’day, Davo. Been out to the Bronx, yet? Nice little Irish bar right across the road from the Old Icecream Shoppe. Definitely worth a day trip. Don’t think there’d be any issues with kids (except in the bar… .) Great history recount. If you do the bus tour, ask the guide about the film ‘The Warriors’. Estimation of Aussies rose appreciably throughout the tour bus when we asked about it. They were stunned that we were fans of one of their cultural icons… . The driver himself became highly excited, punching the air…. . Had to laugh… . :D http://www.flixster.com/movie/the-warriors
Biker Pete
Guest

“See ya Biker Ned.”

NVis has left the building… . ;)

Ned S
Guest
He’s been lurking as NV for ages I reckon mate? As NV he threw you a patently obvious bait a few weeks back when he said how much in favour of Death Duties he was. IMO. Then came back very quickly after no-one bit under his long lost ‘Pete’ persona to empathize with NV as to what pricks you and I are for cluttering DRA up with shite and not telling everyone how we reckon they could make lots of money … Poor silly prick! :D Anyway, the potentially most useful comment I’ve presumably made tonight was the following link… Read more »
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