A very interesting macro perspective piece by Jessica Irvine in the Fairfax press today here.
Irivine reviews bank lending patterns, interest rate history and Australians' spending since the early 2000s and notes that consumer spending statistics contained a significant proportion of debt. She gives cogent reasons why these spending patterns will not be repeated in the current and near future.
The bottom line for retailers is that they must get used to permanently lower sales growth. This is bad news for shareholders and bad news for retail employees.
But for the economy as a whole, this deleveraging by households is a good thing. It's something households across the rest of the developed world are desperately trying to achieve but that only we have the ability to do effectively, thanks to the income boost from the mining boom. The Reserve Bank is happy to see some weakness in retail spending to make room for increased spending by businesses in the mining sector.
And if households can reduce their debts and build a buffer for future international financial turbulence, that is no bad thing
APRA calls for Big 4 Banks to provide "living wills'
The ABC yesterday broke this story view here. To deal with the notion of "too big to fail", the banks are being asked to give the regulator their plans in the event of another global financial crisis so as to minimise systemic risk; part of a global regulatory process reviewing capital requirements.
Ian Verrender writes yesterday in The Age "The Labour of Nicholas" that the future of Macquarie Bank's traditional investment banking operations is uncertain in the post-GST global market against much bigger players.
He details how its strategy of creating, selling to, and reaping management fees from, satellites is no longer a viable part of its investment banking business - an illustrative read.
Back then (2007), Nick (Moore) and his lieutenants had convinced the world that they had invented the financial equivalent of the perpetual motion machine. It was devilishly simple. Establish your own buyers, your very own set of clients in the form of listed satellites.
Then, buy assets at outrageous prices, sell them on to the satellites, for a handsome fee, and install your own management, again for a handsome annual fee. Each year, all you had to do was revalue the assets and borrow ever more cash to pay the dividends. Simple!
So impregnable seemed the model, that Macquarie's much bigger global rivals couldn't understand why they hadn't thought of it first and tried to get in on the act.
When debt suddenly dried up in 2007 and asset prices crashed, the machine ground to a halt, forcing Macquarie to cut loose all the satellites and return to a traditional business.
That was always going to be a hard slog.
While Macquarie never abandoned traditional investment banking, its operations had become addicted to the easy money to be made from the satellites. And they no longer exist.
It will be interesting to see what happens next week at the Macquarie AGM.
In his speech widely reported yesterday, RBA Governor Glenn Stevens gave the following three insights to "make sense" of the phenomenon:
while everyone understands that there is a ‘mining boom’, many people would say that they themselves cannot directly feel the effects. We have seen widespread re-emergence of talk of ‘two speed’ or ‘multi speed’ economies.
The first point is:
the impact of the resources sector expansion does get spread around, in more ways than might immediately be apparent. Obviously mining employs only a small share of the workforce directly – less than 2 per cent. But to produce a dollar of revenue, companies spend about 40 cents on acquiring non labour intermediate inputs, primarily from the domestic sector. Apart from the direct physical inputs, there are effects on utilities, transport, business services such as engineering, accounting, legal, exploration and other industries. It is noteworthy that a number of these areas are growing quickly at present.
This flows through to shareholders and more generally to superannuation schemes in which most Australians have a stake. Stevens describes this effect as "geniune income and genuine increase in wealth"
Secondly,
...a complex interaction of forces – the commodity price cycle, the financial cycle, population flows, endogenous responses of housing prices that then feed back to population flows and so on – has been occurring. The ebb and flow of these forces has made for differences in performance, first in one direction, then the other.
The example Stevens gives of this "complex interaction" is:
Take housing prices and population growth, which are of course quite closely related...It surely is no coincidence that the two state capitals that have had the clearest evidence of declining house prices over the past couple of years – Brisbane and Perth – are the two that previously had the highest rate of population growth and that have since had the biggest decline in population growth. Moreover, it is hard to avoid the conclusion that changes in relative housing costs between states, while certainly not the only factor at work, have played an important role.
Thirdly, he notes the industry make-up of our economy is continually changing, which is a fact we have known for a long time. But the significance of this, he says, is:
The point about long term shifts reminds us to look beyond the immediate conjuncture, and to think about the magnitude of the event through which we are living. For a good part of the change in our terms of trade is a manifestation of a large and persistent change in global relative prices. Let me be clear here: there is a cyclical dimension to the China story, and it is important that we remember that. But there is also a structural dimension. And the associated change in relative prices constitutes a force for significant structural change in the economy.
He notes the high exchange rate is exerting a powerful force for structural change, citing the retail industry as the leading example of this. The "structural adjustment" to which the Australian economy needs to respond is "inherently income-increasing for Australia", and most postively he concludes:
this is a much better problem to have than those we see in many advanced countries...we do not carry the legacies of the past several years in our banks' or public sector balance sheets that are such an impediment in other places.
and
Resilience and adaptability are among the characteristics we will all need in order to cope with a global environment that is growing more complex rather than less, and that presents both economic challenges and opportunities greater than those we have seen for many years.
We can see by the length and nature of Stevens' speech that it is meant to educate the Australian people about both the economic climate and the RBA's view of its role. Most commentators have interpreted Stevens' speech as an indication that interest rates will rise in the latter part of 2011, probably August. It certainly had an immediate effect on the Australian dollar which rose against the $US by 0.53 cents yesterday. The speech is doing more than that however, in that it is clearly an attempt to explain the RBA's position so as to take the people with them, or massage sentiment. Its success in that regard remains to be seen if and when rates are hiked.
For the full text of Stevens' speech click here.
To read the full piece click here mentioned in the Australian media by many commentators this week including Terry McCrann who savaged the piece in the Murdoch press as:
a unique combination of the libertarian leftism of capital city - read: Sydney and Melbourne - elites that we can read every day in the Fairfax press and the pompous condescension of a fly-in fly-out visitor from 'the old country' click here
We like many of the observations made in the Economist article. Of great interest to us is the following graphic which lends context to WA's current dispute with the Commonwealth over GST receipts and mining tax revenues:
Of course we all like to see the "good news story" such as the following chart entitled "Where the Aussies Score" (with the exception of the gambling table):
I went to the Budget Breakfast yesterday hosted by NAB at Crown, Melbourne. Whilst there weren't any BBQ stoppers the presentation/economic update given by NAB's Chief Economist, Alan Oster was useful. His main message is that NAB's economic modelling is much the same as Treasury's.
Here is NAB's webcast: watch Alan Oster present his summary
View webcast (link opens in new window - you'll need to enter your name)
