The cricket analogy

Fresh from another unsuccessful Ashes series against England the Australian team may be licking their wounds and economy watchers may feel salt is being rubbed into those aforementioned wounds by Larry Elliot of Britain's Guardian newspaper who sees a clear and comparable trend in failure on a big scale ahead for Australia:

It may prove to be a similar story with the economy. Australia was one of the few developed economies to emerge from the global recessionlargely unscathed. Growth has been good for a quarter of a century, public debt is low, the banking system proved resilient during thefinancial crisis and it is one of only a handful of countries that still retains a AAA credit rating.

Australia now bears all the hallmarks of a country where its industrial base has hollowed out. The decision by Ford Australia to close its manufacturing plants at Broadmeadows and Geelong is evidence of what economists call Dutch disease: a natural resource boom drives up the exchange rate and makes all other exports deeply uncompetitive....

...As the economist John Llewellyn has pointed out, household debt in Australia rose sharply in the 1990s and 2000s and now stands at 150% of GDP. Noting that the housing market may already be in bubble territory, he adds: "Depending on a strong pickup in housing as a means to sustain growth and rebalance the economy would therefore appear to be fraught with danger.....The Reserve Bank of Australia is now cutting interest rates and talking down the currency in an attempt to rebalance the economy. That is easier said than done when your economy amounts to a large hole in the ground ringed by some expensive property.(here)

CBA makes hay while the sun shines

A good set of results out for the Commonwealth Bank of Australia, now thanks to favourable encouragement from the regulator and the lopsided economy, one of the largest banks in the world:

In an unaudited trading update Wednesday, Commonwealth Bank reported net profit of 1.90 billion Australian dollars (US$1.88 billion) in the three months to Mar. 31, up from A$1.70 billion a year earlier. The lender is Australia's largest by market value. 

Cash profit, which smoothes out one-off items, was also A$1.90 billion, compared with A$1.75 billion a year earlier and A$1.85 billion in the immediately preceding quarter....

...Their shares have been among the best-performing on the Australian stock exchange as investors have flocked to their high-yielding stocks. Commonwealth Bank and Westpac topped the A$100 billion value mark this month, at one point making each worth more than the Australian listing of the world's largest mining company, BHP Billiton (BHP).(here)

But note some words of gloom looking forward for the sector:

But behind the headline results, Australia's banks are struggling to keep growing profit amid slowing economic growth. Together, the revenue of the big four banks was largely flat from a year ago, while much of the profit improvement came from cost cutting and a reduction in combined bad debt, which fell 17% from the previous half.

Credit Suisse analyst James Ellis said the lender's result was "supported by a cyclically-low bad debt charge" and pointed to worse times ahead for Australia's banks.

"For the sector the result suggests that the optimisation of bank earnings is reaching its limit, with bad debt charges as feasibly low as they can get, margin expansion and the pace of productivity improvements fading," he said in a note to clients.

The article also mentions declining business confidence, capital levels and the end of the mining boom as factors at play.

Meanwhile a new Occupy-style movement is reported to be stirring in the UK (http://breakupthebanks.org.uk/).  When things start to go wrong will there be significant protests in Oz against the banks? 

Aussies going for gold

This blog is very much in favour of people moving their money into alternative asset classes and while suffering from recent price volatility, the market for over the counter gold bullion in Australia is booming, with high sales reported as in India and China, despite the sharp price falls last week.

... There is an interesting phenomenon happening in the CBD of Sydney: Private Vaulting. Until now the only option for safe deposit boxes was with one of Australia’s four TBTF banks and most of those vaults seem to date from the gold rush era of the 1890′s. But in the space of two months there will be two state of the art private underground safe deposit vaults opening, both with an emphasis on storing physical gold and silver. One has been showcased by Mike Maloney in a national news report and the other vault opens at the end of this month, (here)

... In the face of the worst slump in gold prices in decades, some so called bargain hunters are prepared to buck that trend and dive into the market for gold bullion, believing the precious metal is already bottomed out. 
Dealers in gold bullion and jewellery across Australia are reporting queues outside their shop fronts, as small investors swim against the downward tide driven by the big sellers of gold. 
One stock analyst is warning that anyone who thinks they're getting a bargain today just because gold's more than $200 an ounce cheaper than a week ago, could actually be queuing for fool's gold. (here).

And refiner the Perth Mint has been doing well also:

...Very significant demand is being seen throughout the world for physical bullion – in Japan, India, Australia, the U.S., Europe and elsewhere. The speculative raid by one or two banks which led to the price crash is being seen as a gift by eager buyers internationally.
Gold sales from Australia’s Perth Mint, which refines nearly all of the nation’s bullion, surged after prices plunged, adding to signs that gold’s slump to a two-year low is spurring increased demand.
“The volume of business that we’re putting through is way in excess of double what we did last week,” Treasurer Nigel Moffatt said by phone, without giving precise figures. “There’s been people running through the gate.”
The Perth Mint’s sales of gold coins climbed 49 percent to 97,541 ounces in the three months ended March 31 from a year earlier, according to data from the facility in Western Australia that was founded in 1899. 

Squeezing monetary policy

Nothing unusual in politicians seeking to pull the levers of supposedly independent monetary policy with some public comments and a coming election in mind.  Question is, in the midst of a currency war with central bankers from Japan, Cyprus, Europe, UK and US all feeling the politcal heat to abandon orthodoxy and print, will Julia begin a trend of greater pressure on the RBA?

...Prime Minister Julia Gillard says that the federal government’s ‘‘tight’’ fiscal stance leaves room for the central bank to cut interest rates as manufacturers try to cope with sustained currency strength....
...‘‘Our success as a resources economy, as an economy that’s emerged from the global financial crisis strong, has meant that our Australian dollar has been very high,’’ Ms Gillard said hours after meeting with business leaders advising the government on its 2014 presidency of the Group of 20 nations..... (here)

As has been posted, Garnaut and others have discounted the comfort such statements and assumptions propagate - the Asian mining boom is ending and income and growth will drop but FTAlphaville noted another reason why this is dangerous:

Hot Money

It turns out Australia is being funded by non-conventional sources, with the implication being it is "hot" and can be withdrawn very quickly in a crisis (and quick hot money withdrawal means currency crisis and/or collapse):

...At face value, given the share of foreign companies involved, the analysis implies that around half of the investment during the boom has been funded from offshore. However, the actual use of foreign sources of funds is much higher than that. This is because wherever companies are partly foreign owned, funding from internal sources is equivalent to partial funding from foreign sources. Consequently, since the Australian listed resources sector is around three-quarters foreign owned, the same large proportion of internal funding is attributable to foreign sources.... Taking all this together suggests that around four-fifths of the investment funding has been sourced from offshore (here).

This is what a post boom world looks like...

The market oracles have been showing a glimpse of the future, with an Aussie miner suffering a share price slump following a buyout to a Chinese investor falling through:

...SUNDANCE Resources plunged in early trading after the iron-ore explorer terminated a planned takeover by China's Sichuan Hanlong Group....Sundance shares tumbled by more than half after the mining company said late yesterday that the $1.38 billion takeover wouldn't proceed because the Chinese investment group had missed key deadlines to finance the deal. (here).

...“They have to start from scratch now when economic conditions are a lot more difficult,” said Mine Life’s Wendt. “It’s not going to be easy for them to go out there to find investors because of the more concerning outlook for iron ore demand and iron ore prices and it’s significantly harder to attract funding for high capex projects.”(here).

Meanwhile in other sectors:

...Fitch Ratings has delivered a fresh blow to the upstream liquefied natural gas industry in Australia, tipping more cost blowouts and delays and calling into question the viability of some projects in the pipeline. ...Australia's competitive advantage in the sector is eroding on the back of increased costs and risks, and likely lower gas prices over the medium term, the agency said....

...Fitch also said predicted producers would be forced to sell-down assets...."Rising execution and development risks will force project sponsors of these LNG projects to dilute equity stakes or undertake sales of infrastructure and reserves," Fitch said in a statement. (here).

And with a slowdown comes more fraud:

...A Melbourne professor has warned that hardware and software used for tax fraud is likely in secret use by Australian businesses....The technologies, known as zappers or phantomware, can help a business remove sales from their tax records....Zappers are physical devices used to prevent sales transactions from appearing on a business' records... Phantomware is a class of software that creates virtual sales terminals. It can be used for legitimate staff training, but is also used to keep sales transactions off the books... (here).

Tall tales

There is a level of confusion as to the state of the Australian economy and likely risks and even those at the top can't agree.

...Three of Australia's big four banks have given market updates this month. You'd be forgiven for wondering if they were discussing the same market....The discrepancy in viewpoints is partly explained by the different business models of the three banks. Commonwealth Bank is the country's biggest retail lender, which means it benefits most from rising consumer confidence....
.
..NAB and ANZ are both more exposed to business lending, where sentiment is weaker. A survey from East & Partners, for instance, last week found that demand for all types of business banking services fell between November and January by an average of 1.9%....Despite their differing outlooks, investors overall still seem to like Australia's banks, deemed to be among the most credit worthy in the world. (here).

Yet meanwhile the central narrative underpinning the actual (or purported) growth was in fact being unwound by the central bank, the RBA:

...The Reserve Bank of Australia (RBA) says the mining investment boom will peak sooner and at a lower level than previously expected.

The central bank also says that while commodity prices are likely to drift lower over the next few years, Australia will continue to benefit from China's economic expansion...."And as mining investment tails away, we'll increasingly move into the operational phase of the mining boom," he said.(here)

Just to spell it out - the mining boom has been and gone....and there is not so much to prop up the Oz economy...

Brokers/Analysts misreading the market?!

There may be an equity upturn, but any new year flush is likely to lose steam and there are too many big questions of fundamentals which are going to weight down any momentum for lift off.  Same for bond crash predictions - money may be moving into equity, but doesn't make it smart or sustainable...

This piece is typical of false positives...

....Many analysts are quietly confident as the recovery in global markets gathers steam,...
...In the past quarter the ASX 200 index has risen 12 per cent in lockstep with the surge in global sharemarkets. In the US, Wall Street is just 5 per cent off an all-time high and in Europe equity markets have also risen as the ''rotation'' from bonds to equities gathers steam. Price-to-earnings ratios have jumped from 10.6 a year ago to 13.7 and volumes going through the market have almost doubled.....(here).