Well it didn’t have any conviction, but Friday’s 46 point loss on the Dow was the 7th consecutive losing session and brought America’s share idol to a 9-month low. The Dow is trading below the “psychologically important” 10,000 level. And investors in the US are resigned to the fact that the labour market’s problems may be far worse than they expected and take a lot longer to recover.
Not to be Danny Downer, but we reckon that the Western World is just waking up to the fact that globalisation has wrought structural changes to labour markets. Many skilled manufacturing jobs (and unskilled too) have migrated to markets with lower labour costs (and easier labour laws…and no labour unions). Those high-paying jobs probably aren’t coming back. And to the extent they’ve been replaced at all, they’ve been replaced by lower-wage salaries in the service economy.
The Australian market was virtually unchanged Friday, although the Sydney Futures are down this morning. Incidentally, we’re working from Sydney for most of this week. We’ve come up to prepare for our debate tonight with Macquarie Bank interest rate specialist Rory Robertson. Tickets to the event – dinner, drinks, debate – are limited but may still be available. Send emails to firstname.lastname@example.org
And speaking of Macquarie Group, how different it is to be a financial institution in Sydney than a miner in Melbourne or Perth. This article in today’s Age revealed an October 7th, 2008 dinner between Macquarie executives and then-financial services minister Senator Nick Sherry at Macquarie’s Martin Place redoubt here in Sydney.
Five days later a federally backed deposit guarantee was in place along with a valuable wholesale funding guarantee that made it possible for Macquarie and other Aussie banks to “rent” the government’s triple AAA credit rating.
According to the article, “Under the wholesale funding guarantee, Macquarie was able to use the taxpayers’ AAA-rated backing to access money on credit markets at a cheaper rate than it otherwise could before lending it at a higher rate to make a profit on the spread. The bank paid $200million to use the rating. Its corporate and asset finance division tripled its profit last year, in part by using the cheap funding to buy loan books at a discount. The risk to the taxpayer AAA rating remains until all the loans are repaid in full.”
Nice work if you can get it, huh? What was that about socialising losses and privatising profits again? The article points out that shortly after the collapse of Lehman Brothers in New York, ASIC banned short-selling on Australian financial firms. That stopped the bleeding.
Our point? Well of course a responsible government would do what it thought necessary to prevent a collapse in a major financial firm. That’s the way things work these days. But aren’t we constantly assured that no such crisis is possible with Australia’s well-regulated and well-capitalised banks?
Yes we are!
Of course it’s possible extraordinary actions are only required in extraordinary situations. But it’s also possible that the events in October of 2008 were the beginning of a giant transfer of risk in the Australian financial system from the private sector to the public sector. It’s this same transfer of risk that’s put so much pressure on sovereign credit ratings in Europe.
In fact, one of the current proposals in front of APRA is for a Financial Claims Scheme which makes permanent the guarantee on all Australian bank deposits. It’s a government guarantee. So as far as we can figure, the government, in principle, is putting itself on the hook to guarantee all Australian bank deposits should an Aussie bank, in some unlikely circumstance, go under.
Not possible? It is possible. Unlikely? Maybe.
But if you accept the premise that the last thirty years have seen fiat money credit bubbles leak their way into all sorts of markets, and one by one that those markets have topped out and fallen as the supply of cheap money fell away…and if you look at the huge levels in household debt growth in Australia (primarily mortgage debt) and see just how exposed the banking sector is to a) wholesale borrowing costs from overseas and b) residential housing… well then?
You get Aussie banks chock full of assets bought with borrowed money. Safe as houses? Hmm. More on that tomorrow.
for The Daily Reckoning Australia